HSN - Company Profile, Information, Business Description, History, Background Information on HSN

1 HSN Drive
St. Petersburg, Florida 33729

Company Perspectives:

HSN, an operating business of IAC/InterActiveCorp (NASDAQ: IAC), originated the electronic retailing industry in 1977. The idea materialized on a small AM radio station in Florida and has since grown into a global MultiChannel retailer with worldwide consolidated sales of $2.2 billion in 2003 and a growing customer base of over 5 million.

History of HSN

HSN, formerly known as Home Shopping Network, Inc., is the second-largest shop-at-home television network in the United States, behind QVC. HSN sells thousands of unique products through its shows, which are broadcast 24 hours a day via cable, satellite, and network television. Its main product areas are electronics, fashion and jewelry, health and beauty, and home and entertainment. HSN reaches some 81 million households in the United States. It also runs home shopping subsidiaries in Germany, Italy, Japan, and China. HSN also runs an Internet subsidiary, HSN.com. The company benefits from a stable of celebrity designers and pitchmen, including chef Wolfgang Puck, actress Suzanne Somers, singer Patti Labelle, and jewelry designer Cathy Waterman. HSN sells many goods designed exclusively for it, as well as products from popular brands such as Sony, Hoover, and Gateway. The company runs four order fulfillment centers in the United States, and one each in Germany, Japan, and China. The company is owned by IAC/InterActiveCorp., a publicly traded firm that includes several e-commerce divisions. IAC is run by Barry Diller, one of the leading media dealmakers in the United States and formerly the head of Fox Television Network.

Origins in the 1970s

The idea for the Home Shopping Network originated in the 1970s when Lowell W. Paxson, who owned an AM radio station in Clearwater, Florida, began to lose listeners to FM alternatives. Paxson also lost advertisers. He decided to try selling merchandise directly over the air, switching from an easy-listening music format to an at-home radio shopping service called The Bargaineers. To finance the new format, Paxson turned to Roy M. Speer, a lawyer and real estate developer. Speer would later become Home Shopping's chairman.

Almost immediately after the switch in format, the station's revenues swelled so much that Paxson was eager to try out his home shopping idea on television. Speer liked the idea of expanding to television but wanted to proceed slowly, investing $500,000 for a 60 percent stake and set out to make sure that viewers would not be disappointed before he gave the go-ahead in July 1982.

Speer and Paxson called their local TV program the Home Shopping Club (HSC). Within three months, it was turning a profit. After two more Tampa Bay-area cable companies decided to carry HSC, Speer and Paxson began to explore markets in Fort Lauderdale and Miami. By 1985, HSC was so successful that it went national, calling itself the Home Shopping Network. Speer based his decision to expand on the belief that the profiles of Tampa Bay customers would be the same for people all over the United States.

Speer commissioned the development of a computer system that would have the capacity to respond to customers' needs immediately. He acquired a large number of phone lines and hired many operators, all in an effort to make a return customer of that first-time buyer. Within three months, Home Shopping had become the world's first network to broadcast live 24 hours a day, and its number of employees had grown from 300 to 1,280. Speer's approach was successful; in just one year he was able to take the company public.

Public Offering in the Mid-1980s

In February 1986, Merrill Lynch underwrote the Home Shopping Network's initial public offering at $18 a share. An investment banker who helped with the offering commented on Speer's wisdom in pricing Home Shopping's stock so low, because it was still perceived as a risky company in an untried industry. At that time, Home Shopping was still in the process of trying to convince cable operators to carry its show over other alternative programming. Home Shopping stock became the fastest rising new issue of 1986, registering a 137 percent gain by the end of the day. Since the initial offering, Home Shopping stock went on to split twice, the first time at three for one and the second time at two for one.

The Home Shopping Club had developed three formats: Home Shopping Network 1 (HSN 1), Home Shopping Network 2 (HSN 2), and Home Shopping Spree. HSN 1 was available live, 24 hours a day, seven days a week, and was produced exclusively for cable. HSN 2, which offered upscale merchandise, was also available live, 24 hours a day, seven days a week, but was marketed to both broadcast and cable television. Home Shopping Spree offered limited-time or 24-hour programming to broadcast stations.

Opinions varied on the reasons for the rapid rise in popularity of HSN 1 and HSN 2 stations. Perhaps viewers were attracted to the fact that they automatically became members the first time they placed an order and that they received a $5 credit applicable to the next purchase. Another reason may have been that the shows' hosts gave no warning as to what items would appear on the TV screen and when. As viewers could only purchase items for as long as the products appeared on their screens, anywhere from two to ten minutes, the typical member would watch the program for several hours each day in an effort to find the best deals on products they wanted.

The hosts of the program, almost all of whom had a background in retail sales, soon became popular personalities and were given nicknames by their adoring fans. As Home Shopping's success grew, competing stations began popping up, causing host as well as viewer defections. Competition continued to grow, with many stations in the industry, including Home Shopping, turning to celebrity endorsements and hosts. Another, more conventional, way that Home Shopping ensured that customers kept coming back was by allowing the return of any purchase if for any reason a member was not satisfied.

As Home Shopping grew, so did the companies that supported it. Home Shopping was one of United Parcel Service's largest accounts, and many suppliers owed their success to Home Shopping. A new product could be introduced to the nation on the network, and within minutes thousands of items could be sold. While some of the merchandise sold over Home Shopping came from closeouts, overstocks, or overruns, the company's purchasing clout was evident in the fact that at least 60 percent of the company's sales in 1987 consisted of products made specifically for Home Shopping and sold to them for rock-bottom prices.

Not everything, however, was on the upswing in 1987. In that year alone, more than 15 television shop-at-home programs went off the air. Stock market analysts began to question how long Home Shopping could sustain its rapid growth rate. Some believed that members would eventually reach their credit card limits, while others thought the company was paying too much for its acquisitions of UHF television stations and burdening itself with excessive debt. Still others speculated that the company would lose market share to its ever-growing number of competitors who offered improvements on Home Shopping's unpredictable format, such as the plan JC Penney and Sears announced for Telaction, which would allow customers to use their phone to select items from their screens.

In one year, between March 1987 and March 1988, Home Shopping stock experienced a market slip of 18.95 percent, compared to a 6.76 percent drop in the Dow Jones Industrial Average. The company lost no time in reacting, however; as early as 1987, it was looking around for better ways to harness its market. In January 1987, Home Shopping announced plans to build a new telecommunications center and corporate headquarters in St. Petersburg, Florida. By September, the company had started using the UHF television stations it had been acquiring, and the network began broadcasting from its new 180,000-square-foot telecommunications facility, hoping to beat down its competitors with better reception. In September 1987, Home Shopping announced its plans for a major corporate restructuring, with HSN Inc. becoming a holding company for the various subsidiaries conducting its businesses.

Distinctions such as fast delivery and guaranteed products, the ability to process orders rapidly and reduce labor costs, and the higher quality of television reception provided by its own TV stations enabled HSN to preserve its market share, as well as distance itself from all but one of its competitors. It also reported good annual sales gains, passing the $1 billion mark in 1990. However, these distinctions still had not succeeded in recapturing wary investors. There was worry about the stability of the home shopping industry in the face of recession years. HSN stock, nevertheless, moved to the New York Stock Exchange from the smaller American Stock Exchange in 1990, and the company began a stock repurchase program.

New Owners in the 1990s

HSN had grown quickly, but it remained in second place behind the home shopping industry leader, QVC. In late 1992, a complicated set of mergers and acquisitions began, which almost resulted in a combination of the two leading companies. In December 1992, Liberty Media Corporation bought a 23-percent stake in HSN by acquiring shares from chairman Roy Speer. Liberty offered to buy the remaining stake in the company a few months later but then dropped its bid when allegations surfaced before a Florida grand jury about improprieties at the company and investigations into Speer and co-founder Lowell Paxon. Speer resigned his chairmanship of HSN soon after. Liberty Media also owned a stake in QVC. QVC was headed by media mogul Barry Diller, the former chairman of the Fox network. Diller invested some $25 million in QVC and led it through some unsuccessful takeover attempts. In July 1993, Diller's QVC offered a $1.3 billion stock swap to gain control of HSN. By November, however, HSN and QVC ended their merger discussions when QVC decided to pursue the acquisition of Paramount Communications Inc.

In the meantime, HSN went into 1994 with global aspirations. The company prepared to partner with Tele-Communications Inc. to launch an international teleshopping service. In late 1993, HSN established an international division, headed by Michael W.D. McMullen, to explore international television opportunities. Known as Home Shopping International, the service countered the international activities of rival QVC, which earlier had established shopping services in the United Kingdom and Mexico. HSN launched its first international venture--a home shopping company in Japan--in February 1994. Cable television was not widely available in Japan, but it was available to the wealthy, so HSN planned to develop a home shopping program for more upscale viewers. HSN intended to export products to the Japanese market but also stated a commitment to developing businesses there, especially for apparel and other products that might depend on local appeal.

About this time, HSN and Prodigy Services Company began working together on an online store to debut in the fall of 1994. Selling housewares, electronics, fashions, jewelry, and products for personal-computer users, the service was the first to use full-color photos rather than drawings of merchandise. In addition to the shopping aspects, the service also provided a bulletin board for contacting HSN hosts and celebrity guests. HSN also established HSN Interactive, a new division headed by Jeff Gentry.

Beginning in May 1994, HSN worked on expanding its viewer base. The company again entered into an agreement with Tele-Communications Inc. that added 500,000 viewers to its Home Shopping Club in the form of new Tele-Communications Inc. subscribers. The federal government's Cable Act of 1992 ensured that 4.8 million other homes also would be covered through the agreement, since the rules specified that cable operators must carry all broadcasters with signals in the areas. In addition, HSN renewed contracts with ten cable operators with seven million subscribers, including Continental Cablevision, a system with three million subscribers. HSN added 16 million subscribers through agreements with five additional cable television companies that would carry Home Shopping Network programming the following month.

In order to compete financially with the revenues generated by commercials aired on other home shopping networks, HSN initiated a division to produce infomercials and distribute them globally in July 1994. HSN Direct, located at the HSN headquarters in St. Petersburg, Florida, aired its infomercials on cable networks and through broadcast services--excluding HSN's home shopping vehicles, which were not formatted for long commercials. HSN embarked upon a joint venture to produce the infomercials. Headed by Kevin Harrington, a past vice-president at National Media and co-owner of the venture, HSN Direct positioned Home Shopping Network to sell to a European audience. Harrington was responsible for developing the infomercial in Europe through Quantum International, a company he formed in 1988. He expected HSN to create infomercials for housewares, exercise equipment, and other products--especially merchandise produced by manufacturers unaware of the infomercial potential of their goods or for products with a history of success on HSN.

New Directions in the Mid-1990s

From 1994 to 1995, HSN underwent a transformation. The network redesigned sets, changed the format of programs, and improved the merchandise that it offered. Nevertheless, it remained unprofitable and posted millions of dollars in losses. The company came under new leadership in 1995 when it was finally captured by media entrepreneur Barry Diller. Diller resigned from QVC in early 1995 after the failure of his ventures to buy Paramount and CBS. He then spent $10 million to buy a 20-percent controlling stake in a small string of television stations called Silver King Communications. In a complex transaction valued at $1.3 billion, Silver King then bought HSN. Diller came to HSN with a proven track record. He had successfully managed Paramount Pictures and engineered the creation of the Fox network. Under his direction, QVC, the competing home shopping network, flourished. Diller demonstrated a knack for interesting high-profile investors in his projects, such as John Malone, owner of 39 percent of Silver King, and billionaire David Geffen. Diller's arrival as chairman of HSN created excitement and anticipation within the industry. Analysts expected Diller to continue to improve programming at HSN and to develop the true value of the company. For example, observers assumed that Diller, well-connected with high-profile designers and celebrities, would utilize his contacts to enhance HSN's offerings and contacts.

However, Diller's interests were varied, and the company moved in some unexpected ways. In a stock-for-stock transaction during the summer of 1997, HSN gained control of Ticketmaster, a broker of entertainment tickets. Valued at about $209 million, the merger created opportunities for both companies. HSN greatly expanded its distribution system. HSN's network provided Ticketmaster with a massive venue through which to market concert, theater, and other entertainment event tickets. Founder Paul Allen sold his controlling interest in Ticketmaster in exchange for 11 percent of HSN. He also became a member of HSN's board, as did Frederic Rosen and William Savoy.

Expansion continued after the merger, especially on an international level. Earlier, with Sumitomo Corporation, a large Japanese trading company, HSN brought televised home shopping to Japan through 30-minute programs broadcast in Tokyo, Osaka, and nearby regions beginning in 1996. Similarly, Jupiter Programming and HSN introduced the SHOP channel in Japan in November 1997. After success in Japan, HSN developed a shopping channel for Germany in conjunction with Quelle, a European catalog company, and Kirch Media Interests of Germany.

Then, with Spanish-language broadcaster Univision, HSN initiated a Spanish-language shopping channel in 1997 for full operations in 1998. Univision secured U.S. distribution, and HSN controlled operations of the channel target for seven million Hispanic households in the United States. Since HSN recognized more than 500 million Spanish-speaking consumers worldwide, the company planned to expand the shopping channel into Latin America and Spain, both of which had millions of existing or cable-ready households.

In November 1997, Diller sold an HSN network in Baltimore, Maryland--WHSW--in order to set the groundwork for his Silver King Communications' planned joint venture with the Universal Television Group and USA Networks. Diller negotiated with the parent company of Universal Studios--Seagram--to join HSN with the television unit of Universal Studios. In exchange for more than $1 million and a 45 percent share of HSN, Seagram, Universal TV's owner, sold its USA Networks and its domestic television business. Diller purchased the lion's share of Universal TV Studios operations in the United States, including production and distribution of such hit television programs as Law and Order and Xena: Warrior Princess, in a billion-dollar deal. Though Universal Studios retained part ownership in the newly formed company, HSN gained the domestic and some of the international activities of the USA Network (a popular cable station) and the Sci-Fi Network. In addition to the merger on the domestic scene, HSN and Universal worked together on a venture for international television. Diller remained as chairman of the new company. Executives from Universal TV and its parent company, Seagram, joined USA Networks board; Diller assumed a seat as a director of Seagram. Shareholders approved HSN's purchase of Universal TV for $4 billion, changing the company's name to USA Networks Inc. This became the holding company for Home Shopping Network and other entities.

Changing Landscape in the 2000s

When USA Networks completed its transaction with Seagram for Universal TV Studios in 1998, the Wall Street Journal (February 13, 1998) reported, "Some entertainment executives were puzzled when the deal was announced" and others were unsure what Diller's role at Universal would be. Fortune magazine (May 3, 2004) later claimed that Diller had at first envisioned USA Networks as his second Fox. Yet shortly after buying the Universal properties, Diller began making other deals that brought the company away from traditional television and into new media. In 1999, USA Networks planned to buy Lycos Inc., an Internet search engine portal. USA Networks planned to spend $3.8 billion on 60 percent of Lycos, which at the time was the number three company among Internet search engines. This deal did not come off, though it did apparently lead to the resignation of James Held, who had been chief executive of HSN since 1995. Held was credited with improving the fortunes of the company over the previous few years, when it took market share from QVC. Held had also handled HSN's expansion into German and Japanese home shopping shows, and pushed HSN into expanding its Spanish-language shows in the United States. Mark Bozek took over Held's job. USA Networks did manage to buy a stake in another Internet company, Citysearch, which soon became part of a new company merged with Ticketmaster, called Ticketmaster Online-Citysearch, or TMCS. Parent company USA Networks also bought a hotel reservation company which became Hotels.com and a stake in the Internet travel reservation company Expedia.

Home Shopping Network continued to do what it did best--sell things on TV. While not quite catching up with QVC, Home Shopping Network in the late 1990s was a solid money maker. Broadcasting & Cable (April 3, 2000) reported that over 1999, HSN made on average $2,500 per minute, 24 hours a day, seven days a week. The network improved the quality of its offerings, and by 2000 the largest percentage of its sales was in electronics exclusively made for HSN. HSN had other successful exclusive deals, such as selling the video of the hit movie Titanic three months before it was available in stores. HSN made $6 million on the Titanic videos alone. HSN also swiped a popular show from rival QVC in 2000, broadcasting live from ABC's Monday Night Football to retail football-related goods through its exclusive "NFL Shop." Home Shopping Network changed its name officially to just its initials, HSN, in 2000. HSN made an Internet purchase of its own that year, buying up a Web site that sold home craft goods, Craftopia.com. It also did cross-marketing with the ABC network, selling jewelry on HSN worn by characters on ABC's popular soap opera All My Children.

The Internet bubble lost its air over 2000 and 2001, with many promising web companies folding or seeing their stock prices plummet. USA Network's Diller had built up a complex of Internet firms, making HSN an odd fit with the parent company. In May 2001, USA Network sold back to Vivendi Universal the entertainment properties it had given up (as Seagram) in 1998. A few months later, Diller announced he was ready to sell HSN. The parent company changed its name to USA Interactive, which at that point consisted principally of the shopping channel, Ticketmaster, Expedia, and Hotels.com. The Wall Street Journal (November 15, 2002) reported that Diller was frustrated with trying to market USA Networks to investors. Its businesses were confusing. Though it looked like a "new media" company with its online businesses, most of its revenues came from solid old HSN.

However, HSN did not do very well over 2002. It grew only 3.2 percent in what was a dismal year for many retailers. Yet QVC showed an 11 percent growth rate over the same period.

HSN did not find an immediate buyer. In 2003, Tom McInerney took over as the company's new chief executive. McInerney questioned why QVC consistently did better than HSN and ultimately told Fortune in the article cited above that the rival had "better execution," meaning QVC simply sold better goods and offered better service. By 2003, HSN had half the sales and a third of the profits of QVC. McInerney resisted his boss Barry Diller's request that he acquire companies in order to promote growth at HSN. McInerney's focus on better service, however, did apparently improve results, and HSN sales grew strongly in 2003. On December 6, 2003, HSN set a one-day sales record of $30 million. Its previous one-day sales record was $16.9 million, set in 2002, so this represented a huge jump. HSN took significant steps to improve its customer service in late 2003. These included signing an agreement with the carrier service UPS to deliver HSN packages on average two days faster than previously. The company also felt that it benefited from some of its exclusive sales agreements, such as the Wolfgang Puck line of cookware, Adrien Arpel beauty items, and a desktop computer system available only on HSN from Gateway Computers.

Sales for 2003 came to $2.2 billion. That year, HSN's parent company again changed its name, settling on IAC/InterActiveCorp. HSN seemed to be doing better, yet it was still an odd match with the rest of the parent company's holdings. The fate of the parent company seemed to hinge on shakeouts in the online sales industry, which in the early 2000s was still very much in flux. Diller had already said he wanted to sell HSN, and to many analysts this still seemed likely. IAC had been anointed one of the "four horsemen" of the Internet, along with bookseller Amazon.com, the auction site eBay, and the portal Yahoo. HSN was clearly a different kind of animal. Yet Diller was unpredictable and a veteran of many convoluted business combinations. Thus, it was uncertain in 2004 what might lie ahead for HSN.

Principal Subsidiaries: HSN.com; Craftopia.com; Home Shopping Europe (Germany); Home Shopping Europe (Italy); SHOP Channel (Japan); TVSN Ltd. (China).

Principal Competitors: QVC, Inc.; ValueVision Media, Inc.; Summit America Television, Inc.


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