• by Erik Sass , November 7, 2006

With XM's release of third-quarter results on Monday, satellite radio seems to be inching toward its subscription plateau--the point at which its natural market has been reached. Sirius Radio and XM, the two competing subscription satellite radio services, are adding substantially fewer subscribers in the third quarter than previous quarters. However, XM also touted smaller year-over-year losses as proof that the company is moving toward financial stability, eliciting approval from Wall Street.

XM said yesterday that it added 286,000 subscribers in the third quarter--a big dip from its addition of 640,000 in the second. Competitor Sirius Satellite said last week that it added about 441,000 subscribers in the third quarter--also a steep decline from its net addition of about 600,000 in the second.

Both companies' third-quarter numbers are also far lower than their first-quarter performances, when XM added about 569,000 subscribers and Sirius added about 761,000. Still, XM's third-quarter results showed a much smaller loss than previous years, indicating that the company may be in the black sometime soon.

All together, the three quarterly performances suggest that new subscriber demand for satellite radio peaked sometime in the first and second quarters, then began to taper off. However, that's not necessarily bad news for satellite radio. Executives from both companies have said that the market for subscription radio is finite, and a fraction of the total radio market.

Under shareholder pressure, XM cut its marketing budget by 11%--helping to shrink its third-quarter loss to just $83.8 million, down from $131.9 million in the same quarter last year. And it's a huge drop from the company's second-quarter loss of $229 million and first-quarter loss of $149.2 million. Monday's announcement of improved performance cheered Wall Street, which saw XM shares jump 13% to $11.94.

Beset by shareholder lawsuits and regulatory issues, the company needs good news. The FCC said in April that XM's Delphi XM SKYFi2 model was not in compliance with emissions standards, and also sought information about XM's Sportscaster, Roady XT, MyFi, AirWare, Tao and Roady 2 models, according to a letter delivered to the company on August 7.

That damaging news came on the heels of a second-quarter earnings announcement on July 27, in which XM cut its year-end subscription forecast from 8.5 million to a range between 7.7 and 8.2 million. This was the second reduction in XM's forecasted subscription base, which began at 9 million in March and was reduced to 8.5 in May. The service currently has about 7 million subscribers.

XM is also the subject of a massive lawsuit from the Recording Industry Association of America (RIAA), which alleges that a new XM portable player allows consumer piracy. The prospects of the RIAA lawsuit against XM are unclear, according to Fred von Lohmann, an attorney with the Electronic Frontier Foundation in San Francisco. Lohmann calls the RIAA's case "a stretch," especially in light of the Audio Home Recording Act. "As far as I know, every one of these devices was designed to conform to the AHRA," he notes.