Sirius Satellite: Making Waves
The No. 2 company in digital radio has reeled in Howard Stern with a $500 million payday. Is this a breakthrough for the young industry?
By Brad Stone
Newsweek

Nov. 29 issue - When shock jock Howard Stern swooped into Sirius Satellite Radio, he was greeted like a conquering hero. Last month, a week after he announced on his popular morning radio show that he was taking his act to Sirius’s digital airwaves, he paid his first visit to the company’s midtown Manhattan headquarters. Three-quarters of Sirius’s 400 employees crowded into the 36th-floor lobby. When the distinctive black mane of FM radio’s pre-eminent provocateur appeared on the balcony, his new colleagues erupted into five minutes of raucous applause. Some admitted to choking back a few tears. “I just know how much this means to the company,” says hard-rock DJ José Mangin. Stern apparently was stunned by the outpouring. He no doubt felt similarly moved by what Sirius had done to get him to leave the free airwaves for the No. 2 satellite-radio company: a $500 million deal over five years. For that kind of money, who wouldn’t be touched?

If the employees of Sirius gave Stern an almost messianic reception, it’s only because they needed to be saved. During the past decade investors have showered two companies, Sirius and XM Radio, with $2 billion apiece to develop satellite-based radio networks that offer monthly subscribers more than 100 channels of mostly ad-free music and talk. But ever since both companies began broadcasting about three years ago, XM has been cleaning Sirius’s clock-radio. Washington, D.C.-based XM has three times the subscribers, cooler receivers, a bigger chunk of retail sales and better relationships with automakers-all because it got a crucial head start developing workable radios. Sirius is ahead only in the PR battle: a month after making a splash with Stern, it made new headlines last week by recruiting Stern’s longtime boss, former Viacom president Mel Karmazin, to be its new CEO.

But a perennial runner-up can’t survive on news clips alone. In a series of expensive gambles, the new team of cowboy capitalists at the helm of Sirius are also spending prodigious amounts money to attract high-profile programs that can’t be heard anywhere else-the aural equivalent of must-see TV. They’ve paid for celebrity talents like Stern, Eminem (who lends his name, his tastes and occasionally his voice to a hip-hop channel) and skateboarding icon Tony Hawk (who hosts a weekly rock show). Sirius has also outbid rival XM to broadcast the games of the NBA, NHL and NFL (XM recently snagged Major League Baseball for $650 million over 11 years). The game plan: to spend whatever it takes to get premier programming aimed at young adult men, who’ll then drive up Sirius’s sales in electronics stores and auto dealerships. “We think that with enough time and money, we’ll eventually catch up on the technology,” says outgoing Sirius CEO Joseph Clayton, who will stay on as chairman of the company. “So we believe it will eventually boil down to who has better content.”

Clayton and his replacement, Karmazin, dream of building a radio network with as many choices as cable TV. Nabbing Stern was a key step, and shows how expensive such a vision can be. The numbers in the Stern deal are staggering. For teasing celebrities, bantering with strippers and railing against the FCC’s indecency restrictions for as many as five hours a day, Stern makes $25 million a year to talk to an average 8 million listeners on Viacom’s Infinity radio network. His new Sirius show, which likely starts when his Viacom deal ends in 13 months, will pay him $100 million annually for five years to talk to some portion of 2 million subscribers. (Stern has said he would like to get out of his Viacom contract earlier; his agent and Sirius spokespeople declined to comment.) According to Sirius, Stern will develop three channels of programming, and will broadcast from a new custom-built studio.

To make it all work, the prolific Stern will have to perform the same magic he did with his two best-selling books and his 1997 hit film “Private Parts.” In short, he’ll have to get his fans to pay for his shtick. For the deal to pay off, the self-styled “king of all media” needs to persuade at least 1 million fans to buy satellite radios (which start at about $150 in stores and $200 to get installed in a new car) and pay a monthly $12.95 subscription fee. Most analysts not only think that’s achievable but believe the Stern deal is already paying off in the crucial currency of buzz. “This made a statement to other radio talent and to everybody in the industry that Sirius is for real,” says Karmazin.

Sirius wasn’t always in XM’s rearview mirror. It was founded in 1990, two years before XM; it went public in 1994, five years before XM; and in 1997 it became the first satellite-radio broadcaster to get a license from the FCC. In 2000 it beat XM to outer space, launching three satellites into orbit. But Sirius ran into trouble making the microchips needed for its radios to communicate with the satellites. Its supplier, Agere, a spinoff of Lucent Technologies, struggled with technical problems and fell more than a year behind schedule. As the stock market declined in 2001, both satellite-radio companies flirted with bankruptcy. But XM emerged first from tough times and launched its network in November 2001. Sirius’s first national broadcast wasn’t until July 2002.

While Sirius was struggling, its board of directors took dramatic action. In 2001 it pushed out the company’s founder, David Margolese, and hired Clayton, a technology executive from Thomson Multimedia, which helped launch DirecTV in the early ’90s. A Kentucky native and fan of horse races, the 55-year-old Clayton has a Dwight Yoakam poster on his office wall and a Bush-Cheney re-election pin on his desk, and he personally initiated the effort inside Sirius to give the National Rifle Association a three-hour talk show. He also was willing to take a big financial-and personal-risk on a provocative host like Howard Stern. “My church neighbors say to me, ‘Why in God’s name would you ever put that guy on the air?’ ” Clayton says. “I tell them that this business is about balance of programming choices.”

In his three years running Sirius, Clayton used his gambler’s instinct to get the company on track. He replaced 22 of the top 25 executives with more experienced veterans of consumer electronics and television programming. To ease Sirius’s debt burden, he repeatedly turned to the stock market to raise cash-including five times in the past 18 months. The company now has more cash than debt, but more shares outstanding on NASDAQ than either Microsoft or Intel. It’s a sign, says Banc of America Securities analyst Jonathon Jacoby, that “they are very freewheeling with their cash and equity.” The introduction of new shares is also a main reason that Sirius’s stock plummeted from more than $50 a share in the late ’90s to about $4 in mid-November. At the same time, the extra money allowed Clayton to usually outbid XM on deals like the NFL ($220 million for seven years). Sirius president Scott Greenstein, who brokered the Stern deal, says the big expenditures prepare Sirius for the day when “the quality of the programming dictates where people go.”

Recruiting Mel Karmazin as CEO is the ultimate expression of Sirius’s evolving strategy. “The thing that people don’t understand about this business is that it’s all about brand names,” Clayton said before last week’s announcement. Karmazin, who managed Infinity radio’s growth from three stations in 1981 to 185 by the time Viacom bought it in 2000, is the ultimate celebrity executive, particularly compared to the relatively unknown Clayton. Karmazin will also likely be a more aggressive steward. Clayton said repeatedly during his tenure that Sirius could profitably be the No. 2 player in satellite radio. Firing a shot across XM’s bow, Karmazin says that staying No. 2 “is not something that is on my agenda.”

XM is not sitting still, of course, as shown by its recent $650 million deal for the satellite rights to every Major League Baseball game. XM also plans to press its technology advantage. This holiday season it will start selling its $340 Delphi MyFi-a portable radio that listeners can use like a TiVo to record and store programs, and carry around like an iPod. Because of the early problems with the technology, Sirius doesn’t expect to have a wearable device on the market for a year. “We are not in this to tie, and as they say, ‘When you’re in second place in the dogsled race, the view isn’t that attractive’,” says XM CEO Hugh Panero. He also notes that XM has mature partnerships with GM and Honda, which installed XM radios in more than 200,000 cars last quarter, more than double Sirius’s number. (Both automakers own large pieces of XM, while Ford and DaimlerChrysler own much less in Sirius.) Sirius’s relationships with Ford and DaimlerChrysler are “just starting to get some momentum,” Clayton says. But because there are 15 million new cars sold each year, analysts expect car purchases to eventually drive the business.

Sirius is clearly planning for a future, several years away, when the playing field is even and it gains ground on the strength of its shows. For now, its deals with Stern and the NFL and the appointment of Karmazin have brought a manic, bustling energy to Sirius’s offices. On the day when Enterprise visited, salsa singer Oscar D’Leon and his band were performing in the lobby. Down the hall, DJs kicked off the first official day of Shade 45, Eminem’s new channel, and talked of persuading Sirius to install a stripper pole in their studio. Nearby, in another studio festooned with team banners, the sports-nut hosts of the NFL channel opined on the invincibility of the New England Patriots. There appears to be little friction between these disparate groups. “Everyone here is fascinated by each other,” says Jeremy Coleman, vice president of entertainment programming.

In Sirius’s studios, there’s also a touch of amateurishness, a lingering college-radio vibe. It is more evidence that the company remains young, with lots of room to grow. For example, one afternoon in the studio of OutQ, Sirius’s gay-and-lesbian channel, a talk-show host inadvertently put one prank caller after another on the air. They all claimed to be Arab-American and asked to discuss the newest Osama bin Laden video message. After a few moments, each let loose a stream of anti-gay invective. The OutQ DJ sighed in frustration. But perhaps it was not as bad as he thought. The callers sounded like Howard Stern fans-and they are finally getting Sirius.

© 2004 Newsweek, Inc.
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