Suddenly XM's (XMSR) iPod killer isn't looking quite as menacing.U.S. District Judge Deborah Batts denied XM's request to throw out a copyright lawsuit brought by a group of music companies. At issue is a hybrid satellite radio and MP3 device called the Inno that allows users to record music. XM's Inno allows users to select artists and songs for recording. Those audio files can be indexed with other MP3s to create music libraries. In May, the Recording Industry Association of America -- a trade group representing music companies such as Warner Music ( WMG), EMI, Vivendi's Universal Music and Sony ( SNE) -- filed a lawsuit in New York, charging that XM's Inno portable radio violates copyrights by recording selected songs. The judge cleared the way Friday for the case to go to trial. The music companies "sufficiently allege that the device gives XM added commercial benefit as a satellite radio broadcaster," Batts said in her 23-page order. "By broadcasting and storing this copyrighted music ... for later recording by the consumer, XM is both a broadcaster and a distributor, but is only paying to be a broadcaster," Batts wrote in the order. XM argues that use of the device is protected by the Audio Home Recording Act of 1992 and that it is no different than a tape recorder that legally allows users to record material of their choice.
Rival Sirius ( SIRI) settled a similar case with the music companies early last year after it introduced its S50 radio with MP3 recording and playback features. The legal setback for XM comes as the satellite radio industry's rapid subscriber growth has slowed. Observers note that the pay radio market is maturing and the days of blockbuster user gains have ended. Among the challenges XM and rival Sirius face is the popularity of MP3 players such as iPods and the emergence of high-definition radio broadcasts. The hybrid radio/MP3 device is one of XM's more promising answers to the competitive technologies. The problem for XM is that now it will likely have to settle with the music companies at a far higher price than it would have before the judge's decision. Already sensitive to the high costs of the satellite radio business, investors worry that expenses will climb even higher. XM shares fell 70 cents to $15.02 in late morning trading Monday.