XM Radio Loss Swells; a Director Resigns

The orbit of XM Satellite Radio Holdings Inc. wobbled Thursday as the nation’s largest pay-radio service said its fourth-quarter loss widened and a company director quit after warning of an impending crisis.

Its shares fell 5% as investors learned of concerns raised by former XM director Pierce Roberts Jr. that the company might be spending too much to attract subscribers in its fight against rival Sirius Satellite Radio Inc.

Revenue more than doubled to $177 million and the company signed up more than 2.7 million additional subscribers in the quarter, bringing its total to more than 6 million. But the cost of acquiring those customers rose to an average of $141 each, up from $104 in the same period last year.

That increased XM’s loss to $268.3 million, or $1.22 a share, up from $188 million, or 93 cents, a year earlier.

Increased costs played a role in Roberts’ resignation after more than five years on XM’s board. Company insiders said Roberts, a former investment banker, long had urged the company to spend less and pursue profitability over growth.

“Given current course and speed there is, in my view, a significant chance of a crisis on the horizon,” Roberts wrote in his resignation letter. Insiders said Roberts’ departure was partially motivated by XM’s recent decision to pay talk show host Oprah Winfrey $55 million to program an XM channel for three years.

Sirius, which has about half the subscribers of XM, recently began broadcasting shock jock Howard Stern. Although both companies have yet to turn a profit, they are spending hundreds of millions of dollars apiece to develop programming that will draw listeners willing to pay $12.95 a month.

Roberts did not return calls seeking comment.

But some analysts said XM was wise to trade short-term profit for rapid growth.

“Any young company is going to struggle to find the right balance between growing and conserving money,” said Sanford C. Bernstein & Co. analyst Craig Moffett. “But if a new subscriber is going to eventually pay more than XM spends to sign them up, then the company is doing shareholders a favor by growing as fast as they can.”

XM Chief Executive Hugh Panero said Thursday in a conference call that he expected to achieve profitability by 2010.

Investors, though, appear to be losing patience. XM shares lost $1.27 to $23.98, off 36% from their 52-week high of $37.31 in July. Sirius shares fell 17 cents to $5.65, off 29% from their 52-week high of $7.98.

The holiday season was challenging for XM and Sirius, as both offered large rebates to woo shoppers. XM’s marketing costs in the quarter jumped 82% from a year earlier to $196.5 million, and programming costs more than tripled to $30.6 million.

Although the company sold record numbers of radios -- and recently announced a new portable device that would allow listeners to save songs in a manner similar to Apple Computer Inc.’s iPod -- the percentage of radio owners signing up for subscriptions was slowing.

XM and Sirius hope to grow by persuading drivers to activate satellite radios that are pre-installed in new cars. Many analysts believe both companies will eventually find their audiences.

“Everyone is still trying to figure out how this market works,” said Eileen Furukawa, an analyst at Citigroup Inc. “It’s easy to throw stones. But one quarter of not doing things perfectly doesn’t mean XM should be in the penalty box forever.”

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Cost of business

Here are some of the big names, and big contracts, XM has signed to build its audience.

* Bob Edwards: Former anchor of National Public Radio’s “Morning Edition.”

* Oprah Winfrey: In a $55-million pact, the talk show queen will program a channel for three years and appear on air 30 minutes a week for 39 weeks.

* Bob Dylan: The ‘60s icon and musical recluse will host a weekly show beginning in March.

* Snoop Dogg: The rapper will be the host of a 90-minute program.

* NASCAR: Broadcast rights through 2006.

* Major League Baseball: An 11-year deal worth $650 million.

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Source: Times research