Paying to hear radio?

Some question satellite radio's future as two top rivals gain subscribers, but keep posting losses

Cary McDonald, an emergency room physician at WakeMed in Raleigh, hates AM/FM radio. He figures that he upgraded the 36-mile daily commute from his home in Chapel Hill the day he subscribed to XM Satellite Radio, which lets him listen to the rock music he likes without commercials.

"Do I really have to have it? No," McDonald says. "But I really want to have it."

So do more than 10.5 million other Americans who have subscribed to XM and its smaller rival, Sirius, to gain more listening choices.

Satellite radio, which only hit the market five years ago, quickly has made inroads with consumers. Despite that impressive growth -- and projections for more -- some question how long pay-radio can continue adding subscribers at its current pace. Others speculate subscription prices can only go up.

The latter is no small concern to listeners who pay $12.95 a month and also must buy special equipment, ranging from $49 to hundreds of dollars, to receive the satellite signals. The problem, say some analysts, is that XM and Sirius (pronounced SEE-ree-us) invested large sums to acquire new programming and market their offerings, triggering heavy losses. Those losses in turn have rattled shareholders. XM shares are down 33 percent this year. Sirius shares have fallen 31 percent.

The programming deal that attracted the most attention was between Sirius and shock jock Howard Stern: $500 million for five years. Sirius also has signed exclusive pacts with Martha Stewart, Jimmy Buffett and the NFL. XM has countered by forging deals with Bob Dylan, Oprah Winfrey and Major League Baseball.

"They are spending like crazy, ... way ahead of revenue," said Forrester Research analyst Ted Schadler.

Still, XM and Sirius executives talk confidently about a profitable future because of rapid subscriber growth. XM expects to generate positive cash flow in the fourth quarter of this year, and Sirius projects that it will be cash-flow positive next year. Analysts such as April Horace of Hoefer & Arnett expect that they will be able to deliver on those promises.

Projections for subscriber growth, however, vary widely -- from as low as 20 million to as many as 35 million by 2010.

Certainly, there's plenty of room for expansion. Arbitron estimates that 230 million Americans listen to AM/FM radio each week.

Analysts draw a parallel between XM and Sirius and their satellite television counterparts, DirecTV and Dish Network, both of which have prospered.

"The marketplace is clearly large enough to support two companies," Horace said.

Indeed, more than 80 percent of U.S. households have given up on TV antennas and instead get their signals from the cable company or via satellite, according to Leichtman Research Group, a New Hampshire market research firm.

But few observers expect satellite radio to achieve market penetration on that scale.

For one thing, the alternative to cable or satellite TV is underwhelming -- local stations that you mostly have to pick up with rabbit ears. But the music available on satellite radio is readily available on CDs or through Internet downloads.

Radio also isn't as high a priority as TV for most people.

"I don't know that radio is important enough in people's lives to pay for," said Jeffrey McCall, communications professor at DePauw University. "I think TV is."

XM and Sirius are moving aggressively to attract new subscribers.

Both give financial incentives to carmakers that make satellite radio part of their factory-installed or dealer-installed options or make them standard equipment. Those who buy a car with a satellite radio typically get a free subscription ranging from three months to a year.