XM Curdles as Churn Comes to Light

A bit of back-of-the-envelope math shows why XM hasn't been eager to share the gross-adds figure. The company says it added a total of 475,000 customers in the first quarter.

That looks good, but recall that XM added 321,675 new subscribers in the quarter on a net basis. That means 153,325 customers somehow vanished -- putting the monthly churn at something like 3.8%, nearly three times the official count.

That churn figure looks substantially less rosy, though XM representatives were quick to explain why. They say their churn number excludes customers who drop the service after a three-month introduction when they buy an XM-equipped car. "We felt comfortable" disclosing the gross subscriber figure on the call rather than having analysts guess at it, says a company rep.

XM adds that it converts about 70% of these promotional users into monthly subscribers. But as observers note, all the promotional users are counted in the overall subscriber totals.

Counting freeloaders as actual customers helps XM pump up its subscriber growth and helps spread the per-gross-add costs over a much wider base, say critics. That makes it look like acquisition expenses are coming down, an important consideration at a cash-burning company.

Still, keeping customers is just as important as winning them. The company says it expects to spend $110 for every customer it adds. But if the customer doesn't stick around for a year, paying the full $10 per month, XM will have trouble recouping its investment.

For its part, XM says it probably won't offer two different churn numbers in future press releases. But the company rep says XM "may be more open than we have been in the past" in disclosing gross subscriber additions.

"That would be more in keeping with the times," says Rodman's Ernst.