We're now axle-deep into the Cash for Clunkers campaign, and Sirius XM Radio (NASDAQ:SIRI) shareholders are licking their lips.

The Car Allowance Rebate System is just the kind of catalyst that the satellite-radio provider needs to win over new subscribers. Under the terms of the program, car buyers could collect as much as $4,500 for their trade-ins, as long as their new wheels offer improved fuel-efficient mileage (four miles more per gallon on cars, one mile more per gallon on trucks).

Perfect! Right? The rebates make it more attractive to those with older -- nearly worthless -- cars, so it's not as if too many cars with factory-installed satellite receivers are being sent to the shredder for scrap. On the flip side, most of the replacement cars will have Sirius or XM receivers.

The move has eco-friendly implications, but it's really about stimulating the economy, and obviously helping out GM, Ford (NYSE:F), and other car makers.

Sirius XM will be a big winner too, but keep expectations in check:

  • The rebate is only good for roughly 250,000 cars.
  • Sirius XM's conversion rate in its latest quarter was 44.9%. In other words, less than 45% of the buyers of satellite-equipped cars are becoming paying subscribers after their free trials run out. So even if all 250,000 cars come with factory-installed receivers, just 112,250 buyers would stick around as paying customers.
  • That number may still be lofty, when you consider the makeup of those exchanging their cars. Drivers of cars worth less than $4,500 aren't the best group to pitch satellite subscriptions to. Those subscriptions will also be getting more expensive Wednesday, when the music royalty increase kicks in.

No matter how the numbers ultimately add up on the acquisition side, Sirius XM still lost 404,422 more subscribers than it gained during the first three months of the year.

Cash for Clunkers will help, but it's no savior.

Crowned by royalty
Monthly subscribers -- or anyone renewing longer subscriptions -- may be shocked to see their satellite-radio bills increase starting Wednesday. The Federal Communications Commission's decision to approve the merger forces Sirius XM to keep its base price intact for the first three years of the union.

Why is that $12.95 monthly tab going up to $14.93? Well, the FCC is allowing Sirius XM to pass on higher music royalty fees to subscribers.

It's a defining moment for the satrad star. Will people pay or will there be more defections?

If subscribers on music packages accept the higher fees -- $1.98 a month, or $0.97 a month for secondary radios under a master account -- it would be a huge victory for Sirius XM. Its cash flow picture is already improving. Passing on programming costs would help push the company that much closer to actual profitability.  

Success would also validate Sirius XM's model and its pricing flexibility. It began charging $2.99 a month for Internet streaming access in March. That feature used to be included at no additional cost, along the lines of Netflix (NASDAQ:NFLX) offering its DVD renters streaming movies as a subscriber perk.

Someone who was paying $12.95 a month for Sirius or XM five months ago, and streaming online when away from the activated receiver, will now be paying $17.92 a month between the Web access and music royalty add-ons. Pulling off a 38% price hike during the deepest recession in decades would be gutsy.

Online radio providers aren't following suit. Pandora, CBS' (NYSE:CBS) Last.fm, Time Warner's (NYSE:TWX) AOL Music, and Yahoo!'s (NASDAQ:YHOO) Y! Music stream on, mostly for free.

Apples or dunce caps
This is all going to test Sirius XM, but what if it passes? Subscriber levels tanked the last time Sirius XM imposed higher fees, in March. The economy isn't getting any better, especially for big-ticket items like cars. The company's ballyhooed entrance into Apple's (NASDAQ:AAPL) App Store is old news. The former chart-topper isn't even one of the 50 most downloaded free apps at the moment.

No one is talking about subscriber growth at Sirius XM anymore. It's more about bleeding than leading. However, what if Sirius XM could be profitable with 15 million subscribers next summer, instead of oozing red ink with 20 million subscribers? Isn't it time to begin assessing Sirius XM as a viable business model, especially if its recent subscriber-alienating hikes actually catapult it toward breakeven numbers and self-sustainability?

Sirius XM doesn't need to ace this test with flying colors -- it just needs to pass.

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Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the companies in this story, save for Netflix. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.