The stage: XM Satellite Radio (NASDAQ:XMSR) headquarters in Washington, D.C.
The time: Mid-December, mid-afternoon, about 30 minutes late for the meeting because we got lost.
The players: Allen Goldberg, Director of Corp. Affairs; Hugh Panero, CEO; and Gary Parsons, Chairman.

The story
It was a sunny, clear, and brisk December afternoon when we had an appointment to meet executives at the nation's leading satellite radio firm, XM. The company, along with sole competitor Sirius Satellite (NASDAQ:SIRI), had been grabbing more and more attention as satellite radio took flight.

Both XM and Sirius offer more than 100 digital radio channels of music, talk, sports, and more. You receive signals anywhere in the country, can listen in your car or home, and all the music channels are commercial-free. (XM moves to that model Feb. 1). After you buy a receiver (anywhere from $99 to $300), XM costs $9.99 a month and Sirius is $12.95 monthly. Paying in advance, the costs decrease.

Two years ago, many people -- including us -- wondered if customers would pay for radio. We shorted Sirius at $7 because the company had so much debt, zero revenue and was lagging XM. The short worked well (going below $1 at one point), but now, as XM hosts nearly 1.4 million subs and Sirius 261,000, it's clear people are paying for radio and loving it. Now word of mouth is growing about the quality of the offerings; the lack of ads; the diversity and mix; the ability to listen while driving across country. All this makes for lively conversation.

Last year the stocks came to life, though XM much more than Sirius. It was under these upbeat conditions that we arrived at XM headquarters to -- as investors, analysts, and consumers -- take it in, pose some questions, and listen.

From the front door to the main floor
XM spearheaded development in an economically depressed part of D.C., near Capitol Hill, when it bought and rehabbed a big old brick warehouse. You enter glass doors and recognize immediately the hand of award-winning modern design -- light, open, sleek, cool -- thanks to the architectural firm Studios. (You can follow along with us at their website, choosing XM Satellite Radio under "Portfolios.") Setting the stage upon entrance is the indelible corporate icon above, XM with "signals" emanating from it, but with the XM turned 90 degrees -- projected high up on the brick wall. Nice.

Up an elevator to the main floor, we're first shown the glass-walled command center (something straight from NASA, but darkly lit). From a Captain Kirk chair, a human and myriad controls monitor XM's satellites and stations, 24/7 via dozens of colorful wall monitors. The key engineering braintrust lives to the right in its own sanctum.

They tried to tell us the graphic-equalizer-type thermometers, which were bouncing up and down in red and green bars, corresponded to each of the 100 broadcasting channels, but their smile gave it away. They honestly weren't sure what those were for. To the two of us -- steeled against the corporate spinmeisters -- it was completely disarming.

There's a lack of spin at XM, though maybe it's because we're from The Motley Fool -- we make people comfortable (we hope!). Moving on, sure, we met a number of executives with firm handshakes and hole-boring gazes -- we'd worry if we hadn't (this is the culture of finance, and companies on the march to profitability need that, doncha know). But in the wide-open office spaces, where everyone is visible, Bad Attitudes would be hard to hide. Our antennae said people were having a good time, working, enjoying, creating. The esprit de corps was high. And why not? This is radio, reborn.

The high points from the high chair
Case in point. We went in for what we all expected to be a 15-minute meet-and-greet with Chairman Gary Parsons, and everyone had such a good time that we didn't leave until more than an hour later. A few interesting points from our Q&A:

Parsons -- like everyone we met at XM -- was not interested in bashing the competition, instead pointing out XM's strengths and accomplishments. Parsons is an engineer by training, so it's no wonder he emphasizes that XM controls its technology development through its 30-strong engineering shop in Boca Raton, Fla. XM licenses its technology to chip makers and is paid royalties. We collectively remembered, nodding, the chipset delays at Lucent (NYSE:LU) that removed Sirius from the race to be first-to-market with satellite radio.

By controlling its own tech development, XM can time its product life cycles and tell third-party radio developers exactly where tech roll outs stand. It helps everyone with inventory control, and it allows XM to plan roll outs at optimum times, rather than at the whim of outside developers.

Additionally, the auto market is helping drive XM's rapid growth, where it has the advantage of a factory-installed option and free trial from General Motors (NYSE:GM) and others. Note that the trial is free to the user, Parsons told us, but GM pays XM the usual subscription fee. In contrast, Sirius -- offered by Ford (NYSE:F) and others -- is only an option at the dealer. One school of thought is that a car buyer will accept an installed option and free trial, but won't specifically order it done at the dealer for extra cost, giving XM a leg up.

Parsons also addressed something he must be hearing about lately -- insider selling of XM shares. All things being equal, we attach importance to significant insider buying, but less to selling. People have all sorts of reasons to raise cash, from home purchasing to diversification. And it would seem prudent for anyone to unload some shares that had risen 10-fold in a little over a year.

But Parsons explained that the year before he had asked executives to take bonuses in options, rather than cash (times were tight), and they agreed. Now, lately, he had encouraged those executives to "take their bonuses" by selling some shares, if they liked.

With a long career in communications, Parsons can rattle off technologies and various cable and dish companies without missing a beat, explaining simply how XM fits into the overall market. Most revealing, however, was his willingness to admit mistakes. One he cited was raising debt early last year at share prices much lower than today's. But, as he said, you can't know where the market will go. He also candidly spoke about the company's debt, saying, "We have too much for my taste."

In the next breath, he explained how the debt is being paid down, how today's environment makes it possible for XM to buy back debt and retire it on favorable terms -- and it has been doing this, and will continue to. Parsons has financial chops that, as analysts, made us glad he was Chairman. And by the way, he isn't CEO -- that's Hugh Panero, who we also met briefly. The company smartly kept the two positions separate.

Touring the studios
The economics of this business are relatively simple (and lends itself nicely to discounted cash flow models, incidentally). First, obtain the satellite radio license, which XM did in 1997. Pay for, launch, and maintain the satellites; invent, design, and disseminate the receivers; devise and execute the programming.

After that, it's about one thing only: get the subscribers. A large sign overlooking the main office floor reminds everyone that this is Rule #1; and if they don't catch Rule #1, Rule #2 -- of course -- reminds them to see Rule #1. And it's working. CEO Panero projects breakeven results by year end, with 2.8 million subs.

All the technology and vehicle options would not have mattered if the 101 channels (with 20 more coming this year) didn't attract and retain subscribers. The programming is the company's intellectual property, its bread and butter, and -- like Sirius -- there's something for everyone. We saw where it all happens at XM -- from World Zone, to Luna (Latin jazz), from Frank's Place (vocal standards) to Club Hits, and much more.

To put you in the "studio" mood, you pass through hallways where you can stand under hanging cones and -- only there and not an inch outside -- hear an XM station live. We were Maxwell Smarts in the cone of silence: no denying the tech thrill.

Huge renderings of great musicians line the walls, and then we were in cozy, quiet halls, taking in the glassed studios on either side, with their neon-pink "on air" tubes and sleek blue-smoked glass identifiers. We spied in on the DJs, surrounded with their own idiosyncratic visions of their beats -- life-size Elvis cutouts for the '50s station, multitudes of stuffed animals for the XM kids channel; and the '80s station -- what a riot of memorabilia in there.

We spied the pristine performance studio only to learn that we preceded Sarah McLachlan live by a few days. It was enough to make us, starry-eyed for a moment, wonder if we could come back.

Brass tacks
Once analysts, always analysts, so we contrasted the deal XM got on the warehouse with the millions ($80 million to be precise) it spent on its transformation. But it's all business. There's no waste in this workspace, and when you're a media company, it pays to have headquarters that make your stars feel like stars, beyond acoustical brilliance, engineering perfection, and perfect sound quality for listeners. Throughout, XM's home has a certain edgy, clean glow.

We've heard XM for months and love it; it's made us listen to music radio for the first time in years, and now daily. We haven't heard Sirius for comparison, so we need to. For now, we can focus on comparing some numbers.

Satellite Radio Competitors
XM Sirius
Subscribers (end of '03) 1.36 million 261,000
Sales (through 9/30/03) $58.2 m $7.9 million
Operating Loss (through 9/30/03) 323 m 312 m
Cash and Equivalents (9/30/03) 456 m 479 m
Long-term Debt (9/30/03) 760 m 259 m
Share Price (1/8/04) $28 $3.30
Market Value $4.1 billion $3.2 billion
Enterprise Value (EV) $4.4 billion $2.98 billion
EV/Current Subscriber $3,250 $11,500
Projected 2004 subscribers 2.8 million 860,000

Both companies need to have operatings losses telescope dramatically in order to maintain cash before reaching break-even. Despite large losses last year, XM aims for break-even by year end. The picture at Sirius is more cloudy. Meanwhile, valuations are steep at both stocks. Investors are foregoing any margin of safety, instead optimistically betting that satellite radio will -- within five years, apparently -- sport some 10 million customers.

As investors, we know there are no more rabid groups of followers than those behind XM and Sirius -- they are as partisan as Apple (NASDAQ:AAPL), Advanced Micro Devices (NYSE:AMD), Qualcomm (NASDAQ:QCOM) or Rambus (NASDAQ:RMBS) shareholders. They love their companies and their products equally. But on a numbers basis, as well as with execution thus far, XM is leading the race against Sirius. On a valuation basis, both stocks are high risk (Sirius looking more precarious due to lower subs), but -- provided mass popularity of satellite radio -- one or both could still offer long-term rewards. We're looking closely.

Meanwhile, we'll keep listenin' to satellite radio. We've heard the future, and it sounds great.

Jeff Fischer and Tom Jacobs do not hold positions in XM or Sirius at time of publication (the Fool has a disclosure policy). Are XM and Sirius good investments? Waltz over to our XM and Sirius discussion boards, where you'll find strong opinions sung in convincing tones.