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A Sirius Gamble

Discussion in 'Mobile Phones / Entertainment' started by Ronald Epstein, Feb 13, 2006.

  1. Ronald Epstein

    Ronald Epstein Administrator
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    http://www.forbes.com/2006/02/10/xm-...ton_print.html

    A Sirius Gamble
    Knowledge@ Wharton, 02.13.06, 6:00 AM ET

    In the 16 months since announcing that it had signed Howard Stern to a five-year deal, Sirius Satellite Radio has added approximately 2.7 million subscribers and become a household name in the satellite radio world. The tab: close to $700 million.

    Is Stern worth it? The answer depends on whom you ask. Sirius CEO Mel Karmazin, who joined the company in November 2004, and had been Stern's boss at Infinity Broadcasting and then Viacom (nyse: VIAB - news - people ) before departing in June 2004, says the radio "shock jock" is a good investment. "There is no question that Howard is worth the money that he is getting paid," said Karmazin on CNBC's Mad Money show last fall. "As a matter of fact, if he was going to renegotiate today, he would have to get more money because [sales are] really doing well."

    Others aren't so sure. Wharton marketing professor Peter Fader says Sirius would have reached its current 3.3 million subscriber total without Stern. According to Wayne Guay, a Wharton accounting professor and compensation expert, Stern's salary is a simple function of supply and demand. "There are few in the industry who could generate those subscriber numbers," he notes. Wharton marketing professor Jagmohan Raju labels the bet on Stern "a reasonable gamble." And David Bell, another marketing professor at Wharton, suggests Stern can deliver the type of consumer "evangelism" that can make Sirius a sustainable brand.

    "For Sirius, it's a bit of a gamble, but Stern was instrumental early on with putting brands like Snapple in the limelight on his radio show," says Bell. "He has a hardcore loyal audience that will be brand evangelists" for Sirius.

    While it's still early to determine how the Stern story will ultimately play out--the radio personality began his first Sirius broadcast on Jan. 9--a few key issues will tell the tale. Can the Stern effect last beyond his first few months of airtime? Will Sirius be able to close the gap with XM Satellite Radio (nasdaq: XMSR - news - people ), which ended the year with more than 6 million subscribers? And will the buzz generated by Sirius's grab for shows like Stern's and the broadcasting rights to the National Football League games help the company to eventually surpass XM's subscriber base?

    No matter how this saga unfolds, Stern won't come cheap. Jonathan Jacoby, an analyst at Banc of America Securities, estimates that the true cost of Stern's contract will be about $670 million, including noncash compensation. Stern and his agent, Don Buchwald, were awarded 34 million shares valued at about $200 million last month for bringing in more subscribers than expected.

    Wharton's Fader finds it hard to defend Stern's compensation. While it's possible to cook up metrics to justify the deal, what remains to be seen is whether Stern's fans stick with Sirius. "A lot of them bought Sirius just for Stern, but there could be lower retention rates. It's very hard to imagine that the acquisition of one person, even if it is someone as popular as Howard Stern, will be enough to keep Sirius afloat for long," he says.

    Crunching The Numbers

    Putting a number on the Stern effect has been a relatively simple calculation. In announcing the deal in 2004, Sirius said it needed just 1 million subscribers to break even on the base five-year $500 million contract. Raju has no reason to doubt that math and agrees that the lifetime value of a Sirius subscriber who pays $12.95 a month is about $500.

    The only complication in Sirius's math is trying to benchmark what Stern is really worth, says Guay, adding that determining whether Stern is overpaid isn't as clear-cut as it would be for a company executive, such as a chief financial officer. Why? Executive compensation can be compared across entire industries to get a ballpark figure and range of fair salaries. For entertainers, those benchmarks are difficult to find. "It's a different animal when you're dealing with entertainers," says Guay. "Stern is a huge player in the industry and had bargaining power. Sirius had to pay whatever it took. It's like paying for a star baseball player."

    The comparison between Stern and a star baseball player is apt, Guay adds. When a baseball team signs a star, it has to project how much additional revenue from jersey and ticket sales and concessions can be generated by the new player. Sirius also had to make a guess as to what Stern could add in advertising revenue (the Stern show has a handful of commercials during a nearly five-hour broadcast) and media attention.

    In the media attention department, there are few entertainers who can rival Stern, who spent more than a year talking about his Sirius move on his previous "terrestrial" radio show before actually leaving. Stern was so successful at pushing Sirius subscriptions that he triggered an incentive clause for bringing in new subscribers. The result has been the 34 million shares award. Despite Stern's efforts, however, the subscriber gap between XM and Sirius is about the same as it was when the radio personality signed in 2004.

    According to Fader, Sirius probably would have had the same subscriber tally without Stern. "That gap was misleading," he says. "If the technology truly is becoming ubiquitous, both [companies] will have tens of millions of subscribers. It was too early to do a bold move like this." Indeed, Fader expects the Stern effect to wear off shortly, a theory endorsed by Banc of America's Jacoby. In a Jan. 27 research note, Jacoby said that shortages of Sirius radios [due to high consumer demand] have abated from early January, and that advertising on Stern's show is selling at a discount due to lack of initial audience data.

    Excerpted from Knowledge @ Wharton
     
  2. James St

    James St Supporting Actor

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    Shouldn't this be in the Sirius forum?
     
  3. Jeff Gatie

    Jeff Gatie Lead Actor

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    Nah, we don't talk about Howard in the Sirius forum. We're too busy listening to him to bother.[​IMG]
     
  4. TheLongshot

    TheLongshot Producer

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    The downside of having two forums is that reactions to articles like this change depending on what forum they were put in, since only fans will enter certain forums.

    As for the article itself, I disagree with Fader that it was too early for Sirius to have taken this risk. I think it was absolutely needed, since before Stern, Sirius was a big nothing in most people's eyes. Before I joined up, I knew absolutely nothing about them, and XM was pretty much Satellite Radio as I knew it. That is no longer the case.

    Now, I still think it is a risky move, but they needed to do something figure out how to get past XM, and this is the way to do it.

    Jason
     
  5. Devin U

    Devin U Second Unit

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    Howards' minions cant take anything that might be remotely negative about him.
     
  6. Jeff Gatie

    Jeff Gatie Lead Actor

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    Do we really need this Wack/Stern Fan Network crap on a forum that prides itself on maturity and ... dare I say ... actual intelligence and debate? Please, come up with something original. See Jason Birzer's well thought out reply above or James St's clever retort that did not require him to insult anyone with the derisive term "minions". In other words, if you are going to insult, at least be original.[​IMG]
     
  7. Tino

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    [​IMG] is right !
     
  8. Ronn.W

    Ronn.W Second Unit

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    I think we'll have to wait a couple of years to see if it was a smart move or not. Right now, every thing is 'early numbers' and none of it may be meaningful even 6 months from now.

    I think if I was a Sirius subscriber, I'd be more upset that they put that much money into the one eggbasket of Stern instead of broader content or tech advancements.
     
  9. Jeff Gatie

    Jeff Gatie Lead Actor

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    I like the content. I don't need Oprah and been a Stern fan for years. Now excuse me while I go home and decide how much of the 25 hours of Stern recorded on my S50 I'm going to listen to tonight. [​IMG]
     
  10. Chris

    Chris Lead Actor

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    Considering SIRIUS introd one of the cooler devices today in their meeting, as well as business savvy, radios that will come out this summer with a "buy" and keep option for songs/concerts/etc. I'm not sure were the idea of "there is no innovation" going on.

    In fact, the largest portion of SIRI's debt load in Q4 was mostly due to infrastructure upgrades (more terrestrial repeaters) as much as anything.

    SIRI also noted four new radio types today due over the summer. So, innovation is happening [​IMG]
     
  11. Ronn.W

    Ronn.W Second Unit

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    I don't think I ever said there was no innovation going on. But if you look at the Sirius units and the XM units, XM has been way ahead of them on the tech side for quite awhile.
     

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