XM's Inno Lands in Court

When you call someone's bluff, it's good to make sure they don't have Marshall stacks and amplified microphones to talk you down. XM (NASDAQ:XMSR) is finding that out the hard way, now that angry record labels will have their day in court over XM's portable receivers that record tunes off the company's channels (including more than 70 music stations).

XM was banking on next-generation receivers -- like the critically acclaimed Inno, which stores up to 50 hours of recording time -- to spur growth. Instead, the technology spurred copyright infringement lawsuits that were filed back in May. XM's shares slid 6% lower yesterday, after U.S. District Judge Deborah Batts decided to grant the labels their say and proceed with the trial.

The Inno is never going to be an Apple (NASDAQ:AAPL) iPod killer, but it doesn't have to be. Like rival Sirius (NASDAQ:SIRI) and its Stiletto, the new receivers aim to make satellite radio more popular by making it more portable. There are only a limited number of drivers who spend enough time on the road to justify $13 a month for in-car subscriptions, and possibly even fewer who see merit in the original home-based models (which are cumbersome and suffer from signal reception challenges).

But just because a judge sees enough merit in the complaint to move it forward, that doesn't mean XM is doomed. It may very well win this case. However, the real challenge for XM -- win or lose -- is to make sure its relationship with the major labels doesn't turn icy. For now, XM and the labels have a win-win situation; the labels showcase fringe artists who normally aren't heard on mainstream FM stations, and XM broadcasts them in commercial-free glory to win over subscribers.

Let's keep those legal fisticuffs to a minimum. After all, there are bigger battles to be won -- like the battle for the consumer's eardrum.

Rick recommended XM to Rule Breakers subscribers last year, but the position has since been liquidated. If you want to know why, dive into a free 30-day trial to read all about the decision-making process.

Longtime Fool contributor Rick Munarriz is a Sirius and XM subscriber, but he does not own shares in any of the companies mentioned 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.