Sirius: What Howard Stern's Appeal, Karmazin's Cash Out Mean for Investors

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As expected, Howard Stern and his agent have appealed a New York state court judge's dismissal of their breach of contract suit against Sirius XM (NASDAQ: SIRI). On April 16, Justice Barbara Kapnick threw out the suit that alleged Sirius owed the shock jock, his company One Twelve, and agent Don Buchwald hundreds of millions dollars because it breached a contract.

When she dismissed the suit, Kapnick bought Sirius's argument that it created a new contract with Stern when it merged with XM to become a new company. Stern is arguing that the original contract he signed with Sirius back in 2005 is still in effect. That contract promised Stern hundreds of millions' worth of stock options if he could attract a million new listeners to Sirius, which he did.

Business Week reported that Stern's attorneys have filed an appeal that claims Kapnick misinterpreted the contract, so her ruling is no longer valid. Among other things, the appeal alleges that Kapnick took the action before the discovery began which deprived Sterns' lawyers of an opportunity to present evidence verifying their case. Neither the lawsuit nor the appeal appears to affect Stern's current contract, which will expire in 2015.

It is unclear how a successful appeal in this suit would affect Sirius' stock. It's also not clear if Stern's actions could have any affect on the hostile takeover attempt that Liberty Media has launched against Sirius.

Karmazin Cashes Out

Sirius's colorful CEO Mel Karmazin has sold 11 million shares of Sirius XM stock that he owned for $2.20 a share. That would apparently net him $22 million, but some media outlets are claiming Mel actually made $25 million from the sale. Karmazin made the move last week.

The Street is reporting that Karmazin will donate that money to charity, which is obviously a good gesture. The sale is more questionable because of speculation from some analysts that Sirius will report weak growth in the number of subscriptions, or worse, no growth in subscription at all.

What's even more unusual is that Mr. Karmazin's move would presumably help Liberty Media's John Malone in his takeover bid for Sirius. Malone would need to buy more shares to get the more than 51% he needs to take control. Liberty currently owns 40% of Sirius. It goes without saying that putting this stock on the market would help Malone get the shares he needs for the takeover bid.

It's also interesting to note that Malone presumably plans to fire Karmazin when he takes over at Sirius. One has to wonder why Karmazin is taking actions that would presumably help Mr. Malone deprive him of his job.

Cumulus Plans Stock Offering

Cumulus Media (NASDAQ: CMLS) is apparently planning to sell 18.5 million more shares of stock. News reports indicate that the company has filed paperwork with the SEC to make a shelf offering of additional stock. There is no word on when this stock will hit the market, nor is there any word what Cumulus plans to do with the additional money it could raise from this offering.

Spotify Reportedly Planning to Compete with Sirius and Pandora

Sirius and Pandora (NYSE: P) could be getting some more competition in the non-traditional radio business real soon. Business Week and other media are reporting that online music service Spotify Ltd. is planning to launch its own online radio network in the U.S. by the end of 2012.

News reports claim the service would be a network similar to Pandora's and that Spotify would sell advertising on the network. Spotify is a closely held British company that reportedly has 10 million registered users and 3 million subscribers worldwide. That's small potatoes compared to Pandora, which has 150 million users in the U.S.A alone.

Spotify's spokespeople denied the speculation, which comes from anonymous sources. Business Week quoted the usual people with knowledge of the situation rather than naming a source, so this story should be viewed as speculation, not as news.

Spotify certainly has the money to launch such a network; it reportedly raised $100 million from venture capitalists last year. Business Week reported that Spotify's value is around $1 billion. It would need a vast amount of money to create the kind of advertising sales network needed to challenge established radio operators like Cumulus and Clear Channel (NYSE: CCO).

Pandora is trying to create such a network by hiring local ad sales people to peddle its airtime to local business owners. Since the local advertisers' willingness to buy advertising on internet is unknown, this could be a real risky venture. Pandora's venture is simply too new to judge its success.

Spotify would face some other obstacles in a foray into radio land. It apparently lacks the rights to play some major artists, including The Beatles. Some of today's top acts have also refused Spotify the right to play on it. Spotify's business model is a little different than Pandora. It lets music lovers pick the songs and artists they want to listen to. Pandora lets listeners create a radio station that plays a list of songs.

An interesting challenge that both Spotify and Pandora could face is offering something besides music. Much of Sirius's success has been built on non-musical offerings, like Howard Stern, and sports, such as NASCAR and Major League Baseball. If they want to make serious forays into radio, Spotify and Pandora would have to start offering something besides music. In recent months, Sirius has beefed up its line up by adding virtually every sport under the sun, including harness racing.

Will Rush or Stern jump to Internet Radio?

One way either service could attract a large number of talk radio fans would be to hire a major talent like Rush Limbaugh or Howard Stern. Stern's current $80 million year contract is up in 2015. That certainly worked for Sirius in the last decade. Rush's $400 million contract with Clear Channel lasts through 2016. Since neither Spotify nor Pandora has gone after either mega talker, such deal talk is pure speculation.

An interesting possibility is that Rush and/or Howard might approach the internet radio services in an attempt to their raise their pay. Howard may have tried something like this during his last round of contract negotiations with Sirius in 2010. There were rumors that he was planning to move his show to Apple (NASDAQ: AAPL) iTunes floating around back then.

It should be pointed out here that hugely popular and profitable services like Apple iTunes and Google Play (formerly Google Marketplace) don't need big names like Rush or Howard to attract customers. Relatively new companies like Pandora or Spotify might need to resort to such a gimmick to lure in new listeners.

Something else we must also remember is that Pandora needs to attract advertisers as well as listeners. Established talk radio giants, with their huge audiences of loyal fans, are always attractive to advertisers. Clear Channel's success is largely based on talkers like Rush, who can establish a brand and bring in high-income listeners.

One problem Pandora could face is that its listeners largely consist of younger music lovers with lower incomes and less tolerance for ads. Such listeners may not be that attractive to the advertisers with the biggest checkbooks, though that won't stop Sirius from courting them.

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