Dueling Fools: XM Satellite Radio Bull

Satellite radio is an easy sell. That's because it's the no-brainer taste test that spoils you forever.

Would you rather have XM Satellite Radio (NASDAQ:XMSR), offering 150 different channels of digital content with dozens of commercial-free music stations, or go back to terrestrial radio, with limited choices chock-full of obnoxious ads and predictably thin musical play lists?

Would you rather have access to every single Major League Baseball game throughout the season or just the local ball club? Would you rather have the right to tune in radio personalities like Bob Edwards, Wolfman Jack and Opie & Anthony -- or none at all?

Now, before you -- or my fellow Fool Chuck Saletta -- argue that it's not a fair comparison because of the costs involved: XM subscribers are paying $12.95 a month for XM, after paying $30 to $200 for a receiver, as opposed to traditional radio, which is free and subsidized by ads.

Let's broaden the scope. Would you rather pay DirecTV (NYSE:DTV) $95 a month -- or whatever your local cable provider is charging you these days -- or duke it out on the VHF and UHF bands with your rabbit ear antennas? Would you rather pay Starbucks (NASDAQ:SBUX) $3 for a premium brew in the morning or fork over pocket change for convenience store coffee?

We know where John Q. Public will turn. We may be a thrifty lot, but the mainstream has never had a problem paying up for quality when the divide is wide between the alternatives. That's why it has taken just four years for XM and Sirius Satellite Radio (NASDAQ:SIRI) to go from zero to more than 9 million subscribers by the end of next month.

Soaring prices at the pump have siphoned off our disposable income. A dozen interest rate hikes have eaten into our finances. Waning consumer confidence finds many of us shuffling our feet and hanging our heads low, like Charlie Brown in a Christmas special. Yep. But it hasn't slowed down the XM freight train. In fact, it hiked its subscription prices by 30% seven months ago and hasn't had to look back once.

Every million subscriber milestone has come quicker than the one before it. XM is projecting to quadruple its base over the next five to seven years. That may sound ambitious, but XM's history has erred on the side of the conservative, with upward revisions along the way.

Some have wondered if XM and Sirius are battling more than just terrestrial radio. Internet radio is a wonderful thing. Apple Computer's (NASDAQ:AAPL) iPod provides access to an infinite range of music and spoken content through podcasts. Fine, but iPod's music is limited to your personal collection. It may replace your CD player, but when you want to be exposed to your next favorite artist or song, you will need the introductory handshake provided by satellite radio.

Podcasts? They're cool, but the water-cooler appeal of spoken programming is when it's live, relevant, and known. I have no beef with portable media players or online streaming. However, I think it has simply expanded our appetite for audio content. It's why XM and Sirius are growing so quickly, alongside the many other aural applications.

Financially speaking, XM is still shooting off red ink like some wine-fueled sprinkler system. Does anyone really think it will be this way when the company is at least four times larger in a half-dozen years? This past quarter, margins improved yet again on a 134% uptick in revenues. The losses are acceptable because it takes more than 45 days for a new subscriber to offset the rather reasonable acquisition costs.

Getting a satellite radio business off the ground isn't for the weak of heart. It's a 10-figure investment to get your satellites airborne. The programming and marketing overhead is substantial. However, most of those costs are fixed. That's why one can't be misled by the losses of today. Yes, XM's third-quarter loss translates into a deficit of $27 for every subscriber, but that's far below the $48 shortcoming at this time last year. XM will continue to improve, and by the time it turns free cash flow positive -- by the end of next year or 2007 -- the profitability will bloom quickly.

That's why I've been a big fan of the satellite radio revolution and have written about it often in my Early Adopter Roundup column for the Motley Fool Rule Breakers newsletter service. I'm guessing that Chuck may have some valuation issues with XM Satellite Radio. I'll tackle those in my rebuttal. Let me just say that of the four leading satellite content providers -- DirecTV and EchoStar (NASDAQ:DISH) in the crowded television space, and Sirius and XM as the only licensed players in SatRad -- XM has the lowest market cap of them all.

The leader in satellite radio? With so much real estate left to conquer and a minority stake in WorldSpace (NASDAQ:WRSP) to give it an overseas presence? Believe the hype. XM is out of this world.

In a good way.

Wait! You're not done. This is just a quarter of the Duel! Don't miss the Bear opening argument and the Bull and Bear rebuttals. Even when you're done, you're still not done. You can vote and let us know who you think won this Duel.

Fool contributor Rick Munarriz has been a satellite radio subscriber since 2004. He can't imagine living without it, though he doesn't own shares in any of the stocks mentioned in this Duel. He is also part of the Motley Fool Rule Breakers analytical team, scouring sectors like satellite radio to find the next ultimate growth stock. You can find out more with arisk-free trial subscription. The Fool has a disclosure policy