By Brian “Newman” Rayl
Yesterday’s article regarding the lawsuit against Sirius XM Radio (NASDAQ:SIRI) filed by Howard Stern’s production company One Twelve Inc. and Stern’s agent Don Buchwald discussed the basis of facts regarding the suit. Today’s article is going to dig a bit deeper into a few facts, theories, and potential outcomes.
According to paragraph 40 in the filing, the internal subscriber projections used to determine if a bonus was going to paid out were as follows:
- 2006 – 3,707,000
- 2007 – 5,291,000
- 2008 – 7,192,000
- 2009 – 9,284,600
- 2010 – 12,112,400
These numbers bear repeating, since they goes to the heart of the lawsuit. One thing that is not made clear in the suit is if the subscriber numbers that are used to determine the bonus structure are based on TOTAL subscribers, or SELF-PAY subscribers.
Total Subscribers vs. Self-Pay Subscribers
Sirius XM currently reports the number of self-pay subscribers as well as promotional subscribers (also known as “parking lot subs”) as separate line items in their financial filings. The numbers are significantly different, however this would only affect the 2007 bonus payment.
Stern alleges that in 2007 Sirius added more than 3 million subscribers over its internal estimates, which made him eligible for his (and Buchwald’s) stock-based bonus. It is true that Sirius reported total subscribers of 8,321,785 for the year, exceeding the internal projection by 3,030,785 subscribers. However, Sirius also reported that they had 2,636,721 vehicles in paid promotional trials at the time. When you factor these paid promotional subscriptions out, Sirius only exceeded their internal projections by 394,064 subscribers, well below the threshold for Stern’s bonus.
In 2008, Sirius XM reported a total subscriber number of 19,003,856, which included 9,850,741 subscribers from the XM subsidiary. When looking at a Sirius subsidiary only, the subscriber additions of 9,153,115 did not surpass the numbers Stern would need to earn his bonus, even without factoring out the 2,699,037 paid promotional trials that were not true subscribers at the time. Sirius XM has stated in the past that it has approximately one million subscribers who had picked up the “Best of Sirius” package of programming which includes Howard Stern and the NFL. If you add this one million subscribers to the Sirius numbers, it is still under what Stern would need for a bonus.
2009 was the same story. Sirius XM reported a total of 18,772,758 subscribers, which included 9,749,100 XM subscribers. Sirius alone added 9,023,658 subscribers, including paid promotions which actually missed the internal projections set forth in the contract.
Howard Stern Generated Subscribers
Another key paragraph to take note of in the plaintiffs lawsuit is paragraph 38 which states:
With respect to clause (i) of these provisions, an HS-Generated Subscriber” is defined in the Agreement as a Sirius subscriber directly and trackably (e.g., through a promotion code or dedicated web site or 800 number) generated through any marketing or sales initiative One Twelve directs to Stem’s fan base, other than certain excluded initiatives.
– Court Filing, One Twelve Inc. and Don Buchwald vs Sirius XM Radio Inc.
Unless there is verbiage elsewhere in the contract that states otherwise, it would be difficult to use this clause as a reason to count XM subscribers with Sirius subscribers for the purpose of the bonus argument. The subscribers that were acquired from XM during the merger could be in no way “directly and trackably” attributed to Howard Stern. The auto markets in 2006 through 2008 were extremely strong, especially for the Sirius automotive partners, and the retail market was booming in 2006 and 2007. While there are assumptions that much of this demand was for Stern, can it be proven “directly and trackably”? In this case, it is the plaintiffs (Stern and Buchwald) that would have the burden of proof to show that it was Stern and Stern alone who “directly and trackably” allowed the company to acquire XM, which simply cannot be done.
The Sirius XM Merger
Finally, with that argument out of the way, the focus turns to paragraph 30 which reads:
Indeed, throughout the contract negotiations, Buchwald and Stern raised the possibility that Sirius and XM might merge, bringing both company’s subscribers together under one entity. The parties added a separate provision to Stern’s contract to account for the possibility of a merger and permit the broadcast of the Howard Stern Show to the combined subscribers of the surviving entity. Yet, even though the parties were discussing the possibility of a merger in this separate context, Sirius did not seek to exclude from its subscriber targets any additional subscribers that might come to Sirius as a result of such a merger or acquisition.
– Court Filing, One Twelve Inc. and Don Buchwald vs Sirius XM Radio Inc.
I highlighted the above text in red for a reason. That is the term that will be the death knell of this lawsuit if this is indeed how the contract reads. In the Sirius XM merger of equals, both the Sirius and the XM subsidiaries were surviving entities. XM Radio Inc. continued to be a reporting corporation even though it was not done with the fanfare of normal corporate broadcasts and conference calls. The official merger of the XM Radio Inc. subsidiary into Sirius XM Radio did not occur until January 12th, 2011, after the end of the initial Howard Stern contract.
The verbiage in the contract is obviously unknown at this point, but if the above indications are indeed true, Sirius XM has nothing to worry about. If Stern is able to argue that subscriber numbers should have been based off of total Sirius (and Sirius only) subscribers, as opposed to self pay subscribers, the worse that could happen is that Sirius XM has to pay a single bonus amount for 2007 to Stern and Buchwald plus penalties and interest. This amount probably would not exceed $100 million, an amount that would put a dent in any pocket book but will not significantly hurt Sirius XM, or the business model going forward.
The suit will probably be settled out of court long before it goes to trial. Stern, Buchwald, and Sirius XM will settle for an undisclosed amount, and all will be right and happy with the SIRI world once again.
Disclosure: Long SIRI
Contact the author: Newman@SatelliteRadioPlayground.com
Cool, thanks for explaining everything.
Once again, I wouldn’t bet against mel. He’s been thru worse, combining SIRI + XMSR when analysts said there was an 80% or so chance it wouldn’t go thru. Then he averted bankruptcy in 2008. Now this… Just a walk in the park for Mel.
Make that averted bk in 2009
“With respect to clause (ii) of these provisions, the phrase “total number of
Sirius subscribers” refers to the total number of subscribers belonging to Sirius Satellite
Radio Inc. (now Sirius XM Radio Inc.) in any given year. The word “total” was intended to
have its plain meaning, and the contractual provisions contain no restrictions or caveats on its
use.”
bonus to be paid according to clause i or clause ii
i think stern is claiming clause ii in most cases.
I agree, he is claiming clause ii in most cases, which is to use the total subscribers for the end of the year. The other two parts of my article go to defend that part of the contract, determining if that is self-pay subs and if it includes XM subs.
A lot depends on the exact contract verbiage. I don’t have a copy of the contract, so I cant say for sure. If anyone out there has a copy and would like to forward it to me, I’d appreaciate it! =)
“In this case, it is the plaintiffs (Stern and Buchwald) that would have the burden of proof to show that it was Stern and Stern alone who “directly and trackably” allowed the company to acquire XM, which simply cannot be done.”
Why do you say that with such decisiveness? Can it be proven that XM was essentially forced to merge bc Stern joined Sirius? I’d have to think so: isn’t that exactly what happened?
Stern said that when he was first exploring satellite radio, he told XM that if they didn’t sign him, they’d go under. He says they laughed at him.
It seems to me that it might not be such a challenge to establish a case that XM failed as a direct result of Stern going to Sirius. That’s not to say that it would hold great decisive sway in court, but it’s obvious that that’s exactly what happened. But Stern seems to be trying to legally leverage the idea that Sirius had their boom because of him. And, that’s probably true. To legally establish that might be a stretch.