XM Board Member Quits, Says 'Crisis' Looms

Following the announcement of a wider than expected loss, satellite radio provider XM said Thursday that a member of its board of directors had stepped down, citing disagreements with management over the company's direction.

Both XM and its smaller competitor Sirius are incurring heavy losses in order to attract high-profile content to their services. XM signed a $55 million deal for the exclusive rights to radio content produced by Oprah Winfrey's Harpo Studios.

Analysts say that the deal was likely in response to Sirius' high-profile hiring of Howard Stern, who began broadcasting his show on the service in January. However, some are beginning to question whether the strategy of spending heavily on content instead of focusing on profitability.

That reasoning is said to be one of the contributing factors to XM Director Pierce Roberts' departure. In an SEC filing, the service said it received his letter of resignation on Monday, which said if the company did not right itself financially, "given current course and speed there is, in my view, a significant chance of a crisis on the horizon."

XM reported a fourth quarter loss of $268.3 million or $1.22 per share versus $188.2 million or 93 cents per share in the year ago quarter. Financial analysts had expected a loss of 92 cents a share.

A similar story is likely from Sirius, which will report its earnings on Friday.

Roberts said that he does not believe the current direction was in the best interest of the company. XM admitted in its filings that Roberts had become increasingly vocal in his opposition to the company's strategies.

"Even absent a crisis, I believe that XM will inevitably serve its shareholders poorly without major changes now," he wrote in a letter to XM chairman Gary Parsons. "It is clear to me that I cannot be part of the solution and I will not be part of the problem."

Comments from XM CEO Hugh Panero in a conference call to analysts and investors seemed to suggest a sharp disagreement with Roberts' opinion. "Our overall focus in 2006 is to continue driving rapid growth in a cost-effective manner," he said.

Furthermore, in a statement covering the earnings release, Panero said that much of the higher costs, such as subscriber acquisition, were due to "a one-time competitive event in the fourth quarter," likely referring to the buildup to Stern's debut on Sirius.

Analysts seemed to agree, with Standard & Poor's Equity Research maintaining a "strong buy" rating on the stock, echoing Panero's reasoning.

Panero also added that the company expects its costs to decrease, especially in marketing, with the Stern launch out of the way. Also, XM plans to break even on a cash flow basis by the end of the year.

Banc of America Securities analyst Jonathan Jacoby said recently that the company is in a better position than Sirius financially, as it has less programming costs and is not as far in debt.

"[We] feel management needs to give more transparency on churn expectations … and true cost of Stern," Jacoby said of Sirius.

Checks by the analyst suggest that Stern is drawing fewer new subscribers to the satellite radio service over time, which could be a potential problem for Sirius. In order to break even just on Stern's contract alone, it must use the base monthly fees of close to 700,000 of its subscribers just to pay his salary.

While it may not seem like much with the company boasting a $3 billion market cap, Sirius currently counts only 3 million total subscribers and the fees do not include any other company expenses and programming.

In either case, Roberts' resignation brings the debate of whether entertainment companies should be first focusing on content or profitability, say analysts.