XM Satellite Radio [XMSR] officials expect the company’s subscriber numbers to top 1.1 million by the end of this year. The outlook is buoyed by General Motors [GM] offering XM satellite radio receivers as a factory-installed option in additional vehicle models and brisk sales of a new portable radio that is expected to expand the non-vehicle market for the service.

Washington-based XM boosted its subscriber base to more than 360,000 by the first week of 2003, as people who received XM radios as gifts during the holiday season activated their service. Sales momentum unquestionably is growing with more than 145,000 new customers signing up during fourth quarter 2002 to mark a 72 percent rise from the third quarter.

The subscriber level achieved in the fourth quarter of 2002 was five times higher than that reached in the same quarter of 2001, explained Hugh Panero, XM’s president and CEO. However, XM only was offering its receivers as factory-installed equipment in two GM car models in late 2001 and had not yet begun selling its XM’s SKYFi portable receivers.

GM’s Muscle

GM’s commitment to XM will grow this fall when the world’s largest automobile manufacturer plans to expand to 44 the number of models that will offer XM receivers as a factory- installed option. This is one of the “fastest-ever technology” rollouts in automobile history, GM officials said.

XM anticipates that GM eventually will offer the satellite radio service across its entire product line.

GM became the first automobile manufacturer to offer XM receivers as factory-installed equipment in November 2001 and featured the technology last week at the International Auto Show in Detroit. Among the models offering XM equipment are the Chevrolet Malibu, Malibu Maxx, Colorado and GMC Canyon mid-size pick-ups. XM also will be available on GM’s SUVs, such as the Chevy Trailblazer, GMC Envoy and the new Buick Rainier.

The reaction of GM’s new vehicle buyers to XM has been “overwhelmingly positive,” said John F. Smith, group vice president of GM vehicle sales, service and marketing. Among GM vehicle owners that have XM units, the automaker’s market research shows that more than 90 percent would either “only buy a vehicle with XM” or would “prefer to buy with XM” when they next shop for a vehicle, Smith said.

In addition, Japanese automakers Toyota, Honda and Nissan are expected to expand the number of XM-equipped models in 2003. Toyota’s new youth-oriented Scion vehicle will begin arriving at U.S. showrooms in June with XM as factory-installed equipment. National rollout of the Scion will be completed by June 2004 and feature the xA and xB variations that will have Pioneer-built XM radio units available.

Skyrocketing SKYFi

The fastest-selling satellite radio unit is the new SKYFi audio system, manufactured by Delphi Product & Service Solutions and sold through the aftermarket. SKYFi sold 100,000 units in the last ten weeks of 2002.

The SKYFi’s new “boom box” component reached store shelves just days before Christmas and won acclaim at the Consumer Electronics Show earlier this month when the product was named a finalist for the Best of CES award in the portable audio category.

Delphi Product & Service Solutions, the aftermarket division of GM’s Delphi Corp., designed the unit as a self-contained “boom box” to allow subscribers to take their radios almost anywhere. The compact SKYFi receiver offers the most advanced user features of any satellite radio now on the market, Delphi officials said.

The SKYFi system retails for $229.99 (MSRP) and contains a pair of speakers with an integrated high gain antenna. The device can be powered by an A/C adapter to create a countertop XM system for the home or office or by batteries for use in virtually any location. XM listeners who already own the SKYFi receiver can purchase the boom box portion for $99.99 (MSRP).

Features on the portable XM SKYFi units include a display, direct channel entry, preview and search functions, and 20 channel presets. The SKYFi receiver, and its accessory kits, did not arrive at major retail outlets until October but already account for more than 90 percent of portable satellite radio sales at Best Buy and Circuit City, the two largest U.S. consumer electronics retailers, said Laura Joseph, Delphi’s manager of communications.

Delphi’s Innovation

Delphi is planning another XM product innovation during the first half of this year, Joseph said. She declined to offer details, but said that Delphi “constantly” is looking at new and improved products and applications.

The Delphi SKYFi system is expected to be a strong seller during 2003, said Karim Zia, a cable and satellite analyst with Deutsche Bank Securities Inc. Overall, XM likely will have between 1.1 million and 1.2 million subscribers by year-end, Zia said.

Tom Watts, a satellite analyst with SG Cowen Securities, said XM helped itself with a $450 million refinancing program announced last month that is expected to fund the company through the second half of 2004. He projects more than 1 million XM subscribers by the close of 2003.

GM likely will install XM in 350,000 to 400,000 vehicles during the 2003 model year to account for roughly 15 percent of the new vehicle sales among the 25 models that now offer the option, Watts said.

Ten vehicles equipped with XM were on display at the Consumer Electronics Show in Las Vegas earlier this month, said Chance Patterson, XM’s vice president of corporate affairs. By fourth quarter 2003, 50 percent of the new XM subscribers are expected to emerge from the new vehicle market, he added.

The number of new subscribers that XM gains next year and beyond should grow as additional vehicle models of GM and other manufacturers offer the satellite radio service as a factory-installed option, Patterson said.

“Our success, to date, in adding subscribers tells us that the business case for satellite radio is stronger than ever,” Patterson said.

Rival Sirius Satellite Radio [SIRI] used the CES show to demonstrate the capability of its satellite radio equipment to carry video, as well as audio signals. However, Sirius is at least a full year away from offering the video feature for commercial sale.

–Paul Dykewicz

(Laura Joseph, Delphi Product & Service Solutions, 248/267-8643; Chance Patterson, XM Satellite Radio, 202/380-4061; Karim Zia, Deutsche Bank Securities, 212-469-7591; Tom Watts, SG Cowen Securities, 212/278-4260)