By  on July 5, 1994

NEW YORK -- The future of Q2 and On-Q, the new channels at QVC that are still being developed, could be jeopardized by the home shopping giant's proposed merger with CBS.

Industry experts agreed that QVC's core business -- the QVC shopping channel -- will continue selling its mainstream fare around the clock with little disruption, if the deal with CBS becomes a reality.

But On-Q and Q2 -- QVC's much hyped concepts designed to upgrade the home shopping format with lifestyle elements and higher priced merchandise -- will likely become less of a priority for QVC chairman Barry Diller. Diller has been actively involved in the development of both projects.

"Nothing will happen to QVC," said James M. Meyer, a securities analyst with Janney, Montgomery, Scott in Philadelphia. "It is a billion-plus, very profitable home shopping channel and no one has any interest in throwing that away. Nothing is going to negatively impact its leadership position. What happens to On-Q and Q2? Who knows? At this point it's a very raw product that has fairly limited appeal."

"The merger raises the question of whether Diller will focus all his energies on CBS and slow down on home shopping or take his eye off the ball," said Steven Kernkraut, a managing director of Bear Stearns. "If he does slow his energies it helps the home shopping networks of the world, such as Fingerhut and Catalog 1."

"[Diller's] not going to be able to spend the time on QVC," said one industry observer. "The basic QVC business is not an issue. I think Q2 is going to have to be reevaluated anyway. It's going to be tough to make it work with a limited number of products and production values three to five times that of QVC."

At a time when diminished cable capacity has been a stumbling block to channels trying to increase their distribution -- QVC, Home Shopping Network and ValueVision all recently paid cable systems operators for subscribers -- a CBS-QVC merger, valued at $7.2 billion, could potentially give QVC access to CBS's 94 million homes.

"We really don't know what the ramifications of the merger are going to be," said Gordon Cooke, president of Time Warner Interactive Merchandising. Time Warner is a partner with Spiegel in Catalog 1, a home shopping channel."I believe it now makes QVC a somewhat more formidable competitor in terms of size and resources, but I don't necessarily think [the merger] guarantees greater distribution," Cooke said. "Some of our most difficult negotiations over carriage for Catalog 1 were with Time Warner Cable [systems] because they're in business independently to get the most revenue."

Gerald Hogan, president and chief executive of HSN, said he doesn't think a QVC/CBS merger will give QVC an advantage over his own network. "We're already a partner with Tele-Communications Inc., which is as powerful a communications partner as you'd want to have," Hogan said. TCI is also an investor in QVC.

"We had very preliminary discussions with CBS about the possibility of running a home shopping program on the network three months ago," Hogan said. "It's certainly something they're open to."

When told that Diller had said an overnight shopping program on CBS was a possibility, Hogan said, "If that's a possibility it opens up an opportunity for us to talk to other networks about supplying programming or infrastructure."

"There aren't a whole lot of synergies in the sense that QVC is going to put a home shopping program on the CBS network," said Meyer. "But it meshes very well if you look at television as one industry and broadcast and cable as two branches. Now you're looking at an enterprise that plays on both fields."

"Diller could use CBS's retransmission rights to get carriage for QVC programming," said Mark Riely, a principal of MacDonald, Grippo, Riely. The 1992 Cable Act requires cable operators to pay broadcasters for the right to air their local programming. Cable operators can also give non-cash deals, for example, offering distribution instead.

"Instead of looking for cash, they might look for carriage," Riely said. "That's one modest bit of synergy."

Others point to transactional programming and the division QVC has established for that purpose, Q-Direct.

Q-Direct produced programs for ESPN that offered soccer-related products for sale. However, the programs aired on cable TV, not on broadcast, where transactional shows have not succeeded thus far."There are a lot of other potential synergies and a lot of opportunity for cross-promotion," said Peter Sirius, an analyst with UBS Securities. "QVC could sell products from CBS shows or personalities. There is the opportunity to use CBS to advertise QVC. There is also the opportunity to use CBS talk and news shows to promote QVC's new shows."

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