The Last Big Radio Deal

Did Rush Limbaugh just ink the last blockbuster megadeal in the radio broadcasting industry?

The conservative talk show icon is extending his deal with Clear Channel's (NYSE: CCU) Premiere Radio Networks. Clear Channel didn't disclose the terms of the extension, though media reports suggest it's worth as much as $400 million over the next eight years.

According to Clear Channel, Limbaugh's show draws an audience of nearly 20 million listeners through 600 radio stations. The deal also includes syndicated snippets, running the RushLimbaugh.com website, and a premium site and newsletter.

A Rush of blood to the brain
Limbaugh's deal is dwarfed by the five-year $500 million contract that Howard Stern signed with Sirius Satellite Radio (Nasdaq: SIRI) a few years ago, but this could be the last time that the radio industry waves around a nine-figure deal.

Why?

Well, terrestrial radio's appeal is waning. Hardcore commuters have switched to the mostly ad-free satellite radio, while the portability of digital music, podcasts, and Internet radio have created pocket-sized alternatives to firing up the AM and FM bands.

Even more importantly for terrestrial radio's fortunes, the merger between XM Satellite Radio (Nasdaq: XMSR) and Sirius should close later this year.

XM and Sirius have opened up their billfolds in the past to ink pricey deals. Whether they were wooing Stern, Oprah Winfrey, or Martha Stewart Living Omnimedia's (NYSE: MSO) namesake star, the satellite broadcasters have won over celebrities with big bucks and the unshackled freedom of reaching a premium radio audience. Professional sport leagues and college conferences have also been at the center of bidding wars, with XM and Sirius jockeying for eardrum magnets.

That will change. Stern is unlikely to command the same $100 million-a-year payday he's averaging today, even though Sirius' ability to close the subscriber gap with XM since Stern's arrival certainly suggests he deserved the money. The key is that Sirius-XM won't bid against itself. Limbaugh's deal is a record for terrestrial radio, but it still averages out to just $50 million a year, and that's if performance incentives are hit.

Turning dollars into pocket change
Scaling back programming costs is probably long overdue. Other old-school media companies like newspaper and magazine publishers have resorted to layoffs to counter plummeting circulation rates and ad revenue. XM and Sirius now combine to beam digital radio to nearly 18 million paying subscribers, yet neither company has ever come close to turning a profit.

Terrestrial heavies like Clear Channel and Cox Radio (NYSE: COX) are profitable, yet analysts expect earnings to dip at both companies this year.

The industry will evolve. Terrestrial and satellite radio providers have generally done lousy jobs in monetizing their websites. This may come as a surprise, since terrestrial radio should be milking the heck out of local search advertising. XM and Sirius have done little to implement interactive marketing on their sites. Even XM's deal to sell songs through Napster (Nasdaq: NAPS) -- a slam dunk, since XM's deep genre playlists of commercial-free music are a no-brainer catalyst for new music discovery and concert ticket sales -- has never been effectively promoted.

Hopefully, that will change in the future. When you couple new revenue streams with the lower cost structure afforded by programming costs, the future of radio -- both satellite and terrestrial -- may be brighter than you think.

Here are some other recent stories on XM's long courtship with Sirius:

• What Now, Satellite Radio?
• Before XM Kisses Sirius
• Satellite Radio Hands Out Appetizers