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Costs Crackle at Sirius, XM

Two cash-burning satellite radio favorites falter.

Satellite radio got a poor reception on Wall Street Friday, as rising costs generated hefty static for a second straight day.

New York-based



fell 6% after posting the inevitable

steep quarterly loss, and archrival



dropped 8%. The selloff put Washington, D.C.-based XM down 12% over two days.

Part of the hangover was Thursday's

call to arms by departing XM director Jack Roberts. He said XM's spend-first, ask-questions-later approach could leave shareholders high and dry. But investors are also starting to wonder whether the companies' great growth hope, the preinstalled car satellite radio, will really pay off.

The view of satellite radio investors on whether huge growth justifies huge costs seems to have shifted in the direction of conserving cash. No question, the explosive growth of pay radio has defied skeptics who have watched subscriber numbers increase fivefold in two years, to nearly 10 million users. But one of the glaring issues now is whether the so-called hyper-growth phase is over.

Sirius, for example, bagged 1.14 million new subscribers during the quarter, a blowout number attributed largely to the debut of Howard Stern's program. But Stern, as huge as his popularity may be, debuts only once. In other words, say observers, there aren't many big growth tricks left.

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And speculative investors who crave growth don't like to stick around when the momentum is gone and the topic switches from expansion to conservation.

Sirius posted a net loss of $311 million on sales of $80 million in the fourth quarter. Those numbers compare with a loss of $262 million on $25 million in revenue in the year-ago period. Though the losses continue to widen, chief Mel Karmazin promised that costs would come closer in line with sales by the end of the year, and that cash flow would turn positive next year.

Investors might be more inclined to cheer the progress if they hadn't heard similar promises before. In the pre-Stern/Karmazin era, Sirius was similarly optimistic.

"The company continues to expect to reach the cash-flow break-even point of 2 million subscribers by the end of 2005," Sirius

said in February 2004.

But slower growth and perpetual red ink aren't the only concerns among satellite radio watchers. Keeping subscribers is going to be a big challenge this year.

Sirius, as


reported, counts cars that arrive at dealerships as subscribers. Then, once the car is sold, the buyer gets a year of free service. After the trial period, the car owner selects whether they want to pay for the service or end it.

In similar arrangements with auto partners, rival XM has found that about 54% of the free-service users convert to paid subscribers. Sirius doesn't disclose its auto conversion rate. Asked about auto signups on a conference call with analysts Friday, Karmazin said: "We are not in the position of giving that."

It is early yet, and the new Sirius-radio equipped Chryslers started hitting the lots in the second half of last year. So it is reasonable to expect that a good percentage of the cars that were originally counted as subscribers will soon become non-subscribers when the freebie expires. That's certainly one reason Sirius is expecting monthly customer defections as measured under its own set of rules to rise to 1.8% this year from 1.5% last year.

"They do bundle the service with cars from the outset when it is factory installed," says one money manager with no positions. "But after the promotional period ends, the monthly payment is probably daunting to some people."

On Friday afternoon, Sirius fell 33 cents to $5.32, and XM dropped $1.93 to $22.05.