Howard Stern Vs Mel Karmazin: It's War!

Journalist and attorney Allison Hope Weiner is a special correspondent to Deadline and files this exclusive breaking news:

Throughout Howard Stern’s career, his radio contract often prevented him from saying anything nasty about his frequent boss Mel Karmazin. But the shock jock also had little to complain about: Karmazin helped make Stern a very, very rich man at Infinity Broadcasting, then CBS, then Viacom. After Karmazin became CEO of Sirius, he inherited Stern’s original satellite radio deal. Then Sirius merged with arch-rival XM, and last December Stern opted to re-up. Once again, Howard publicly praised Mel, now CEO of Sirius XM. But behind the scenes relations between Howard and Mel were becoming seriously strained. And only 3 months after entering into that new 5-year pact, Stern and his longtime agent Don Buchwald sued Sirius XM,  claiming that the company had failed to pay him performance-based stock awards which he’s owed because he exceeded the subscriber targets set in his original agreement with Sirius. But even then, Howard refused to discuss the lawsuit at length or say anything negative about Mel or even Sirius XM.

But that was then, and this is now.

Today, Karmazin confirmed at the Sirius XM shareholders meeting that the company will file a motion for summary judgment in the Stern lawsuit yet also warned that judges rarely dismiss a case at this stage. But the real surprise, several of my sources with knowledge of the dispute tell me, is that Mel is the driving force behind Sirius XM’s position that Howard is owed no additional compensation. Even more of a shocker, they claim Karmazin was never happy with the original Stern/Sirius- $80 million a year in cash and $20 million in stock to program two channels starting in 2006 as well as bounties if Sirius’ subscriptions passed certain milestones — negotiated before Mel arrived. And, here’s the real stunner from my sources: allegations that Mel didn’t take care of Howard financially as well as the world believes: “Mel Karmazin does a much better job of taking care of Mel Karmazin than most other Sirius shareholders,” accuses one of my sources.

At issue is what happened after Sirius and XM merged in 2008 and the combined company nearly went bankrupt in 2009. As the recession killed new car sales (by far the biggest source of new satellite radio customers), Sirius XM couldn’t meet its hefty debt payments. The company’s stock plummeted to below 6 cents. That’s when Karmazin turned to John Malone’s Liberty Media for a rescue: $530 million in exchange for 15% interest as well as 40% equity in Sirius XM. But after the stock went to 50 cents, Karmazin and a few favored executives received options for approximately 150 million shares at that price. Today, Sirius XM stock is over $2.40. “This option arrangement was not offered to many other shareholders, including Howard Stern,” one of my sources complains. Add to this some massive “golden parachutes” for Karmazin and others, and Stern feels inadequately compensated for his contribution.

“Howard took the job on the promise that he would have a share in Sirius’ future success,” one source with knowledge of the negotiations explains to me. “He worked hard from the day the deal was signed to insure that success. That was the way the Sirius contract was structured. When Sirius needed Howard, they promised him a share in its success.”

Stern’s complaint claims that, in October 2004, Sirius had fewer than 700,000 subscribers and now the combined Sirius XM has 20 million — and he’s responsible for that number. He also claims Sirius was able to merge with its biggest competitor because of him, and he also helped Sirius XM avoid bankruptcy and he didn’t take his rightful payments.

On yesterday’s show, Stern spoke at length about the lawsuit. “Sirius Radio, by the way, was just about going out of business. I sat down with these guys and I said to them: ‘Look — if I leave terrestrial radio and come to Sirius, I’m gonna bust my balls for you. I’m gonna make shit happen… I guarantee you guys acquire XM radio. Forget merge — that’s a horseshit fucking term — acquire XM Radio… But people have a short memory… And now that times are good and they’ve reached ‘it,’ everybody wants to fucking forget what they owe — and who they owe… There wouldn’t be a Sirius if I wasn’t here.”

A source familiar with the negotiations between Stern and Sirius XM tells me that the satellite radio company negotiated a very generous deal with Stern and that he should be satisfied with the contract he signed only a few months ago. And that both Stern and the company agreed they would discuss Stern’s claims to performance-based stock awards after his new deal was closed. But after that happened, the negotiations went nowhere.

That the relationship between Stern and Karmazin has eroded to this extent belies their history. When NBC famously fired Stern in 1985, “Mel was the guy who rescued me,” Stern once said. And when Karmazin syndicated Stern’s show and defended him against FCC fines, “I praise Mel all the time on the air and I will continue to praise him until I die,” Stern has said. “Because the guy is the consummate broadcaster.” And the relationship grew strong as Karmazin grew more powerful, first in 1997 when CBS bought Infinity, and again in 2000 when CBS merged with Viacom.

Karmazin’s tolerance for Stern was put to the test, however, after February 1, 2004, when the Janet Jackson bare breast scandal ended the Super Bowl half-time show on CBS. A U.S. House Commerce subcommittee summoned Karmazin, then Viacom’s president, who found himself under attack. Karmazin ordered executives at Viacom-owned stations to ensure programming was “not even arguably indecent”. Stern did not pull back, though: in a February 24 broadcast Howard spent nearly one hour explicitly discussing Paris Hilton’s sexual activities. That’s when FCC Chairman Michael Powell pounced. The FCC fined Clear Channel that April for 18 alleged infractions by Stern. The radio giant agreed to pay a $1.75 million fine and dropped Stern from six of its stations as it announced that it would have “zero tolerance” for on-air obscenity. Later that year Viacom agreed to a record $3.5 million consent decree.

The static provided the cover that Viacom owner Sumner Redstone needed in May 2004 to force out Karmazin (whom Redstone already didn’t like). “With Mel gone,” Stern told his audience, “[that was] a definite nail in my coffin. He’s the guy who had my back.”

But Stern had a new option: Sirius Satellite Radio, which badly needed to create some buzz for itself with rival XM pursuing a strategy of spending money on marketing that gave it a big edge in the battle for subscribers. XM had about 1.4 million retail customers vs. 535,000 for Sirius. (These figures just include people who bought satellite radios in stores, not those who bought cars that came equipped with either Sirius or XM radios.) In October 2004, Joe Clayton’s Sirius signed Stern. Six weeks after the deal was unveiled, Sirius announced that Karmazin was coming aboard as CEO – an announcement that sent the company’s stock soaring 23%.

Karmazin’s relationship with Stern appeared to remain strong, and for good reason: Stern’s channel became the most popular on Sirius as it closed the subscription gap with XM. When the two satellite radio companies merged in 2008, Sirius had 4.6 million retail customers vs. XM’s 4.5 million. But Karmazin’s famously tight with a dollar, and Stern’s contract was approaching its expiration date. Maybe it was inevitable that Howard’s new deal would put him at odds with Mel. But, since the near-bankruptcy, Karmazin has been on a relentless campaign to regain Wall Street’s faith in Sirius XM’s ability to grow at a time when listeners have less expensive alternatives  like terrestrial HD radio, Internet radio services such as Pandora, and the music they load into their MP3 players. The question that remains unanswered is whether Mel can continue to woo Wall Street while at war with Howard Stern.