Minneapolis, Minnesota-based ValueVision International (Nasdaq: VVTV) is a home shopping network selling a variety of goods on cable TV and the Internet that recently announced plans to loosen the purse strings and invest in startup e-tailers. We spoke with company online honcho Cary Deacon about the evolution of the home shopping industry and ValueVision's ability to change directions quickly.

TMF: Maybe the best way to start would be to have you give us an overview of ValueVision.

Deacon: ValueVision's core business is a television home shopping network. We broadcast via cable into approximately $32 million households. Our annual volume this year on the TV side is approximately $280 million to $300 million -- our year ends Jan. 31.

"Some of our biggest volume and our record hours have come through the computer business."

We also have an Internet business. Basically, we broadcast live on the Internet what we do 24 by 7 on television. That was kind of a start up this year and we launched that in November. It's been very successful for us.

Our business has more than tripled in the last almost a year and a half to two years in terms of volume and in households that we broadcast into. As well, we've made quite a few investments in e-commerce companies that we've taken positions in -- Telocity, Wine.com, Bigstar.com (Nasdaq: BGST), and Roxy.com. We're contemplating six or seven others. We have a pretty strong balance sheet. We have no debt and $300 million in cash and we've been profitable for the last six consecutive quarters.
TMF: Readers might be the most curious about your investment arm. I wonder if you can talk a little bit about what it means to you not only operationally, but financially as well.

Deacon: I guess I'll cover it with somewhat of our investment philosophy on the dot-com side, because it is pretty synergistic with our television strategy. We basically targeted pre-IPO companies, to a great degree -- the only exception was Bigstar -- and we're looking for companies that have a pretty substantial business model and also people who feel being on television and associated with us would be a great advantage to their strategy, be it transactional or from a marketing perspective.

We're evolving our business model somewhat on the television side. We're going to be rebranding the company. We've done a joint venture with NBC, General Electric (NYSE: GE), and NBCi (Nasdaq: NBCI), and more particularly with the with the Snap brand. We're going to be rebranding our corporation to SnapTV alongside with what their portal strategy is and have that kind of run right through with what they're doing with NBC. Our Internet business will be SnapTV.com. So many of the investments we're looking at we are also bringing on our television model. We're probably going to sell 25% of our programming time -- for example, on December 2nd we launched the first-ever Wine.com television show. It's done in a transactional environment and an entertaining and educational environment and it allows them to sell. So it's kind of a unique branding methodology that allows you also to drive business.

Wine.com has proven to be, from their first show, a very successful start. They almost tripled their traffic. It was the highest traffic they've ever had when they ran the show and they've maintained double their volume post the show in terms of site traffic. I can't give 100% of that to the TV show, because they've got a lot of other initiatives going, but it's really great to see that kind of performance. They've taken another series of shows, six new shows over the next three or four months, as well.

From on the heels of Wine.com came BigStar and that investment; BigStar will be buying a weekly show from us. They'll be doing kind of a magalog as well as a transaction show with their products, doing a weekly show. We just announced with Roxy.com a 52-week, once-a-week electronics show. And it's interesting as well because we're bringing kind of transactional items to our network that were products that we previously didn't sell.

So it's really attracting somewhat of a new viewership to us. If you'll look at the traditional home shopping model -- I would say typically 40-year-old woman, middle market, middle income demo and predominately jewelry and health and beauty -- what we found in testing over the last year with a lot of new categories is that there's a great desire to buy them on television.

So some of our model on the TV side changes from being just a buying and selling model to somewhat of almost a network model where we're taking revenue, we produce everything from start to finish. It's a turnkey operation.

"I don't think we would ever go that far that it would be 100% entertainment."

TMF: When you have those sort of partnerships, how does that show up financially?

Deacon: The bulk of it is a revenue model. Straight revenue with dollars per hour if you sell well. We've got a small transactional model and we take a percent of some of the transactions, but that would represent maybe four to five percent of the total revenue against that time. It's really more of a revenue model of buying the time from us.

TMF: I wonder if you could take about your views on the evolution of [home shopping] as an industry. It got started with sort of a shady beginning.

Deacon: I think today it's more a hangover of opinion as opposed to reality. I would say to you that QVC has done more than anybody to bring some respect to the medium. Over the last few years they've done some marvelous marketing things. We have been self-policing as an industry and done a great job over time.

I think it still has a little bit of a down market, shady image, but I think that's more kind of outside opinion as opposed to customer opinion. Home shopping has of the strongest growing businesses in terms of viewership and people buying on air and I think the self-policing of ourselves, [USA Networks' (Nasdaq: USAI)] HSN, [Comcast's (Nasdaq: CMCSK)] QVC, Shop At Home (Nasdaq: SATH). I think the industry's done a great job of cleaning itself up if it needed to be. It needed to be at least from a marketing perspective.

TMF: But at the same time you threw yourself into an entirely different competitive scenario.

Deacon: We had to, though, for a different reason. When we took over this company there was a group of us that came in about a year and a half ago. The company had been floundering, been doing about $60 million a year, hadn't been making any money from an operating standpoint and had a decent balance sheet and its original startup was in 90, 91. The company bought television stations and that's how it got its carriage.

Over time, with all of the new legislation that came in during the early '90s with must-carry and so on, these television stations that the former group had bought that they paid anywhere from $3 to $6 million dollars for were all of a sudden worth $15, $20, $25 million dollars and what they would do was sell a television station every year [and] report a profit, but no operating profit.

So when we grabbed hold of the business we fixed it operationally, got it profitable, grew it substantially -- just good retail detail would be our description of how we did that. Then we began to reinvent the model a little bit -- here's a company doing $60 million, now we're doing $250 million.

But the reality is QVC's out there at $2.4 billion and HSN was out there at $1.3 or $1.4 billion, and being the third horse in a two horse race didn't make a lot of sense to us. So we felt that [with] a reinvention of this model... we were going to exponentially expand our audience base and grow it that way.

As part of our deal with NBC, NBC became our cable affiliate negotiating group, which for us was a powerhouse for them to be out there every year with contracts with MSNBC and CNBC. It was very opportune. NBC had about 70% of its cable contracts coming up due in the next 18 months for renegotiation and we felt that being part of the package would get us major distribution over time. We believe we can be in 50 million households by the end of 2002, which would put us up there, distributed-wise, with the HSNs and the QVC's or close to them, but still with a different point of view.

And of course for us to change our model, we are a small company. For HSN or QVC to sit there and say they're going to become somebody else next week, I don't think was in the cards. Their model is so strong that I'm not sure they could reinvent themselves in the same way, so a lot of it was kind of time and place and opportunity and so far we're moving ahead.

TMF: Maybe you could just talk a little bit about your user demographics? I guess they must be changing fairly significantly.

Deacon: Over time they will. We believe if you think of home shopping in general and you take the industry, the industry typically has targeted one demo. Typically on a 24-by-7 mentality of this is what we're going to sell and who we're going to sell it to and not looking at it like a network model where in the morning you might have business and news, health and beauty, cooking, etc.. Midday you'll have the "stay at home so I've got to run the soaps" mentality, the early evening access and news, and then the evening prime time, and then on Saturdays and Sundays you've got males with sports.

The home shopping networks really didn't do a good job of broadcasting to audience potential. So we've taken that approach that if we start to do these new programs, we're going to throw in a network model against audience potential. Wherever we've done that, we've had relatively good success.

We've had some really interesting success this year when we launched a major computer edition, for example, which predominately today is still at 75% to 80% male purchasing and we've actually set sales records on an hourly basis by selling computers where originally some detractors of that strategy said we're not going to be able to sell to any men because they don't watch home shopping. Amazingly enough, some of our biggest volume and our record hours have come through the computer business. So to a degree if you build it and give it to them, they'll come and we seem to be able to be successful in changing that demo over time.

We're not looking to stretch it so significantly to make it out of sight. We're not saying we're going from a $55,000 average household income to $120,000. We think that most of our customers have an interest in these commodities that we're doing. We've brought a lot of new customers to our own network when we ran the wine show, but we had unbelievable participation from our own clientele. I don't think we will scare off our customers. I think we'll just attract new customers on top of it.

TMF: As your business model changes, how do you see the cost structure changing?

Deacon: Well the cost structure changes in the sense that we currently turn our inventory about ten times which is pretty strong for a retail model, but as time goes by we'll probably turn our inventory even greater and obviously when they're selling this programming time and the revenue stream comes in that way you have no cost of goods, it becomes pure revenue. Obviously we're building infrastructure to sell and service that model as well, but it probably adds about another -- well if I take today's volume, it would improve our net profit by about 25%, this new model.

TMF: Then sounds like you're going to maintain operating margins because of some of the marketing agreements you've made.

Deacon: Absolutely.

TMF: Now might be a pretty good time to wrap this up, but I'm wondering if there's anything else you might want to add.

Deacon: One of the things we see for the future is our Internet model rolling outwards because it is a recreation of the broadcast model, but in a much more interactive environment and obviously we're not restricted by cable distribution. Our growth has been absolutely phenomenal in that sector and we see that growing. Our Internet model also could represent 30% of our volume on an incrementalized basis and so far everything we've done on there has been incrementalized. There was concern about a big cannibalization of our own audience and what we found is yes, there are those who like to behave both ways, but we get business on the Internet at lunch from customers who buy from us regularly so they're obviously using the computer at

On top of that about 85% of our customers on the Internet side have become new customers and very particularly growing in markets where we don't have television distribution which is very pleasing to us, because it truly is a new customer acquisition model. And the interactivity that we have on the Internet side, a lot of it will drive backwards with the TV business. I'm sure you're familiar with some of the interactive cable capabilities that are out there; whilst not well-distributed at this point, we feel the future of television and computer being kind of one and the same device, so I won't need my keyboard to order. I'll just take my cursor and click on that ring or click on that bottle of wine and have that transaction take place, so a lot of what we're doing on the Internet is incremental business that we see to be profitable, [but it will also help] drive us to where we head for interactivity on our core business, the TV business.

TMF: Does that mean that in the longer term, you might see yourself getting away from pure marketing type programming into more traditional programming, entertainment type stuff?

Deacon: I would say I don't think we would ever go that far that it would be 100% entertainment. I think a caution I would throw with that is our customers and the strong growth of that business, be it on the Internet side from an interactive standpoint or on television, is that they still want to buy something. It's kind of like if you took us as what we used to be, our attitude was sell, sell, sell, and if you went on the other extreme you would have NBC which is entertain, entertain, entertain. This new model of ours is really kind of right in the middle.

TMF: This has been fantastic. I appreciate your taking some time to talk with us.

Deacon: I appreciate the call and thanks a lot.

Related Links:

• ValueVision
  
• ValueVision Message Board
  
• Fool News, 12/2/99: "ValueVision: Dial 'C' for Cash"