Video: Oprah on XM

By John W. Schoen Senior Producer
updated 2/9/2006 3:51:30 PM ET 2006-02-09T20:51:30

In the latest shot fired by two rivals locked in a fierce dogfight, XM Satellite Radio has signed TV talk show goddess Oprah Winfrey to a 3-year, $55 million deal to work her media magic on the radio. The move counters the recent carpet bombing publicity surrounding the launch of Sirius Satellite Radio’s $500 million, five-year, two-channel deal featuring the self-proclaimed “King of all Media,” Howard Stern.

There’s no doubt these high-profile deals have created plenty of buzz for a fledgling medium. But a big question remains: will these big-money deals pay for themselves over the long run by attracting enough paying customers to pay the star’s salaries?

The new channel, "Oprah & Friends," will launch in September with programs on fitness, health and self-improvement topics, drawing from her syndicated television talk show and her monthly magazine. Winfrey will host a radio show of her own on XM once a week

For XM the contract is a “wild home run,” according to Jason Helfstein, a media analyst at CIBC World Markets. As she has proven with book sales, her television show offers a powerful promotion platform for her new XM channel. “If she really likes the product, she’s one of these people who will then go tout it on her TV show,” said Helfstein. “And that’s really, really, really valuable.”

As she adds satellite radio to her media empire, Winfrey will also have to convert her successful formula to a new business model. Much of her on-air success is based on the economics of syndicated television, where the flagship of her media armada. "The Oprah Winfrey Show," reaches nearly 50 million viewers a week in 121 countries, according to her Web site.

Converting that audience into a profit-making enterprise relies on scores of deals brokered by her syndicator, King World, with the individual television station owners than pay to carry her show. With King World now owned by CBS, the show enjoys considerable leverage in those deals, as CBS CEO Leslie Moonves explained to Wall Street analysts at a media conference last summer. “Every time 'Oprah' is up (for renewal) in a station, (King World CEO) Roger King goes in there and says, 'Look, I've got a CBS station right over there, ABC, if you don't want to buy it.' And the price goes way up,” he said.

For satellite radio companies, converting star power to dollars means signing up individual paying subscribers, not stations. XM’s deal with Winfrey is the latest in a series of big-money programming deals by XM and Sirius, both of which continue to sustain heavy losses. XM also has signed an 11-year, $650 million deal for Major League Baseball, for example.

So far, XM leads the race for subscribers, with more than 6 million customers, but Sirius, with 3 million, has recently begun closing the gap.

With its sports contracts and Howard Stern, Sirius has targeted male listeners, especially early adopters who can be relied on to sample the latest consumer electronics. Last year, Sirius signed a $30-million deal to carry programs produced by lifestyle diva Martha Stewart.

XM’s deal with Oprah will help the company widen its target audience, according to Friedman, Billings and Ramsey analyst Maurice McKenzie.

“The new programming addition will broaden XM’s awareness and adoption among potential female subscribers,” he wrote in a research note to clients on Thursday.

While star power is clearly fueling the race between the two rival services, there are a host of other factors that are driving subscription growth. Both companies have received a big boost from the sharp drop in the price of receivers, which have fallen by 50 percent over the last year and now sell for $30-$50. Both Sirius and XM have made exclusive deals with automakers to offer their receivers in new cars.

Analysts say XM’s deal with Winfrey will pay for itself if XM can sign roughly 200,000 subscribers for $13 a month to cover the cost of the contract. If the new Oprah channel signs up more new customers than that, the deal will generate profits. Sirius, on the other hand, will have to sign up millions of new subscribers to justify its $500 million deal with Howard Stern, say analysts.  (Not all of the money from new customers becomes profit because there are costs associated with signing up a new subscriber, such as revenue sharing arrangements with auto manufacturers that install the radios in new cars.)

As the subscriber base grows and satellite radio takes hold, signing Winfrey may prove to be an important defensive move for XM, according to Helfstein.

“It may have been worth it to XM to pay her more than that just to keep her from not going to Sirius,” he said. “Today Sirius has most of the high profile brands locked up, and I think XM to some degree is playing catch-up to that.”

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