More Regulatory Woes For XM

Just a few weeks after several new model radios cleared regulatory hurdles set up by the Federal Communications Commission (FCC), XM Satellite has become entangled with another arm of the federal octopus. This time XM faces a request from the Securities and Exchange Commission (SEC) that the company voluntarily hand over documents detailing its subscription targets and the average cost of new subscriber acquisition in the second half of 2005. XM stock fell 4 percent Tuesday after the news broke.

According to Merrill Lynch analyst Laraine Mancini, these requests may well be used to support a continuing lawsuit brought by investors against XM over executive compensation in May. The lawsuit centers on the sale of a total of about $79 million of XM stock by CEO Hugh Panero and four other XM execs. Panero and the other execs are accused of issuing false forecasts of overall subscriptions and the average cost of new subscriber acquisition to inflate stock prices in the 6-month period before they sold their stock.

The lawsuit alleges that Panero and other execs promised a subscriber base of 6 million by the end of 2005, while saying they would also lower the average cost of new subscriber acquisition--but knew that the latter would rise substantially. XM subscriber acquisition costs were indeed driven higher in that period by radio shock jock Howard Stern's move to rival Sirius Satellite.

Overall, the average cost of new subscriber acquisitions remains high for both XM and Sirius, and presents a daunting challenge to satellite radio. In end-of-year SEC filings in February, Sirius posted an $863 million net loss for 2005 versus XM's net loss of $666.7 million. But while Sirius' net loss was far larger, its investment in acquiring new subscribers paid off with a fourth-quarter bonanza--and XM's flurry fell flat, as only 900,000 new customers signed on in the fourth quarter.

In addition to its run-ins with the FCC and the SEC, XM has also struggled with the private sector, including a massive lawsuit brought by the Recording Industry Association of America (RIAA). The RIAA lawsuit centers on one of XM's portable radios, the Pioneer Inno, an electronic time-shifting device that can store up to a gigabyte of copyrighted music culled from radio airplay. The RIAA claims that the Pioneer Inno allows users to "pirate" copyrighted music. However, Fred von Lohmann, an attorney at the Electronic Frontier Foundation who practices digital copyright law, has described the RIAA's legal theories as "pretty threadbare" and "a stretch."

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