CORPORATE FOCUS—Investors Spooked by Wild Gyrations of Liberty Digital

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It’s been a rough roller-coaster ride these last few months for Liberty Digital Inc., the West Los Angeles-based new-media arm of AT & T; Corp.

Its ups and downs in both stock price and financial performance show no signs of ending soon for the interactive television programming and music distribution company.

From a record high of $75 a share at the beginning of the year, the stock price plummeted to less than $20 a share in the spring. It rebounded briefly during the summer before slipping again last month. As of last week, it stood at about $13 a share.

“This has proven to be a very volatile investment,” said Spencer Wang, an analyst with ING Barings in New York.

That volatility has essentially reflected the uncertainties facing the interactive television market. At this point, investors have no clear idea about the size of the market or whether it will ultimately be able to support the numerous companies making a play in the sector.

Liberty Digital’s income picture has swung just as wildly as its stock price, moving from loss to profit in each of the last five quarters, thanks in part to highly variable expenses associated with stock options.

In the second quarter ended June 30, Liberty Digital posted a net loss of $9.7 million (5 cents per share), compared with a net loss of $153.9 million ($1.10 per share) for the like period a year earlier. Revenue was $17.7 million vs. $18 million.

Third-quarter figures are due to be released this week.

The substantial loss in the second quarter of 1999 resulted from $240 million in stock compensation expenses.

Of course, some volatility is to be expected, given that the whole interactive television market is in its infancy. In fact, it was the hope of gaining a foothold in this new market that prompted AT & T; Corp. executives to form Liberty Digital 18 months ago.

When AT & T; Corp. bought cable operator TCI Communications Inc. last year, it also bought TCI’s interactive music and video subsidiary.

Executives with the new corporate entity, known as AT & T; Liberty Media Group, merged TCI Music into Liberty Media’s cable television operations and renamed the subsidiary Liberty Digital, which is essentially the new-media arm of AT & T.;

The idea was to make Liberty Digital into a leading provider of content for interactive television. As part of the effort, Liberty Media execs moved the whole operation from New York to L.A. to take advantage of the region’s television content industry.

For a while, it looked like things were clicking: the Internet and new-media worlds were booming and the future for interactive television looked bright and revenues were continuing to stream in from Liberty Digital’s programmed music distribution business.

But since then, the bottom has fallen out of Internet stocks and the Nasdaq, taking Liberty Digital’s stock down with it.

“With the meltdown in Internet stocks, there was carnage everywhere, and Liberty Digital fell victim to it,” said Stacy Forbes, an analyst with Janco Partners Inc. in Denver.

Indeed, investors were suddenly demanding profits from tech companies. And, in May, Liberty Digital delivered by announcing record earnings of $95 million for the first quarter ended March 31. The stock price rebounded to about $35 a share.

Still, there were nagging doubts about the prospects for interactive television, Forbes said.

Unlike with cable modems, no standard equipment has emerged for this new medium. The competing set-top digital boxes have added to customer confusion and slowed down the growth of the market.

“Clearly, it’s in the best interest of all parties involved to come to a standard, and from our perspective, the sooner that happens, the better,” said Mark Rozells, chief financial officer for Liberty Digital. “Our focus will be on transactions and commerce. Television, with its universal penetration, is a natural for e-commerce transactions.”

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