4 Questions for Sirius

If Monday's uninspiring quarterly report from XM Satellite Radio (Nasdaq: XMSR) left you hungry for something more, Sirius Satellite Radio's (Nasdaq: SIRI) dish last night seemed more like a second appetizer than a main course.

Revenue grew by 33% to $270.4 million. The company's net loss refreshingly narrowed to $0.07 a share, but what's the deal with landing just 322,534 net subs? Despite regular criticism regarding the discrepancies in how each company counts its subscribers, Sirius has spent the past two years quickly closing the reported gap between the two companies. Sirius' gain is scarcely different from the 303,000 net additions that XM scored during the same three months.

I shouldn't rain on the companies' parade. XM and Sirius still managed to combine for more than 600,000 net new accounts during the period. The two satellite radio powers now have nearly 18 million subscribers in total. However, both companies missed Wall Street's revenue expectations yesterday. Furthermore, this industry now depends heavily upon revenue-sharing deals with automakers to get its receivers into more new cars.

Company-specific concerns remain as well. Churn is climbing at Sirius. Losses are widening at XM. These companies need to wrap up their 15-month courtship in a major way, if and when the FCC gives the merger its blessing.

Until they do, I have four questions for Sirius.

1. What is holding the concept back on the retail front?
Sirius closed the period with just 2,506 more retail subscribers than it started with. XM surrendered more than 50,000 retail users. In other words, if we backed out all of the installed receivers in automobiles, satellite radio's popularity shrank during the first three months of the year. Before you panic, however, there's a good reason for the decline.

"You have an industry that appears to be in limbo, when it's actually just trying to tiptoe past the border guard," I wrote last month, suggesting that the companies have scaled back on their consumer marketing until regulators approve the deal. There's no point in springing for lavish ad campaigns when terrestrial heavies like Clear Channel (NYSE: CCU) and a few concerned Congressmen are voicing their objections to an unchecked satellite-radio union.

I'm hoping my theory is correct. If not, I'll settle for the logical explanation that many potential retail buyers are simply getting swept up in the car upgrade cycle, and going with their factory-installed receivers.

2. Will better portable receivers be the key to a retail turnaround?
Satellite radio has solid options for consumers on the go. Sirius' Stiletto and XM's inno and Helix are slick receivers that double as MP3 players. However, after seeing what Apple (Nasdaq: AAPL) and Research in Motion (Nasdaq: RIMM) have done with their latest smartphone lines, why can't XM and Sirius also make gadgets that do it all?

True, BlackBerry users can now pay for a sliver of XM's programming, but that's hardly the complete satellite-radio experience. Hopefully, the merger will inspire the combined company to come up with the mother of all handheld appliances -- a gizmo that offers phone calls, GPS navigation, games, and media playback, along with satellite-radio streaming.

Am I asking too much? Probably. Will this thing eat batteries? That's for the techies to determine. I just think that XM and Sirius will need to pursue audiences beyond car-bound commuters. Better plug-and-play devices with more real-world features are crucial to that goal.

3. Will Sirius-XM count its subs the XM or Sirius way?
I'm particularly curious about this. XM fans have long argued that Sirius is cheating by counting Sirius-equipped cars in showrooms as subscribers, rather than going by subscriptions activated by eventual auto buyers.

I don't agree with these complaints, because the numbers all balance out in the end. After all, Sirius doesn't count the same subscriber again when a car is driven off the lot. If anything, I see Sirius' approach as a leading indicator.

4. Who is the next Howard Stern?
Satellite radio hasn't made waves since Howard Stern joined Sirius. Even Oprah Winfrey's arrival at XM didn't result in accelerated subscriber growth. Many of the satellite radio's most appealing features, like commercial-free music, are more or less duplicated by Internet radio or portable media players with Napster (Nasdaq: NAPS) or other music-subscription plans. Satellite radio's sports programming is great, but many fans will be just fine with terrestrial-radio coverage of their home teams.

Is there another needle-mover out there? Something else that will set satellite radio apart? I thought that Sirius' backseat video offering would raise the stakes, but it hasn't exactly caught on yet.

The pending merger will result in huge cost savings, but XM and Sirius will still need a new killer app to take the medium to the next level.

Vignettes from XM and Sirius' long courtship:

• Why Does Goldman Hate XM?
• Before XM Kisses Sirius
• Satellite Radio Hands Out Appetizers