Can Sirius Save XM?

• Email
• Share
• Print

There are two ways to ensure poor reception with XM Satellite Radio (Nasdaq: XMSR).

First, drive through an underground tunnel or a cavernous parking garage. Second, post a wider operating loss and lackluster subscriber growth, just days after rival Sirius Satellite Radio (Nasdaq: SIRI) did the opposite.

XM's fourth-quarter report wasn't all bad. Revenue growth of 20%, to $308 million, actually exceeded the 18% top-line gain the market expected. Net loss narrowed to $0.78 a share, or $0.53 a share before merger and settlement charges. The adjusted deficit also clocked in ahead of Wall Street's target.

However, that net loss comparison includes a steep investment impairment loss, which XM booked in the final quarter of 2006. The company's adjusted operating loss actually widened substantially during the period, providing a stark contrast to Sirius, which actually trimmed its expense overhead in the same quarter.

Comparing XM to Sirius will hopefully be a short-lived game. The companies have been waiting 374 days to get regulatory approval of their merger since last year's initial announcement. With accumulated deficits growing at both companies, delaying a decision too much longer borders on cruelty.

XM could use a hand. It brags about automaker partners like General Motors (NYSE: GM) coming through with 3.5 million XM receiver installs during 2007, yet the company closed out the year with just 1.4 million more subscribers than when it started.

Topping 9 million total subs is nice, though Sirius continues to close the gap with its 8.3 million accounts. If there's one positive thing to point out in XM's quarter, it's that the conversion rate -- the percentage of car buyers who decide to pay for service after their free trials run out -- grew to 53.9% during the period. Economic concerns, or fears that the next wave of adopters would refuse to pay $13 a month for digital radio, now seem overblown.   

XM is also doing well beyond its subscriber base. The company's a force on Apple's (Nasdaq: AAPL) iTunes storefront, with podcasts that help give non-XMers a taste of what they're missing. XM will no longer be streaming at Starbucks (Nasdaq: SBUX), but it's still selling tunes through Napster (Nasdaq: NAPS) and beaming mobile audio through Alltel (NYSE: AT).

At this point, the potential fruits of an XM-Sirius combo seem tantalizing. Both services now combine for 17.3 million subscribers. A merger would shave substantial operating redundancies, and a marketing message that supported satellite radio as a medium, rather than pitting one brand against the other, would also be a better use of ad budgets at both companies.

The industry's competitive challenges are real, but its synergies are worth fighting for in getting the deal approved. Let's hope that this is the last XM quarterly report, and that any future poor reception for the company owes entirely to driving around in satellite-inaccessible areas.