Sirius ( SIRI) jumped into 2007 after nailing its free cash flow target for the fourth quarter.Of course, this is the first trading day of 2007, and the details of this positive free cash flow achievement have not yet been disclosed. Still, investors cheered the news heartily, sending shares of Sirius and rival XM ( XMSR) up 7% each. If the stock surge makes for an optimistic start to the year, it hardly erases the 47% decline both Sirius and XM shares posted in 2006. The year ahead looks to be even more challenging for the space radio duo. After both companies slashed their year-end subscriber targets last year, it's clear growth has slowed. Worse still, perhaps, the era of phenomenal growth is over. Gone is the blistering subscriber addition performance that provided cover for the fantastic cash burn going on in the background. And as maturing markets inevitably go, once blockbuster growth turns lackluster, the companies will be expected to turn in ever-improving financial results to keep shareholders happy. There are several key coordinates to manage, say observers. Costs have to come down, the average revenue per user has to go up, and music licensing fees need to be contained, among other things. Meanwhile, customers facing contract renewals now have more options when it comes to in-car entertainment -- including iPods and other mp3 players, as well as high-definition broadcasts from conventional radio stations.
Both companies expect to answer with offerings such as video broadcasts for kid programming and hybrid radios with mp3 players. Sirius says it has "price elasticity," meaning subscription rates can be raised if need be. And Sirius CEO Mel Karmazin has said he expects advertising revenue will go up this year as more subscribers come on. The more listeners there are, the higher the ad rates go. To be sure, a merger of the two nearly identical operations has been considered by both companies, but neither have received much encouragement from regulators. That's why even if satellite radio is off to a good start this year, the streak may be hard to sustain. "I'm looking forward to them merging," says one hedge fund manager with no positions in either company, "so I can become a big short."