By securing Howard Stern, Sirius XM Radio avoids static

How happy was Sirius XM Radio Inc. Chief Executive Mel Karmazin last week after his biggest star, Howard Stern, agreed to a new five-year contract with the satellite radio broadcaster?

“From what I remember it was a good celebration,” Karmazin said wryly.

Getting Stern to stick around removed one of the big question marks facing Sirius XM. The company, which has weathered a difficult two years of financial uncertainty, needed to keep Stern not only for his listeners but also to signal to the financial community that its momentum is continuing.

Wall Street drove up the company’s stock about 20% Thursday, after Stern announced on his morning show that he would stay through 2015. The stock price has more than doubled this year as the company’s finances have improved and closed Monday at $1.38.

Another milestone Monday: The company passed 20 million subscribers. Sirius XM now trails only cable giant Comcast Corp. among the largest subscription media businesses in the U.S. It celebrated Monday night by treating its staff and select listeners to a private concert by Paul McCartney at New York City’s Apollo Theater.

If this were 22 months ago, a more appropriate performer for a Sirius XM party would have been the band Dire Straits. The company was on the verge of filing for bankruptcy, and its stock was trading for a few pennies a share. The company was at the edge of the abyss because of a combination of circumstances, some of which were out of the company’s control.

After Sirius and its rival XM announced plans to a merger in 2007, the government’s antitrust review took 17 months. When the deal finally closed in the summer of 2008, the new company had to refinance some $2 billion in debt, much of it at high interest rates. Then Bear Stearns & Co. and Lehman Bros. collapsed, the credit markets froze and the economy hit the skids. Sirius XM had to scramble to find money to pay its debts.

In early 2009, as the deadline for a huge debt payment approached, media mogul John Malone’s Liberty Media Corp. played white knight and lent Sirius XM $530 million in a complex transaction that resulted in Liberty’s ending up with options for 40% of the company’s common stock and getting seats on the board.

Sirius XM has since paid back that loan, and Standard & Poor’s on Friday raised the rating on the company’s $3 billion in debt to BB-minus. Sirius XM has said it expects to finish 2010 with revenue approaching $3 billion and cash flow of $600 million. It has about $500 million in cash on hand.

Although its financial situation is finally stabilizing, there are other issues facing Sirius XM. (The company’s non-executive chairman, Eddy Hartenstein, is also publisher of the Los Angeles Times.) When satellite radio first appeared almost a decade ago, some observers said it would mean the end of free over-the-air, or “terrestrial,” radio.

Sirius XM has certainly taken a bite out of broadcast radio. According to industry estimates, commercial radio revenue has fallen 16% to $15 billion in 2010 from $18 billion in 2001. Of the almost $19 billion spent on radio in either advertising or subscriptions, broadcast radio still holds 80%, followed by Sirius XM with 15%. Internet radio companies such as Pandora and Slacker account for the remaining 5%.

The AM-FM dial has proved remarkably resilient over the last half century. It has survived the eight-track player, cassette tape decks, car phones and iPods, which can be plugged into the car radio. Now some analysts say that Sirius XM will have to look over its shoulders at the upstarts such as Pandora and Last.fm at the same time it continues to gun for commercial radio.

Furthermore, broadcasters now have their own additional offering: high-definition radio, which allows a station to create specialized channels with their additional digital spectrum.

“The challenge for Sirius XM is, obviously, when every station in the world is available in your dashboard, they are no longer the only alternative to your local AM-FM station,” said Sean Ross, who follows the radio industry for Edison Research, a market research firm.

“There is only going to be so much discretionary income for entertainment going into the future,” said Joel Hollander, a former radio executive who is now an industry consultant.

Karmazin, who cut his teeth as a radio broadcaster and went on to become president of CBS Corp. and later Viacom Inc., has never predicted that Sirius XM would make broadcast radio irrelevant, and it doesn’t seem as if he is being kept awake, worrying about his competitors.

“I challenge anyone to show me an Internet company or a collection of companies that provide the depth and breadth of content that we do at the same or better price point,” Karmazin said in a conference call with Wall Street analysts last month.

In an interview, Karmazin said the company’s subscription model, which relies on only a smattering of commercials on its talk channels and none on its music channels, will allow Sirius XM to continue to differentiate itself from its new rivals.

“The more successful these Internet radio companies, they will have to have more advertising because that is principally their business model, and Internet radio with commercials sounds an awful lot like terrestrial radio to me.”

As for traditional broadcasters, Karmazin said that while they are still the “800 pound gorilla in the radio space,” they are not investing enough in their content and there is nowhere to go but down.

“I don’t know what terrestrial radio is going to do in the next 10 years to get its mojo back,” Karmazin said.

Besides Stern, Sirius XM’s other big signing was controversial talk show host Laura Schlessinger, who will move her “Dr. Laura” show to the satellite broadcaster in January. Schlessinger recently left broadcast radio after she was criticized for using a racial epithet on the air. Sirius XM also secured U.S. rights to popular comedian and actor Russell Brand’s British radio show.

Over-the-top talk show hosts aren’t the only thing on Sirius XM’s agenda. Karmazin said the company wants to go after Hispanic listeners next year. “Satellite radio has not served that market very well at all,” he said.

Right now, Sirius has just three Spanish channels.

The company is also expanding into more adult programming. It already has a Playboy channel and is adding a channel from Spice Networks.

Asked if he thinks having racy programming might be one more distraction for drivers, Karmazin said, “As long as they keep their eyes on the road and hands on the steering wheel, we’re happy.”

With direct access into cars, Sirius is also starting to offer services beyond the radio. One that is sure to catch on is a warning system to let drivers know when they are approaching cameras used to catch drivers who run red lights.

“We are able to alert you — for safety reasons — where all these cameras are,” Karmazin said. “That’s the only reason we’re doing it.”

joe.flint@latimes.com