Wall Street Analysis

By Tom Watts, SG Cowen Securities

Will Mel Aand Howard Go Satellite?

The buzz continues to grow louder that Mel Karmazin could end up heading one of the two satellite radio companies. And where Mel goes, radio shock jock Howard Stern soon could follow.

Karmazin resigned from Viacom at the beginning of this month. While he was there, he oversaw Viacom’s Infinity Broadcasting Group, Howard Stern’s employer. Prior to Karmazin’s departure, Stern had said that if Mel left Viacom, he would as well. Karmazin had been Stern’s strongest defender as well as his boss, testifying before Congress to defend the “king of all media’s” right to freedom of speech.

Stern’s contract runs through the end of 2005, so the opportunity for him to move to satellite radio could be postponed. However, he’s been running up a series of indecency fines from the FCC. Earlier this month, Clear Channel agreed to a record setting $1.75 million fine for an April 2003 broadcast by Stern. Clear Channel dropped Stern from six of its stations.

The price of indecency could rise further. The House of Representatives voted to raise the cap to $500,000 from its current $27,500 per incident and to require the FCC to consider revoking a broadcaster’s license after three indecency violations. Similar legislation is pending in the Senate.

So, would it make sense for XM or Sirius to hire Stern and, along with him, Karmazin? Reports have Stern favoring setting up an independent production company and selling his programming to satellite and, perhaps, to others. Stern’s show could air on a special premium channel costing as little as $1 per month. Translating that to $12 per year, Stern only would need to tell 2.5 million of his 15 million current listeners to tune in on satellite to generate the same $30 million annually he earns now.

And what about Karmazin? At XM, both Chairman Gary Parsons’ and CEO Hugh Panero’s contracts expire July 1. The company claims it is negotiating extensions. At Sirius, CEO Joe Clayton’s contract runs out in November. It looks like there could be room in the executive suite.

Tom Watts is a managing director and satellite analyst at SG Cowen Securities. He can be reached by phone at 212/278-4260 or by e-mail at [email protected]. Readers should assume that SG Cowen Securities Corp. and/or its affiliates intend to offer services in investment banking to the above referenced companies within the next three months and to seek compensation for such services.