When Stern goes live as expected on the Sirius Satellite Radio network on Jan. 9, it will certainly mark one of the biggest shakeups the radio world has seen in years and potentially provide an extraordinary shot in the arm for the nascent satellite radio industry.
Sirius Satellite Radio gambles that shock jock Howard Stern is worth his $500 million paycheck.
The news has already boosted Sirius subscriptions, but the service has to attract a lot more subscribers and retain advertisers to cover the costs.
From Sirius' perspective, it had better. The young company, which has yet to turn a profit since launching its service in 2002, has agreed to pay Stern $500 million over five years to transform his show into two channels broadcasting around the clock. Some of that will go into production costs and the other salaries associated with his show.
Subscriptions, which typically cost $12.95 per month, will have to jump to justify that monster contract--Sirius executives say they need 1 million new subscribers, above and beyond what they would otherwise have drawn, to pay for the deal. No doubt about it: Sirius has all but bet its future on Stern.
That 1 million figure is rough at best, but it takes into account average subscriber fees per month of about $10.81 (lower than retail price, due to promotions and rebates) and an average monthly churn, or cancellation rate, of 1.8 percent, according to the company's latest earnings release. To get there, the New York-based satellite radio network is counting on a sizable portion of Stern's 8 million to 12 million listeners to follow their radio Pied Piper to the subscription service.
Sirius executives already have some reason for optimism. Subscriptions have tripled since Stern, from about 700,000 in October 2003 to more than 2.1 million today. And the network thinks Stern is the right bet to help it close the gap against its rival XM Radio, which currently reaches about twice as many people.
Only a few more weeks before Howard Stern moves to the Sirius Satellite Radio network. CNET News.com's Charles Cooper, John Borland and Harry Fuller debate whether CEO Mel Karmazin is crazy like a fox--or simply crazy.
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Indeed, at the beginning of 2005 the company predicted it would reach 2.5 million subscribers by the end of this year. Now it's instead on track to reach more than 3 million by the end of the year, according to the company's latest earnings release.
"We're not putting a number on it, but we do believe that if he hasn't already paid for himself, then he has contributed a tremendous amount of subscription growth over the last year," said Sirius spokesman Jim Collins.
Under current projections, analysts say it shouldn't be hard for Stern to pay for himself.
"I think it will turn out to be a very astute investment by Sirius," said Sanford C. Bernstein analyst Craig Moffett. "The value of what (Sirius has) already gotten from him in promotional appearances alone is worth tens of millions of dollars in free advertising."
In a recent research note, Friedman Billings Ramsey stock analyst Maurice McKenzie said he expected Stern to draw about 1.5 million new subscribers for Sirius, weighted heavily toward the last quarter of this year, and the first quarter of next, when the buzz around the shock jock's defection is peaking.
Analysts predict strong growth for both Sirius and rival XM next year, with estimates for Sirius' 2006 year-end subscriber totals ranging from 5.7 million to more than 7 million people. That represents more than 625,000 new subscribers per quarter, far more than the 360,000 new people it added last quarter.
Some of that growth will come from people interested in other programming, of course. Sirius will also carry scores of music stations, professional football, hockey, basketball and soccer, and a show hosted by Martha Stewart.
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However, subscriptions are only half of the revenue equation. Sirius also plans to sell advertising on Stern's two channels and has told analysts that it has already secured contracts from some of the faithful advertisers on his terrestrial radio show.
Collins declined to say who those advertisers were, or how much Sirius was charging, but did say that there will be less advertising on Stern's satellite show than on the Infinity airwaves, where ads could sometimes amount to more than 20 minutes out of an hour.
To date, advertising revenue for Sirius has been minimal--about 26 cents per subscriber per month--since it avoids commercials on the music channels that make up the bulk of its programming. Chief Executive Officer Mel Karmazin, a master at boosting revenues while serving as the top executive at Infinity Broadcasting and CBS Radio, has predicted that advertising revenue will double after Stern's arrival.
Of course, the Sirius contract banks on the notion that Stern will remain a powerful presence over the full five years of the contract. It won't do the company much good if a million subscribers join, and then leave en masse after deciding the service isn't worth the monthly subscription fees.
But what about the free spirit himself?
At this stage, Stern has been ebullient in interviews, talking in a recent New York Magazine cover story about a personal creative revival. In that article and others, he has been overflowing with ideas that go far beyond anything he was allowed to do during his last few years on the radio. Stern could not be reached for comment for this article.
His hints have certainly stirred interest in seeing just how far beyond the boundaries of conventional good taste he'll go, given the apparent complete lack of censoring standards in his contract. But even his supporters ask how long that curiosity may last.
Ironically, a good part of the appeal of Stern was his chafing at his limits, railing against the Federal Communications Commission, or his bosses, or other authority figures, and wondering when he would again cross one of the lines that prompted more than $2.5 million in federal indecency fines for his behavior during the last 15 years. That tension will now be gone.
"Can he create compelling content when he doesn't have the foil of the FCC?" asked GartnerG2 media analyst Mike McGuire. "That's going to be an interesting challenge for him."
Already, some warning signs have emerged. His ratings at his flagship New York station WXRK slid year over year by 18 percent this summer, analysts have noted.
Several investment banks have downgraded Sirius' stock in recent days, saying that the market has badly overvalued the company in comparison with XM, its chief rival.
But all eyes, or ears, will be on Stern's station when he launches on Jan. 9. Sirius has declined to say exactly what people will hear. Stern himself has given some hints in interviews, ranging from a "Who Wants To Be A Millionaire?"-like game awarding a date with a porn star as a prize, to explicit "sports" events having more to do with bathrooms than stadiums.
"It's hard to quantify how listeners will react once (he) moves to an FCC-free medium," Banc of America Securities analyst Jonathan Jacoby wrote in a research note on Tuesday. "The actual impact of Stern remains the biggest wild card in the Sirius story."