• by Erik Sass , October 5, 2006

In the third quarter, Sirius Satellite Radio added 440,000 new subscribers versus 285,000 for competitor XM, scoring another victory in their long-running battle for market share. Sirius remains the smaller of the two in total subscriber base, with 5.1 million versus XM's 7.2 million. After the companies released their new subscriber acquisitions on Wednesday, Sirius stock fell 13 cents--or 3.2 percent, to $3.94--and XM dropped 62 cents, or 4.9 percent, to $11.96.

Although Sirius' net additions exceed XM's, XM may have generated more new subscriptions, according to Sanford C. Bernstein analyst Craig Moffett. Moffett explained that XM's larger subscriber base means greater subscriber "churn" or turnover, with more customers dropping out. The results for both companies are in keeping with earlier corporate guidance. XM's forecast of its year-end subscription base began at 9 million in March, was reduced to 8.5 million in May, and was lowered again to a range between 7.7 million and 8.2 million on July 27.

2006 has been a year marked by expensive big-name additions at both companies, beginning with shock jock Howard Stern's move to Sirius in January. Stern's move was accompanied by massive promotional spending and counter-spending--which inflated the average cost of acquiring a new subscriber for both companies, contributing to continuing losses on the bottom line for each company. In September, Oprah Winfrey joined XM with her show "Oprah and Friends," widely viewed as a move to counter Stern.

Overall, the average cost of new subscriber acquisitions remains high for 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.

XM has also been dogged by legal troubles and regulatory obstacles. Most recently, in September, XM received a request from the Securities and Exchange Commission (SEC) to voluntarily hand over documents detailing its subscription targets and the average cost of new subscriber acquisition in the second half of 2005.

According to Merrill Lynch analyst Laraine Mancini, these requests may 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 six-month period before they sold their stock.

In addition to its run-ins with 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.