But the two companies that divide the fledgling satellite radio business, Sirius Satellite Radio Inc. and XM Satellite Radio Inc., have a long road ahead as they try to convince millions of Americans to pay for new audio receivers and shell out $10 or more per month for access to radio stations -- something people are used to getting for free.

XM of Washington, which beat New York-based Sirius to market, commands the lion’s share of the business, with more than one million subscribers at last count. Sirius, about six months behind XM, had about 150,000 subscribers at the end of the third quarter, which ended Sept. 30.

Sharp growth expected

Analysts expect those numbers to grow sharply during the coming years as more consumers are introduced to the services and people get used to the idea of paying for radio. Jimmy Schaeffler, who runs the Carmel Group, a media consulting firm in Carmel, Calif., predicts that XM could have 28 million subscribers in five years -- if the company is able to execute its business plan.

"They have been able to build a phenomenal new industry, and they are the leaders in it," he said.

Steve Blum, president of Tellus Venture Associates of Marina, Calif., notes that XM and Sirius face the formidable task of creating a new industry and overcoming skepticism from analysts and investors that the concept of pay-radio will be viable.

"Four or five years ago it would have been tough to convince anybody that there was even a market for subscription radio, but since XM and Sirius have come along they have demonstrated that there is a market, and once you do that, people’s attitudes change," Blum said.

Although subscriber numbers are on the rise, neither Sirius nor XM are profitable.

Sirius reported a pretax loss of $79.8 million for the third quarter of 2003 and generated $4.3 million in revenue during the period. XM posted a $64.4 million pretax loss for the quarter on revenue of $26.9 million.

From a broad perspective, XM and Sirius are employing similar strategies to attract subscribers. Both emphasize that they offer channels that are unavailable on the traditional AM and FM bands, including genres of music that do not attract enough listeners to justify their own terrestrial radio stations and audio feeds of programming primarily intended for TV viewers, such as CNN and Fox News, now also available via satellite radio. [How Satellite Radio Works]

XM and Sirius have different approaches to dealing with commercials.

Some XM music channels are commercial free, while none of Sirius’ music channels have commercial interruptions. But avoiding ads entirely comes at a price: Sirius charges $12.95 per month, $3 more than XM.

Another key to the industry’s strategy is that satellite radio is not limited by the geographic boundaries that govern regular radio stations. With the potential to reach people across the country, even channels of relatively narrow interest -- classic country and western or pop music just from the 1970s, for example -- can reasonably be expected to attract a large enough audience to justify their existence, according to industry analysts.

XM and Sirius took years to develop their ideas into commercial operations.

Both companies got started in the 1990s, acquiring their licenses from the U.S. Federal Communications Commission (FCC) in an April 1997 auction, going on to raise more than $1 billion each to build and launch satellites.

Four companies went after the two satellite radio licenses the FCC offered. Sirius, then known as CD Radio Inc., and XM, which was called American Mobile Radio Corp., were joined by Digital Satellite Broadcasting Corp. and Primosphere LP. Sirius’ license cost the company $83.3 million. XM paid $89.9 million.

Sirius launched all three of its satellites in 2000. XM’s two satellites were deployed in 2001.

But while Sirius was first to orbit, technical difficulties cost it the ability to inaugurate service ahead of the competition. XM took full advantage of reaching the market first, building a substantial lead over Sirius in terms of subscribers, something that remains an issue for Sirius officials.

Both companies are counting on car manufacturers to propel sales. The firms have relationships with virtually all the major automakers that call for dozens of car models to come equipped with factory- or dealer-installed satellite radio receivers either standard or as an option. The idea is that the cost of a satellite receiver can be rolled into a vehicle’s price like other options.

Most subscribers to date have acquired their satellite radios in the aftermarket, either for their vehicles or to use at home, according to Sirius and XM.

Both companies skirted with financial disaster in 2002, as funding nearly ran out before they could sign up enough subscribers to meet expenses.

Sirius managed to avoid bankruptcy by giving up equity control to creditors in exchange for the elimination of most of an unmanageable $700 million debt load. XM won financial concessions from a chief backer, General Motors.

In a clear sign that the satellite radio is attractive to investors, stock in Sirius and XM is up considerably this year, although both companies lost most of their market value when the technology bubble burst and remain well below all-time highs. Also, each has been able to tap capital markets for additional funding this year.

The firms are investing in improvements to the equipment subscribers use to receive programming streams.

Both are developing new versions of the chips that enable receivers to decode satellite signals. These new chipsets will consume less power and take up less space than the current chips, which could eventually lead to smaller, more portable satellite radio units.

Even as they compete for listeners, XM and Sirius are working together to create radios that are compatible with both companies’ systems. They are required to develop such interoperable technology by their FCC licenses, but receivers that can work with either XM or Sirius are not expected to be available for at least several years.