Lords of Silicon Valley: Larry Black on the auction of a media empire that wields a unique power in the computer world

IN a year of US media mega-deals, the most important property to change hands may not be a Hollywood studio or an American cable- television company.

Arguably it will be Ziff Communications, the privately owned New York publishing group whose computer magazines and services dominate Silicon Valley, wielding a unique power to make or break almost any computer product.

Judging by the dozens of letters of interest received by the end of last week, the informal deadline set by Lazard Freres, the bankers handling the sale, Ziff is a hot enough property to justify its dollars 3bn price tag.

Potential bidders range from rival publishers such as the Anglo- Dutch Reed Elsevier and K-III, a New York media group controlled by the buyout specialists Kohlberg Kravis Roberts, to Paul Allen, Microsoft's co-founder, on-line services like Compuserve, global entertainment conglomerates and telecommunications giants.

But then Ziff is an unusual - and highly successful - publishing company in more ways than one. Bill Ziff junior, its founder, is said to be the next most influential person in the computer industry after Microsoft's Bill Gates.

This auction is the second time he has sold a publishing empire for a huge sum. In 1984, diagnosed with cancer, Mr Ziff, who pioneered special-interest magazines in the US in the 1950s, decided to quit. He sold his 24 consumer and trade magazines, including Car & Driver, Modern Brides and Yachting, to Rupert Murdoch's News Corporation and to the broadcaster CBS for more than dollars 700m.

However, he was unable to find a buyer for a small personal computer magazine he had launched a few years before, given a nasty downturn in corporate computer- buying in late 1984.

Yet by the time Mr Ziff had recovered from his illness in 1988, the industry was experiencing hyper- growth, and PC Magazine - current circulation 1 million - on its way to becoming the world's biggest business publication, attracting more advertiser dollars than either Fortune or Business Week. Its dollars 300m revenue makes it the 10th richest magazine in the US, compared with dollars 966m for TV Guide, the biggest, with sales of 14.1 million. The company is the fifth- largest magazine publisher in the country, with advertising revenues of dollars 489m, almost a third of the dollars 1.55bn generated by the giant Time Warner.

The current auction has been prompted by Mr Ziff's decision to retire at the age of 63 - the company is now run by its chief executive, Eric Hippeau, although Dirk, Robert and Daniel Ziff, Mr Ziff's sons, and related trusts own 90 per cent of the company while other family members own the rest.

But Ziff is now much more than simply a publishing company. New York-based Ziff Communications, founded in 1927 as Ziff- Davis Publishing, which employs 4,300 people worldwide and has annual revenues of more than dollars 1bn, operates in four distinct areas - magazines, trade shows, an on-line computer network, and an electronic database group - although all centre on computers.

They offer the world's fastest- growing group of advertisers - computer hardware and software makers - a comprehensive array of ways to reach technophiles, from print, CD-Rom and broadcast television, to computer trade shows, electronic databases and, beginning this autumn, a new on- line information service.

The group, though dominated by its seven traditional business magazines, enjoys enormous marketing synergies. Advertising salesmen from Ziff's various divisions, armed with pooled information about their clients' markets, often accompany one another on sales calls.

And the media they are selling - denounced by one critic as 'dependable, dull and by-the-book' are religiously focused on their advertisers' products.

This stems from Mr Ziff's insight in the 1950s that big American general-interest magazines like Life, Look and the Saturday Evening Post were doomed, and would be overtaken by 'narrow- cast' titles devoted to equipment- centred hobbies such as skiing, boating or photography.

'If a product is hard to use and expensive, you don't buy on impulse,' the eclectic Mr Ziff once explained. 'You do research.'

Computers fit this bill perfectly, and Mr Ziff has invested heavily to render PC Magazine and MacUser 'the last word on a product, making them places advertisers cannot afford not to be', as Wired, the industry's counter-culture magazine, put it recently.

Each year, Ziff rigorously tests more than 6,000 products at its laboratories, which rival those of IBM and Microsoft. Not only are equipment and software measured for performance; a test developed at its UK labs also monitors 'useability', video-taping the reactions and comments of first-time users.

This testing, combined with millions of dollars' worth of annual market research into consumer buying habits, means that Ziff ad salesmen often know more about the market for a product than do its manufacturers.

Ziff's hold on its advertisers is further enhanced by PCWeek and MacWeek, controlled-circulation magazines that go out to the 340,000 Americans who are responsible for buying their firms' computer systems.

Virtually every company in Silicon Valley advertises regularly in one of Ziff's magazines; indeed both Apple and Intel have been known to place ads in the magazines that cater to the users of the rival operating system.

As a result Ziff magazines account for half the computer magazines sector's US advertising revenues and circulation - double that of the nearest competitor, International Data Group.

Ziff's Computer Shopper, the five- pound bible of the direct-mail computer business in the US, carries more pages of advertising - 7,856 - than any other publication in the world.

Though less international than IDG, Ziff's magazines and dollars 80m-a- year trade-show business are growing fast outside North America. It produces local versions of PC Magazine and Computer Shopper in the UK, Germany and France - which account for 60 per cent of European PC sales - and circulates under licence in China.

This autumn, Ziff will air four weekly TV programmes in the US and will launch two new magazines: Family PC, a joint venture with Disney, and Computer Life, an attempt to reach a broader audience, with articles such as how to use a laptop to tune the microprocessors in one's car engine.

Ziff hopes to sell all four divisions - publications, trade shows, database and on-line service - as a package. 'We feel they belong together,' Mr Hippeau says. 'At the heart of all this is the computer.'

But Reed and K-III, likely to be in the short-listed bidders when the list is announced in October, are among a large number thought to be primarily interested in Ziff's magazine titles, especially PC Magazine, PC Week and PC Computing, rather than in its electronic and on-line services.

Ziff has not ruled out selling its Information Access database group or perhaps its new Interchange on-line service separately - a strategy some outsider say may yield a higher price.

However, bidders interested mainly in the magazines - cash cows that account for more than 70 per cent of Ziff's revenues and almost all its estimated dollars 60m profit - may pay only marginally more for the three other divisions.

Some analysts make the point that the magazines are maturing after years of 20 per cent annual growth. Which underlines the biggest risk in this auction: overpaying. Something the dozens of interested buyers may find it impossible to avoid.

(Photographs omitted)