Why, XM? Why?
In a move that can either be seen as gutsy bravado or a corporate death wish, XM Satellite Radio (Nasdaq: XMSR ) is waging a war with the music industry. It's bad enough that the Recording Industry Association of America (RIAA) is already looking for satellite radio operators XM and Sirius (Nasdaq: SIRI ) to pay the record labels more for their music royalties. After settling with Sirius over the recording functionality of its S50 receiver unit, the record companies are going after XM and its new Inno portable receiver.
The record labels maintain that the Inno's ability to record a song from one of the dozens of commercial-free stations on XM and play it later is a gateway to piracy. XM counters that the process isn't all that different from folks making cassette copies of radio broadcasts for personal enjoyment in the olden, golden days of terrestrial radio.
I won't even attempt to dissect the legal ramifications. The point here is that instead of coming to terms with the industry to fork over a set amount for every Inno sold -- the way Sirius did with its S50 -- XM is determined to fight this battle out.
It's spunky. It's stupid. It's Hugh Panero.
Inno through the out door
In an e-mailed statement titled "Defending the XM Nation" last week, the company addressed the service's 6.5 million subscribers to explain its position.
"The music industry wants to stop your ability to choose when and where you can listen," the call to arms reads. "Their lawyers have filed a meritless lawsuit to try and stop you from enjoying these radios."
The letter emphasizes that the company is working with Napster (Nasdaq: NAPS ) to help promote digital-music sales through the Inno, with a nifty feature that allows listeners to bookmark songs they like and then buy them online. It goes on to compare the recording features on the new wave of XM receivers to that of TiVo (Nasdaq: TIVO ) . The ability to timeshift programming on the recipient's terms clearly has precedent, but is it enough to guarantee a slam-dunk at the courthouse?
That's where XM's call gets risky. I was a shareholder of MP3.com when the major labels took it to court for its revolutionary Beam-It technology. That case, too, evoked a legal gray area. Beam-It users would insert a music CD in their PC, and the CD would unlock the ability to stream MP3.com's stored copy.
The lawsuit obliterated MP3.com. It wound up settling with four of the labels for a whopping $150 million and sold itself to the fifth label. A major label running a site for indie music -- you can imagine how well that worked out. Things went downhill in a hurry, and eventually, the domain name alone was sold to CNET Networks (Nasdaq: CNET ) , where it now resides as a more mainstream digital-music referral site.
A fine line between legal and tender
Memories of watching MP3.com get ripped to shreds are vivid in my mind. On paper, XM's argument appears stronger than MP3.com's did, but even a legal expert -- which I definitely am not -- can't guarantee which way the tide will turn.
I don't own shares of XM, but I'm attached to the situation in two ways. For starters, a few months ago, I recommended the stock to Rule Breakers newsletter subscribers. The promise of satellite radio as a disruptive technology is too potent to ignore, and XM offered relatively cheaper multiples than Sirius as a ticket to this booming duopoly.
The other reason I'm attached is that I became an XM subscriber when I bought my new car last week. Armed with a lifetime Sirius subscription, I didn't plan on going that route, but I got a great price break on the General Motors (NYSE: GM ) car I wanted with a factory-installed receiver. So XM has three months of a trial subscription to persuade me to renew.
Taking a stand with a microphone stand
Would a quiet deal have made me more comfortable? With the stock trading in the teens, I would have probably felt easier in assessing the downside under that kind of scenario. It gets tricky know. It gets iffy.
There's that little voice in me that says, "You take it to 'em, Hugh. Show them who's boss!" Then the more reasonable voice wonders whether paying the price of pacifism would be money better spent and energy better directed.
After watching Sirius land more net new subscribers than XM over the past two quarters, XM was banking on the Inno, Helix, and NeXus to revitalize interest in the company's service. XM closed out the quarter ended in March with 6.5 million subscribers, far more than the 4.1 million on Sirius, but it's clear that Sirius is the one with the momentum right now.
XM was hoping that it would be "out of terrestrial sight, out of terrestrial mind" for Howard Stern, after his move to Sirius in January. And if you go by each company's year-end projections, XM is looking to land more net new subscribers than Sirius over the last nine months of the year.
So is that it, XM? You try to set yourself apart as a rebel to the more settle-happy Sirius? That kind of approach may have worked when the services were just starting up, but now, with more than 10.6 million accounts between them, satellite radio has little choice but to target the mainstream audience. Ditch the Fonzie jacket, and let's have supper with the Cunninghams. That's the way to matter.
Sirius went with Stern. XM is going for a nibble of the Oprah Winfrey juggernaut come September. Satellite radio keeps doing so many things right that it's a bit staggering to see both stocks trade for less than half of what they fetched when they peaked just before the 2004 holiday shopping season.
So where does this leave XM? It needs to win back investors. It needs to win back subscribers. It needs to win back talent commensurable to the Stern and NASCAR deals that it let Sirius walk away with.
Let's hope it realizes when to use that huge megaphone it's toting -- and when not to.
XM is an active recommendation in theRule Breakersnewsletter service. The stock is trading lower, but that isn't the norm with the stock selection service. The average pick is up 9%, while the S&P 500 has mustered a mere 4% average advance in that time. Check out a free trial to discover the newsletter's biggest winners.
CNET is also a Rule Breakers pick, while TiVo is aMotley Fool Stock Advisorrecommendation.
Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004 and an XM subscriber since last week, 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 theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.