Hearing Loss at XM

Milestones are usually a pretty good thing -- the sign of a company moving in the right direction. However, this morning's announcement from XM Satellite Radio (NASDAQ:XMSR) that the terrestrial-radio threat topped the 6.5 million subscriber mark won't go down as one of the more cheerful moments in the young company's history.

For starters, it almost feels like a knee-jerk reaction to rival Sirius (NASDAQ:SIRI) announcing that it had cleared the 4 million mark just two weeks ago. XM has normally reserved its milestone press releases for when the net additions come in nice round million-subscriber chunks. This is the equivalent of asking a little kid how old he is and having him fire back, "I'm 6 ... and a half!"

XM's 6 (and a half!) million net subscribers are certainly worth celebrating. Truth be told, the company isn't desperately trying to split millions. It always announces its satrad-loving headcount at the end of every quarter. It's just that the numbers that are out aren't very comforting. Until now, XM has hit every million mark earlier than the one before it.

That streak ends here. It took XM 13 weeks to tack on 500,000 more accounts, and it will clearly take more than a few weeks before it straddles 7 million. The announcement also concedes that rival Sirius will have signed up more new subscribers for the second quarter in a row. XM wound up signing up nearly 600,000 new listeners for the March quarter, while Sirius had at least 700,000 net additions with nearly two weeks to go.

Then again, this may be also come as a relief for XM. The company is still on track to close out the year with 9 million subscribers as it heads into its strong spring and summer seasons. XM has historically enjoyed an advantage over Sirius in those periods, thanks to XM's exclusive satellite radio deal with Major League Baseball. The niche-leader baton will fall to Sirius only if XM proves unable to regain the new-subscriber lead over the next two quarters. XM also announced that it was able to lower its customer acquisition costs during the quarter, something that had been a sticking point after a costly fourth quarter.

Landing Howard Stern was a major coup for Sirius. However, XM can take some degree of comfort in knowing that despite Stern's celebrated migration from CBS (NYSE:CBS), Sirius has signed up just 350,000 to 500,000 more subscribers than XM during the two critical quarters in which Stern left CBS in December and launched his new show in January. Some chose Sirius for Stern before that, though XM still signed up more overall users every single quarter, until this past holiday season turned the tide in its rival's favor. More Stern listeners will continue to trickle in, though even Stern voiced his disappointment in an Entertainment Weekly interview that more of his listeners didn't jump ship from terrestrial radio to join him on Sirius.

Where those fans have gone remains to be seen -- or heard. Stern's daytime replacements on CBS have fared horrendously for the most part. That's why these next two quarters will be important as more than just a gauge of XM or Sirius's true market leadership. Given the two services' combined 10.5 million subscribers, the next few months will also determine whether the medium will gobble up 15 million net subscribers by the end of the year.

Let's hope that XM doesn't hit us in a few months with an "I'm 6 ... and three-quarters!" release. There are big numbers worth claiming here, and they should all be millions.

XM is an active recommendation in the Rule Breakers newsletter service. The average pick is up 35% since the service's inception, while the S&P 500 has mustered a mere 7.5% average advance in that time.

Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004, but he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.