Seriously, Does the Sirius-Howard Stern Deal Make Sense?
Radio shock jock Howard Stern got his big payoff Thursday:
NEW YORK (AP) — Sirius Satellite Radio Inc. will give Howard Stern 34 million shares of stock — worth about $220 million at today’s prices — because the company has met agreed-upon targets for gaining new subscribers under its 2004 deal with the shock jock.
In a regulatory filing Thursday, Sirius said its subscriber count as of Dec. 31, 2005, exceeded the target it had agreed upon with Stern in October 2004, when it made a five-year deal with him.
At the time, Sirius said its deal with Stern would be worth about $100 million per year beginning in 2006. The 34.4 million shares were worth about $110 million then, but the stock has roughly doubled since then.
Stern begins his new show on Sirius on Jan. 9, having left his longtime employer Infinity Broadcasting, which has been renamed CBS Radio, a unit of CBS Corp.
Stern now owns about 2.5% of Sirius.
Back in October 2004, when the deal was announced, the company’s press release (2nd last para) said that “SIRIUS estimates that Stern only would need to generate approximately 1 million subscribers in order to cover the costs of the deal. Total production and operating costs for the Stern show, including compensation of the show cast and staff, overhead, construction costs for a dedicated studio, and a budget for the development of additional programming and marketing concepts, is estimated to be approximately $100 million per year.”
If the company is “Siriusly” taking on another $100 million a year over and above the stock they just paid Stern (which presumably includes Stern’s salary), it’s hard not to think they are in “Sirius” trouble:
- The company had operating losses of $811 million during the last four reported quarters ending Sept. 30, 2005, on revenues of $188 million (you read that right).
- If the company somehow gets to the 4 million subscriber level, a roughly 20% increase over where they are now, total annual revenue, based on $13 a month per subscriber, would only be $624 millon. And don’t forget the $100 mil in new costs from the Stern deal. They’re still hundreds of millions short of breaking even.
- Any subscriber gains from the NFL deal announced two years ago have probably already been realized. So where are the huge numbers of new subscribers going to come from? Especially considering that archrival XM has about 6 million subscribers (noted near the end of the USAT Stern stock announcement link), are there really more than 10 million people out there willing to pay $150-plus a year for radio programming?
- A price increase might help, but I would think there would be significant subscriber attrition if they tried to go above $14.95 a month, especially if XM doesn’t change its pricing.
I don’t see how Sirius gets over the top. Its best bet would be to somehow get within striking distance of break-even, and hope someone’s interested enough to buy it while the stock is at its current bubbly level (This company is worth $8.7 billion? Please). In the meantime, they’d better hope Howard Stern hangs on to his shares, because a large sale by him, if known (and he may be considered an “insider” who has to disclose his trades) could tank the stock.
I don’t own either stock, but if I had to choose I’d go with XM. XM has baseball & Sirius has football. Baseball is a game made for radio whereas football was popularized by tv. Football is once a week when most folks are home watching on tv. Baseball is a daily event often during driving hours. Sirius is going to end up doing a secondary offering which will drive the share price even lower.
Comment by LargeBill — January 7, 2006 @ 11:55 am
#1 Bill, I would agree with that. XM has 75% more subscribers and is somehow worth 29-plus % less ($6.2 bil vs. 8.7 bil).
I think both are probably overvalued, but Sirius is much worse.
Comment by TBlumer — January 7, 2006 @ 12:21 pm
[...] Howard Stern believes Morningstar more than he believes his own BS. UPDATE: Seriously, Does the Sirius-Howard Stern Deal Make Sense? Filed in: Radio, Economics | No Comments » [...]
Pingback by Pundit Review » Blog Archive » Howard Stern Cannot Be Sirius — January 14, 2006 @ 10:51 am
Twenty Two years ago, when I became a Howard Stern fanatic, a friend of mine predicted that he wouldn’t last. Too funny.
How about factoring this into your “fuzzy” math abut Sirius financials…Infinity (Viacom) made a killing by selling advertising on Howard’s show. Howard’s show on Sirius is not commercial free. Your math seemed to miss this fact. Also, you somehow are stuck at 4 million subscribers. It’s going to go way above and beyond that. Is there any reason it wouldn’t?
Here’s my prediction…Sirius will pass XM within two years. Howard’s show is better than ever and the buzz about it will reverse XM’s dominance. Something you probably won’t see in the press is a count of how many XM subsribers have already jumped ship to go with Sirius. I bet it’s more than a few.
Steve
Comment by Steve Dunst — February 2, 2006 @ 7:45 am
I had no idea Sirius had commercials during any program. I thought people were paying $13 a month partly to avoid commercials. Yes of course that affects things significantly, but I have no idea how much revenue they’ll generate (maybe you do). I guess they’re probably getting ad venue from football then too. Seems like that’s ruining a good thing.
You may not have seen the other post I did on Stern, where some are questioning why he’s allowed to sell his shares any time he wants:
http://www.bizzyblog.com/?p=1247
I don’t understand how the two services combined will get past maybe 12 million subscribers, esp with attrition, iPods, Podcasts, and other competitions for ears, eyes, and time.
I don’t have any hostility towards Stern’s programming, I just don’t get what people see in him, and I’ve tried to get it. I saw “Private Parts” and it seems like it should have been called “I’m a Megamillionaire Martyr.”
Comment by TBlumer — February 2, 2006 @ 8:20 am