One hundred and seventy digital channels and nothing's on? You will rarely find XM Satellite Radio (NASDAQ:XMSR) at a loss for something to hear. Whether it's the 70 commercial-free music channels or the balance of talk, sports, and weather-related programming, XM subscribers don't have a lot to complain about.

XM shareholders, on the other hand, may be hissing more than tunnel static. Since peaking two years ago, shares of XM have fallen by 63%. If it's any consolation, more recent investors are doing a lot better. The stock is trading 56% above this summer's low.

Which side of the glass do you want to sip from these days? Chairman Gary Parson and CFO Joe Euteneuer opted for the upbeat as they spoke at the Credit Suisse Media & Telecom Week this past Thursday.

XM is a realist. It knows that it's not doing so well at the retail level. Since May, when the company began lowering its year-end subscriber targets, it has seen softness in the secondary market for satellite radio in general, but for its products in particular. The holiday season may not be much brighter, as satellite radios are competing with flat-panel televisions and next-generation video game consoles as ideal big-ticket gifts.

The battle that once started as consumer enlightenment at consumer electronics chains like Best Buy (NYSE:BBY) and Circuit City (NYSE:CC) has moved on to mainstream discount department stores. However, the broader reach hasn't delivered the same kind of success that XM has found in the automobile market, where 5.5 million to 6 million cars with factory-installed XM receivers are on the road today.

Got a feel for my automobile
With 60% of the auto market on its side, XM feels that the factory-installed market gives the company an edge over rival Sirius Satellite Radio (NASDAQ:SIRI). Even though Sirius has walked away with more net new subscriber additions for four consecutive quarters, XM is holding up better on the gross additions, and it's still the market leader.

XM is looking to close out the year with between 7.7 million and 7.9 million subscribers. Sirius recently lowered its range to a year-end total of 5.9 million to 6.1 million subscribers. That places Sirius just about where XM was at this point last year. According to XM, Sirius may be closer to 18 months behind, once you factor in that Sirius tallies up promotional subscriptions and unsold cars sitting on dealer lots in its reported totals.

Yes, XM loves cars, especially after other automakers followed General Motors' (NYSE:GM) lead in factory-installing satellite radio systems in their new cars. With 16 million to 17 million cars sold or leased annually stateside, even the rising popularity of jacks for Apple's (NASDAQ:AAPL) iPod in many new models shouldn't make much of a dent in the automotive momentum.

It's been a pretty amazing run. According to Parsons, just three years into the factory installation cycle of satellite receivers in cars finds the platform exceeding the penetration level that cars with CD players took seven years to achieve. Satellite radio penetration should double over the next couple of years.

The argument for satellite radio
XM is about more than just the $12.95 a month that subscribers pay for the service. Higher-end portable models are rolling out with MP3 players and music-storage functionality. There are also data services like the NavTraffic service (in which subscribers pay an extra $3.99 a month for help navigating through metropolitan traffic jams) and advertising revenue for channels that aren't commercial-free.

Sponsors are starting to take notice; individual XM channels are outdrawing 99% of the country's radio stations. Satellite radio is even affecting the music scene in general. Parsons believes that seven XM channels and four or five Sirius channels have their playlists counted to determine the Billboard Hot 100. Parsons claims that, statistically speaking, a song can't be a No. 1 hit if it's not in rotation at XM's Top 20 at 20 station.

The urge to merge
A few questions into the presentation, Parsons was asked about the possibility of Sirius and XM ultimately merging.

"How many minutes into the thing did that go?" he asked, tongue in cheek. "That's the question I answer every other question."

He doesn't shoot down the speculation. In fact, one can argue that he encourages it, by pointing out how a combination would pass regulatory forces that have shot down other proposed duopoly unions in the past.

Then again, Parsons doesn't really see this as a duopoly. XM and Sirius have 12 million subscribers and currently reach 25 million listeners. That's a mere 8% penetration of the U.S. population. He also points to the exclusive car deals. (Only Audi and Infiniti tried to play both sides with interoperable systems, which failed to catch on due to the poor reception quality.) He points to a Sirius radio in a Chrysler, where the only real competition is the other components in the car.

XM's product is also not the same as Sirius's offering, despite the overlap. That's obvious in the demographics, where XM tends to own the male 18-34 year-old market, while Sirius skews older and is more gender-neutral. XM has more female and Latino subscribers, probably a result of both the arrival of Oprah Winfrey and the dozens of more active channels that allow it to offer wider Spanish programming (especially when it comes to baseball).

This doesn't mean that XM is holding out for a buyout. Parsons and Euteneuer feel that XM offers the tighter ship, pointing to narrower losses and lower subscriber acquisition and programming overhead.

The company is still aiming to produce positive cash flow on an operating basis in the current quarter, and the EBITDA trends, before one tacks on the company's marketing expenses, are refreshing.

Year

Pre-Marketing EBITDA

2003

Negative

2004

Breakeven

2005

$24 million

2006

$80 million
Source: Gary Parsons

Parsons also points to the disparity in valuation between the two companies, an indication that XM won't be acquired unless it's at a healthy premium.

Still, when there is both respect and disgust for your only real competitor in the satellite radio space, that can only be love. If XM's share price continues its recent winning ways, it may put an end to the buyout talk. XM regaining the net new subscriber addition lead at some point in 2007 would definitely end such chatter -- or at least spin it toward XM buying Sirius instead.

XM's world sounds pretty exciting at the moment. One hundred and seventy different channels, and everything's on.

More satellite radio chatter:

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Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004 and an XM subscriber since this spring. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.