LAS VEGAS–At the recent Consumer Electronics Show (CES) here, XM Satellite Radio [XMSR] seemed to have its name on just about every banner, kiosk or bag in sight. However, rival Sirius Satellite Radio [SIRI] had the most news releases, numbering close to a half dozen.

XM featured its new SKYFi portable radio and touted the heightened sales support it is receiving from General Motors [GM] with 25 models now offering the satellite radio as a factory-installed option. Sirius, in contrast, highlighted its focus on entertainment, as well as a new deal for its service to be offered in Hertz rental cars, programming changes and a demonstration of a potential video offering that may be ready next year.

Despite the hoopla, a legitimate question is how much the CES that caters to consumer electronics retailers will help sell satellite radio?

XM’s Story

At a CES panel discussion sponsored by the Satellite Broadcasting & Communications Association (SBCA), Dan Murphy, XM’s vice president of retail marketing and distribution, predicted his service will grow in 2003 to more than one million total subscribers, up from the 360,000 it had amassed by the start of the show. That growth projection would require XM to add 77 percent more net new subscribers than it achieved in its first year. A close look at the numbers shows that XM averaged an additional 26,666 net new subscribers per month during the first 13.5 months of its launch from mid-November 2001 to December 2002, while its forecast would require averaging 53,333 per month this year.

On the plus side, Murphy said the customer information from XM subscribers shows across-the-board interest in the pay radio service from virtually every demographic group. He also highlighted studies that found high customer-satisfaction levels for XM’s service. When asked about the possibility of future advanced services, including a digital hard drive capable of recording music, Murphy opined that a development like that is probably years away, especially due to complex legal requirements in the areas of digital rights management.

On the CES show floor, XM showcased its newest retail radio product, the SKYFi radio. The product includes the new SKYFi portable audio system, known as a “boom box.” That unit is the first of its kind in the satellite radio industry.

XM officials predict that the SKYFi unit will be an important part of its plan to top the one million-subscriber mark by year-end. Further, GM announced last week that it is expanding the number of models that will offer the XM satellite radio equipment as a factory-installed option to 44, or 75 percent of its total vehicle fleet.

XM also displayed a wide variety of radios in new cars, including models from Toyota, Honda, Nissan, and even Ford [F] and BMW. Although Ford maintains an exclusive relationship with Sirius, XM was showing units that can be installed as aftermarket equipment in Ford vehicles, too. The Cadillac Escalade EXT, the Hummer H-2, the Honda Element and the Toyota Scion were among the new models offering factory-installed XM radios.

“We’re showing real products that retailers can order today for their customers,” said Chance Patterson, XM’s vice president of corporate affairs. XM also attracted attention by bragging about its affiliation with top music talent, including Quincy Jones. XM’s heavy volume of booth traffic included strong interest from the consumer and trade press, as well as the placement of a special feature on CNN.

A key difference between the strategy of XM and Sirius was reflected when Patterson was asked if his company planned to offer video service, as well as audio. Unlike Sirius, XM is “focused on radio” for the foreseeable future, he explained.

The Sirius Side

Sirius surprised the satellite radio, consumer electronics and auto industries Jan. 8, when it announced at a press conference that it was planning to offer video on its system. Sirius executives believe there is a huge market, with lots of pent-up demand, for mobile video service. The company’s management remained noncommittal about the timing for launching video service.

At its CES show floor booth, Sirius had its share of celebrities, including Alanis Morrissette, Dan Akroyd and Jim Belushi.

Under the guidance of new Sirius Senior Vice President of Marketing Mary Pat Ryan, formerly of satellite TV firm U.S. Satellite Broadcasting, Sirius entered 2003 with a new focus on “uncompromised” music aimed at serious audiophiles. Its new theme, “It’s all about the music,” delivers the message that Sirius is an entertainment, not a radio, company, she said. In that vein, Sirius no longer calls itself “Sirius Satellite Radio,” but just Sirius.

The new Sirius focus will be on people who relish music. Examples are young people who burn their own music CDs, attend concerts, and even spend time on-line learning about new music. Sirius believes that lots of new niche-type channels will accommodate these potential subscribers.

Sirius says it will, in the future, put less emphasis on listener demographics, and more attention on the listener. An example of Sirius’ jazzed up programming is the new JAM Central channel, which will be called the JAM Central “stream.” The use of the term “stream,” according to Sirius officials, is intended to take people away from the idea of radio channels and closer to the concept of entertainment streams. Another one of these new niche streams will be a new service geared toward a gay audience. Sirius believes that a good part of its business model going forward should include “entertainment you can’t get anywhere else.”

The SBCA-sponsored satellite panel discussions also featured Sirius Senior Vice President of Distribution Stan Kozlowski, who said satellite radio will “up the bar” for traditional radio. Just as CDs, VCRs and DVDs took off, so will the satellite radio industry when it reaches its critical mass of at least one million subscribers, Kozlowski predicted. He projected Sirius will get to 300,000 total subscribers by year-end. As of the close of 2002, it had less than 30,000 subscribers.

Another area where Sirius says it will focus will be on the in-home market, where it has entered into recent new product agreements with hardware vendors Kenwood and Audiovox, which are scheduled to hit the U.S. market in August of this year. Additional developments included Sirius’ new low-profile antennas and a variety of new “plug ‘n play” radio devices from makers JVC, Audiovox, Sanyo and Kenwood. One new Sirius antenna product can be clipped on to a satellite television dish for in-home use.

Since CES 2003, Sirius’ stock value has been on the rise. In addition to the public attention it drew from its video demonstration, Sirius was able to show it has a commitment to subscriber growth and innovation. By year-end, Sirius says it will have approximately 60 different products in the consumer market pipeline. Sirius also plans this quarter to be more visible with “lots of ads.”

Is CES The Right Niche?

XM and Sirius certainly gathered a good deal of attention from CES attendees and the media. Should XM and Sirius return and attempt to create a similar splash next year? Maybe the companies should diversify by testing the waters at other entertainment and music-focused shows. The choice should be driven by where the biggest subscriber gains are likely to be. Orders taken from consumer electronics outlets at the 2003 CES event and subsequent in-store sales will give officials at both satellite radio companies a good indication of which direction to head.

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription services analyst at The Carmel Group, a publisher of industry databooks and the monthly newsletters Satellite Radio Investor and DBS Investor, as well as a consultancy based in Carmel-by-the-Sea, CA (http://www.carmelgroup.com). The company specializes in telecommunications, computers and the media. He can be reached at e-mail or at telephone number 831/643 2222.