XM Satellite Radio and Samsung Electronics Co. Ltd. announced July 26 a partnership to develop the first MP3 player with satellite radio capabilities, but it is the potential for accessing the mobile phone market that makes this deal even more significant.

The relationship calls for the production of two miniature flash memory Samsung players that will utilize XM’s “connect-and-play” technology. Both players will come with an XM Radio home accessory kit, which allows the device to receive XM programming. XM spokesman David Butler declined to say how much memory the new Samsung MP3 players would have.

When the player is docked either at home or in the car, users will be able to record and store XM content for playback at a later time. It also will function like a traditional MP3 player, storing music from a user’s personal collection or from online audio download services.

Legg Mason Analyst Sean Butson said in a July 26 equity research report that the devices will have either 512 megabytes or 1 gigabyte (GB) of storage capacity and will be able to record in two modes: 100 percent songs from XM or 50 percent from XM and 50 percent of MP3 or Windows Media files. Butson estimated the 1 GB version of the XM-Samsung device will be able to store about 750 songs in the XM-only mode or about 500 songs in the XM/downloaded file mode.

“I think this is actually the first step in a very important relationship,” Butson told Satellite News. “In and of itself, it is interesting. But you have to keep in mind that you will not be able to use these devices to receive music live in a portable environment. They are not going to have antennas or receivers in them. For example, I use an XM MyFi portable. The coverage and quality of the signal is not great, so what I do a lot of times is it just sits on my desk (I have an antenna sticking out the window) and I pop it in the cradle to record and then I listen to it later.” Butson predicted the two devices announced will be the first step “to a fully functional product that will give you portable live use.”

The Cell Phone As A Radio

From XM’s perspective, getting its technology into an MP3 player should not come as a surprise to market observers.

“It is inevitable that you will be seeing XM technology integrated with a variety of new technologies, be its MP3 players and other types of digital audio players or looking ahead, the possibility of seeing XM combined with other types of technology,” Butler told Satellite News. “Our CEO, Hugh Panero, has commented several times in the past that he thinks it is inevitable that you will see an integration of cell phone technology with XM Satellite Radio.”

It is the cell phone integration that observers believe is what drove XM to Samsung, even though Apple and its iPod MP3 player lead the MP3 player market.

“I think initially the iPod opportunity is much bigger because there is an existing device,” Butson said “But long-term, I think that being partnered with wireless manufacturers and carriers is going to be even more important.” He noted that more than 100 million cell phones are sold every year in the United States alone. Apple only sold 6 million iPods in the second quarter globally. “The number of wireless handsets being sold far outstrips portable music players and every other consumer electronics product. That is where the real big market is.”

Samsung accounts for more than 20 percent of handsets sold in the United States, selling between 25 and 30 million in 2004, Butson said. “”If you think about it, a lot of people are carrying around cell phones and music players,” he said. “There is no reason over the long term you can’t combine those two, and I think that is where the market for satellite radio really starts to get big potentially. The fact that they already have a relationship with Samsung now is good news going forward.”

“The cell phone is becoming the next Swiss Army knife,” added Stephen Blum, president of Tellus Venture Associates. “It is what everybody carries and it does everything. That is a potentially huge market.”

But Blum noted that there are still some technological hurdles that XM will need to overcome in order to break into the cell phone market. “One of the problems with satellite radio is it is still not very portable,” he said. “If [XM] can cure the power consumption problem on the chip side and put it into a cell phone and make it available for long duration use, you are going to see people running around with their headphones hooked up to satellite radio via a cell phone. That is a pretty powerful model.”

Butler declined to comment on whether XM’s deal with Samsung was exclusive, but said that, “Historically, XM has partnered with a variety of manufacturers for different products.”

XM+Napster

If the deal with Samsung wasn’t enough to raise eyebrows, XM followed up 24 hours later with an announcement of a collaboration with online music download service Napster, under which the two companies will market XM+Napster, the first online service to provide a single interface for accessing, purchasing and managing music from XM and Napster. The launch will coincide with the availability of MP3 players with XM’s connect-and-play technology later this year. Users of an XM-enabled MP3 player will be able to flag songs played from recorded XM programming. When the XM-enabled MP3 player is connected to a personal computer, the XM+Napster service will match the marked XM song titles with Napster’s music catalog; available songs can be purchased individually for on-demand listening and transferred to the player for a completely portable experience. The service also will enable XM subscribers to manage their entire digital music collection, giving them the freedom to create playlists that contain music from a variety of sources.

Blum saw the announcement as a way for XM to potentially gain a huge boost to revenues. “If you can start dinging customers for an extra nickel here and an extra nickel there, that can be a powerful business model,” he said.

But Butson was a bit more cautious about the Napster deal and XM’s marketing muscle leading users to drop satellite radio in favor of Napster exclusively.

“I worry a little bit that XM’s marketing clout could push some subscribers and potential subscribers to Napster’s To Go service,” Butson said. “There is a segment of the population that only wants music. Some people would rather pay $15 a month and get unlimited songs that they pick at their choice than pay $13 a month for satellite radio.”

—Gregory Twachtman

(Sean Butson, Legg Mason, 410/454-5917; Stephen Blum, Tellus Venture, 831/582-0700; David Butler, XM, 202/380-4317)