With the dust still not settled after the blockbuster signing of shock jock Howard Stern, Sirius Satellite Radio [SIRI] made headlines again last week with another huge addition to the team when it announced that Mel Karmazin would be taking over as CEO of the company. Karmazin served as president and CEO of Viacom until earlier this year and has had a previous working relationship with Stern.

With Karmazin coming aboard, Joseph Clayton will be stepping down as CEO (his current contract was set to expire at the end of this year). Clayton will, however, remain as chairman of the Sirius board of directors. This management move adds a significant amount of credibility to Sirius going forward as it attempts to bridge the gap between it and XM Satellite Radio [XMSR].

That Karmazin was signed was not the surprise, at least from inside the boardroom at Sirius.

“We had talked about the possibility some time back” of bringing Karmazin onto the Sirius management team, Clayton told Satellite News. “I told the board I was willing to stay on for another couple of years. [But once] we signed Howard Stern and the NFL (National Football League), I think we were a more attractive place to come to.”

Clayton said that discussions with Karmazin began about four weeks ago and, after bringing Karmazin up to speed on the business plan and operations at Sirius, they were able to sign the deal Nov. 18 to bring him in.

The deal reached between Karmazin and Sirius spans five years, the company said. Under the terms of the agreement, Karmazin will receive a base salary of $1.25 million per year with annual bonuses to be determined by the compensation committee of Sirius’ board of directors. Additionally, Karmazin has been granted options to purchase 30 million shares of common stock at an exercise price of $4.72 per share (which corresponds the closing price of Sirius stock on Nov. 18) and 3 million shares of restricted stock.

Clayton said in a prepared statement issued Nov. 18 that the hiring of Karmazin is “the final piece in the turnaround of Sirius that began when I joined the company three years ago. I am very confident that Mel will accelerate the very positive momentum that we have established at Sirius in the past two years.”

The Coming Challenges

In order to continue with that momentum, Clayton highlighted three specific areas that will need to be addressed in his conversation with us, including beefing up investments from automobile manufacturers, lowering subscriber acquisition costs and, finally, closing the subscriber gap between Sirius and XM.

On the automobile front, Clayton said the company needs to improve the involvement among its automobile partners, and he hinted at possibly seeking a strong financial commitment from car manufacturers.

“Honda [HMC] and General Motors [GM] are major shareholders of XM,” Clayton noted, but Sirius partners Ford [F], DaimlerChrysler [DCX] and BMW do not share similar financial arrangements that XM has with its automobile partners. “They have some equity positions with Sirius but they don’t have the same financial motivation, if you will,” Clayton said.

With regard to driving subscriber acquisition costs (SACs) down, Clayton noted that the current plan in place revolves around technology. “Mostly, [the SAC drop] will come from taking hardware costs down with our next iteration of integrated-circuit development,” Clayton told us.

And third — the most important goal at the end of the day — will be to continue to build subscribers and to close the gap between Sirius and XM.

“We feel we can close the gap with the compelling content we have added over the last year,” Clayton said. “At this time last year, we didn’t have the National Football League. We didn’t have Howard Stern. We didn’t have Eminem. We didn’t have college sports – football, and men’s and women’s basketball. Elvis is dead but he hasn’t left the building, so we brought him [back] for one of our channels. And we’ve added traffic over the last year. We have done a lot of, I think, significant content enhancements that will make it more compelling to the buying public.”

And, of course, possibly the biggest compelling factor Clayton did not raise is that XM, while cheaper in its base subscriber package pricing, charges subscribers an additional fee for certain premium channels and for such other services as accessing its content over the Internet. Sirius’ pricing is a flat-rate, all-inclusive pricing plan. Additionally, Sirius subscribers can access the satellite radio broadcaster’s musical content over the Internet for free.

Clayton also offered a glimpse of what is to come on the equipment side, including, at some point in the future, a wearable Sirius receiver. “We don’t know how deep that market is, but we will have product, especially with the next iteration of integrated circuits,” he said.

Another product teased by Clayton was a receiver that has recording and storage capabilities. He tied that functionality into a portable device, saying, “I am not going to guarantee you can get a signal in your earphones with a satellite antenna in them if you are sitting under a palm tree or in a subway, but we can guarantee that you will be able to take your music with you wherever you go.”

One short-term future question Clayton would not answer directly was this: What about those rumors already circulating that Sirius would look to buy out Stern’s contract with Viacom-owned Infinity Broadcasting and put him on the air before his contracted January 2006 start date?

“We would not do anything to disrupt Howard Stern’s contract with Infinity today,” Clayton said. “That does not mean to say that if it was in the best interest of Howard Stern, Infinity and Sirius that we might arrive at some type of an agreement. There are a lot of moving parts to that, and there are no announcements to discuss at this point in time.”

Cautious Optimism

The reaction to the Karmazin hire from Wall Street overall was positive, but there were questions that tempered the blockbuster announcement.

Bear Stearns, in a Nov. 19 equity research report, highlighted two positives stemming from the signing. For Sirius specifically, Karmazin’s “radio experience and ability to attract, negotiate and sign major programming rights is a major advantage” for Sirius, the investment firm said.

And for satellite radio in general, “the signing of radio icon such as Mr. Karmazin dramatically validates the future of satellite radio as a medium. Furthermore, we think this underscores our thesis…that investors should think of the satellite radio duopoly as Coke & Pepsi, not VHS & Betamax,” Bear Stearns said.

Lehman Brothers was a bit more cautious in its analysis of the signing. In its Nov. 19 equity research report, the company also touted the overall effect of the signing on the satellite radio industry, saying it “enhances the credibility of the development-stage satellite radio business.”

Having said that, Lehman withheld some praise, preferring to wait and see what Karmazin will be capable of in the subscriber-driven satellite radio market.

“Mr. Karmazin’s radio advertising heritage brings with it managerial skills to control costs and establish a motivated sales organization,” Lehman Brothers said in its report. “However, satellite radio is primarily a subscription-based model, and the sales organization is primarily third party (automobile dealers, retail chains, etc.), not in-house personnel. It will be interesting to see if he has the same level of success in a different environment.”

Lehman Brothers also noted that while both XM and Sirius offer music commercial-free, there is limited advertising on the non-music channels. The report noted that 55 of Sirius’ 120 channels carried advertising, prompting the firm to ponder if, given Karmazin’s ad-based sales radio experience, the Sirius business model could “become more advertising centric over time.”

(Jim Collins, Sirius, 212/901-6422; Vijay Jayant, Lehman Brothers, 212/526-6019; Robert Peck, Bear Stearns, 212/272-6130)