Sirius: Apple Rumor Is Beneficial, No Matter How It's Cut

Includes: AAPL, SIRI
by: Jacob Jordan

Howard Stern makes $80 million a year and is now approaching his sixties. At this point, it would be foolhardy for him to abandon a growing operation in the attempt to gin up a new enterprise, putting himself at the mercy of a new company. The pay-off from such a move would have to be quite hefty. One reason Stern left radio is because he desired fuller control of content, as stations which carried him continued to incur FCC fines; the move was motivated by a threat to what was proving to be a long-term profit-generating shtick.

Thomson-Reuters projects Sirius’ (NASDAQ:SIRI) revenue--in the billions--to continue growing into 2011. What the article does not fully explore is the fact that Sirius will be able to significantly cut costs in the event that Stern leaves. Consider this: When broken down to a quarterly basis, the value of Stern’s 5-year contract (comprised of cash and stock) is just over $8 million. Sirius’ average quarterly pre-tax income, from Q4 2009 to Q3 2010, averages $37 million. What that means is Howard Stern’s average quarterly take-home pay slightly exceeds 20% of Sirius total pre-tax profit.

The obvious question is this: At this point, is Stern still a significant enough factor in Sirius’ growth to warrant such compensation?

With regard to the circulating Apple (NASDAQ:AAPL) rumor, it would only make sense for Stern to leave if Steve Jobs is willing to pay him a figure exceeding what Sirius offers him. Personally, I do not think Steve Jobs cares about shelling out upwards of $400-500 million dollars (the figure Stern demanded at the inception of Sirius) to obtain Stern’s talk-personality. While a number of Sirius listeners may be willing to jump ship, in the long-run, it is quite a stretch to envision Stern as appearing to be anywhere close to the asset he was at the beginning of satellite radio. From Stern’s perspective, it is not only a pay-cut which must be considered as to what would motivate him to leave Sirius; it is also the gamble he may be taking in terms o f content control. While neither one of these factors are the end-all-be-all in Stern’s career path, they need to be weighed together.

From a business perspective, it seems Steve Jobs would be much more interested in Sirius’ overall infrastructure, and something more creative than simply incorporating Howard Stern—as important as he has been at Sirius (and still is)—into Apple’s business.

Personally, I believe the simplistic "Howard is leaving SIRI" rumor is being played out to get the shares down low for some big investors to move in cheaply. The company is profitable and growing, and the sensationalist rumors—very deliberately and publicly—are being used to shake out weak hands. With QE2 doing its magic, and also the extension of the Bush tax-cuts for the investor class, Sirius will be scooped up.

Even if Stern does abandon Sirius and moves Apple, Sirius’ profits will go up in the long-run because Sirius will not be restricted by Stern’s compensation terms, which, as mentioned above, are no longer commensurate with his contribution to Sirius’ growth due to the Law of Diminishing Returns. Sirius achieved much through Stern’s presence while a fledgling company; now, the most profitable path for Sirius is that of integration, through apps and technological partnerships.

In the short-term, Sirius’ stock price will surely shrink if Stern leaves, due to short-sighted people who view Stern through 2004 lenses. These shareholders, who over-estimate Stern's importance and view it as a constant, will (and have been) dumping their stock. Obviously, the other short-term trajectory will be a relieved appreciation of Sirius’ stock price as investors flood in or increase their shares.

My two long-run views of Sirius are the following: in the first scenario, Howard leaves, and the stock depreciates. Some subscribers will abandon Sirius, but the lost revenue from this will be outweighed by the cost-cutting from not having to re-negotiate another contract with Stern. Stern, being the big-name, will have publicly been “made an example of.” In these recessionary times, this will send a signal to others at Sirius, who will capitulate on their own contract terms. More cash will be freed up, and Sirius will not only be able to acquire yet-unknowns, but will also have a greater degree in financing new enterprises in integration and acquisitions.

Whatever happens, I am long on Sirius.

Disclosure: I am long SIRI.