• by David Kaplan , February 8, 2005

Much like cable and satellite television, the major promise of satellite radio is its ability to deliver commercial-free content, a survey by J.P. Morgan found.

Though demand for satellite radio is still strong, the survey indicates that XM Satellite Radio could achieve at least a 35 percent penetration level at its $10 price point and that Sirius could reach at least 19 percent penetration at its $13 subscription price.

"While this is below the respective 43 percent and 26 percent penetration levels suggested by our previous survey, it still implies a healthy level of demand for satellite radio," said Stephen Wang, an analyst for J.P. Morgan.

"What it comes down to is, the absence of commercials on satellite radio still reigns as the No. 1 driver of demand. Unique content, on the other hand, appears to be the least important factor, which implies that the loss of Howard Stern and other programming should not have too negative an impact."

In terms of the amount of time subscribers spend listening to satellite radio, respondents said they spent two-thirds of their time with satellite radio, a trend that suggests a significant erosion of regular radio's audience.

"This means that terrestrial radio listening will likely be cannibalized as penetration rises," Wang said. "If satellite radio listening is confined to the car, we estimate cannibalization to be 3.5 percent in 2010. The risk increases significantly if satellite radio listening expands to at home and/or at work."

In looking at the radio industry as a whole, J.P. Morgan is currently forecasting a 3 to 4 percent annual long-term revenue growth projection for the radio industry assuming flat inventory, with 2 percent annual audience declines, and 5.5 percent CPM growth.

Traditional radio has only one advantage when it comes to slowing the growth of satellite radio - whether or not consumers will become more price sensitive to subscription and start-up fees, Wang said.

"Though 57 percent said they would be willing to pay some fee for satellite radio service, non-subscribers in our new survey are showing greater price sensitivity in their demand for satellite radio," he said. "Still, it's obvious that early adopters tend to be less price-sensitive. But if satellite radio plays its cards right, there's no reason why it shouldn't be able to increase demand among the rest of the population."