Satellite radio for cars is taking off and adding new features—now broadcasters are starting to fight back.

Mechanical designer David Richmond heads to his car during lunch, takes two coffee breaks a day behind the wheel and sometimes just sits in his car even when the blustery winter temperatures in Greenbrier County, W.Va., fall below 20 degrees. All so he can listen to the radio. Greenbrier County has only two local stations, and the nearby mountains tend to interfere with reception. But over Christmas, Richmond’s girlfriend, Mary, bought him a $100 tuner and a $10 monthly subscription to a service called XM Radio, allowing his Jeep Cherokee to draw 120 channels of crisp digital audio from two geostationary satellites hovering above the Earth. Richmond, 45, now spends his free time switching between the greatest hits of the ’70s, urban top 40 and old-school blues. “I haven’t listened to any other form of music since I got it,” he says.

Satellite radio has finally evolved from an expensive fantasy into another booming category of entertainment for the digital decade, alongside DVD and MP3 players. The D.C.-based XM Radio exceeded 1.3 million subscribers last year, and, with help from smaller New York City rival Sirius and its 261,000 subscribers, satellite radio is gaining customers at a faster clip than CDs, VCRs and cable TV did in their early years. Both services are an audiophile’s nirvana, offering more than a hundred channels of music, sports, news and talk programming—mostly commercial-free, and recorded at the firms’ own studios (some regular networks, like Bloomberg and ESPN radio, are picked up). Meanwhile, consumer-electronics companies continue to produce ever smaller and more interesting receivers, like Delphi’s recently launched XM Roady ($120), a portable satellite receiver that you plug into your home or car stereo and can take wherever you go. “People said no one would ever pay for satellite TV, and now it has 21 million subscribers,” says Sirius CEO Joe Clayton. “The same thing is going to be true here.”

Traditional radio broadcasters, which lobbied the FCC against issuing licenses to the companies in the ’90s, are growing increasingly alarmed by their popularity and plans for expansion. At the Consumer Electronics Show in Las Vegas earlier this month, XM Radio announced that through a partnership with the Weather Channel and a traffic-data firm, it would soon transmit constantly updated weather and traffic information for the 21 largest cities in the country. Local radio considers such regional services its biggest draw, the reason 175 million Americans tune to the AM and FM bands. National Association of Broadcasters president Edward Fritts calls XM’s move “an appalling, backdoor attempt” to skirt XM’s original FCC license. XM spokesperson Chance Patterson says it is permitted under XM’s licenses and that “this is content that the consumer wants.”

Meanwhile, across the convention hall at the CES, Sirius previewed another frill. Starting in 2005, it will send three channels of video over its satellites for the increasing number of cars with video screens in the back seat—itself a growing tech trend targeted primarily at helping parents subdue unruly children. This time the FCC didn’t wait for formal objections over whether this violated Sirius’s license: it asked the company to provide more information on the proposed plan. A Sirius spokesperson argues the video offering is “ancillary” to its 100 stations of audio and therefore covered under its original deal with the FCC.

The two companies may feel pressured to trot out new features to lure customers more quickly and get their balance sheets in order. Back in 1997, they each paid more than $80 million in an FCC auction for their licenses and the right to enter uncharted regions. Since then, GM and Honda invested in XM, Ford and DaimlerChrysler in Sirius. Today half of new sat-radio subscribers sign up for the service when they buy a new car. But both companies are still unprofitable and buried in mountainous debt. Last week XM filed to sell 7 million new shares of stock to the public.

Ironically, its most ardent fans think satellite radio is a great deal even without the controversial new features. Salesman Brian Mather, a sports-radio lover in Chicago who has grown weary of local talk shows about the irredeemable Bulls, says his new satellite radio and its national sports broadcasts have dulled the pain of his regular 90-mile drive to Milwaukee. “I would rank this up there with must-have items like duct tape,” he says. The only show that can lure Mather back to the regular dial is Howard Stern’s. No wonder traditional broadcasters are worried.

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