I listened to XM through my iPhone pretty much all day long while I worked today. I even did it over A2DP headphones. The experience was almost completely seamless.
One glitch is that while the iPod app pops up an audio device selector widget when there's an A2DP headphone available, 3rd party apps do not. This means that initially you may need to use the iPod to play a snippet of some audio, then select the A2DP headphones, then flip over to the XM app and fire it up. Once you start it, however, it sticks with your A2DP device for as long as it can.
XM sounds to me as good as it ever does in the car when the phone has WiFi. It's slightly worse over 3G, but it's certainly acceptable. It worked well while I was on CalTrain - no pauses or gaps.
The only part of the experience that leaves anything to be desired it's the cost. XM is $12.95/mo if you don't have a radio at all - equivalent to the cost of their full radio package, even though they leave out some channels (mostly news and talk) that they don't have internet streaming rights for. If you have a radio on the $13/mo plan, be prepared to shell out an additional $3/mo for streaming privileges.
It seems to me we've seen this dance before: a company struggling financially raises prices in order to try and drive up revenue. Inevitably the result of such short-sighted thinking is a rush for the exits. Sigh.
But it's worth it to me at least for as long as they can make it last.