Is Napster's Deal With XM Satellite Radio An Inherent Loser? (NAPS, XMSR)

In the prepared remarks on its earnings conference call last week, online music provider Napster (NAPS) spent considerable time praising its recently-launched XM+Napster service. The product is essentially a web portal for XM Satellite Radio (XMSR) subscribers, allowing them to listen to the XM stations on their PC, 'tag' songs they like, then purchase those music tracks directly from Napster. Napster CEO William Christopher Gorog described it glowingly:

This is a breakthrough for radio and fulfils the dream many have had for decades to be able to instantly purchase a song as soon as you hear it on the radio.

One apparent problem with the service, though, is that XM recently announced (along with competitor Sirius) a receiver that allows direct recording of music. So why would an XM subscriber pay for a Napster product that they can download and save for free with an XM receiver? An alert analyst raised precisely this point -- read Napster CEO Gorog's response carefully:

Q - Kit Spring, analyst Stifel Nicolaus

On XM, sounds interesting but doesn’t XM’s new devices allow them to library songs which might limit the likelihood that they would buy songs on Napster?

A - William Christopher Gorog, CEO Napster

In terms of XM I think that in a general way we view the opportunity here to be quite significant because of their very large installed base that seems to continue to grow, just very dramatically every quarter. And we have the opportunity to address this 6 million plus subscriber base, which is growing so fast. Our true and integrated relationship to offer them up, their subscribers, opportunities to build libraries on their PC and of course as I mentioned we have really quite a comprehensive roadmap ahead of us.

I think it really gives us just a [range] of marketing opportunities to help XM really complete the experience for power music fans. So I think that relationship for us over the long-term, as you may recall, this is a five year deal and really provides a lot of opportunity for us to acquire subscribers in a great way. We do have subscriber acquisition cost, surely sell a lot of downloads, but most importantly increase our subscriber base through this relationship. So whether people have the opportunity to temporarily store... songs they hear live, we ultimately are in this to build our subscriber base and not to sell downloads, although I think that, that will and has already made important contribution.

So as far as the Napster CEO is concerned, XM+Napster isn't about paid downloads of individual songs -- its goal is to get new Napster subscribers. That's one big step removed from 'the dream' of instantly purchasing a song you liked on the radio.

The question is: Is it reasonable to assume that listeners who are already dropped a pretty penny to become XM subscribers will buy another subscription to Napster -- when they can record those songs on their XM receivers?