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Holidays Are Huge for XM, Sirius Satellite

Satellite radio investors continue to weigh strong growth against hefty cash use.

Satellite radio investors are expecting the gift of huge holiday growth under the tree next month, though some on Wall Street are already bracing for the stiff tab.

Heavy advertising, cash givebacks, a slew of new radios and Howard Stern's January debut will easily make this the biggest Christmas season yet for pay radio rivals





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, say analysts.

"It's going to be a great success," says Hoefer & Arnett analyst April Horace. "Go in a Best Buy or a Circuit City, satellite radio is pretty prominent. They have the best products they have ever had across the shelf."

Indeed, the companies are touting new lineups of portables and satellite receivers. And while the year-end holiday retail sales push is likely to account for the largest surge in new subscribers, investors can expect the added promotional push to ring up big expenses as well. This is an unsettling puzzle for investors who demand big growth but want to extinguish roaring cash bonfires at both companies.

But the satellite duo can't really afford to coast at holiday crunch time, especially when critical subscriber growth targets loom over their stocks. Sirius had 2.17 million subscribers at the end of September and has promised to pass 3 million by year-end. Meanwhile, XM had 5.03 million users and boosted its 2005-end forecast to 6 million.

Both shops are dangling $50 rebates to hook new users, and some industry watchers fear more dueling giveaways and price cuts could be in the works.

"Management stated that they will not start a price war, but will respond aggressively," Merrill Lynch analyst Laraine Mancini writes in a research note, referring to Sirius. "We reiterate that while seasonal promotion is normal, a price war could erode the profitability of the satellite radio business model and remains an investment risk." Mancini rates Sirius a buy and XM a hold.

Analysts say Sirius has a slight edge over XM this time around, with the introduction of its S50 MP3 player-satellite radio combination. XM has delayed the unveiling of its iPod-like combo device until early next year.

And the biggest draw for Sirius in December will be Howard Stern, as fans sign on in anticipation of the shock jock's debut at the beginning of the year.

Hoefer & Arnett analyst Horace says the buzz around Stern will help push satellite radio a little further toward the mass-market audience industry observers have long been predicting.

"They have been promoting in markets where Stern's not been available, and that will generate a lot more awareness," says Horace.