Looking for a skeptic about satellite radio’s potential? “You’re not going to find one here,” says Car Sound & Performance editorial director Robert B. Hephner. “Once people get it in their hands, they’re not going back.”

And shock jock Howard Stern is hoping to be a part of the reason people stick with satellite radio—specifically Sirius Satellite Radio, where his show will begin airing in January. Stern views this change as a First Amendment issue—a way to say what he wants without incurring Federal Communications Commission fines (he’s racked up $2.5 million during his career). But freedom-of-speech issues aside, there is also a techno-war being waged.

Hephner views mobile electronics as a content battle pitting Sirius Satellite Radio and XM Satellite Radio against MP3 technologies, particularly Apple’s iPod, as much as against each other or traditional radio. “Even with the iPod, you still need to load everything in, and that takes time and effort. Satellite radio makes someone else do the work,” he says.

Drew Kaplan, CEO of business broadband provider ISWest in Agoura Hills, Calif., also sees the technology affecting bigger purchase decisions. “A few years ago, I wondered who the heck was going to pay for radio,” he says. “Now, I promise you that people are making car purchases and rental decisions based on which system they have—I know, because I’ve done both. And I have two friends who are incorporating satellite radio into their home remodels.”

Pay for Play, Revisited

Analogies abound on exactly which historical precedent satellite radio is likely to follow: Beta vs. VHS isn’t particularly apt, because the technologies—a signal bounced off one of five satellites to a receiver on the ground—are essentially identical to the end user, and different only in the subscription service you purchase (both currently at $12.95 a month) and the gadgets you can buy. The commercial TV vs. cable battle is closer; both companies point to the fact that people are willing to pay extra for a better product even when there’s a free alternative, but it remains unlikely we’ll see dozens of competitors in the satellite space. DirecTV vs. Dish Network has some resonance, as far as being a space-race commodity that consumers will choose between based on a calculus of cost and service, but there’s not much “history” from which to draw. (Their paths have even crossed, as Sirius programming is offered free to Dish subscribers.)

Perhaps the best analogy is as low-tech as it gets. The exclusive, five-year, half-billion-dollar deal that Sirius cut with Stern in October 2004 “reinforces our belief that satellite radio will become ubiquitous,” wrote Bear Stearns analyst Robert Peck in a recent research report. “Investors should start to think of the duopoly of XM Radio and Sirius as Coke and Pepsi.”

Then again, it’s hard to imagine the paranoid soft-drink giants making a revelation like the one XM and Sirius made at the 2005 Consumer Electronics Show in Las Vegas in January. During a panel discussion, XM CEO Hugh Panero and Sirius Chairman Joseph Clayton noted that a joint development team is working on technologies that will support both companies’ content platforms. To that end, Pioneer announced a unit for later this year that will receive both, so users will be able to toggle back and forth.

No Static at All

Make no mistake—behind the dynamic duo’s public handshaking, there are some serious fisticuffs going on. Each day brings a new round of announcements (and a bevy of rumors) of who’s signed whom to a contract. With an influx of Stern devotees in January 2006, Sirius hopes to double its 1 million subscriber base and close the gap on XM, which boasts 3.1 million listeners as of spring 2005. (For some perspective, these listeners represent only about 2 percent of U.S. adults.)

Meanwhile, Sirius CEO Mel Karmazin, a celebrity of a different sort, is striving to shake things up in advertising and negotiation rights in the same fashion he did in his previous CEO gigs at Infinity, Westwood One and CBS, and as COO of Viacom.

Beyond the megabucks deals, satellite radio hasn’t had much impact on media buying, says Christina Hall, University of Phoenix MBA 2000, an account director in the San Diego office of Initiative, a worldwide media buying company. “As with all new media, satellite radio offers new opportunities for advertisers,” she says of recent packages purchased for the company’s clients. “However, we don’t see satellite taking over the radio industry any time soon.”

Hall also describes two competitive shortcomings of satellite radio. “First, true regional or local opportunities do not exist. The closest we can get to geo-targeting is to purchase news or weather sponsorships—though the rest of the U.S will still hear this message,” she says. “And second, demographic information is limited at the moment. Statistics offered by the satellite providers are based on national subscriber figures. Ultimately, we’d like to be able to share more detailed geographic and demographic information with our clients.”

The Fight for Eyeshare

There are clouds lurking under the satellites, starting with stock prices that often defy logic and balance sheets, along with gravity. XM, for example, reported a net loss of $190.4 million for the last calendar quarter of 2004, $20 million more than in the same period in 2003. (If you’re in need of a positive spin, revenues went from $33.5 million to $83.1 million, and the company lost only 93 cents per share, while analysts were looking for a $1.02 loss. Undaunted, XM maintains that it will break even on a cash-flow basis in 2006.)

Then there are the technological shortcomings that don’t get much attention. Since you need a clear view of the sky for the antenna to pick up the signal, tunnels and office buildings can be a black hole. If you’re using an aftermarket unit that broadcasts to an empty FM channel on your car’s radio—“really clunky,” says Kaplan—the sound quality isn’t going to be as sharp as a direct line-in, a problem that’s exacerbated in major metropolises that have packed their FM spectrums.

As for competitive threats, there are more than 10 million iPods in use around the world, a trend that’s accelerating all the time. Recently launched Virgin Radio exploits 3G technology to broadcast two free stations to its 15 million users. HD Radio, a free digital- format broadcast with partners such as Clear Channel (ironically, a minority owner of XM) and NPR, anticipates “2,500 stations covering over 90 percent of the nation to be equipped with HD Radio technology” by the end of 2005. Internet radio, broadcast over free Wi-Fi networks to portable units, is inevitable.

Believers in the Grand Convergence Theory—i.e., that eventually a pocket-sized gadget will be all things to all people—foresee a time when PDAs, iPods and cell phones will switch seamlessly between satellite and wireless technologies. But today, satellite communications expert and sat-radio fan Bruce Elbert has some concerns. “Because they’re operating in a very narrow spectrum, satellite radio is constrained,” says Elbert, president of Thousand Oaks, Calif.–based Application Technology Strategy, which consults with satellite operators and network providers in the public and private sectors. “The current architecture forces them to reallocate bits from their existing 100 channels when they add new channels above that—it’s a hard sell to get government to open up more spectrum. So they use compression technology, like you see with MP3, but that can only go so far before you start to lose quality. CDMA, which is used for cell phones, may eventually be an answer, but we’re not there yet. Content and quality become opposing forces. The question becomes whether they can make incremental improvements fast enough to keep up with the need to expand content.”

For how much he loves the technology, Car Sound & Performance’s Hephner admits to being skeptical about satellite radio keeping pace in another respect. “The biggest problem is availability,” he says. “Will the manufacturers be able to make enough units by the time Stern goes on the air?”

Sirius Shock Value

Indecency on the airwaves? Yeah, that sounds like Howard Stern. And it’s been a big deal for the FCC in the wake of public outcry over a certain bared breast, among other things. Because of that, Clear Channel Communications yanked Stern’s show and commercial radio just hasn’t been a safe or happy place for Stern. That’s why he struck a five-year, multimillion-dollar contract with Sirius Satellite Radio, which will kick off in January 2006.

So will this move by Stern and other Infinity Broadcasting favorites Opie & Anthony be the beginning of the end of traditional commercial radio? Hard to say, but it was certainly a boost for Sirius, whose stock rose more than 15 percent on the first day of trading after the announcement. Hoping to build even more excitement, Stern and Sirius spent some time in Manhattan’s Union Square last November giving away $2 million in freebies—including 500 satellite radios.