NY Times
Contributing reporter Bill Carter
Published: December 26, 2008
DID you hear what
Howard Stern said the other day? Neither did we. But we read about it on a blog.
Mr. Stern, the ribald radio jock who once commanded attention with each off-color utterance and obscene joke, mused recently on the air that he was thinking of retiring when his contract expires in two years. “This is my swan song,” he said.
Back in the day when Mr. Stern was on free radio and had an audience of 12 million, that remark would have cascaded through the media universe. But by switching to satellite radio three years ago, Mr. Stern swapped cultural cachet for big money.
Then — poof! — Mr. Stern all but disappeared. Even
Jay Leno, during a recent interview with The New York Times about his decision to stay at
NBC to host a prime-time show, cited Mr. Stern as an example of the dangers of obscurity.
“On radio, Howard to me was a populist. The truck driver, the average guy would listen in the cafe, the truck, the old car that’s 50 years old and still has an AM radio,” said Mr. Leno in the interview. “But I don’t hear him quoted anymore. People don’t say: ‘Hey, did you hear what Howard said today?’ ”
Yet Mr. Stern’s retirement chatter did get one group talking: investors fretting over the fate of
Sirius XM Radio, the satellite radio company that has been Mr. Stern’s home for the past three years.
Today, five months after regulators approved a merger of Sirius and XM, satellite radio’s pioneers and former rivals, in a deal that was supposed to deliver their industry to the promised land of profits and permanence, the company faces an uncertain future.
Although Mr. Stern brought listeners and prominence to Sirius, the move had a steep cost. His blockbuster, $500 million, five-year deal fueled a high-stakes competition between the two services that contributed to Sirius XM’s current bind.
Unlike free radio, which depends on advertising, satellite radio offers nearly commercial-free music and talk for a subscription fee. It’s akin to the difference between broadcast TV and premium cable, between NBC and
HBO.
Even though Sirius XM is one of the very few media companies whose revenue and number of subscribers are growing these days, a dime and a nickel will get you a share of the company’s stock (with some change left over).
Its balance sheet is larded with nearly $1 billion of debt that matures in 2009 and must be refinanced — but try finding a sympathetic banker in our current hard-luck environment. Sirius XM has nearly 20 million paying customers, many of them evangelists for the service, but what does that matter if you can’t pay your debts?
The company has never turned a profit and cannot predict when it ever will. Cap that with the struggles of Detroit — the bulk of new satellite radio subscribers come from partnerships with automakers — and you have a set of obstacles that Sirius XM has to overcome at the very moment the recession seems to be deepening.
The satellite radio industry is relatively young — when Mr. Stern announced that he was joining Sirius in 2004, the company had less than a million subscribers. But it is facing a media environment that is shifting toward cheaply distributed content over the Internet.
It’s also a conundrum that all traditional media face: Who needs satellites — or, for that matter, printing presses and delivery trucks — when the world is wired for broadband and Wi-Fi?
All of these obstacles have Sirius XM’s investors and subscribers worried that they may even be beyond the significant talents of
Mel Karmazin, the combative, longtime radio man who is the company’s chief executive.
“I met Mel through my coverage of radio back when radio was something,” said Bishop Cheen, an analyst at
Wachovia Capital Markets in Charlotte, N.C. “He’s an amazing guy. It’s never paid to short Mel. But this is his toughest challenge. It’s something that seems even beyond his legend.”
ON a recent morning that would include more meetings with lenders, and three days before Sirius XM’s annual shareholder meeting — which would be a feisty affair — Mr. Karmazin bounds into a glass-walled conference room at the company’s headquarters and sits for an interview.
He says he would prefer lesser surroundings in someplace like Astoria, Queens, but the company has a long-term lease — negotiated, Mr. Karmazin is careful to note, before his tenure as C.E.O. — in fancy, Midtown Manhattan quarters near Rockefeller Center
Mr. Karmazin has a helmet of white hair and is thinner than when he was president of Viacom and in perpetual conflict with
Sumner M. Redstone, then his boss. On his left lapel is a pin shaped like a jigsaw puzzle that is the emblem of Autism Speaks, a charity in which Mr. Karmazin is deeply involved because he has a grandson with autism.
He begins off-topic, musing about which friends of his may have lost money in the debacle involving
Bernard L. Madoff, whom Mr. Karmazin himself had never heard of until the news erupted about two weeks ago. (Mr. Karmazin says all of his money is in Treasury bills and Sirius XM stock.)
“Some of the stories are just horrific,” he says. But given Sirius XM’s current woes, Mr. Karmazin may soon be facing horrors of his own.
He, of course, has been in financial pinches before during his long career. In the early 1980s, he once had to lend money to Infinity Broadcasting, the radio company he helped found, to meet its payroll.
“I don’t think that the performance of the stock is related to the performance of the company,” he says. “It’s related to the balance sheet of the company and the need for the company to refinance.”
Ironically, one rationale for the merger was the expectation that the combined company could borrow money more cheaply. “The bankers who covered the deal believed that one of the synergies of the merger was the ability to refinance at a lower level,” says Mr. Karmazin. What he didn’t count on was the year and a half it took the
Federal Communications Commission to approve the deal.
The most pressing problem for Sirius XM is refinancing its debt, which includes three batches worth almost $1 billion that come due in 2009, beginning with $193.5 million in February. It’s a rough task right now, given the frozen credit markets.
Consider this: five years ago, Sirius, with 300,000 subscribers and no hint that Mr. Stern would be gracing its channel lineup, borrowed money at 2.5 percent interest. Those days are long gone.
“
Warren Buffett managed to get a 10 percent coupon from G.E. and
Goldman Sachs,” says Mr. Karmazin, speaking of the interest rate that Mr. Buffett, the Omaha investing legend, was promised for his recent investments in both companies. “So if you are Sirius XM, what should the coupon be?”
Sirius XM simply isn’t a blue-chip stock like
General Electric, so the interest the company would have to pay to raise funds is likely to be exorbitant. Mr. Karmazin said many lenders are willing to refinance, “but they are interested in it at very unattractive terms.”
He takes solace in the fact that Sirius XM has growing revenue and is adding subscribers: in the company’s fiscal third quarter, which it reported on Nov. 10, revenue grew 16 percent, to $613 million, and the number of subscribers rose 17 percent, to about 19 million.
“If you take a look around at all of the media space — I’m not trying to paint the rosy picture because we have challenges connected to our liquidity and certainly our stock price is dreadful,” Mr. Karmazin says. “But, you know, our revenues are growing double digits. We’re growing subscribers. We’re not losing subscribers.
“So if would be unfair to compare us to a newspaper business that’s losing circulation and losing revenue, traditional television, traditional radio,” he adds. “They have fundamental company flaws or industry flaws.”
But Sirius XM does have a serious flaw in its capital structure. Its costs, which include servicing its pile of debt, appear to be too high to make the business viable.
Mr. Cheen, the analyst, agrees with Mr. Karmazin that satellite radio is a delightful product and gives him credit for showing revenue growth amid the economic downturn. “But you don’t have any unlevered, free cash flow, dude,” he says of Mr. Karmazin and his company. “In this environment, how do you walk on water?
“This is the drama of it all,” Mr. Cheen continues. “No one is suggesting this media is not a viable media. It’s just poorly capitalized.”
Mr. Karmazin’s corner office on the 37th floor is a flight of stairs up from Mr. Stern’s studio. He and Mr. Stern have known each other since 1985, when Mr. Karmazin hired the shock jock at Infinity. But he is not responsible for Mr. Stern’s jump to Sirius, having joined the company after that deal.
“Would I like to have seen Howard get less money?” Mr. Karmazin asks. “Yes. But I think any company that deals with content would say the same thing.”
Mr. Karmazin, when asked if he thinks Mr. Stern has lost his place in the culture, says: “I think the size of the audience is less today. And I think one of the things Howard was looking forward to with the merger is that we’ll have twice as many subscribers potentially available to listen to him.”
Mr. Stern declined to be interviewed for this article, but his travails are emblematic of satellite radio and Sirius XM’s own shrinking horizons.
It seems that if Mr. Stern were to stay beyond his current contract, which expires at the end of 2010, he would have to accept less money, given the finances of the company and the fact that there are no longer two satellite radio companies battling each other.
“I really can’t speak for what Howard would do,” Mr. Karmazin says. “You know, heavy expectations believe that he would stay. Because why wouldn’t he stay? He’s having a good time. He’s enjoying himself. He’s paid fairly for it.”
But some Stern watchers think otherwise. “I’m starting to think that he might actually retire,” says Mark Mercer, who since the mid-1990s has written a daily blog about the Stern show, which has become a nearly minute-by-minute account of each program.
“I love the show, and I’ve got nothing better to do,” says Mr. Mercer, 40, who lives in Califon, N.J. Even Mr. Mercer, as diehard a Stern fan as there is, acknowledges that Mr. Stern’s gig doesn’t have the same influence it once did.
“Once you get used to hearing it on Sirius, it’s not as shocking as it was when you heard him on terrestrial radio and they’d be bleeping him out,” he says.
SIRIUS XM’s annual meeting on Dec. 18, held in a basement auditorium of a skyscraper elsewhere in Midtown, featured a crew of shareholders holding forth at two microphones in the aisles; a gray-haired man in a brown suede blazer indignant over the loss of his favorite folk music channel; a self-professed inventor who said he developed a computerized golf cart and had an idea about interactive advertising; and a burly, goateed man who claimed to have lost $1 million on Sirius XM stock and stood in the lobby saying, “It’s time for Mel to go, in my opinion.”
With pursed lips and admirable restraint, Mr. Karmazin addresses every question, from the germane to the ridiculous. His famous temper never goes beyond the quip, “I think it would be helpful if we dealt with facts.”
He stays on message, even though the dynamics of his company — continued revenue and subscription growth, but nothing left in the bank at the end of the day — cannot continue forever.
Mr. Karmazin doesn’t duck responsibility by laying his corporate problems on the economy. He tells shareholders at the annual meeting to consider him the company’s
Joe Torre and blame him for any and all problems.
“There’s no question, this company needs to make money,” he tells shareholders. “This company has a lot going for it, but it has never made a dime.”
Shareholders approved two measures that analysts consider to be last-ditch possibilities. One, a reverse stock split, would be a way to avoid a delisting from the Nasdaq; if it weren’t for the recent suspension of rules that threaten the pink sheets for stocks that fall below $1 for more than 30 days, Sirius XM would already be facing banishment.
Another measure, to raise money by selling more stock, would be an extreme preventive measure against bankruptcy. A stock sale is seen as unlikely because it would be dilutive to existing shareholders, but executives want this option in their arsenal in case they cannot refinance the debt.
MR. KARMAZIN is one of the few executives who can say his business really is rocket science. Next year Sirius XM will send another satellite into orbit, at a cost of $250 million to $300 million.
Three rocket scientists report to Mr. Karmazin. Whenever he receives e-mail from the person in charge of the satellite — even if it’s just a birthday wish or a thank-you note — the first words of the message have to be “the satellites are fine.”
“If something’s wrong with the satellites, I’m going to panic,” he says.
Mr. Karmazin likes to say that the company competes against technology — things like digital music players and Internet radio that can be streamed through an
iPhone and played in the car — rather than other companies.
Dave Zatz, who lives in Rockville, Md., and writes a blog about digital media, was an XM subscriber but dropped the service after his favorite channel, Chrome — “which is sort of a disco station,” he says — was dropped. Now, he says, he streams Pandora, a popular Internet radio service, through his iPhone while driving.
“The price is right and you can get whatever music you like,” he says.
But those competitive threats remain secondary to the urgency of Sirius XM finding a way to extract itself from the financial vise visited upon it by its heavy debt. Mr. Cheen, the debt analyst at Wachovia, has this stark assessment: “The bare economics of it cannot appropriately service the capital load.”
During the shareholder meeting, Mr. Karmazin acknowledges that bankruptcy is a possibility if the company cannot reach agreement with lenders, but he says it is unlikely.
“You have to play the hand you’re dealt,” he says in the interview. “Right now, I don’t like my hand. But we’ll play it.”
