TCS Daily

Stern Finally Gets SIRIUS

By Dominic Basulto - October 18, 2004 12:00 AM

In early October, Sirius Satellite Radio shook up the world of broadcast radio by signing radio "shock jock" Howard Stern to a five-year, $500 million deal that some analysts have already called "cataclysmic" and "a wake-up call" for the world of AM and FM radio. Within days, the comparisons came fast and furious, with some comparing Howard Stern's planned defection to satellite radio in January 2006 to Joe Namath's decision to move to the fledgling AFL or Milton Berle's decision to move from radio to TV in the late 1940's. These comparisons may be overstating the matter, but it is not hard to see why satellite radio -- which offers digital-quality, commercial-free programming -- is ready to challenge the long-time dominance of traditional broadcast radio.

The signing of the controversial Stern to a half-billion-dollar deal is an interesting gambit for satellite radio pioneer Sirius. Love him or hate him, Howard Stern has the ability to move markets and challenge the status quo: by some estimates, he now commands an audience of 12 million listeners and is responsible for $100 million in annual advertising revenue for Viacom's Infinity Broadcasting unit. Not surprisingly, a consultant hired by Sirius contends that "this deal has the potential to turn FM into AM and AM into shortwave."

That's a bold proclamation, to be sure. After all, the two market leaders in the nascent field of satellite radio, Sirius and XM Satellite, are still far short of profitability. In 2003, Sirius posted a loss of $226.2 million on total revenue of only $12.9 million; in 2002, Sirius posted a loss of $422.5 million on a tiny revenue base of $805,000. The problem, quite simply, is that satellite radio entrants must completely upturn the existing business model for radio and convince radio listeners to part with their hard-earned dollars, much as cable TV operators succeeded in doing.

Currently, broadcast radio listeners pay a grand total of zero bucks to listen to an amalgam of talk, music, news, local programming and sports -- but in exchange they are also subject to a barrage of as much as 18 minutes of commercials per hour. Sirius Satellite Radio turns that business model upside down -- in exchange for paying $12.95 per month, subscribers have access to over 120 channels, including 65 channels that are 100% commercial-free.

By deciding to pay Stern $500 million over the next five years and covering all production-related expenses, Sirius is basically gambling that it can recoup a nice chunk of change over the next five years. The economics are interesting: Stern currently commands an audience of 12 million listeners, roughly 20 times the size of the 600,000-strong Sirius subscriber base. In total, there are only 3.1 million satellite radio listeners in 2004, compared to more than 200 million everyday broadcast radio listeners. Sirius executives have publicly stated that they expect the addition of Stern to add another 1 million subscribers. Assuming that each subscriber is worth about $150 each year, the deal implies that Stern will be able to convince at least 8% his listeners in 2006 to plunk down $12.95 a month -- and then keep plunking down $12.95 per month over the next 60 months.

It's a bet that Sirius Satellite is willing to take. After all, as the New York Times has pointed out, it was Howard Stern who has put his substantial marketing heft behind previously unknown products (e.g. Snapple), books, movies, cable TV shows and even politicians. Stern claims credit for helping elect a number of high-powered politicians including New York governor George Pataki and New Jersey governor Christine Whitman. Stern's controversial nature and willingness to become a marketing "pitchman" for a variety of products and causes makes him a dangerous wild card from the perspective of the broadcast radio incumbents.

Going forward, both Sirius and XM Satellite will need to continue their aggregation of premium, high-quality content and big-name contributors in order to keep the pressure on broadcast radio. Currently, Sirius has assembled a stable of top programming partners and brands, including the NFL, NHL and National Public Radio. There are even channels dedicated to Elvis Presley and Eminem. For its part, XM has partnered with ESPN, MTV, VH1, NASCAR and Disney Radio.

In addition to a willingness to ink big-name talent, explore new demographics and experiment with new radio formats, the nascent satellite radio market has been helped by its ability to sidestep the FCC's tough stance on censoring the public airwaves. For now, satellite radio is beyond the reach of the FCC's public decency czars. Thus, a star like Howard Stern, who has been fined hundreds of thousands of dollars by the FCC for his controversial mix of scatological and sexual references, is now free to create uncensored programming. That could be a big selling point: radio listeners want the type of freewheeling, unedited, off-the-cuff commentary that may or not pass public decency standards.

Going forward, it will be interesting to see whether satellite radio does indeed mark the end of broadcast radio. After all, most acknowledge that satellite radio may never be able to compete with broadcast radio in terms of absolute audience size. Yet, despite less than stellar financial returns to date, Sirius has lined up a number of high-profile backers -- especially automobile giants like DaimlerChrysler, Ford and BMW -- which are now making satellite radio widely available as an option in new vehicles. Obviously, some major corporations are betting on the future of satellite radio. The only question remains: What role will Howard Stern, the self-proclaimed "King of All Media," continue to play in the satellite radio revolution?

The author is a TCS contributor.


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