I don't know if this even remotely helps because it's more a response about XM quality overall, and introduces new variables. I receive XM as part of my DirectTV package and have it enabled through a Marantz processed and powered home theater with B&W CDM-NT speakers, as well as through a Meridian digital home theater system.
I can hear a significant difference between the two that is attibutable to more than just the build quality of the gear. What I've noticed is that on my Marantz rig, the quality is as you described, and I've tried every form of processing, including "direct" and none sound that good to me.
Conversely, on the meridian system, using Trifield processing the sound is quite remarkable. I can push it to high volumes without egregious harm, but can't do so on the other system. When I go into 'direct' mode, it's better than on the Marantz system, but still falls apart musically.
Unscientifically, I attribute this to the meridian's capabilities in both upsampling and bit length conversion as well as general processing capability (trifield is good with all source material, but seems to really forgive bad stuff). Meridian also keeps everything digital, right out to the speakers, so it may be able to deal with the source material better in that domain.
So, my conclusion is that the XM signal is pretty low grade, comparatively speaking. My variable is getting via DirecTV, so who knows if it's being crushed to fit in the allowed bandwidth.
