A Sirius Gamble
Knowledge@ Wharton, 02.13.06
In the 16 months since announcing that it had signed Howard Stern to a five-year deal, Sirius Satellite Radio has added approximately 2.7 million subscribers and become a household name in the satellite radio world. The tab: close to $700 million.
Is Stern worth it? The answer depends on whom you ask. Sirius CEO Mel Karmazin, who joined the company in November 2004, and had been Stern's boss at Infinity Broadcasting and then Viacom before departing in June 2004, says the radio "shock jock" is a good investment. "There is no question that Howard is worth the money that he is getting paid," said Karmazin on CNBC's Mad Money show last fall. "As a matter of fact, if he was going to renegotiate today, he would have to get more money because [sales are] really doing well."
Others aren't so sure. Wharton marketing professor Peter Fader says Sirius would have reached its current 3.3 million subscriber total without Stern. According to Wayne Guay, a Wharton accounting professor and compensation expert, Stern's salary is a simple function of supply and demand. "There are few in the industry who could generate those subscriber numbers," he notes. Wharton marketing professor Jagmohan Raju labels the bet on Stern "a reasonable gamble." And David Bell, another marketing professor at Wharton, suggests Stern can deliver the type of consumer "evangelism" that can make Sirius a sustainable brand.
"For Sirius, it's a bit of a gamble, but Stern was instrumental early on with putting brands like Snapple in the limelight on his radio show," says Bell. "He has a hardcore loyal audience that will be brand evangelists" for Sirius.
While it's still early to determine how the Stern story will ultimately play out -- the radio personality began his first Sirius broadcast on Jan. 9--a few key issues will tell the tale. Can the Stern effect last beyond his first few months of airtime? Will Sirius be able to close the gap with XM Satellite Radio , which ended the year with more than 6 million subscribers? And will the buzz generated by Sirius's grab for shows like Stern's and the broadcasting rights to the National Football League games help the company to eventually surpass XM's subscriber base?
No matter how this saga unfolds, Stern won't come cheap. Jonathan Jacoby, an analyst at Banc of America Securities, estimates that the true cost of Stern's contract will be about $670 million, including noncash compensation. Stern and his agent, Don Buchwald, were awarded 34 million shares valued at about $200 million last month for bringing in more subscribers than expected.
Wharton's Fader finds it hard to defend Stern's compensation. While it's possible to cook up metrics to justify the deal, what remains to be seen is whether Stern's fans stick with Sirius. "A lot of them bought Sirius just for Stern, but there could be lower retention rates. It's very hard to imagine that the acquisition of one person, even if it is someone as popular as Howard Stern, will be enough to keep Sirius afloat for long," he says.
Crunching The Numbers
Putting a number on the Stern effect has been a relatively simple calculation. In announcing the deal in 2004, Sirius said it needed just 1 million subscribers to break even on the base five-year $500 million contract. Raju has no reason to doubt that math and agrees that the lifetime value of a Sirius subscriber who pays $12.95 a month is about $500.
The only complication in Sirius's math is trying to benchmark what Stern is really worth, says Guay, adding that determining whether Stern is overpaid isn't as clear-cut as it would be for a company executive, such as a chief financial officer. Why? Executive compensation can be compared across entire industries to get a ballpark figure and range of fair salaries. For entertainers, those benchmarks are difficult to find. "It's a different animal when you're dealing with entertainers," says Guay. "Stern is a huge player in the industry and had bargaining power. Sirius had to pay whatever it took. It's like paying for a star baseball player."
The comparison between Stern and a star baseball player is apt, Guay adds. When a baseball team signs a star, it has to project how much additional revenue from jersey and ticket sales and concessions can be generated by the new player. Sirius also had to make a guess as to what Stern could add in advertising revenue (the Stern show has a handful of commercials during a nearly five-hour broadcast) and media attention.
In the media attention department, there are few entertainers who can rival Stern, who spent more than a year talking about his Sirius move on his previous "terrestrial" radio show before actually leaving. Stern was so successful at pushing Sirius subscriptions that he triggered an incentive clause for bringing in new subscribers. The result has been the 34 million shares award. Despite Stern's efforts, however, the subscriber gap between XM and Sirius is about the same as it was when the radio personality signed in 2004.
According to Fader, Sirius probably would have had the same subscriber tally without Stern. "That gap was misleading," he says. "If the technology truly is becoming ubiquitous, both [companies] will have tens of millions of subscribers. It was too early to do a bold move like this." Indeed, Fader expects the Stern effect to wear off shortly, a theory endorsed by Banc of America's Jacoby. In a Jan. 27 research note, Jacoby said that shortages of Sirius radios [due to high consumer demand] have abated from early January, and that advertising on Stern's show is selling at a discount due to lack of initial audience data.