After a strong finish to 2004, XM Satellite Radio (NASDAQ:XMSR) is in a good financial position. Yes, the company lost a good chunk of money in the fourth quarter, but we're already starting to see glimpses of the sector's economies of scale.

Because so much of satellite radio's upkeep comes from fixed overhead costs, every new subscriber improves the leading provider's performance. Just go down the income statement and you'll see what I mean. Revenues rose by 148% during the December quarter, yet if you scour the expense line items, you'll see that not a single one even doubled.

Think about it. It doesn't cost the company any more to have its programming reach 3.2 million people today than it did 1.4 million a year ago -- at least not beyond the additional costs in drawing more appealing content to keep pace with its smaller yet determined competitor, Sirius Satellite Radio (NASDAQ:SIRI). Costs behind everything from servicing the accounts to administrating the company will inch higher, but XM has no need to match the subscriber hikes dollar for dollar.

That's why the company is comfortable in projecting that it will turn cash-flow positive next year. The future of satellite radio appears bright, and it's not just because XM is looking to close out 2005 with 5.5 million subscribers. It's also because XM has managed to top its own public acquisition targets every time.

The potential is huge. Unlike the traditional commercial-radio model that relies on broadcast advertising to pay the bills, just 5% of XM's revenue is coming from ad sales. Yes, having nearly 70 commercial-free music stations is a great lure, but that won't stop companies from sponsoring the commercial channels as well as paying up for branding rights on the all-musical ones.

XM and Sirius should combine for nearly 8 million subscribers by the end of this year. While traditional broadcasters like Clear Channel (NYSE:CCU), Viacom (NYSE:VIA), and Cumulus Media (NASDAQ:CMLS) aren't likely to go down without a fight, they'll have lost the country's 8 million most ardent listeners, who are also the most lucrative to marketers.

Most radio fans are still content with FM and AM offerings. But as traditional radio's top stars defect to satellite radio, and as XM and Sirius continue to sign exclusive sporting-content deals, AM/FM radio will find that it's trying to pull listeners back with a shredded rope in an ultimately hopeless tug-of-war.

For the first time in its history, XM posted a narrower operating loss during the quarter. It's only going to get better from here.

Where do you want to go next? Just turn the knob:

Longtime Fool contributor Rick Munarriz thinks it's cool that Sirius broadcasts The Motley Fool Radio Show four times over the weekend. He does not own shares in any of the companies mentioned in this story.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.