The good: The satellite radio company posted one of its strongest third quarters ever, reporting $104 million in net income, or 2 cents a share, on revenue of $763 million — up 6 percent from last year. And that was a penny better than Wall Street predictions.

The bad: Sirius added just 334,000 new subscribers in the third quarter, well below analyst’s expectations of as many as 400,000.

So, a significant shortfall. That said, it doesn’t seem to have caused Sirius to alter its subscriber guidance at all. During the last quarter, it raised it to 1.6 million net adds, and during a conference call Tuesday, CEO Mel Karmazin said that forecast still holds.

“We’ve added 1.16 million new net subscribers so far this year compared to 1.09 million in the first 9 months of 2010, a 6 percent increase over last year,” Karmazin said. “And our second quarter — on our second quarter earnings call, we raised our subscriber guidance for the year to 1.6 million net adds, which we expect to meet. This means, we anticipate adding about 440,000 net subscribers in the fourth quarter, up about 34 percent from subscriber growth in the fourth quarter of 2010.”

In other words, subscribership remains at an all-time high and the growth trend is strong enough that Karmazin feels the company can still hit its target.

At least as important: Spotify now has 175,000 paying U.S. subscribers, less than a month after it finally opened its doors in America, says the same source. Last week Billboard cited a source who pegged Spotify’s U.S. user total at “at least one million.”

That’s a conversion rate — crucial to both Spotify’s business plans and to the big music labels — of 12.5 percent. Not quite as good as the 15 percent rate that Spotify reported in its home base of Europe last spring.

On the other hand, Amercian users have less incentive to pay for Spotify than Europeans do — during the company’s six-month launch phase, the U.S. version of the free service gives users more music than the European one does. The main reason to upgrade to paid is to get access on iPhones and Android handsets, for $10 a month.

In any case, it’s still hard to gauge what the numbers mean — it’s very early, and there has been a lot of hype.

Still, for context: Spotify reports that it has 1.6 million paid subscribers in Europe. And last month Rhapsody, the biggest digital music subscription service in the U.S., said it had 800,000 paid subscribers. (Sirius XM has 21 million subscribers, but the satellite radio service isn’t an apples-to-apples analog with Spotify et al; closer to a pear.)

Meanwhile, Rdio, a U.S.-based Spotify competitor hoping to capitalize on Spotify’s wave of publicity — or at least not get drowned by it — has made an interesting move: It is going to continue marketing its service via Apple’s iTunes, while raising its prices — for customers who sign up via its mobile apps — from $10 to $15 a month in order to comply with Apple’s new subscription rules and fees.

Most other subscription services — including Spotify and Rhapsody — have gone the other route, by taking down subscription links from their Apple apps, but keeping their pricing intact.

“We continue to believe it would be appropriate for us to increase our pricing to be able to continue investing in and delivering the best audio content in the world,” Karmazin said. “Early next year, for the first time since the merger, we will be able to price our service as we see fit.”

He offered no further details beyond that and said nothing about the size of the increase the company is mulling. But the company’s clearly aware it’s treading toward dangerous territory here. As CFO David Frear observed during the call, higher prices could result in subscriber attrition, something the company would prefer to avoid.

“Generally, when you raise prices you tend to dampen demand,” Frear said. “But I think you’ve heard us say that pretty clearly that overall, for this business, that we think that price increases make a lot of sense, given the programming we’re delivering and given how long we’ve left the price unchanged. It just makes a lot of sense to increase it in the future.”

I’m sure it does. With aggregate subscriber levels that exceeded 21 million this quarter, Sirius is by far the most popular music subscription service in the world (Spotify isn’t even a distant second with a self-reported 1.6 million). With the federally mandated freeze lifted, it’s time to milk it for all it’s worth.

Filed in 2009, the complaint claims the union gave Sirius a monopoly in radio services, one which resulted in higher prices for consumers. Which is interesting, considering the Department of Justice’s comments on the merger when it first approved it.

“After a careful and thorough review of the proposed transaction, the Division concluded that the evidence does not demonstrate that the proposed merger of XM and Sirius is likely to substantially lessen competition, and that the transaction therefore is not likely to harm consumers.”

Anyway…

An unfortunate turn of events for Sirius, which is likely still reeling from the other high-profile lawsuit it was slapped with earlier this month.

“When Sirius needed Stern, it promised him a share in any success that the company achieved,” the suit reads. “But now that Sirius has conquered its chief competitor and acquired more than 20 million subscribers, it has reneged on its commitment to Stern, unilaterally deciding that it has paid him enough.”

According to the suit, Sirius did give Stern his initial stock award after he signed on in January 2006, but it failed to pay him out on any others even though it “exceeded its own internal estimates by more than 2 million subscribers” each year for the remainder of the original contract.

“Stern enabled Sirius to surpass its internal subscriber targets by more than 2 million subscribers in 2006 and in 2007,” the suit alleges. “Because of this success and the revenue that it brought into the company, [Stern] was entitled to receive the performance-based stock awards Sirius promised [him].”

So Sirius is stiffing Stern. Not a particularly wise move given the latter’s irascibility and reach of his daily radio show. If there’s a PR battle to be fought here, Sirius will likely lose it first thing tomorrow morning when Stern’s back on the air again.

Reached for comment, Sirius claimed to have met its obligations to Stern. “SIRIUS XM just signed a contract through 2015 with Howard Stern, and he is a valued part of our company,” spokesman Patrick Reilly told me. “We were thus surprised and disappointed by the subsequent legal action initiated by his production company and agent. We have met all of our obligations under the terms of our 2004 agreement with Howard, his agent and production company.”

Here’s a copy of the suit:

SternSuit –

The company’s satellite radio service is pre-installed in about 60 percent of cars sold in the United States, and historically its take rate has been upward of 44 percent. So when J.D Power says that light-vehicle sales for January will hit 794,500 units, 14 percent higher than January 2010, that’s good news for Sirius. Even better is this: The research firm is raising its retail sales forecast for the entire year. Not by much–just to 10.5 million units from 10.4 million units.

But the trend is upward, and J.D. Power and Associates’ Jeff Schuster says there’s room for even more upside. “Optimism is increasing for the auto industry following a stronger outlook for the economy,” he explained. “GDP growth is expected to be in the 3 percent to 3.2 percent range for 2011. As the macro drivers continue to improve and credit availability increases, further upside potential remains.”

In other words, 2011 is shaping up to be a good year for Sirius XM.

UPDATE: Sirius now confirms the deal. It doesn’t offer up any new details except for this one: The company will now have the ability to transmit Stern’s show to mobile devices. Which would make the company’s mobile apps for, say, Apple’s iPhone and Google’s Android handsets much more attractive, and that’s a valuable deal point.

Press release:

Howard Stern Signs New Five-Year Contract With SIRIUS XM
Agreement Includes Rights for SIRIUS XM to Transmit Howard Stern’s Programming to Mobile Devices

NEW YORK, Dec. 9, 2010 /PRNewswire-FirstCall/ — Howard Stern and SIRIUS XM Radio (Nasdaq: SIRI) today announced a new five-year agreement. The news was first reported by Howard during his show this morning.

“On my first day in satellite radio SIRIUS had approximately 600,000 subscribers. Today, the two companies have 20 million; and, in my view, we have just scratched the surface of how many people will get on board,” said Howard Stern. “I am especially excited that my show will now be heard through SIRIUS XM on mobile devices. Access to my show on mobile devices will open up additional opportunities for my fans to hear me wherever they are.”

“Howard is a great talent and we are thrilled that he will continue to provoke, engage and entertain on SIRIUS XM. Our agreement is good news on all fronts — it is good for SIRIUS XM subscribers and good for SIRIUS XM stockholders. Howard forever changed radio and was instrumental in putting SIRIUS on the map when he first launched on satellite radio. He is one of the few ‘one-name’ entertainers in the country and our 20 million subscribers are lucky to have him,” said Mel Karmazin, Chief Executive Officer, SIRIUS XM.

The world-renowned Stern is credited with revolutionizing the talk radio format. Known for his large and extremely loyal fan base and for his unequalled ability to migrate fans to other media, Stern has embarked on numerous highly successful ventures over the years. Stern has written two best-selling books — Private Parts, which was Simon & Schuster’s fastest-selling book ever, and Miss America, the fastest-selling book in publishing history. He later starred in the highly successful motion picture adaptation of Private Parts, orchestrated one of the fastest-selling soundtracks in motion picture history and has starred in one of the most watched entertainment pay-per-view special of all time.

Howard’s new contract will run through December 31, 2015. Under the terms of the new contract, SIRIUS XM will now have the right to transmit Howard’s exclusive programming to mobile devices. Additional terms of the contract will not be disclosed.

Shares in the satellite radio broadcaster hit a new 52-week high Wednesday–$1.44. And while that’s a fraction of their all-time high, it still means they’re up more than 130 percent for the year.

Which is damn impressive for a company that was slapped with a Nasdaq minimum-bid notice a little over a year ago.

And there’s more good news on the way. Sirius (SIRI) said Wednesday that it added more than 334,000 Net subscribers in its third quarter. That’s more than triple its gain of a year ago. Sirius now has about 19.9 million subscribers and hopes to end the year with approximately 20.1 million.

Amazing what a recovery in consumer spending and auto sales can do, isn’t it?

The recovery in consumer spending and auto sales is evidently giving Sirius (SIRI) quite a lift, enough for it to boost projected new subscriptions to approximately 750,000 from about 500,000, its revenue to $2.75 billion and its profit to $575 million.

Quite a change from last year, when the company seemed headed toward almost certain bankruptcy. Its shares are up some 75 percent this year.

The FCC is proposing to make it easier for the winners of a 1997 airwaves auction to use those airwaves for mobile wireless Internet and phone use. Until now, a dispute about power levels and potential interference has meant the companies were limited in how they could use the airwaves they own.

The FCC is scheduled to vote on the proposal in May as part of a broader effort to devote more airwaves for wireless Internet services. A FCC spokeswoman declined to comment on the specifics of the proposal.

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The league, which has 140 players competing in Vancouver, has already seen an uptick in traffic to its Web, mobile and social-media outlets. NHL.com received 13.4 million unique visits in January, a record, said Mike DiLorenzo, the league’s director of social media marketing and strategy, and visits for the ‘09/’10 season are up 34 percent from the year-earlier period. Its audience on Facebook and Twitter has more than doubled since the beginning of the season, and visits to NHL Mobile have more than tripled year-over-year.

It plans to introduce NHL All-Access Vancouver this weekend, as the Olympics begin, which will provide pre- and post-game reports, analysis and interviews on its online, radio and TV networks. The league’s daily radio show will also air on Sirius XM (SIRI) and stream on NHL.com.

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“There’s not a better job on the planet than judging that f—ing karaoke contest,” Stern said, the site reports. “It might be possible, we’ll see,” he said, adding: “They’d have to pay me a ton of dough because I already make a ton of dough.”

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The New York Post reports that the producers of American Idol are eager to hire Stern for the show. The Page Six item says that Stern is the show’s top choice to take over from Cowell, who will leave the show at the end of the current season. Stern’s current contract with Sirius XM (SIRI) expires in January 2011.

An excerpt from the Post:

A source connected to “Idol” said, “It’s one of the few shows that could compete with Stern’s $100 million-a-year Sirius contract, and ‘Idol’ bosses think he’d be even nastier than Simon.

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At a roundtable event this morning at The Paley Center for Media, Sirius (SIRI) CEO Mel Karmazin was asked that very question. Does he worry about Stern leaving for an outfit–like Pandora–looking to avail itself of the same “Stern Effect” that spiked Sirius’s subscriber rolls?

Karmazin acknowledged that while it’s a possibility, he’s dubious. “I think it’s great to be content today,” he said. “In this world of fragmentation, great content prevails. Howard Stern is great content. Howard would be sought after by anyone. He’s a great talent. Having said that, we would like him to stay with us and we are optimistic that he will continue to do so.”

It’s worth noting that Karmazin, while he does view Internet radio as a competitor, doesn’t seem too worried by it. “There are a lot of choices for audio content,” he remarked. “And obviously, the Internet is one of them. But the question is who’s going to the the largest player? And I think that’s our spot to lose. I believe we will be the most profitable of audio content choices.”

Further Notes From the Event

On Amazon’s Kindle:
I am addicted to my Kindle. I saw Jeff Bezos in Sun Valley recently [and] I told him I have personally bought a dozen to give as gifts.

On Comcast/NBC Universal:
I dont’ see anything anticompetitive about what Comcast is doing–the review should take a few weeks. Either you accept the fact that there’s a lot of competition out there, or you don’t….But I do think this thing is going to drag out like it did for us. So far there are only two congressional hearings on Comcast/NBC. We had four–there were fewer for the Exxon Valdez.

On In-Car Internet and the Apple iPod:
I think the Internet will absolutely be in the car and we think it will be a good competitor. You know we’ve been competing with iPods for a long time. And we look at how sat radio performs in the vehicles where people have the ability to put an iPod jack in and we don’t see much of a difference. We believe them to be complementary.

Stern said today that he has been approached by several “regular” radio execs about returning to his original turf when his five-year $500 million contract with Sirius XM (SIRI) expires.

“I actually have an offer,” Stern said, according to a report on The Wrap. “Well, not a bona fide offer, but people have been making them.”

Stern’s remarks today follow a public call-and-response negotiation with Sirius CEO Mel Karmazin that began last fall. “It will start with Howard feeling that he is working too hard and doing too many shows and not making enough money,” Karmazin told attendees of the Reuters Media Summit in November. “Our side would say, ‘We want you to do more, and get less money.’ The hope would be that we would come out with Howard staying with our service.”

Stern, of course, is angling for the exact opposite. “I don’t think I’m going to be re-signing. I know exactly what I want to do here,” he said last year, referring to a less busy schedule. “And I don’t know if it would interest [Sirius.]“

Given the size of Stern’s audience and the availability of much of Sirius’s other content on the Internet, my guess is that it would.

Consider this: For the satellite radio company’s current quarter, RBC Capital Markets expected Sirius (SIRI) to add 49,000 new subscribers. At the time it was issued, that projection was described as “cautiously optimistic.” And it was…far too cautious. Because after market close Tuesday, Sirius said it added 257,028 net new subscribers in the fourth quarter–the most since the third quarter of 2008.

The company ended the year with 18,772,758 subscribers. Now that’s not the 20.6 million for which CEO Mel Karmazin had been hoping, but it’s impressive nonetheless and suggests that Sirius may indeed be turning the corner. Further evidence: The company also said it will report more than $100 million in free cash flow for the full year. This, after posting negative free cash flow of $552 million in 2008.

“I don’t think I’m going to be re-signing,” said morning-show host Howard Stern on the air last month. “I know exactly what I want to do here,” he said, in terms of a less time-consuming schedule, “and I don’t know if it would interest them,” meaning his bosses. That leaves open the question of what Mr. Stern will do once his contract with Sirius expires at the end of next year. Pre-negotiating posturing is already well under way.

On the same show where he questioned his prospects, Mr. Stern pronounced his current gig on satellite “the best job in radio I’ve ever had.” But it could also be true that he is angling for a change.

Mr. Stern signed up with Sirius in late 2004, but he didn’t join the company until 15 months later.

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Karmazin credits some of his sales success to a new ad campaign. I guess he has to say that inasmuch as he approved the campaign, but I have a hard time believing it. I’ve seen this ad several times, but until I read this interview, I had no idea it was for Sirius (SIRI):

Meanwhile, maybe it’s just self-interest/projection, but I was struck by the fact that Karmazin seemed to go out of his way to tell the Reuters staff how little he thought of it.

Or maybe he was talking about journalists in general: After being greeted by a dozen Reuters reporters at the company’s Global Media Summit,” Karmazin declared that if he was running the news service, only one of them would be employed.

Here’s Reuters media reporter Robert MacMillan’s account of the exchange, via Twitter:

“There would be no question that I would be perfect to run it,” Karmazin said. “But there is no chance that I will ever take another job outside of Sirius XM. I just renewed my contract. It’s exactly what I want.”

Exactly what he wants, except maybe for that perennially-under-a-dollar share price–though according to Karmazin, that’s going to change. “I think today, you’ll start to see quarter after quarter of growth,” he said. “You’ll see us making free cash flow. You’ll see us with…over $2.5 billion of revenue. We’ll start to make money, and we’ll start to keep investing in content. And I think our future will be great.”

Unassuming guy, that Karmazin…

Absent one-time charges, the company broke even for the quarter. Analysts had been expecting a two-cent loss on revenue of $609 million.

Good news, but it was tempered with a bit of bad. Because Sirius’s (SIRI) subscriber growth is slowing. The company ended the quarter with 18.5 million total subscribers. That’s up 103,000 from the second quarter, but down 2.1 percent from a year earlier.

“We are very pleased with what we accomplished during the third quarter, especially when considering the macroeconomic issues affecting consumers and the auto industry,” Sirius CEO Mel Karmazin said in a statement.

“We managed to grow revenue, grow ARPU, reduce operating costs, increase adjusted income from operations significantly, and refinance higher cost debt,” Karmazin added. “We look forward to continuing this performance. We grew subscribers and improved churn in the quarter, and we are well positioned to take advantage of an economic rebound. We expect to grow subscribers, revenue, and cash flow next year regardless of the magnitude of any recovery.”

“At the end of the June quarter, Apple was having difficulty keeping the iPhone 3GS in stock; the product seems to have exceeded Apple’s internal expectations,” Munster writes in a research note today, explaining that he sees two primary reasons for the uptick in demand.

In the first place, according to Munster, “Apple’s App Store has been a huge success (65k+ apps and 1.5b+g downloads), and app developers (like Sirius/XM, ESPN, etc.) are promoting their apps, and meanwhile providing free advertising for the iPhone platform (which spurs more iPhone sales, app downloads, and the cycle continues)….”

Second, Munster continues, “The smart phone industry has effectively crowned the iPhone and its App Store the gold standard among touchscreen mobile experiences, and competitors are trying to copy the device and its software. In so doing, the iPhone’s competitors are actually promoting the iPhone, and we believe, driving sales of the device similar to the manner in which competing MP3 players drove sales of the iPod as the gold standard in 2004 by defining themselves in comparison to it.”

Hard to disagree with that assessment given that some of the handset ads we’ve seen recently, particularly from Palm (PALM) and Sprint (S)–see ad above–which, though they insist the Pre was never intended as an Apple (AAPL) iPhone killer, can’t help but compare the two devices in their marketing materials.

The Open Book Alliance formally launched the manifesto this past week with which it’s challenging Google’s settlement with authors and publishers. The organization now has a Web site and quite an array of allies–which include, of course, Microsoft (MSFT), Yahoo (YHOO) and Amazon (AMZN). And as if Google doesn’t have enough on its plate, turns out that all along, Microsoft has been holding regular “Screw Google” meetings, the bastards. Uh, I thought that’s what people pay good money to learn in Business School. On a happier note, Howard Stern fans everywhere were happy to learn that Sirius XM (SIRI) has debuted a device that can turn an iPhone or iPod touch into a full-fledged satellite radio.

Over in Personal Technology, Walt reviewed Snow Leopard and found it to be an improvement on its predecessor, but with a lot of the upgrades under the hood invisible to most users. Not the typical object of desire we’re trained to expect out of Apple. In Mossberg’s Mailbox, Walt answers reader email about choosing a vendor to buy a computer online and setting parental controls in Firefox. In The Mossberg Solution, Katie Boehret explores the trials and tribulations of BlackBerry and iPhone users switching one for the other.

More next week.

The Open Book Alliance formally launched the manifesto this past week with which it’s challenging Google’s settlement with authors and publishers. The organization now has a Web site and quite an array of allies–which include, of course, Microsoft (MSFT), Yahoo (YHOO) and Amazon (AMZN). And as if Google doesn’t have enough on its plate, turns out that all along, Microsoft has been holding regular “Screw Google” meetings, the bastards. Uh, I thought that’s what people pay good money to learn in Business School. On a happier note, Howard Stern fans everywhere were happy to learn that Sirius XM (SIRI) has debuted a device that can turn an iPhone or iPod touch into a full-fledged satellite radio.

Over in Personal Technology, Walt reviewed Snow Leopard and found it to be an improvement on its predecessor, but with a lot of the upgrades under the hood invisible to most users. Not the typical object of desire we’re trained to expect out of Apple. In Mossberg’s Mailbox, Walt answers reader email about choosing a vendor to buy a computer online and setting parental controls in Firefox. In The Mossberg Solution, Katie Boehret explores the trials and tribulations of BlackBerry and iPhone users switching one for the other.

More next week.