• by Erik Sass  @eriksass1, November 28, 2006

The two dominant satellite radio broadcasters are facing a tough fourth quarter, largely because of declining retail sales, which may fall as much as 20%, according to Bank of America radio analyst Jonathan Jacoby. Jacoby's warning comes on the heels of third-quarter results that also suggest demand for satellite radio is slackening. Executives from both companies have long said that the market for satellite radio is finite, but the slowdown has come earlier than predicted, raising the possibility that the companies won't meet their subscriber base projections.

Sirius and XM appear to be following similar arcs, paralleling each other even as they compete. In the third quarter, Sirius signed up about 441,000 new subscribers--a noticeable decline from its net addition of about 600,000 in the second quarter and 761,000 in the first. The company now has just over 5.1 million total subscribers. XM has also experienced a slowdown in new subscriber additions, with just 286,000 new subscriptions in the third quarter, compared to 640,000 in the second quarter and 569,000 in the first.

Although the rate of new additions is slowing, both companies are posting smaller losses than before, and finding favor with Wall Street. In the third quarter, Sirius' net loss was $162.9 million--down from $180.4 million in the third quarter of 2005. It's an even bigger drop from the company's second-quarter loss of $237.8 million and a first-quarter loss of $458.5 million, associated with high marketing costs surrounding Howard Stern's move to the company. For its part, XM's third-quarter loss was just $83.8 million, down from $131.9 million in the same quarter last year. That's also a huge drop from the company's second-quarter loss of $229 million and first-quarter loss of $149.2 million.

According to Jacoby, future subscription growth will likely be driven by new car sales. It's not clear what retention rates are after a free introductory period lasting several months, although XM claims a 52% retention rate--a significant number, given that the company has made deals representing 60% of new auto sales in the U.S.

Another means of driving future subscription growth could be offering free, ad-supported satellite radio, according to Jordis Rosenquest, senior vice president of communications strategy for Targetbase, part of Omnicom Group's Diversified Agency Services division. Rosenquest is an advocate of satellite radio as a medium for direct marketing in particular. By 2010, Targetbase estimates that about 20 million American households will have satellite--roughly double the current number. Beyond that date, Rosenquest warns, the business is approaching a crucial juncture: "The numbers suggest satellite is close to maxing out on the early adopters."

Rosenquest added that the popular perception of subscription satellite as "ad-free" isn't correct: "It's already ad-supported, although consumers might not recognize them as ads. They're not your traditional 30-second spots, but it's there." Rosenquest points to program sponsorships and branded infotainment as places where advertising has already infiltrated. She is hopeful that openings for direct marketers aren't far behind.