Valentine’s Day represented a special day for the digital audio radio service (DARS) sector with a somewhat soft marketing launch of Sirius’ system in Phoenix, Houston, Denver and Jackson, Miss.. The toe in the water will give Sirius a better idea of what promotional activities work.

Sirius is testing different marketing offers with a total of about 200 retailers in these cities: Phoenix (15 months subscription for the price of 12), Denver ($50 cash-back rebate), Jackson (no quibble money back guarantee), and Houston (no special offer). Sirius will use these markets to judge buyer response and satisfaction ahead of a promised full national service launch in August, by which time the company expects to have 5,000-6,000 retail outlets selling its product.

Currently, Kenwood, Jensen, Clarion and Panasonic receiver units are said to be “trickling in” to stores, with store staffers (in a limited 17 store survey noted by Lehman Brothers’ analyst William Kidd) preferring Sirius (42 percent) to rival XM (6 percent), although leaving 52 percent indicating “no difference.” Jackson was also the launch city for satellite TV provider DirecTV.

Robert Peck, senior analyst with Bear Stearns, says he expects this activity to help generate overall “conservative” sales in this first year of 50,000 units. Rollout for Sirius is slated to initially (April-May) concentrate on the Southwest, beginning in Dallas/Ft. Worth; Tulsa, Okla.; Albuquerque, N.M.; and Little Rock, Ark. In June and July phase 2 will kick in with service in the South in the key cities like of Miami, Tampa Bay and Orlando, Florida; Indianapolis, Ind.; and Nashville, Tenn. Sirius’ estimates that by the end of 2003 it will have signed up around 518,000 subscribers.

Prices for the Sirius receivers seemed highly affordable. Best Buy in Phoenix told Lehman’s that an FM-modulated Jensen unit would cost about $250 and an additional $70 for the antenna. On the Kenwood side, Circuit City quoted $230 for a unit plus $80 for the antenna and another $60 for installation. Kidd said that “Sirius will generally have to incur higher subscriber acquisition costs in the aftermarket in order to equalise its pricing with [rival] XM Radio, since … its chipset cost more to develop.”

Almost at the same time as the Sirius launch, XM struck a marketing agreement with DirecTV, where an XM flyer will be mailed to DirecTV subscribers alerting them to the XM- based DARS service. Peck said, “We think this is a wise agreement for XM Radio as these satellite video customers are likely candidates for satellite radio.” Few could argue with the sales rationale, but it is also worth remembering that DirecTV has a stake in XM and XM is forecasting 443,000 subscribers by the end of this year.

Robertson Stephens analyst James Marsh initiated coverage of the DARS sector with a “buy” rating on XM and Sirius on Feb. 20. Marsh gave XM an $18 price target and Sirius a $7 target price, adding: “We are confident that, over time, satellite digital audio radio service will be able to carve out at least a niche audience from the current radio listenership base.” Marsh also provided some bullish forecasts, saying: “By penetrating just 15 percent of U.S. passenger vehicles by 2010, the two operators could be generating approximately $7 billion in total revenue alone, enough to drive nearly $4 billion in EBITDA, according to our estimates.”

–Chris Forrester