Adjusting the Signal at XM

There are about as many ways to approach XM Satellite Radio's (Nasdaq: XMSR  ) second-quarter report as there are channels on the XM dial. An optimist could point to a 22% spike in revenues to $277 million, or to losses that narrowed to $0.45 per share before a $0.12-per-share impairment charge from the company's Canadian investment. It could also be pointed out that the company landed 618,000 gross additions through its automotive partners, the best quarter in the company's history on that front. Or that the overall subscriber count keeps inching higher, up to 8.25 million from 7.9 million at the end of March.

That's not too shabby, until you keep reading and realize that XM should probably have a channel that exclusively plays dirges. Since it doesn't, you'll have to make your own somber background music.

All dirges, all the time
And now, the bad news. Subscriber acquisition costs bumped higher, ad sales failed to keep pace with top-line growth, aftermarket sales (revenue from subscribers who purchase a satellite radio through a retail or distributor outlet) continue to slip, and the adjusted operating loss actually widened slightly.

So pick your perspective. Yes, XM and Sirius Satellite Radio (Nasdaq: SIRI  ) are doing well on the automotive front. XM's automaker partners have sold 8 million cars with factory-installed XM satellite radio receivers. And 5.5 million of those vehicles have come from General Motors (NYSE: GM  ) alone.

But then, commuters are an easy sell for satellite radio. They're on the road, where radio is the diversion of choice. You don't have the installation fuss or the finicky reception problems that have plagued home-based receivers. Yet XM receivers become a costly dashboard paperweight to the 47% of car buyers who don't activate their paid XM subscriptions after their promotional trials run out. With the first wave of XM subscribers starting to trade in their cars, we'll find out what kind of loyalty the automaker partnerships have nurtured.

Too many choices and nothing's on
I still believe in satellite radio, though slowing growth and an expanding laundry list of cheaper alternatives have me fearing for the industry's fate if XM and Sirius are not allowed to merge later this year.

Yes, I said alternatives. It's not just the input jacks that are becoming standard equipment in most cars and allowing motorists to plug in their Apple (Nasdaq: AAPL  ) or SanDisk (Nasdaq: SNDK  ) portable music players. Think about what happened on June 26, 2007. That was the day when loads of Internet radio stations went off the virtual airwaves for a day to protest music royalty hikes. That may not seem to have a lot to do with satellite radio, but think about it. With companies and municipalities dreaming up gargantuan, citywide Wi-Fi networks, aren't we just a few years away from tens of thousands of Internet radio stations being made available to metropolitan drivers? It is ludicrous for anyone with enough vision to view XM and Sirius as a monopoly. Unfortunately, these are the same factors that will eat away at the potential satellite-radio market, too. 

The future would have been tricky even without the challenge of new technologies. Losses keep mounting, and incremental subscriber growth will be tougher, as the heavy-driver hardcore radio buffs are already on board.

And what's the deal with the softening of ad revenue per subscriber? This trend also reared its ugly mug at Sirius in the first quarter. Sure, it shouldn't bother me. Most people still see XM and Sirius as a source of commercial-free music. However, one would expect XM and Sirius to be improving on the money they can make through their non-music commercialized offerings. With lower-priced plans in the works if the merger passes regulatory tests, ad sales should be growing instead of shrinking.

Oh, well. I guess I'll save that expectation for the next time I tune in to the Upside Potential channel. It's a tricky find, but it's there for the streaming.

Tune in to more Foolishness:

XM Satellite Radio is a former Rule Breakers stock pick. Don't worry, the newsletter service spared investors a precipitous drop by recommending last year that subscribers sell the stock. A free 30-day subscription will shed some light on the rise and fall of the stock's potential.   

Longtime Fool contributor Rick Munarriz subscribes to both XM and Sirius, but he does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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