• by Erik Sass  @eriksass1, January 11, 2010

Over the last couple of years, two relatively new kinds of digital radio -- satellite radio and HD digital radio -- have pinned their hopes for growth on factory-installed sets offered to new car buyers.

These partnerships with car makers are crucial in 2010, as indicated by the raft of new factory-installed HD radio offerings previewed at last week's Consumer Electronic Show in Las Vegas. The only problem: car sales are still abysmal, and unlikely to show much improvement anytime soon.

Last week's CES saw the unveiling of new partnerships between HD radio manufacturers and car makers. They include Ford's upcoming 2011 models offering HD radio featuring iTunes tagging; HD radio sets offered in some of Audi's 2011 models and Kia's 2010 models; and Volkswagen incorporating HD radio with its GPS-enabled navigation systems.

But both HD and its competitor in satellite radio are facing a distinctly mediocre car market compared to a few years ago, when they first drew up their growth predictions and strategies. (Because there is more information on the satcaster's projections, these must serve as a proxy for HD radio, which follows a similar strategy.)

From 16.1 million vehicles sold in 2007, the industry plunged 18% to 13.2 million in 2008, then another 20% to 10.5 million in 2009 -- the last figure even included a temporary boost from the "cash for clunkers" program, which ended in August.

From a seasonally adjusted annual rate of 14.1 million vehicles in August, sales slumped to a seasonally adjusted rate of 9.2 million in September, then posted fairly modest increases to a SAAR of 10.5 million in October, 10.9 million in November, and 11.6 million in December.

Although carmakers took comfort in the December sales, holding out hope for further rebounds in 2010, industry analysts weren't nearly as optimistic. Jeremy Anwyl, CEO of Edmunds.com, said SAAR trends are unreliable in a recession -- especially during the summer months and December, the strongest periods for automotive sales in 2009 -- because of extra discounts offered by carmakers.

Like Cash for Clunkers, these discounts may boost sales in the short term, but at the cost of near-term sales in the coming year. Overall, Edmunds.com is predicting total sales of 11.5 million in 2010 -- an improvement over 2009, but still "a suppressed market," according to Toyota's group vice president Bob Carter in a Reuters interview. Ford executive chairman Bill Ford Jr. said: "We're not predicting a dramatic increase."

And 11.5 million is certainly a far cry from auto sales of three years ago, when HD radio and the satcasters (since merged) first laid their plans for factory-installed growth. Overall, Sirius-XM needs a SAAR of 10 million vehicles or more to achieve growth in satellite radio subscriptions, with the extent of growth correlated to the SAAR.

2010 could indeed deliver some growth -- but the question is how much. While Sirius-XM chief Mel Karmazin struck an optimistic note in his third-quarter earnings announcement, predicting, "We expect to grow subscribers, revenue, and cash flow next year regardless of the magnitude of any recovery," the company's success depends almost entirely on a rebound in auto sales. Based on 11.5 million vehicles sales in 2010, Karmazin predicted "positive growth" in subscribers, but was noticeably reticent to say how positive.

The merged satcaster needs a big rebound in factory-installed sales after a dismal 2009. In the first nine months of the year, it lost half a million subscribers due to a loss of over 1 million retail subscriptions, which were only partially offset by an increase of half a million subscribers through new car sales.

However, after the 3Q announcement, Standard & Poor analyst Tuna Amobi told BusinessWeek: "This company is not going back to these levels of double-digit growth. The auto companies are hurting also. I am not counting on any major upside on these contracts."