'Twas the week before Christmas
When all through the store
Not a sat-rad receiver
Was sold off the floor...

This won't be much of a holiday to remember for satellite radio. Sirius (NASDAQ:SIRI) and XM Satellite Radio (NASDAQ:XMSR) have already lowered previous year-end subscriber targets, and weakness on the retail front is to blame.

Retail sales of satellite radios have fallen for three consecutive months through October. The momentum is apparently not improving as we dig into the critical holiday selling season.

In addressing the crowd at the Credit Suisse Media & Telecom Week conference earlier this month, XM Chairman Gary Parsons was realistic in his assumptions. His company's channel-checks through consumer-electronics stores found that retailers were looking at 5% improvement in comps, but satellite-radio sales were yielding to other big-ticket items, such as high-def televisions and next-generation game consoles.

Some of you weren't convinced. "No consumer is trying to decide between buying a flat-panel TV or XM radio," one Fool wrote me. "It costs about $1,000 to $2,000 for a flat-panel TV, and about $50 for an XM radio. The comparison is absurd."

Oh, but it's not. In fact, we should strike down whoever tried to position satellite radio as the ideal holiday gift to begin with.

The gift that keeps on getting
Keep in mind that I'm a huge fan of satellite radio. I subscribe to both services! However, I have to grimace at satellite radio as a standalone holiday gift. I mean, I've seen the RadioShack (NYSE:RSH) ads, with the excitable actress pitching all of the benefits of Sirius programming for less than $50, but she never manages to get into the nitty-gritty about the $13 monthly subscription the service requires.

Subscription services are awkward presents. Keep in mind that I've seen ads pitching everything from TiVo to cell phones to satellite television as slam-dunk gifts over the years. How often are they gifted, unless the recipient implicitly states that he or she is willing to take on the monthly fees? If that's not the case, they're little more than fruitcakes with circuitry.

So is it really any surprise that this holiday season belongs to seventh-generation video game consoles, MP3 players, and GPS systems? Yes, GPS. How many times have you seen that Garmin holiday commercial this month? If the "give a, give a, give a, give a Garmin" melody to the tune of "The Carol of the Bells" isn't burned into your brain -- for better or worse -- you simply haven't been watching enough television.

Yet even if you dismiss the theory that satellite radio is a poor holiday gift (or that, in the case of Sirius, it can be saddled with a $500 lifetime subscription to offset recipient liability), how can one deny that other gadgetry is vying for gift-givers' dollars?

Laying it all on the assembly line
Satellite radio will go from adding 4.9 million net new subscribers last year to just 4.6 million new users in 2006. More cars are rolling off the line with factory-installed systems, so how deeply has satellite radio fallen out of favor at the consumer-electronics level? And if that's the case, why are XM and Sirius spending so much in advertising when they already have a captive market, depending on what auto showroom you walk into?

Banking on the car market is tricky. Because consumers can go from an XM-installed Cadillac to a Sirius-installed Ford Expedition, it's more about the perceived value of satellite radio than consumer loyalty. Further obfuscating things, roughly half of the car buyers are refusing to pay for satellite-radio service once their free trials expire, despite having the costly receivers in their cars. XM and Sirius would love to ramp up their conversion rates, but aren't those numbers likely to go the other way?

The next batch of satellite-radio converts will be harder to acquire than the first 13 million, because these newer consumers spend less time commuting. But even worse, people now have more appliances than ever on their dashboards, all begging to entertain the driver.

My new Garmin GPS plays MP3s and audiobooks. More cars come with iPod jacks for folks who load up their players with digital tunes and fresh podcasts. Does satellite radio put out a better audio product? You bet. Will it matter? Let's put this a different way: Remember when cynics were concerned that high gasoline prices would find consumers holding back on discretionary subscription services such as satellite radio? Gas prices have settled down in the latter half of the year, yet Sirius and XM have combined to lower year-end targets for satellite radio subscriberhood a total of four times since May.

XM proved to be a disappointing recommendation in the Rule Breakers growth-stock service and got booted from the scorecard. Sirius has seen its stock cut in half over the past two years.

It doesn't look pretty, does it? However, innovation comes in cycles. By this time in a year or two, XM and Sirius may have improved their value proposition with things like backseat video, improved service to cell phones, and more proprietary content. However, those streams aren't going to get XM and Sirius out of their rut over the next few quarters.

Until then, bah humbug.

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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.