September 3, 2010 / 9:13 PM / 9 years ago

Analysis: Sirius XM sets course with or without Howard Stern

NEW YORK (Reuters) - Shock jock Howard Stern brought more than just his oversized personality to satellite radio when he joined Sirius — he also carted along an estimated 1.2 million new subscribers.

What’s more, Stern used his celebrity to promote his new home, appearing, in one instance, on late-night TV as a scantily clad Santa handing out free radios to David Letterman’s audience.

Now, five years later, Stern’s $500 million contract with Sirius XM Radio Inc (SIRI.O) is nearly up, giving rise to concerns about how well the company would fare without one of its biggest stars.

At the moment, its stock is trading around $1 a share and is down 5 percent in the last month, underperforming the Standard & Poor’s 500 stock index.

“There’s a negotiation going on and everyone’s assuming the worst,” said Maxim Group analyst John Tinker, who says uncertainty about Stern has weighed on Sirius XM’s stock.

Still, others point out that over a six-month stretch, the shares are up 11 percent and say worries are overblown that a boatload of Sirius XM’s 19.6 million subscribers would be lost should Stern depart after his contract expires in December.

With or without Stern, they say Sirius XM’s concentration on car radios and partnerships with auto manufacturers will keep its subscriber base growing for years. Last quarter alone it added 583,000 subscribers.

“The company’s in a pretty good position and their operations would be fine and continue even if they lost subscribers because of Stern,” said BGB Securities analyst Murray Arenson.

Another analyst, James Goss from Barrington Research, says that the listeners who followed Stern to Sirius XM may not be ready to leave with him.

“People who took the product then might have found other things they liked about satellite radio, and at this stage, they wouldn’t necessarily leave,” Goss said.

Satellite radio does not have a formal ratings system in place, since it does not rely on advertisements for its profit, so audience numbers are not available for Stern’s show.

Sirius XM did not returns calls seeking comment for this story.


One possible scenario, analysts said, is Sirius XM and Stern could reach a new contract that called for fewer shows and less money. Under his current contract, Stern produces a show four days a week, as well as other content for the channels Howard 100 and 101.

On air, Stern often talks about wanting to sleep in, work less and spend more time with his second wife, a former model whom he married in 2008.

Besides Stern, Sirius XM has a number of high-profile contracts, including a $600 million deal with Major League Baseball, a $55 million contract with Oprah Winfrey and a $30 million deal with Martha Stewart.

Lately, however, the company has focused on cutting its programing costs. Aiding that effort has been the 2008 deal that merged Sirius with rival XM radio — an arrangement that put an end to bidding wars between the two for talent.

Sirius XM has also gained a key foothold in the auto market. The company said in last quarter’s conference call that about 60 percent of newly manufactured cars now come equipped with a satellite radio.

Even if car sales have been depressed, “six million plus cars a year are still rolling off the assembly line with satellite radios in them,” said Barton Crockett, an analyst at Lazard Capital Markets. He added that the radios could be in 70 million cars by 2015.

Sirius XM has also shown it can get customers to commit to its service after starter promotions end. It has a 46 percent conversion rate, which Barrington Research’s Goss called “very impressive,” and was fueling the company’s momentum.

As for Stern, he has hinted that he may be willing to walk away from Sirius XM, even if traditional radio, which has seen serious revenue declines in the past few years, probably cannot afford to hire him.

On his August 16 show, Stern said, “I do get a little charge out of thinking that in December we might be done. I get a little turned on by that,” according to an audio clip posted on a fan web site.

But such remarks about his uncertain future could be one of Stern’s tactics in his talks with Sirius XM. Stern joined Sirius in 2006 prior to the merger.

“From a negotiating perspective, he wants Sirius to think that he’s thinking of leaving so they’ll bid more,” Gabelli & Co analyst Brett Harriss said.

Tinker, from the Maxim Group, said Stern’s loud chatter over the contract should come as no surprise to longtime fans.

“This has always been a part of Howard Stern’s act — the drama around what’s Howard going to do next?”

The answer to that could come shortly. Sirius XM Chief Executive Mel Karmazin signed off a conference call in August by saying he would have news about Stern in time for next quarter’s results.

Crockett, of Lazard, said he was heartened by the comments. “It suggested to me that Karmazin will have a renewal with Stern that investors are comfortable with,” he said.

Reporting by Liana B. Baker; Editing by Paul Thomasch and Tim Dobbyn

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