How Much of Sirius XM's Success Is Howard Stern?

by: King of All Trades

By Relmor Demitrius

Mel and HowardThere are many ways to identify and define success. The same can be said about worth and value. It is especially true when trying to apply these concepts to something intangible, as an artist or performer. Take a talent like Howard Stern. He’s not a hard asset that you can simply attach a known value to, or state exactly what he would mean to your company. What is his actual value to Sirius XM Radio (NASDAQ:SIRI)? When Greg Maffei (CEO of Liberty Media and Liberty Capital (NASDAQ:LCAPA) and 40% owners of Sirius XM), asks Mel Karmazin (CEO of Sirius XM) how much is Howard Stern worth to the company, what does he tell him? This is the debate among bloggers to professional financial analysis that has been going on for years. How do you evaluate Howard Stern’s actual value to the company? He makes 100 million dollars a year, minus the cost to run his show. Is he worth it? Is he overpaid? Is he underpaid? Is he fairly paid? How much of Sirius XM’s revenue can be attributed to him. In this article I will go over the effect of signing Howard Stern to Sirius Satellite Radio and any effect overall he had on the satellite radio industry altogether. First, let’s get some opinions out of the way.

Howard Stern is an amazing talent and still the best radio on radio. No offense to Michael Savage fans, Rush Limbaugh, Opie and Anthony, or Larry King. Whatever. There is still no bigger celebrity in radio. Rush is close, but I don’t think he can match Howard still to this day. Howard’s popularity may be waning but he is still the best. That being said, let us leave the personal opinions and feelings at the door.

Howard Stern announced in late 2004 his intentions to sign on with Sirius Satellite Radio. We can use XM as a “placebo” or neutral study of sorts to gauge Howard’s effect, as XM was not able to land his services, yet offered an extremely comparable product. Using subscriber data is one way we can determine what effect or advantage Sirius gained over XM by adding this particular radio personality.

Even though both companies were awarded licenses at the same time, one was bound to get the service started before the other. XM began service in November of 2001. Sirius began in July of 2002. That is an eight month head start for XM. Total subscriber numbers for Sirius at the time Howard Stern was announced in 2004 was around 800,000. XM had around 2.5 million at the time. However, XM had almost a year head start on launching their service. This is the obvious reason for the big difference when both companies began service. Also XM was considered to have better quality by samplers of both services. Let’s attribute some of this as well to XM’s early success. It proves that content is important but so is quality of sound and the hardware too. So if you remove 1 million subscribers due to XM having a year head start, we’ll use a base of 1.5 million subs for XM before Howard (assuming both companies began service on the same day) and 800,000 for Sirius before Howard. Now let’s give XM a 1 million subscriber lead at this point, all things being equal. Sirius has begun in the hole in subscriber totals. Retail market is humming for XM and their product is well marketed and “first to market”. This is always a huge advantage. I think early deals with Sony (NYSE:SNE) helped give them another initial jump over Sirius at the time. It might have then attributed some to initial consumers' decision, but now that the majority of the exposure is tied to what type of car you buy, the impact has decreased dramatically over time. Sirius radios have improved and the offerings are more similar. The blending of content and availability of Best of Packages has further muted this difference as well.

In July 2002 both services were in play and could be purchased by consumers. People now had a choice. Sirius began trying to go into more of the OEM growth side, while XM focused mainly initially on retail. Although by the time of the merger both offered retail and many car options, they were both coming to the same conclusion: The OEM market (free trial at the initial new car purchase) was where it was at for huge subscriber growth. XM realizing this too late and needing to make a splash in the OEM channel, overpaid for GM as a reaction to this realization. Sirius at this point had already obtained the majority of the OEM contracts. As a combined company they are now in every major car manufacturer on the planet. This was well in motion before Stern signed. In early 2004, Sirius and XM were in 22% of all vehicles sold in the United States. In 2010 this percentage is now nearly 60%. Stern signed right in the time frame that both Sirius and XM were experiencing significant subscriber growth due to shift to OEM growth. Here is an interesting chart Sirius XM posted in May of 2009 at their shareholders' meeting, showing the shift from retail to OEM sales. Why is this important to Howard Stern’s value? Because we need to establish the exact scenario and timing in which subscriber totals in XM and Sirius jumped big starting in 2004 and were increasing in near proportion to Sirius, regardless of not having Howard Stern.

Subscriber_Shift_Chart

Clearly, retail growth was stalling even before the shift to OEM occurred. Exposure was becoming an issue. Relying on stores to move radios is risky. You’re a slave to consumer traffic flow, location, and salespeople who may or may not know the product. Also, every satellite radio that was purchased had to be incorporated into an existing sound system and radio space that was available in each car. Satellite radio had a solution for this. Install the radio directly into the car, expose consumers to it at the time of new car purchase, and give it away as a free trial. With exposure at the source of where you most listen to the radio and with cooperation from the OEM market, adding subscribers was now a bit less challenging, but more costly. XM still had more retail sales and Sirius had slightly more auto sales, due to the lagging effect of the focus both companies took from day 1. Sirius apparently had caught on to the better way of adding subscribers before XM had. However, today XM has 10,057,380 subscribers. Sirius has 9,470,068 subscribers. Since 2002 this 1 million subscriber difference still hadn’t been made up. It is only 500,000 subscribers off, but clearly having Howard Stern did not seem to make it a large enough factor to cause one product over the other to be dramatically sought out. Well, wait one minute you say. The merger gave consumers options now. Maybe XM fans would flock to Best of Services or now switch due to the merger making the two more similar.

As part of its synergies of the merger, Sirius XM was excited to announce a Best of Package. XM subscribers could now access the Best of Sirius programming as could Sirius subscribers now access the Best of XM. For $4 more a month, an XM customer could keep his XM platform, but still grab Howard and other exclusive channels on Sirius. How many people have signed up for this service in now over 1.5 year of offering it? Less than one million subscribers of the 10 million XM has. So around 1 in 11 people have chosen to add this package. We cannot however attribute all these subscribers to the Best of Sirius package on to Howard Stern alone. It appears less than 500,000 people would qualify here. I’m giving approximately 500,000 to other reasons for adding the package. I mean let’s look at what you get for $4 besides Stern. You get every NFL game, NASCAR, Playboy Channel, Martha Stewart, and College Sports. That’s a lot. Not a stretch to assume then that every person who signed up for Best of Sirius wasn’t just doing it for Howard Stern. There are a hundred reasons to get satellite radio in 2010 versus back in 2004. The amount of content added since then is staggering. I will not go into exactly what was added, but it includes Bloomberg Radio, Glen Beck, CNBC, NFL was not offered then, nor were many other sports packages.

How many Sirius subscribers bought best of XM? Only around 300,000. This is a huge difference and clearly shows that Howard Stern does have some fans over on XM, but apparently never big enough to cancel XM to go with Sirius. Otherwise wouldn’t they have already cancelled and just went over to Sirius by now? If the sub was from 2004 to now, they have had 6 years now to do so. If owning XM and not having Stern was unacceptable, these subscribers had from 2005 to 2009 to cancel their XM sub and get a Sirius one instead. Let’s assume, using the facts, that everyone on XM that wants to hear Howard, and everyone in the country who wants and now can listen to Howard, has done so. It's been 6 years since he signed, and 5 years now of being on the air. The merger took place 2 years ago and the confusion of service is long over. The value of new subscribers coming in at this point solely for Howard Stern is minimal.

So if XM is a case study of satellite radio demand versus exclusively Howard Stern demand, and we know that in 2004 a shift to OEM sales occurred, and Sirius has never been able to overtake XM in subscribers, what can we say about the effect Howard Stern has had on Sirius Satellite Radio? The factual opinion is that while he must have added value to the product, their service was never able to distinguish itself significantly from XM’s and the Best of numbers offer a picture of how many people XM might have had that wanted Stern but bought “the wrong car”. It also says that XM customers like their XM platforms so much, they would rather just add Best of Sirius than cancel their XM radio, remove it, and install one for Sirius. Truly a die hard Stern fan would, wouldn’t he?

So, 1 million subscribers paying an average of $11.80 each times 12 months. That’s 141 million dollars a year attributed to Howard Stern. Now add 5% of every XM subscriber, maximum, who wants to pay $4 for only Howard Stern. Once again being generous, let’s attribute 100% of all these Best of customers to Howard. That’s another 24 million dollars a year. I’m going to add another 20 million in simple exposure (brand awareness, mentions on TV, magazines, etc.) and another 20 million for unique advertisers attached to Howard per year. That’s a hefty 25% or more of their yearly total of all ad dollars. More than generous. Howard makes 100 million dollars a year, minus the cost to run his show. He clearly generates more income than Sirius has to pay him. How many subscribers would cancel the service if Howard left? Maybe 500,000 of the 1 million. Maybe half of the Best of Sirius customers cancel as well. Let's assume over time you get fewer Best of Sirius users now. Will his replacement add back advertising revenue? Who would they pay to replace him? Obviously they would make some of this back. It's not as if a black hole would open up where he talked and become irreplaceable no matter the money spent. But it is good to get a worst case scenario look.

Howard may be responsible for around $120 million in revenue over what they pay him. That’s from a total of 2.8 billion dollars in revenue a year.

Let us look at the Subscriber total chart from 2000 to end of 2006, 1 year into Howard broadcasting on Sirius.

Sub_Total_till_2006

Yes, there was indeed a small spike and increase in pace versus XM in late 2004. But this increase cooled around the time XM and Sirius both started shifting into the OEM markets. Notice the chart above and the time frame the OEM shift began. Seems to be regardless of service, they were both popular and OEM customers told them so. Today almost 50% of all subscribers, given a free trial, take the service. This is XM or Sirius.

Did Howard improve the image of the company and make them more popular? Probably. If he brought over 1 million subscribers [maximum number I can attribute to him given the facts I presented here], then his salary is justified. I can’t give him more because quite frankly, Sirius subscriber totals should be well over XM’s by now, if the talent he provides Sirius is so superior to anyone else that might be able to replace him for the same money. If you were going to present Howard as a unique and vastly superior offering to anything XM pays for, then the subscriber totals would need to reflect that more. Still trailing XM in total subscribers doesn’t help this camp's case.

Conclusion. OEM sales exposed the product to many consumers. They like XM just as much as they like Sirius, but some (less than 5%) are willing to pay for access to Howard, and probably only half of those 5% only for Howard. Those that have XM haven’t made significant efforts to move over to Sirius, or cancel XM when their free trial ran out, and install a Sirius exclusive radio. I believe by the facts presented here that Howard is well worth his salary and should be paid accordingly, as well as offering him on smart phone applications and any overseas content offerings. But is he the end all savior of satellite radio? Absolutely not. Satellite radio would be here with or without him. The company is stronger with him, but would survive just fine without him. In fact, the cost difference is so minimal, it would be in tune to having a bad year, or a storm hitting your oil well that month. A small hiccup that would easily be erased with time due to the overwhelming popularity of the product itself and the now vast options of content offered by both companies. The revenue generated and saving the $100 million of his contract would simply give reason to spend it elsewhere, and sign other talent to compensate. Like any company that loses an asset and has to repurchase another one. Howard’s popularity is no longer so huge that his leaving the platform would harm it in any way, medium or long term. The facts are quite clear on this. Sirius XM added more than 1 million customers this year alone. That would offset losing Howard Stern right there. Their growth would probably cover any cancellations and they wouldn’t miss a beat. The company that hired Stern 5 years ago is vastly different in 2010.

Disclosure: Long SIRI