Howard Stern is dropping jaws and raising eyebrows again after news that SiriusXM wants to re-sign the “shock jock” to a deal worth $120 million per year. Stern, 66, is reaching the end of his five-year contract worth an estimated $80 million per year.
Stern is arguably worth a small fortune. Billboard estimates he is worth $600 million over five years if SiriusXM retains 1.07 million, or 3.1%, of its current 34.3 million subscribers. The host’s breakeven point — where SiriusXM would recoup its money — depends on a handful of factors such as the annual cost, the length of the contract, and SiriusXM’s average revenue per user, ARPU growth rate, churn rate and gross margin. While Stern may not impact prices, his value increases the more he helps SiriusXM retain subscribers (reduce churn).
1) SiriusXM can pay more than competitors because its gross margin percentage (62%) is far higher than competitors such as Spotify (25%) and the standard in subscription service licensing deals (30%).
2) Smiles all around. What’s good for SiriusXM is good for record labels, artists, publishers and songwriters. SiriusXM pays a share of its revenue as royalties for performances of recordings and musical works. Also, SiriusXM helps break new artists and gives a platform to the legends.
3) The way bundled content works, Stern likely improves SiriusXM’s perceived value for people who don’t listen to him.
Analysts’ initial comments on the contract were mixed. Credit Suisse analyst Brian Russo estimates 15% of Stern’s listeners, or roughly 2.7 million subscribers, would leave SiriusXM if he does not return. Using SiriusXM’s current metrics, 2.7 million subscribers have a lifetime value of $1.4 billion, far greater than the value of Stern’s contract. B. Riley analyst Zach Silver believes “only a low-single-digit percentage of respondents subscribe to SiriusXM” solely because of him.
For their part, investors showed their approval by sending SiriusXM’s share price up 7.2% in the two days following the initial report. The company’s share price is down 16.4% year-to-date but has rallied in part because it has added subscriptions during the pandemic. Thursday’s $5.96 closing price was 45.5% greater than its low-point of $4.11 on March 23.
Getting to Stern’s true value is a challenge when he represents a small, albeit important, part of SiriusXM’s programming. SiriusXM has learned how to bundle content over the years by mixing low-cost radio stations with expensive, exclusive deals for live sports leagues such as Major League Baseball, CEO Jim Meyer said during the July 30 earnings call. “Customers pay for what they think they listen to, not necessarily entirely [for] what they do listen to. They pay for what their perceived value is for the service.”
Stern’s contracts always send shock and awe through the business world. Sirius — before its merger with XM — lured him from broadcast syndication in 2004 with a five-year, $500 million contract that began in 2006. (Not all $500 million goes into Stern’s pocket. The show’s production costs come out of his payments.) Stern’s next two five-year SiriusXM contracts were worth $80 million to $100 million per year as he dropped his work week from its original four to three days per week. Stern also made the equivalent of about $250 million in bonuses when SiriusXM hit specific subscriber targets.
But Meyer has been adamant that Stern is worth the money. “I can look every investor in the eye and tell them that [Stern] is a good investment for SiriusXM,” he said at a recent investor conference.
No sane streaming service could pay Stern’s going price. SiriusXM’s 62% gross margin — the percent of revenue left after paying for cost of goods sold — is more than double the 25% to 30% gross margins of music subscription streaming businesses. And SiriusXM’s $13.96 ARPU is more than two times Spotify’s $5.18. What’s more, SiriusXM can maintain its ARPU because it does not offer family plans that are effectively rebates for multiple listeners on a single account. Spotify can afford to give podcaster Joe Rogan a multi-year, $100 million licensing deal. But no music streaming service could use Stern as anything but a loss leader to sell other goods and services.
Stern has called himself the King of All Media for decades. And as long as satellite radio is a stable business, he won’t lose his crown.