Howard Stern is the self proclaimed "King of All Media." He's a seasoned pro, hosting a very popular show with some outrageous guests, but is he really worth $80 million per year? Stern still has 2 years remaining on his exclusive contract with Sirius XM (NASDAQ:SIRI), but he has recently made waves by publicly stating that he wants to leave the company. At this point, is Howard Stern really worth his salary, or should Sirius XM just let him go?
Howard Stern earns (I use that word loosely) $80 million dollars per year under his current 5 year contract at Sirius XM. Doing the math, it works out to a salary of about $2000 per minute of airtime. It's a rich figure by any standard. Yet, Stern repeatedly claims on-air that his compensation is too low, and in 2011, went so far as to sue Sirius XM for over $300 million in bonus compensation which he felt entitled to. The suit was thrown out in 2013, but the animosity between Stern and Sirius XM persists. Stern ranted in April 2013 that he would leave Sirius XM when his contract expires. Sirius XM CEO, Jim Meyer tried to quell the departure rumors by stating in September 2013 that the company was "committed to keeping" Howard Stern, although Mr. Meyer rephrased his comments shortly afterwards, saying that Sirius XM would not be interested in renewing the contract if it was "non-exclusive." Sirius XM either wants all of Howard Stern, or none of him.
Speculating Salary Demands
Stern's original contract, signed in 2005 was worth $500 million. The base salary was $80 million per year along with an additional stock component worth $100 million. In 2010 Stern re-signed in a contract worth $400 million over 5 years. The base salary remained the same, however, there was no stock bonus. In 2010, amid tense contract negotiations there were rumors that Stern was soliciting an offer worth $600 million over 3 years to host a show on Apple's iTunes. However many analysts simply dismissed this as a rumor meant to help Stern gain leverage with Sirius XM.
When the subject of a new contract negotiation was recently brought up, Howard Stern was adamant that he would not in any way accept a salary reduction in the future. Clearly, Howard Stern, should he continue with his exclusive affiliation with Sirius XM, is either looking to maintain his salary at the current rate, or to in fact try to increase it.
As I see it, Howard Stern has three options when his contract with Sirius XM expires in December 2015.
1) Status Quo: Howard Stern can renew his contract and continue working exclusively with Sirius XM. It would be hard to justify a salary increase, and it would likely be difficult to get Stern to agree to a substantial decrease. As such we can assume that Sirius XM and Stern could likely agree to renew the contract at similar terms to the current pay structure. No matter what Stern may say, $80 million dollars is still certainly a lot of money and considering the fact that stern receives 8 weeks of vacation per year and works only 4 days per week at Sirius XM, he might have trouble soliciting sympathy from the contract negotiators. For Sirius XM, it is debatable as to whether holding on to Howard Stern makes sense from a financial standpoint, but management would likely be willing to renew his contract at similar terms just to keep Stern out of any competitors hands, and as well so Sirius XM can continue offering the broadest and most exclusive programming choice possible to their listeners.
2) Stern Departs: Howard Stern has said on multiple occasions that he wants to leave Sirius XM once his contract expires. Furthermore, there is clearly some animosity between Stern and Sirius XM, considering the fact that Stern tried unsuccessfully to sue the company in 2011. There is a distinct possibility that Stern may eventually break all affiliation with Sirius XM and either join a competitor or start his own network and continue his show in syndication. I don't believe that there is any single radio competitor in a strong enough financial position to pay Howard Stern $80 million or more. Realistically speaking, if Howard were to leave Sirius XM, his only viable option would be to syndicate the show and license the broadcasts to a group of nationwide radio stations, which would likely also include a non exclusive broadcast agreement with Sirius XM.
3) Compromise: Under this scenario Stern might decide to syndicate his show while at the same time continue licensing his content to Sirius XM, perhaps as a part time host, offering exclusive content, or simply as syndicated show with a non exclusive program channel on Sirius XM. This would give Stern the option to once again have his show broadcast over regular radio through syndication, while still retaining some lucrative links to Sirius XM. As mentioned before, Sirius XM CEO Jim Meyer has stated that he is not interested in keeping Howard Stern under a non-exclusive contract, however, as anybody knows, a lot of things can change during a contract negotiation.
Sirius XM Should Cut Stern
The radio landscape has changed a lot since 2010 and new contract negotiations will likely be tough for Howard Stern, especially if he shows little wiggle room in his demands. Sirius XM is a much stronger company now than it has ever been. In 2010, with it's stock trading in the $1 range and with a yearly profit of only $43 million, Sirius XM would have taken a large hit if it lost The Howard Stern Show. Sirius XM is currently well established as a profitable company, reporting free cash flow of $709 in 2012 and currently counting almost 26 million subscribers. In 2015 when Stern's contract is set to expire, Sirius XM will be an even larger and stronger company with even more confidence and bargaining power.
Moreover, in the last years, Sirius XM has made a huge push to increase their content offerings. In the sports programming arena, they have signed exclusive radio deals with the NHL, NFL, MLS, NBA, NASCAR,and PGA Tour, just to name a few. And on the regular programming schedule they have a solid lineup of popular radio personalities like Oprah, Martha Stewart, Opie and Anthony, Dr. Laura, Bob Dylan, and Tom Petty.
As I see it, Sirius XM has two good options in their contract negotiations with Stern:
1) Non Renewal: If Stern is serious about wanting to leave the company or he expects Sirius XM to continue paying him $80 million or more per year, then Sirius XM should absolutely drop him from their programming lineup. The risk of a mass subscriber exodus happening if Howard Stern were to leave Sirius XM has been greatly reduced in the last years. In 2010, analysts speculated that losing Howard Stern would cost Sirius XM about 1 million subscribers. Looking ahead to 2015, losing Howard Stern would likely result in an almost negligible subscriber loss. Sure, there may be a few Sirius XM subscribers who only use their subscription to tune into Stern's show, but far and away, the majority of subscribers see the value in the broad range of programming choices and would be reluctant to cancel their subscriptions simply because of Stern. If Stern would agree to a pay cut, Sirius XM should make an effort to reach some sort of an agreement. In 2010 some analysts speculated that Stern's contract would be in the $60 to $70 million range. If Stern would be willing to accept a contract close to those figures, Sirius XM might be willing to keep him, but if he refuses any pay cut, they should send him packing.
2) Non Exclusivity: Although CEO Jim Meyer has stated that he would not want to renew Stern's contract on a non exclusive basis, I believe that this may have simply been a negotiating strategy. If, in 2015, Howard Stern decides to leave Sirius XM and turn to a syndicated broadcasting model, Sirius XM should strike a deal to be able to broadcast his show on a syndicated and non exclusive basis at a greatly reduced fee. Howard Stern, would be once again faced with censoring pressure from the FCC and he would definitely be constricted in his programming freedom if he was broadcasting over public airwaves, but he would likely make more money as the owner of his own network. Although Sirius XM would not have exclusive use of his content, by continuing to broadcast his show under a syndication agreement, they would not be alienating any of their subscribers. It's likely that Howard Sterns departure as an exclusive host would have almost no impact on subscriber numbers.
Huge Saving For Sirius XM
Under either of the two scenarios outlined above, Sirius XM would save millions of dollars in programming fees. If we assume that it would cost Sirius XM $80 million per year to keep Stern under an exclusive contract, but only $15 million to keep Stern as a non-exclusive syndicated broadcast, that is an annual savings of $65 million per year. That is approximately the same income generated by 400 000 subscribers on a yearly basis. In other words, unless Sirius XM expects to lose over 400 000 subscribers, they would be better off letting Howard Stern go, rather than renewing his exclusive contract. If Howard Stern were to branch out with his own network and syndicated show he could potentially earn more than $80 million per year, so this might be the most tempting option for him. This however is a risky maneuver and considering that Stern will be almost 61 years old in 2015, I would question whether he really wants to go through so much effort to syndicate his show, simply to earn a bit more money.
I think that Sirius XM squarely has the ball in its court in the upcoming contract negotiations with Howard Stern. Losing his show would not materially impact their subscriber growth and the cost savings would in fact simply increase their bottom line. Also, we should consider that even if Howard Stern were to syndicate his show, Sirius XM would still likely be able to broker a deal to licence his daily broadcasts on a non exclusive basis. This would represent a significant cost savings for Sirius XM while also appeasing subscribers who are avid listeners to his show. Losing Howard Stern or simply signing him to a non exclusive contract would be a win-win situation for Sirius XM Radio and investors can expect to benefit regardless of the outcome.