Karmazin: Damned if He Does -- and if He Doesn't

Sirius XM CEO on Radio Measurement and Why Howard Stern Is Worth $500 Million

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A correction has been made in this story. See below for details.

NEW YORK (AdAge.com) -- Sirius XM Radio CEO Mel Karmazin wants to change the way radio audiences are measured. He just has no clue how to do it.

The CEO of the newly merged Sirius XM Radio said the biggest hurdle between his company and advertisers is trying to agree on the measurement system that most accurately meets their needs. As the satellite-radio company's terrestrial competitors such as Clear Channel and CBS Radio have learned from Arbitron's oft-delayed switch from listener diaries to portable people meters, the current model is seriously flawed. But finding an alternative has proved to be a Catch-22 for Mr. Karmazin.
with the Sirius-XM merger finally approved, Mel Karmazin has to position satellite radio as a viable solution in the overall audio market.
with the Sirius-XM merger finally approved, Mel Karmazin has to position satellite radio as a viable solution in the overall audio market. Credit: Darryl Estrine

"If I spend the money, they say it's proprietary research and they don't want to use it. But if I don't spend the money, then who's gonna spend the money to do the research?" Mr. Karmazin said in a recent interview at Sirius' New York studios in the McGraw-Hill building.

One thing Mr. Karmazin can offer advertisers these days is a bigger audience, having more than doubled Sirius' subscriber base to 19.5 million with the addition of XM thanks to the merger (which received a 3-to-2 approval vote from the FCC in late July after nearly two years of litigation). And a newly merged sales force is out in the marketplace selling the combined audiences for top-tier shows from Howard Stern, Martha Stewart, Oprah Winfrey, the NFL and Major League Baseball.

Hardly a competition
Sirius XM has a long way to go with advertisers before it catches up with its terrestrial competitors, however. According to its second-quarter earnings report, advertising revenue for the company for the first half of the year was $16.7 million, an increase from $15.9 million during the same period in 2007. That's a far cry from the $6 billion terrestrial radio collectively banks annually, a total that has been flat to slightly up in recent years. And terrestrial radio so far is suffering in 2008 with steep cuts in local spending, its primary revenue source.

But with the merger finally approved, Mr. Karmazin also has to position satellite radio as a viable solution in the overall audio market, competing with everything from iPods and HD Radio to streaming audio and NPR -- not to mention the TV dollars advertisers proved they're still very keen on spending at this year's upfront.

Mr. Karmazin expects to boost subscribers to 21.5 million by 2009, making Sirius XM the second-largest subscriber-based company in the country next to Comcast. The challenge will be to grow that subscriber base even as auto sales slow down, because much of its distribution model depends on consumers getting their first satellite radios through new-car purchases.

He'd like to see advertising revenue account for a much higher percentage of the company's overall revenue than the current 3% to 4%, but he's also realistic about reaching that goal in this economic climate. "What I told our sales department is 'I want to be showing that we're getting better. I won't achieve the number I think I'll be happy with, but I'll be willing to accept that we should be doing a better job in 2009 than we were in 2008.' We know our subscriber revenue is going to grow, so I want to see advertising outperform our subscriber growth."

The ever-candid veteran media executive, who became CEO of Sirius in November 2004 after resigning from his post as President and Chief Operating Officer of Viacom in May 2004, recently spoke with Ad Age about what the XM Sirius merger means for both subscribers and advertisers, how the declining auto market is still boosting his business and why Howard Stern's $500 million contract is the gift that keeps on giving.

Ad Age: Advertisers want to know how many people are listening to their spots at a certain time. What are your plans for delivering that to them under the new merger?

Mr. Karmazin: We've done a number of proprietary studies on awareness where we sit there and say, "What do you want to accomplish?" We do a study beforehand, check awareness and do a research study afterward and see if we have, on a dollar basis, improved your awareness. We're walking the line between people who want to know a hard number and [those] sitting there saying, "Who's going to fund it? Do you want the satellite radio industry, which is us, to fund it? Are you going to not trust it because it's proprietary? So who would you like to do the measurement? Pick the company."

Ad Age: As we've learned from this year's TV upfront, which finished higher than everyone's expectations, advertisers are going to stick with what works. So how will you position XM Sirius as a solution to advertisers' overall media mix?

Mr. Karmazin: I used to always pride myself on being the highest price. Now what we're saying is we could be Wal-Mart. If you're a national advertiser and want to reach an audience in all 48 states, we will be the low-rate provider. We recognize the fact we're just starting in the advertising business, so we're not able to give you these big audiences or these numbers that you want. But you know what, we're able to give you a cost per spot that is very attractive. And by the way, however you want to measure that -- whether it be awareness, results -- we believe that we can get you the return on your investment.

We also, like a lot of other networks, you have direct response. And our direct response has been phenomenal. I mean, unfortunately, we have too much direct-response advertising, and one of my goals has been to dramatically cut back on our direct response. We appreciate the business but think the shows and the programs sound better with traditional national advertising.

Ad Age: What about the economy? What's your biggest concern with growing revenue in such difficult times?

Mr. Karmazin: The biggest thing concerning us with this economy is car sales. Obviously what's going on with Detroit, if they're selling less cars, obviously, we're having less satellite radios in cars. The good news is the penetration rate into cars is increasing.
Karmazin: 'I used to always pride myself on being the highest price. Now what we're saying is we could be Wal-Mart.'
Karmazin: 'I used to always pride myself on being the highest price. Now what we're saying is we could be Wal-Mart.' Credit: Darryl Estrine
It used to be there were 16 million cars made, and of that 16 million, about a third had satellite radio. Now there are 14 million cars being made, and over 50% have satellite radio. So what we are making up on those cars is the penetration into those cars. Roughly 50% in 2009 of the cars that leave the assembly line will have satellite radio baked in, and that's the highest percentage we've ever had, and that will make up for the shortfall.

We have not seen anything on churn where the consumer has said we don't want to pay for satellite radio. We're below the radar screen on that front. The fact is there's less national advertising dollars going to the traditional radio business, and it has concerned us a bit as well. We think it's an opportunity for us, because whereas advertisers are saying they're spending less money on traditional radio, here's an opportunity to get into another new medium where we're targeting better, we're not quite as cluttered and we're cheaper.

Ad Age: Speaking of advertising, you recently said that to cut costs at your company you would be pulling back some of your own marketing spending. How will you be communicating all the changes under the merger to consumers?

Mr. Karmazin: At this point, when you have the kind of competition we have in the audio market, with MP3 players, cellphones that take audio content, we need to constantly make sure our brand is out there -- and particularly because of all the content we have. You can't come up with any company that has audio content that is as strong as this combined company does. Who's out there that has Howard Stern and MLB and NFL and Oprah and Martha? We have all these amazing brands. To not be out there telling people about it is something that would obviously be the wrong thing to do.

On the other hand, so much of our advertising was focused against XM, so now we can be more efficient on that advertising, since some of the dollars being spent weren't for the category of satellite radio.

Ad Age: Much has been made of the $500 million contract you signed Howard Stern to in 2004 and the subsequent $83 million bonus you paid him in 2007. What do you say to those who have said you overpaid?

Mr. Karmazin: So let's remember when the Howard Stern announcement came in October of 2004. Sirius had 600,000 subscribers; XM was by far the dominant satellite radio company. The announcement was it was $100 million a year, so in order to pay for that $100 million, Sirius would need to get 1 million subscribers in 12 months. So let's assume 1 million subscribers gets you $120 million, you pay Howard $100 million, and therefore he's paid for himself. We have about 9 million subscribers now. Howard believes he's responsible for all that difference, and I would never debate Howard. We only needed 1 million; he got us 8 million more, so, boy what a steal that was.

I believe I'd much rather have the content and sell it than not have the content and sell against it.

Ad Age: What about the advertising revenue for the show? Certainly having such a racy show as your tentpole programming hasn't been an easy sell.

Mr. Karmazin: There's a lot of national advertisers who shy away from controversial programming. One of the things I've seen in the past is with companies who are focused on results, they're more concerned with getting their revenues up than somebody who's going to be happy with their advertising there. When the economy is tougher, the argument [from advertisers] is "We don't buy controversial programming" or these hit lists become less important to national advertisers than getting sales results.

Howard was traditionally strong with local advertisers, so we lost a lot of those dollars when he went national, even with autos. When all the national advertising dollars would avoid Howard Stern, the factories didn't buy him, but the dealers did because he sold cars. [Across all of Sirius] we have GM, P&G, Budweiser. We have a lot of national advertisers, but we are getting a small amount of dollars from those advertisers relative to other places. So we get movie business regularly; we just don't get enough movie business.

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CORRECTION: This story originally said Mr. Karmazin was CEO of CBS Corp. when he left the company to go to Sirius in May 2004. Mr. Karmazin was, in fact, chief operating officer of Viacom, and he joined Sirius in November of 2004. Also, a change was made to Mr. Karmazin's quote in which he discusses consumers paying for satellite radio.
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