General Motors is making a major push this fall to whet drivers' appetites for what could become the next big thing in automotive entertainment: satellite radio.
Although satellite radio is a fledgling technology with an uncertain audience, GM will launch an aggressive campaign to sign up customers for XM satellite service. The company's $9.99-a-month service offers 100 channels of mostly commercial-free news, talk, music and comedy.
Pontiac will take the lead, offering a free XM receiver to anyone who buys a 2003 Grand Am, Sunfire, Aztek or Bonneville before Dec. 1. Most other GM makes will offer satellite radio this fall as a factory option.
The hardware, which will have a list price of $325, gives continued access to conventional AM and FM radio, plus the usual complement of tape decks and CD players.
Showdown looms
GM's plan is a major event in the battle between the two players in satellite radio - XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. GM and its subsidiary, Hughes Electronics, hold a 15 percent stake in XM, while DaimlerChrysler has invested $100 million in Sirius. Ford Motor Co. also invested in Sirius, but later sold its shares.
At stake is the industry leadership position - potentially millions in profits - if satellite radio becomes as common in future vehicles as cable TV has become in households.
Chrysler will introduce Sirius radio as a dealer-installed option in the fall, while Ford will introduce Sirius next year. Most other mass-market automakers are on the sidelines, awaiting the outcome.
GM is planning a quick rollout to gain a competitive edge, said Rick Lee, vice president of satellite radio service for GM's OnStar unit. ``We broke a lot of production rules to get XM on so many cars this fast.''
OnStar is coordinating the introduction of satellite radio for GM's marketing divisions.
GM has had limited experience with satellite radio. Cadillac introduced XM as a factory option last November on the Seville and Deville sedans. An estimated 1,000 Cadillac buyers have chosen the option - about one out of 45 cars sold during that period.
According to one insider's estimate, GM expects to sign up about 80,000 subscribers in the last three months of 2002. The automaker will offer the service on 25 models, and expects an adoption rate of 15 percent.But the adoption rate could soar for models that are popular among tech-savvy consumers.
In Phoenix, Lund Cadillac has ordered all of its 2003 Escalades and Escalade EXTs to be equipped with satellite radio. According to sales manager Larry Appleby, the feature has a strong appeal for younger buyers.
The vigorous Pontiac promotion also should boost dealer orders, predicts Gary Steilen, marketing manager for the Pontiac Grand Am. ``If we put some effort behind it, we could easily double the order rate,'' Steilen said.
Cautious dealers
To promote XM, dealers can purchase a $999 product demonstration kiosk created by GM for their showrooms. Once dealers sell a specified number of XM radios, they will get refunds for the kiosk.
The satellite radio option will carry the usual dealer margin of 15 percent. But dealers have asked GM to offer them an additional monetary incentive, and one GM executive says they will get it.
That will help generate more enthusiasm among cautious retailers. ``We need something to entice the dealers,'' said Ed Levy, a member of the Pontiac-GMC dealer council and owner of Golling Pontiac-GMC in Lake Orion, Mich. ``Satellite radio is the type of item where word of mouth might be pretty impressive. But is it for everybody? No.''
Tighter focus
Dealers are cautious in part because the last big innovation in automotive information systems - telematics - has gotten a cool reception from consumers.
Just a few years ago, telematics was touted as a sure thing, offering motorists a grab bag of features such as concierge services, route guidance, roadside assistance and e-mail.
By contrast, Sirius and XM are focusing on one product - radio - and offer it at a lower price than telematics.
As usual for consumer electronics, the early adopters are buying aftermarket satellite radio receivers for installation in their cars or homes.
Retail chains such as Best Buy and Circuit City stock a variety of aftermarket receivers made by Pioneer, Clarion, Alpine and others. Prices range as low as $160 for the receiver, plus $50 for an antenna and $50 for installation.
Currently, XM and Sirius receivers are not compatible, so stores have to stock separate hardware for each service. To avoid a repeat of the VHS-Betamax battle, the Federal Communications Commission has ordered Sirius and XM to design a compatible receiver that could accept either signal.
That would allow consumers to switch services without having to install new hardware in the vehicle.
XM in front
XM has grabbed an early lead in the battle for dominance. After seven months of nationwide service, XM has 130,000 subscribers. Sirius is trailing badly but expects to start catching up after it launches nationwide service on Monday, July 1. After six weeks of test marketing in four cities, Sirius had 412 customers as of March 31.
Early aftermarket sales demonstrate that satellite radio is a marketable product, said XM President Hugh Panero, a formal cable TV executive. ``We've answered the question, `will people pay for radio?''' he said in a recent interview with the New York Times.
Each company needs several million customers to break even. But if satellite radio takes off, GM will prosper. Over a 12-year period, XM agreed to pay the automaker $438 million in return for an exclusive contract to provide service to GM customers.
GM also will receive at least 20 percent of XM's monthly subscription fees, according to one company source.
GM owns 4.2 percent of XM Radio, and GM subsidiary Hughes Electronics holds an additional 10.5 percent. Other strategic investors include American Honda and Clear Channel Communications.
But substantial profits are years away. Sirius and XM have spent roughly $1.5 billion apiece to launch their systems. Both companies must raise hundreds of millions more to avoid running out of cash early next year.
XM says it will break even when it attracts 4 million customers, a goal it hopes to achieve in late 2004 or 2005. Sirius says it expects to achieve a positive cash flow in 2005, when it hopes to have 3 million customers.
On Wall Street, Sirius has become a target of short sellers, perhaps because of XM's early lead. But Sirius continues to draw support from automakers.
Like cable TV
After offering Sirius as a dealer option this fall, Chrysler will offer it as a factory option on the 300M sedan late this year. Jack Withrow, Chrysler group's director of telematics, predicts that satellite radio will catch on as prices fall.
``It will start slowly, then ramp up and become ubiquitous,'' Withrow said. ``It's going to be like cable TV is today. Our plans have been based on conservative (initial) expectations, but we are going to push this with our dealers. We are going to spend some money on this.''
Ford is moving more slowly than its Big 3 rivals. Lincoln will offer Sirius as a dealer-installed option in the 2003 model year - most likely next spring. Ford Division will launch it sometime after Lincoln.
The initial delay ``was primarily a technical issue,'' said Eric Heller, Ford's multimedia planning analyst. But Heller acknowledged that Ford is not in a position to gamble on uncertain consumer demand.
Toyota, Honda and several other automakers also are waiting for the satellite radio market to develop before they make major commitments. ``It's a chicken-and-egg issue,'' Heller said. ``Everyone is waiting to see how big this becomes.''
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