XM Spits Out Coffee

It's gotten so bad for Starbucks (Nasdaq: SBUX) that even XM (Nasdaq: XMSR) doesn't want to be seen with the coffee peddler in public.

The satellite-radio provider is sending $22 million worth of its stock to Starbucks to put an early end to the marketing relationship the companies have had since 2004.

Espresso to my broken heart
Things seemed to be going so well. Starbucks has Hear Music, its own commercial-free music station on XM, where it pumps out the same artfully jazzy tunes that fill the air in its java hubs. The companies also have spent the past few years cross-promoting CDs.

And even though Starbucks itself has been a shareowner disaster lately -- it shed 42% of its value last year -- it's a growing force in music. Paul McCartney's latest studio CD, which Starbucks released, was a runaway success.

But even though the relationship seemed symbiotic, XM was making payments to Starbucks as a partner. Now that XM has grown at a quicker pace than Starbucks -- and since rival Sirius (Nasdaq: SIRI) has grown even more quickly than both companies in that time -- paying $22 million now is apparently a better business decision than to keep sending money to Starbucks until the original termination date in 2009.

We know what investors think of XM's decision to break off the deal early: XM's shares fell 3% terday. But what if Mr. Market is wrong and XM is right?

If XM is finally allowed to merge with Sirius later this year, the resulting company would have roughly 17 million subscribers. With that ace up its sleeve, either company would have the leverage the next time it sits down to negotiate a marketing deal with a potential partner.

Capping the cappuccino
You've probably never heard someone walk out of Starbucks saying, "Gee, I have to get myself an XM receiver." The proof lies in XM's weakness at the retail level. Most of the company's subscriber gains in recent years have been at the auto showrooms, where car buyers aren't given the choice on whether they want a receiver. The once-brisk sales of XM (and Sirius) receivers at consumer-electronics superstores such as Best Buy (NYSE: BBY) and Circuit City (NYSE: CC) have dried up lately.

Critics have knocked both satellite-radio providers for spending too much to acquire new subscribers. And now that XM makes a shrewd move to trim its marketing budget, the market gets upset? If XM thinks it can get more bang for its promotional buck elsewhere, I'm all for it.

Besides, Starbucks was sending mixed messages after teaming up with Apple (Nasdaq: AAPL) to offer in-store connectivity for the iPhone and iPod Touch. To a certain degree, these Wi-Fi-enabled devices compete with the portable receivers that XM was hoping to sell more of through its Starbucks exposure.

The Apple move was a good deal for Starbucks, but a lousy one for XM, especially since XM's contracted with Napster (Nasdaq: NAPS) as its digital-download provider.

I guess it's fitting that XM recently launched a music channel that streams Led Zeppelin exclusively. Listeners can now hear "Whole Lotta Love," but they won't be getting a whole latte love.

Here are some other recent XM stories to shake hands with:

• Why Does Goldman Hate XM?
• Before XM Kisses Sirius
• Satellite Radio Hands Out Appetizers