Consumer Electronics August 6, 2009, 10:53PM EST

Sirius XM Battles for Subscribers

The satellite radio company lost fewer subscribers in Q2. But competition from Internet radio and the possible loss of Howard Stern could stymie a turnaround

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When Erin Patton, a 39-year-old branding consultant in Dallas, traded in his Cadillac Escalade for a Porsche Cayenne in May, Sirius XM nearly lost a subscriber. The Caddy had satellite radio; the Porsche didn't.

So Patton downloaded Sirius XM (SIRI) software for his iPhone. "It was convenient," he says. "I was extremely impressed by some of the functionality," like the ability to buy songs from Apple's (AAPL) iTunes store. Now he's back in the fold. But Sirius hasn't been so lucky with a lot of its customers.

The company reported Aug. 6 that it had lost nearly 186,000 subscribers during the second quarter ended June 30. That was an improvement from the 400,000 subscribers lost in the first quarter, but still not a hopeful sign. Awful car sales during the past year have eaten into the company's subscriber base, as have recession-bitten consumers cutting back. And despite a foray into the world of iPhone software, Internet radio services may eventually make satellite radio superfluous.

Sirius narrowed its second-quarter loss to $171.3 million from $203.5 million a year ago. Revenues grew 1%, to $608 million. But a return to vigorous growth could take a while.

Dwindling Expectations

Listeners who downloaded Sirius XM's iPhone app have been mostly existing subscribers who got to use the app for free; the software drew in few new customers. "Cash for clunkers" car buyers aren't getting satellite radio pre-installed in great numbers. And radio personality Howard Stern's contract runs out at the end of 2010, which may take away a key reason many subscribers have for keeping the service. "The outlook for Sirius hasn't changed substantially," says Susan Kevorkian, a program director at market researcher IDC. James Goss, an analyst with Barrington Research Associates, estimates Sirius could lose 1 million subscribers this year, ending 2009 with 18 million.

Tuna Amobi, an analyst with Standard & Poor's, which, like BusinessWeek.com, is owned by The McGraw-Hill Companies (MHP), says "expectations are going to come down" for Sirius' subscription growth. Wall Street analysts expect the company will lose 9¢ per share this year, on sales of $2.45 billion.

The second-quarter results could splash cold water on investors' hopes that the company had turned a corner after a $530 million round of financing from Liberty Media in February staved off the threat of bankruptcy. Shares of Sirius XM had risen 54% since early June. But the shares closed down 1.7%, to 53¢, following the earnings report on Aug. 6. Sirius XM stock fell another 2% in extended trading.

Sirius management was hopeful the worst was behind it. Chief Executive Mel Karmazin told analysts during a conference call that the company can return to rapid subscriber growth. Losses tied to slower automobile sales "appear to have bottomed out," he said. The company is restructuring its advertising department to increase ad sales and preparing to debut a new show from comedian Rosie O'Donnell.