No Pay Cut For Howard Stern: Insider Details on the Sirius XM Contract

Howard finally announced a deal to stay on Sirius XM for another five years, ending a year of high profile speculation as to whether he would stay or go.  During that year, there were more than a few rumblings from Sirius, amplified by media pundits, that he would have to take a pay cut from his loftily original $500 million deal five years ago.  This despite the fact that Howard put Sirius on the map.

Long story short.  Howard didn't take any freaking pay cut.

In fact, his new deal is better than the old one.  This is no surprise.  Sirius went from 300,000 subscribers when Howard announced his original deal, to over 20 million after it merged with XM (a merger forced by the success of Howard's program).  Even the most conservative estimates put Howard as directly responsible for at least a billion to 1.5 billion in revenue during those five years with untold billions in additional revenue due to his high profile sponsorship.  Sirius is also at a critical juncture as internet radio is taking off.  It simply couldn't afford to lose Howard, or even worse, see Howard directly compete with it on some new internet station.  Again, the most conservative estimates are that Sirius would have lost at least a couple million subscribers, but the damage to its brand would have been much much worse.

So why all the talk about a pay cut to begin with?  And why isn't Howard crowing about how much better his new deal is?

Because Sirius DID overpay for a lot of other programming in the past.  Howard has often pointed out that Sirius overpaid for Oprah and Martha Stewart, who don't put much time into their channels and don't get anything close to his ratings.  Sirius and XM also paid huge fees for sports programming back when they were competing with each other.  Sirius XM has finally become profitable, and the time for overspending on programming is over.  So getting out the word that even its most high profile property has to cut back, is a message they really wanted to send to the world.  Unfortunately for Sirius, Howard is the one person they can't afford to lose.

But Howard is no dummy.  While publicly railing that he wasn't going to take a pay cut, and privately negotiating a great deal, he's happy at Sirius and wants the company to succeed.  As a businessman, and a master PR person, he is willing to keep his mouth shut so they can get tough on other negotiations.  Thus we hear that his old deal was $500 million and his new deal is only $400 million.  Howard won't go out of his way to correct that.  But the truth is more complicated.

One of the problems for Sirius XM during the negotiations was that Howard held all the cards.  They want a pay cut?  Sure, Howard would move his show to a later hour in the day.   NO!   We can't do that, the fans will complain.  Okay, still want a pay cut?  I'll make a deal to broadcast on traditional radio a better show.  NO!   We need you exclusive.  Fine, still want me to take a pay cut, I'll stop doing any promotion, and you can't use my likeness to sell subscriptions.  NO!  We want you to go on Letterman again!

There are a ton of ways Sirius XM could have made a deal with Howard that would have cost them a lot less, but the truth is, they didn't dare tamper with the formula that works so well, and they desperately want Howard happy so he does additional promotion for them.  Especially now when they are in a fight for their lives when it comes to internet competition.  So basically, in the end Sirius XM completely rolled over.  No pay cut was the very beginning.  But the deal is better for Howard in a lot of other ways too.

What is the deal?  Here's what I have put together from a variety of secret sources.  I can't say it's 100% accurate, but it's pretty close.

First, it's important to understand that Howard's original deal wasn't simply for $500 million.  It was a complicated deal with a lot of components.  The most point is that under both deals (and Howard previous traditional radio deals) Howard owns his program.  So in effect, Sirius simply pays him for the right to broadcast during a limited window, and Howard is free to exploit the material in other media.  But, of course, Sirius also pays a huge fee for an exclusive window so Howard won't put it on  competing channels during his contract term.  With a few exceptions like Howard TV.

When Howard originally signed with Sirius, the idea was also that Howard wouldn't take a pay cut from what he was getting on traditional radio.  Plus, if he helped Sirius get a lot of subscribers, he would get a bonus.  Howard's show back on traditional radio had a budget of about $70 million a year (a large percentage of which went to Howard, something like 50 million).   On Sirius, Howard's show cost them approximately $80 million a year, which included programing 24 hours on two channels.   So in some ways, Sirius was getting a lot more for the dollar than traditional radios stations were.  On the other hand, Howard only did his show 4 days a week on Sirius, so it could be argued he was getting more for working less (especially in terms of building up a valuable library).  But the truth is, Howard put in a lot of extra hours programming the channels and promoting Sirus.

So $80 million a year over 5 years is $400 million.  In addition to that, Howard received what amounted to a bonus of $100 million if he delivered two million subscribers, something he did in a heartbeat.  But even that wasn't so simple.  The $100 million was in stock related bonuses, and Howard got a large part of it upon signing.  If Sirius had done better in the stock market, Howard actually could have gotten more.  But Sirius (due to overpaying on other deals) hasn't done very well in the stock market.

Moreover, the $80 million a year in programming costs to Sirius aren't really $80 million.  Sirius makes millions each year selling advertising on Howard's program, in addition to the subscriber revenue.   Most of that money goes to Sirius under a complicated formula.  But a lot of it is kicked back to Howard to encourage him to do on air ads, and support advertisers.  On the other hand, Howard didn't tie his original deal strictly to advertising, because he didn't want pressure to put too many ads in the programming, something both he and his fans hate. (But Howard does like occasional breaks, so some advertising is alright).

Meanwhile, Howard gets almost all the money from Howard TV, Howard's cable on demand programming.  While Howard TV is not as big as the radio program, this is still worth millions in revenue.  Since the radio show is financed by Sirius, and the TV programming costs little to produce, Sirius is in effect proving a budget for Howard to make additional millions in television. And own the library.

So that's the old deal.  What's the new one?  Well, it was based on three principles:  1.  Howard was happy with Sirius and didn't want to leave.  2. Howard wouldn't take a pay cut, but wouldn't ask for a huge pay hike.  3. Howard didn't want his deal tied to Sirius XM stock or overall performance.

As I've said before, Howard didn't need to take a pay cut, and Sirius was not in any position to ask him to take one.  On the other hand, Howard had no real desire to leave Sirius.  He was happy with the show, the facility and the freedom he has there.  There are plenty of places Howard could have gone to try to get a better deal, but he never seriously explored them.  It gets into a classic risk reward scenario.  Howard took a huge risk in going to Sirius and it paid off in a big $100 million dollar bonus.  Howard could have gone to an internet radio company, or formed his own, and made even more money.  But it would have been a lot of risk and a lot of work.

Instead, Howard agreed to basically continue at Sirius under the old deal for $80 million a year.  It's actually a little bit of a bump.  The old deal was a little under $80 million and the new deal is a little over $80 million to account for inflation.  Howard's profit sharing deal in regard to advertising also has some bumps, again, primarily to encourage him to do on air spots.

But, in exchange for not asking for a huge pay increase, Howard did ask for a big piece of any new revenue related to the internet.  Howard's show hasn't been on Sirius XM's online offerings, and in exchange for allowing it to be streamed, Howard will get a big piece of revenue from that, under a very complicated formula.  Howard also gets an even bigger piece if Sirius offers an internet only subscription.

In the meantime, Howard has more freedom to make money on his television deal.  The biggest hold back on Howard TV has been that the cable companies take a huge piece of any revenue Howard gets for his on demand service.  As part of Howard's new deal with Sirius, Howard has the option of making his video programming available over the internet, or Apple iTunes' downloads.  This gives him the option of abandoning the cable companies, or forcing them to make a better deal.  Howard can also make a deal for a syndicated "best of show" like his old E! network show or his late night CBS show.

Lastly, for the first time, a formula has been worked out that will allow Howard to make some of his older programming and best of shows available on iTunes for downloads, with Howard getting most of the revenue for that.  And as always, Howard controls all his merchandising and is non-exclusive in terms of movie, music and book deals.

So in the end, no pay cut, a little bump, and more freedom to make lots more money if Howard wants to put the effort into it.  This is why the fact that Howard's deal isn't tied into Sirius stock is so important.  While Howard has made a ton of money thanks to Sirius, Sirius has made a lot more thanks to Howard.  If Sirius isn't in a position to pay Howard more money, mostly due to wanting to keep their deals cheap with everyone else, Howard shouldn't be limited in the money he can make elsewhere, provided it doesn't hurt Sirius.

For several decades, Howard has been very careful not to oversaturate the public (as if 5 hours of radio show a day wasn't enough).  He hasn't allowed much merchandising, and has been selective about movies, books and other cross promotion.  It's an open question whether this was a good call, adding to his longevity and bargaining position, or a missed opportunity to cash out.  Regardless, it's the way he wanted it.  But if he is serious that this is his last five years on the air, there is little reason for him to be as selective as before.

Instead of that $100 million dollar stock bonus, Howard could make much, much more by releasing a History of Howard Stern boxed set, downloads, DVDs, syndicated shows, etc.  His new deal gives him all those options and more.

Pay cut?  Hardly.  Howard cut an amazing deal, worthy of a unique and valuable talent.