With the year coming to a close, it's time for that obligatory "end of year" prediction and some fine words of wisdom (with hindsight being 20/20 of course). So here's one of them: 2007 will be the year that the OEM subscriber growth will truly begin to shine.

In 2005, we were obsessed with retail. With good reason of course, because the satellite radio retail market was skyrocketing due to the buzz that Stern generated (as well as the seemingly weekly on-air celebrity contract announcements). So it's no surprise that the focus for 2006 was on retail as well. We were still high off of 2005, with noses-sniffling and teeth-grinding, we were jonesing for just another bump to recapture that feeling from the prior year.

And in the beginning of 2006, retail was doing great (thanks again to the aftershock of Stern's move to Sirius). But then the heavy hand of the FCC came down, causing halts in production for both companies (XM's occured prior to Father's Day, while Sirius' after Father's Day; Sirius clearly benefiting from this maneuver). A combination of this, and the drop in Stern-influenced subscribers, caused the retail market to wane. Anyone who was tracking NPD Group numbers clearly saw that XM was feeling the ill effects of this drop in retail more than Sirius, but the overall effects to the industry as a whole were real. This is no better illustrated than the seemingly weak reaction to satellite radio products this holiday season (though the jury is still out on exactly how bad this month will be).

The reason why the retail market has a significance in this industry is because it theoretically is a measurement of consumer interest in satellite radio. This is true to a degree. When people know they want XM or Sirius, they go out and seek it out at retail. So the obvious example is with Howard Stern fans - they knew they wanted to hear him, so they went out and purchased a Sirius. But satellite radio is an interesting product in that many people don't realize that they want it. They don't "get it" until they experience it. The reason why Stern fans wanted Sirius so bad is because they've been experiencing Stern for 20 years. It's already familiar. A softness in retail doesn't mean that there's a loss in interest in satellite radio, it's an indication that there's not enough familiarity with the product.

So that brings us to the outlook ahead. This year is all but done with (though both XM and Sirius still have a few days to aggressively encourage activations before Monday), and now the focus is on what is to come.

But first, a quick note about year-over-year comparisons. (I'm not stalling, I'm bringing it all together. Keep reading.)

While all this doom-and-gloom seems depressing, it's partially driven by unrealistic expectations and skewed comparisons. Last year was a break out year. An anomaly. The retail numbers simply cannot be considered a baseline that we should compare year-over-year results to (though the tendency is to do so, since this is such a young industry). This year was doomed to "drop" in retail because last year's conditions were simply impossible to recreate.

By this same thought, though with an opposite result, we're going to see rapid year-over-year growth in 2007 for OEM-driven subscriber additions - especially when looking at the percentages. Auto manufacturers are very slow to react to 3rd party changes, with no better example of this than that of Toyota (who likes things to be "just right" for factory installation). As a result, many of the OEM partnerships who signed contracts in the previous years will begin to come to fruition next year, and ramp up steadily for the years to follow.

For Sirius, DaimlerChrysler has promised a 40% overall penetration rate in 2007. Mercedes has promised over 50%, and Audi/VW is targeting over 80% next year. Let's not forget the 21 Sirius-capable models from Ford, BMW's increased penetration and the fact that KIA is going standard with Sirius in 2008.

XM is no slouch when it comes to OEM either. Honda has promised over 650,000 XM units, GM has slated 1.8 million XM units and Nissan has promised 500,000 XM units in 2007. XM will be factory-standard equipment for Acura in 2007, while Hyundai too will offer XM as standard equipment in 2007 (~500,000 units). Oh, and let's not forget about Toyota.

Many of these OEM partnerships have yet to see the light of day, so with the initial phases rolling out in 2007, year-over-year OEM driven subscriber additions with undoubtedly show growth. This translates to "good news" in those easily swayed investment media outlets (translating to stock price increases as the easily swayed investors react to this news).

It's not all peaches and cream of course. As penetration increases, the conversion rate will decrease. XM reports just over 50% of OEM free trial subs subscribe to the service. Sirius doesn't report their conversion rate, but it's most likely similar. As the number of new cars with satellite radio increase (from about 27% this year to around 55% in 2010), you can expect that conversion rate to go down. Craig Moffett, analyst at Berstein, expects the conversion rate to decrease to about 44% by 2010. Still not a bad number, all things considered.

So what of the effect on retail? Retail shouldn't be discounted, but the focus will shift in time. As OEM penetration increases, the need for plug-and-play receivers will drop. Think of plug-and-play receivers like the CD players of yesteryear. Before CD players were integrated in vehicles (a process that took about seven years to reach the same installation rates that satellite radio has achieved in three years), everyone was driving around with their portable CD players plugged into their tapedecks. The Discman was the CD equivalent to the satellite radio plug-and-play receiver. Eventually, as satellite is integrated into cars, we won't need them. 

The retail market, over time, will shift to handheld receivers like the Stiletto and the Inno, to home tuners and to more hybrid devices like the XM Mini-Tuner. Inclusion in other devices, like as part of home entertainment systems, will help keep retail subscribers aloft and going strong. Perhaps both companies will start using an OEM-style strategy for retail (i.e., a free 3-month subscription with the purchase of a satellite-enabled home entertainment system). And let's not forget about the fabled "convergence" of satellite radio + MP3 player + a cell phone (which I'm skeptical about). Who knows what's around the corner for retail - innovation will be a key driver - but it's inevitable that retail's focus will drift away from the vehicle as OEM penetration increases.

So while this fourth-quarter doesn't look to be the bearer of great news, take a look at 2007 and focus on the much larger OEM market. Consider that from a percentage basis, OEM growth will be significant (resulting in good press). Even with the most conservative of estimates, there's still a huge opportunity for both companies in 2007, and the doom-sayers will quickly change their tune.

(...now, about that churn issue.) 

Here's a funny article in Florida Today by columnist Breuse Hickman. The article headlines with the dramatic title of "Stern's leap to satellite the year's biggest flop" - yet it does little to support that bold statement.

First off, Breuse doesn't own satellite radio. Great. But, even though his beat is on local and national media, he justifies not owning satellite radio because... well... actually it's hard to understand his justification.

This graduate of the Univertsity of Central Florida (with a degree in technical writing) doesn't really back up his statement at all. He first says that he doesn't feel left out because of the "latest year-end reports" (let's assume he means the reduction in subscriber guidance) then he goes on to refer to Forbes' "Dethroned" article, for really no purpose.

But... then he goes on to say that regular radio is boring. Breuse, a reporter for 15 years at Florida Today, gets so distracted in plugging different local radio stations that the whole article just resorts to name-dropping. So how did "the year's biggest flop" happen? Who knows, but the title sure is catchy.

Fine reporting there Breuse!

[Florida Today]

If you're one of those last-minute shoppers who refuses to hit the mall, remember that it's still not too late to get those satellite radios online. And many of the popular online resellers are now offering free overnight shipping so you're gifts will still arrive before Christmas.

Here's a list of satellite radio resellers (in alphabetical order) that are offering free overnight shipping:

• Crutchfield (free Saturday delivery if ordered by 12 noon ET on Friday)
  
• JJI Electronics (use coupon code: "NEXTDAY" to get free overnight shipping)
  
• MyRadioStore (free Saturday shipping if you order before 5pm ET on Friday)
  
• Satellite Radio Superstore (call for Saturday delivery)
  
• XM Fan Store (order by 4pm Central and get free FedEx overnight)

If you know of other resellers that are offering free overnight shipping, go ahead and comment and the list will be updated.

The Motley Fool has an intriguing article today on why satellite radio may not be selling so well this holiday season.

They raise the question on whether satellite radio is really losing to bigger ticket items like flat-screen TVs and next-gen game consoles; and more importantly, whether satellite radio is a good holiday gift to begin with. The Fool's view is that subscription services are awkward presents. Unless the recipient has expressed the desire to have a satellite radio, you're pretty much unloading a monthly bill on their lap. Last year was easy... got a Stern fan? Buy a Sirius.

"They're little more than fruitcakes with circuitry."

Unfortunately it's a valid point. It's rude to hand over a gift that is only useful if they pay a monthly fee. So both companies don't just have to overcome a mental "conversion" with the subscriber, but they also need to convince the gift giver that "paying for radio" is appreciated by the recipient. That's rough

So it's understandable that both Sirius and XM are pitching three-months of service, plus radio, for under $99. The $100 price-point is attractive to many, and the 3-months ensures that the radios are at the very least activated (unlike last year) and hopefully sampled by their recipients.

But is three months enough? Hard to say, I guess we'll find out in March.

he Los Angeles Times featured an amazing article yesterday about a single man's experience with his new satellite radio. The entire article revolves around a single aspect that he discovered with his new present:

"The first surprise about satellite radio is the return of surprise."

It's a key differentiator from the iPod: the element of surprise. You've already heard the songs on your iPod, you've heard them over and over again. There's nothing new. The article's writer said it perfectly: "even if you collect 1,000 iTunes they all finish uploading with the same empty thunk."

With satellite radio, the chance to discover (or rediscover) music is an opportunity constantly presented to the listener. It's not your entire personal collection in your pocket like the iPod - music from satellite radio is a chance relinquish control and enjoy music for what it is. For the first time, you're actually listening again.

The article is a bit lengthy, so set it aside for your lunch hour, but try to take in everything he says - it's worth it. Read as his enlightenment unfolds while just sitting in L.A. traffic. Then take a moment and see how his experience relates to your own moment of enlightenment, when you  first realized what you've been missing.

[LA Times] 

Listen to the latest episode of the CNN "The Digital Life" podcast as your's truly talks with CNN's Headline News anchor Renay San Miguel about the current state of the satellite radio industry.

We cover the XM-Sirius merger rumors, the importance of celebrity talent, the future of wearable devices, cellphone convergence, and even what both companies need to focus on in 2007.

A worthwhile listen if I do say so myself.

[Play Audio]

Ok, this is fun just for the hell of it. Are you bored at work? Maybe have a friend who's busy filing out TPS reports? Or perhaps you just need to emerse yourself into XM's wacky line-drawing world for a while?

Then XM's Holiday Card Generator is just the ticket kids. Send one to a friend and you all can get a nice chuckle. (Plus it serves as a nice platform for a viral marketing campaign.)

My personal favorite is the groovin' snowman.

NPD Group's November sales data continue to show - once again - a consecutive decline in satellite radio retail demand relative to last year.

For the fourth month in a row, year-over-year retail sales are on the decline - August: -3%; September: -12%; October: -25%; and now for November: unit sales are down 45%.

The Quick Glance:

• Sirius November 2006 Retail Sales:
  Down 45% YoY
• XM November 2006 Retail Sales:
  Down 45% YoY

Marketshare:

• Sirius Nov '06 Retail Marketshare: 59%
• XM Nov '06 Retail Marketshare: 41%

While it's interesting that both Sirius and XM are down 45% from the same period last year, Sirius' retail marketshare jumped up from 56% in October to an impressive 59% in November. A clear indication that Sirius is handling the retail sector much better than XM is (regardless of the fact that NPD doesn't register all retail activity).

Anyone want to make some bets for December? 

• February 5, 1996 - New York City loses country music when WYNY changes formats (it was resurrected as Y-107 in the surrounding areas, only to be killed off again on May 7, 2002).
• May 11, 2005 - San Francisco loses country music when KZBR changes formats. 
• June 3, 2005 - New York's WCBS-FM, an oldies-based station for over three decades, abruptly switches to the Jack FM format. No more oldies on New York's FM dial.
• On the same day - WJMK in Chicago also switches to Jack FM, leaving no oldies for Chicago either. 
• August 17, 2006 - Los Angeles' KZLA switches formats to Adult Contemporary, leaving L.A. with no country music stations.
  
• December, 2006 - Washington D.C.'s 60-year-old classical music station, WGMS, is set to be acquired and turned into a Redskins based sports-talk format station - marking the end of classical music in the Washington D.C. area.

It's an ongoing theme that we're seeing over and over again. Regular radio continues to kill off music genres one at a time, leaving those areas devoid of any way of discovering new music. Commercial classical music stations have dropped from 40 stations in 1998, to only 27 - nationwide - a number that goes from surprising, to really surprising.

WGMS even was to start multicasting in HD Radio (terrestrial radio's supposed technological savior), adding two more classical music stations to the area. Sorry, not anymore.

"But we have iPods."

Sure, iPods are great. They're the perfect way to carry your entire music collection with you. Simple, easy, convenient. But Apple only sells around 20 iTunes per iPod. Twenty. This means that the music on most people's iPods is their own (old) collection (or it's unpaid "borrowed" music that we can't prove). And what's the most popular way that people discover new music? It's through radio.

XM Satellite Radio has been quick to respond.

When country music left L.A., XM stepped in as the sponsor to L.A.'s Country Bash. Now they're aggressively running an ad in the Washington Post, advertising XM's three classical music channels. (Check out the ad after the jump.) XM specifically highlights the fact that D.C.'s acclaimed hosts Martin Goldsmith, Robert Aubry Davis and Paul Bachmann (all formally from WETA) are part of these channels.

Terrestrial radio will continue to complain to the FCC, demanding that satellite radio be regulated by the same rules. The RIAA will gladly file suit against XM, because they need to "fairly compensate labels, artists, songwriters and publishers." SoundExchange will ridiculously demand a massive increase in royalities from XM and Sirius in order to broadcast the music that their terrestrial counterparts continue to cast aside. These are companies who represent the music industry as a whole.

Does anyone see something drastically wrong with this picture?

In the very near future, and even currently, the only way to discover and hear certain types of music will be on the Internet, and on Satellite Radio. Fact: the satellite radio industry is the single largest contributor of sound recording performance royalties to artists and record labels. So while terrestrial radio is killing music, satellite radio is in essence, keeping it alive.

View XM's ad in The Washington Post after the jump...

Apple co-founder, Steve Wozniak (The Woz) gave the satellete radio industry a "Buy" rating in a recent interview with the Motley Fool.

The conversation was basically equating the future of select technologies/products with a investing-style "Buy, Sell, Hold" rating. The interesting part is Woz's reasoning for being so favorable to satellite radio:

"Once you encounter it, it is a one-way street. You go through it and you don't back out. You just discover that there are more stations of the types you want at a very reasonable price and so they basically ... will hold their clientele, and it is large enough," said Wozniak.

Remember that Wozniak was a guest-DJ on XM not too long ago. During that incredible 4 1/2 hour show Woz brought up several times how enamored he is with the service that satellite radio provides.

So why is this important? Because Sirius and XM (and Apple for that matter) aren't really in the radio business. They're in the desire business.

[Motley Fool via SSG]