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Can Howard Stern boost satellite radio?
There are rumors about "shock jocks" fleeing to Sirius or XM. What does that mean for investors?
March 11, 2004: 2:09 PM EST
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Will the self-proclaimed King of All Media help bring satellite radio from the fringes to the mainstream?

Radio "shock jock" Howard Stern has been increasingly talking about the end being near for his popular morning show now that the Federal Communications Commission is starting to enforce stricter obscenity fines on broadcasting companies. Last month Clear Channel stopped broadcasting Stern's show on six stations.

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As a result, there has been rampant speculation that Stern might eventually join Sirius Satellite Radio (SIRI: Research, Estimates) or XM Satellite Radio (XMSR: Research, Estimates), which like pay cable stations, are not subject to the same decency and obscenity rules that affect major TV networks and terrestrial radio stations.

Both satellite radio stocks have bucked the market's downward trend: Since Feb. 2 (the day after the Super Bowl halftime show that kicked off much of the indecency backlash), shares of Sirius are up about 3 percent while XM Satellite has gained 7 percent.

Meanwhile, shares of traditional radio operators Clear Channel Communications (CCU: Research, Estimates) and Citadel Broadcasting (CDL: Research, Estimates) are down 7 percent.

Viacom (VIA.B: Research, Estimates), which owns Infinity Broadcasting, the radio group that syndicates Stern's show and CBS, the network that aired this year's Super Bowl, has fallen 8 percent. Shares of Emmis Communications (EMMS: Research, Estimates) and Cumulus Media (CMLS: Research, Estimates) are down slightly as well.

I wrote a column about Sirius and XM Satellite early last month. And while I admitted to loving the concept, I said the stocks might be due for a near-term pullback. Shares tend to move mainly on reports about subscriber growth and at the time it looked like there might not be much news on that front until the summer, when the big auto companies give more details about which 2005 models will feature built-in satellite radio.

The addition of a high-profile shock jock -- Bubba the Love Sponge, fired last month by Clear Channel, might also be looking for a new gig in satellite -- could certainly spark near-term interest in shares.

But would it really have any lasting fundamental effect on the companies' results?

Now how much would you pay?

To be sure, high profile personalities could mean a big boost to subscriber bases. In a recent report, Stifel, Nicolaus analyst Kit Spring noted that Stern has approximately 15 million listeners nationwide, versus little more than 1.5 million for XM and 260,000 for Sirius.

And satellite radio companies clearly are looking for ways to differentiate themselves from other radio stations. Analysts argue that for the companies to succeed in the long-term they will need to do more than offer music.

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"Consumers still have free terrestrial radio. The satellite radio companies need to convince consumers to pay for radio and exclusive content is a critical factor in that," said Dominic Ainscough, an analyst with Yankee Group, a tech research firm.

But there's the rub. How much will listeners who have grown accustomed to hearing Stern for free want to pony up to continue hearing him? Sirius currently charges $12.95 per month and XM charges $9.95.

If Stern were to make a move to satellite, analysts say, Sirius would be the most likely destination, since Clear Channel owns a stake in XM.

Some analysts hold out hope that satellite companies would be able to charge extra for premium features (like Stern), but the smaller Sirius has yet to go down this road. It has an exclusive deal with the National Football League to broadcast all games, for example, and is not charging extra. XM, on the other hand, is charging an additional $2.99 a month for a Playboy Radio channel.

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By Paul R. La Monica

So if Stern were to join Sirius, he probably would be part of a basic package, said Thomas Watts, an analyst with SG Cowen. And that brings me back to one of my biggest concerns about both companies in the long-term.

It's hard to imagine how either company will be able to raise monthly rates substantially from current levels. Add to that the fact that the satellite companies would now have to spend more on programming (Stern won't come cheap) and that could keep profits, which are still non-existent due to huge start-up costs, relatively low.

Sure, subscriber growth should continue to increase but sooner or later, investors need to look at more than that. Remember how excited Wall Street was about "unique visitors" and "eyeballs" for Internet content companies in the late 90's?

Daniel Ernst, an analyst with Rodman & Renshaw, sums it up best. "These are phenomenal products," he says. "But at the end of the day, you have to invest in profits, not listeners or subscribers."

Analysts quoted in this story do not own shares of Sirius or XM and their firms have no investment banking relationships with either company.

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