Lost in Space

Illustration by Darrow

As showmen go, Steve Jobs and Howard Stern have about as much in common as Yo-Yo Ma and Neil Diamond (if Diamond told fart jokes, that is). But last month, the week after Stern’s new satellite-radio show started bouncing around the stratosphere, the King of Silicon Valley turned in a performance that got me thinking about the King of All Media—and even more so about his boss, Sirius CEO Mel Karmazin, and the venture they’ve undertaken together.

The performance was Jobs’s keynote at the Macworld Conference in San Francisco. Actually, it was just a sliver of that keynote, less than a minute long, in which Jobs unveiled, as is his wont, a nifty new gizmo—a remote control for the iPod that comes equipped with an FM tuner. “It’s a little thing that clips on your clothing,” Jobs explained. “You can set your pre-sets; it’s really nice.”

A remote control? BFD, you might say. But among those whose profession it is to care about the future of radio, the announcement was seen as portentous—as a signal that Jobs, with whom Karmazin was in talks last year to create a Sirius-enabled iPod, has decided to pursue another path. That he may be preparing to embrace an alternative technology, high-definition radio, which is being deployed by traditional broadcasters to stave off the advance of satellite.

Karmazin and his people at Sirius don’t seem worried about Jobs or HD radio. They don’t seem worried about much, in fact—and given the roll they’ve been on lately, who can blame them? Before Karmazin and Stern signed on with Sirius in late 2004, the company had 662,000 subscribers and a market value of $5 billion. Today, the figures are 3.3 million subscribers and $9 billion, and Karmazin expects to add 3 million more subscribers in 2006. (Sirius’s satellite rival, XM Radio, has 6 million subscribers.) “Clearly,” Karmazin told a group of investors recently, “on its own trajectory, satellite radio is going to be a great business.”

Maybe Karmazin is right. Maybe, after more than a decade in commercial purgatory, satellite radio’s time has come and there’s nothing but blue skies ahead. But color me a skeptic. Whether Jobs’s announcement turns out to be a footnote or the prelude to a more substantial passage in the history of radio, it hints at the unfolding of a less auspicious story line—featuring an onslaught of new competitors and technologies—both for Sirius and for Karmazin.

Unlike satellite radio, HD is free, and its receivers will have TiVo-like functionality—the ability to store and replay.

Karmazin, of course, has seen his share of plot twists in his four-decade career in media. Starting as a lowly radio ad salesman, he turns himself, by dint of sheer relentlessness, opportunism, and epic penny-pinching (“It wasn’t like I was a visionary or anything,” he likes to say), into one of radio’s two bona fide moguls (Clear Channel’s Lowry Mays is the other), building Infinity Broadcasting from scratch, selling it to CBS, maneuvering himself into the CEO’s chair at the Tiffany Network, then finally, and fatefully, engineering the $37 billion merger of CBS and Viacom—setting himself up, presumably, as Sumner Redstone’s heir apparent.

But the ascension never happens. Redstone, aged and evidently afflicted with Louis XIV syndrome (“Viacom is me; I’m Viacom,” he tells Fortune), refuses either to relinquish power or to simply keel over. In the meantime, he torments Karmazin until he finally departs in June 2004. Karmazin says he plans to retire. His retirement lasts five months. A few weeks after Stern—Karmazin’s cash-cow cornerstone in the old days at Infinity—signs on with Sirius, his once and future boss does the same.

For Karmazin, plainly, the Sirius gig is all about redemption. It’s a way for him to write his own last chapter—as opposed to having it written for him by an addled billionaire. It’s also an attempt to prove that you can go home again.

For Sirius, Karmazin’s hiring was also about intangibles—credibility, for a start. Now, in the popular conception, the meteoric rise of satellite radio has been driven mainly by the coming of Stern, along with Martha Stewart, Eminem, Lance Armstrong, and a slew of other celebrities, plus the NFL, the NBA, and (in 2007) NASCAR. It’s a “content is king” story.

There’s no doubt that all this programming has been essential to Sirius’s subscriber growth—according to analysts, Stern alone may ultimately account for nearly 2 million new customers—but there’s also little question that, when it comes to the company’s stock price, Karmazin has been a bigger factor. (In the days after the Stern announcement, Sirius shares jumped from $3 to $4; after the Karmazin announcement, they soared from $4 to $9.)

Wall Street’s crush on Karmazin is long-standing, and even legendary. The Street loves his tightfistedness, his deal-making savvy, his abject workaholism. It loves the fact that Karmazin puts his money where his mouth is: Not long ago, he increased his holdings in Sirius from 4.5 million to 5.5 million shares. He even gets credit in some quarters for plunging headfirst into new media, à la Terry Semel or Barry Diller; there’s no pansy-ass old-media hedging with Mel, no trying to have it both ways.

Cults of personality are nothing new in business, obviously. Nor are they always necessarily a destructive thing (Warren Buffett pops to mind). But cults of personality—like vapid, hoary shibboleths such as, well, “content is king”—tend to crumple in the face of more-elemental forces, not least among them the crush of competition and the march of technology. Which brings us back to HD radio.

Developed in the early nineties by a team of engineers funded partly by CBS Radio under Karmazin—irony of ironies—HD lets FM stations broadcast three channels, with CD-quality sound, over their existing frequencies. Before the satellite-radio surge, terrestrial outfits were free to drag their feet in adopting the technology. But now they’re racing to do so, out of fear for their survival. In the next year, the number of HD stations is expected to nearly double, to roughly 1,300. And the industry plans to sink $200 million into marketing the service.

For listeners, the downside of HD radio is that you have to buy a receiver—and the cheapest today costs $299. But the price is expected to fall quickly, and backers of HD hope that auto companies will start adding the chips needed to receive HD signals to ordinary car radios over the next few years. (BMW, for one, is already doing just that.) And there is a major upside to HD radio: Unlike satellite, it’s free; there are no monthly subscription charges. And the receivers will have TiVo-like functionality, allowing you to store and replay.

“This looks a lot like what happened in cable TV,” says Fred Wilson, a New York venture capitalist who’s an investor in iBiquity, the company that licenses the HD technology. “The cable-TV companies were fat and happy until satellite TV came along. Then the cable guys got religion, upgraded to digital, and started offering new services like broadband Internet and video-on-demand.”

The biggest boost imaginable to HD radio would come, naturally, if Jobs were to incorporate it into the iPod. But even if that doesn’t happen, satellite radio won’t be free and clear of threats from Apple. With the rapid proliferation of podcasting—the audio equivalent of blogging—the iPod is becoming a potent vehicle for home-brewed, downloadable radio. Meanwhile, Motorola is planning to launch a service called iRadio, which will allow subscribers to store programming from hundreds of commercial-free channels onto their cell phones. Indeed, Sprint Nextel is already offering something similar. And soon enough, you’ll be able to jack all these devices into ports in most cars.

At a Citigroup conference last month, Karmazin was asked about iRadio and other downloadable services that may pose a threat to Sirius. “The Internet, I think, must have hundreds of thousands of radio stations that are available,” he replied. “[But] most people are still more interested in watching Desperate Housewives last night than just the sundry content that’s … on the Internet. So we think that our content is our strength.”So it is—but the high price that Sirius paid to acquire it (Howard Stern in particular) may prove to be a millstone around the company’s neck in the face of this flurry of competition. Sirius, after all, has yet to make a dime of profit in its fifteen years of existence, whereas many of the rivals it’s likely to be battling are larger and flush with cash.

Is Sirius therefore doomed? Fred Wilson thinks not. “Satellite will survive, but it’s not going to put the traditional radio guys out of business,” he says. “It will be a premium service, like HBO.”

That would hardly be a disastrous outcome—except for the shareholders who’ve bid up Sirius to its current market value, which presumes that the company will continue to grow at an astronomical clip. It’s clear, in fact, that even among Sirius’s fans on Wall Street, a degree of sobriety has taken hold in the months since Karmazin’s appointment: Compared with this time a year ago, the stock is down a bit.

As for Karmazin, though his run at Sirius will allow him to end his career by returning to his first love, it strikes me as unlikely that it will ever reinstate him to the commanding heights of mogulhood. But then Karmazin, of all people, should know that. Some years ago, one of radio’s wisest sages predicted that satellite would never be anything more than a comfortable “niche business.” The sage, in fact, was Karmazin—and when it comes to the future of radio, who would want to argue with him?

E-mail: jheilemann@gmail.com.

Lost in Space