XM and Sirius Stream On

Satellite radio has taken some meaty strides this year. By the end of the year, XM Satellite Radio (NASDAQ:XMSR) and Sirius Satellite Radio (NASDAQ:SIRI) will have 4 million subscribers -- and gaining. Yet perhaps one of its biggest installations came over the weekend when it was announced that both companies would be added to the Nasdaq-100 Composite.

In its annual re-ranking, the two upstarts will be joined by other recent high-risers like Autodesk (NASDAQ:ADSK) and Wynn Resorts (NASDAQ:WYNN), which have more than doubled over the past year. The promotion is a reflection of the market's popularity contest as it is simply an index of the 100 largest nonfinancial equities trading on the Nasdaq. So while it is not an actual endorsement, it's a clear indication that investors are definitely excited about the potential of the sector and its two key players.

Both companies combined to lose more than $900 million last year on a little more than $100 million in revenue. While each company has grown its top line significantly this year on the heels of soaring subscriber growth, they have already lost as much through the first three quarters of 2004 as they did last year.

It's not that the industry is judged solely by its profit and loss statements. Satellite television giant DirecTV (NYSE:DTV) has grown to command a $22 billion market cap despite its perpetual quarterly deficits. Satellite entertainment is a compelling business area given the high barrier to entry -- sky high, literally and figuratively -- and the fact that every incremental subscriber carries little in additional overhead to the provider once acquired.

That doesn't mean that satellite radio will never become profitable. While programming costs have been escalating as both players continue to shore up their lineups to lure listeners away from free radio, the economies of scale are likely to kick in over time. You also have various premium channel and advertising kickers to consider.

However, with both companies closing in on $20 billion in combined market capitalization, is the induction into the Nasdaq-100 an indication that the easy gains -- if there ever is such a thing -- have already been made?

Our new Rule Breakers newsletter likes to single out stocks early in their growth cycle. The promising niche of satellite radio certainly fits the bill on the growth side but the widespread popularity of the shares these days makes it unlikely to feel like much of an early discovery. Now even index investors will have a piece of the satellite radio revolution. It's a bittersweet notion.

Longtime Fool contributor Rick Munarriz thinks that satellite radio will be a huge industry in the years to come. However, he does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.