Last week, XM Satellite Radio announced better than expected financial results for the second quarter. The other digital satellite radio service, Sirius, is also rewarding shareholders. Good news for satellite radio corresponds to bad news for terrestrial radio broadcasters.

Although XM has nearly three times as many subscribers as Sirius (4.4 million compared to 1.5 million), Sirius has a slightly larger market capitalization ($9 billion compared to $7.5 billion). Both companies, but Sirius in particular, are losing money, but margins are closing. XM has a chance to break even in 2006 or 2007.

The satellite radio industry is far from mature and stable. Investors are not valuing the two companies at a few thousand dollars per current subscriber (most of whom pay $12.95 a month for the service) but rather on expectations that the companies’ subscriber base will grow tenfold.

The listener base and market capitalization of broadcast radio still remain much larger than that of satellite radio. Recent trends favor satellite radio. The digital satellite radio service licenses were auctioned by the FCC in 1997. Within a few years, industry prospects were bleak. Both XM and Sirius seemed destined to merge and then quietly disappear. Costs were high, and customer growth slow. Five years ago, most observers doubted that the market could support one let alone two satellite radio services.

The first big break was a few years ago when GM and other automobile manufacturers began to offer satellite radio as a factory-installed option. Most radio listening is in cars. Upscale drivers began to appreciate the sound quality advantages of satellite radio, which was developed as an all digital system with 100 channels of music, news, and entertainment programming. What was once a luxury option has now become a standard feature for many cars. With many customer incentives in the second quarter, automobile manufacturers had brisk sales of cars, many equipped with satellite radio.

Another innovation of satellite radio has been the purchase of valuable audio programming, particularly sports. For its nationwide audiences, Sirius carries all NFL games and many NBA and NHL games. XM carries MLB games and NASCAR races. Both carry college sports. The sports programming is costly, but apparently provides a major incentive for customers to sign up for a subscription radio service.

Satellite radio can offer all of this programming partly because XM and Sirius together have more spectrum that can reach more of America than all of the thousands of traditional radio broadcasters combined. Even so, XM announced last month the acquisition of WCS Wireless, a group that controls parts of an adjacent band of spectrum. Unlike traditional broadcasting, with dozens of stations in a local market, each market has but two satellite radio providers – XM and Sirius.

The business model for both XM and Sirius is primarily subscription-based, rather than the advertising model of traditional radio broadcasting. The subscription model appears to be working while advertising revenue from broadcast radio, although still quite lucrative, has limited upside potential.

Perhaps the greatest difference between satellite radio and broadcast radio is that the former is substantially more attuned to new technological developments and the Internet. XM Radio, for example, has cut deals with Napster for customers to purchase music online and with Samsung for MP3 players. Satellite radio sees its future as tied to audio programming in conjunction with the Internet and new technologies.

In contrast, commercial broadcast radio seems decades behind the times and is only slowly converting to digital radio. In the process, the broadcast industry has managed to irritate the recording industry by not addressing fears of piracy of digital broadcast programming. The broadcast industry has also proposed a single proprietary encoding standard rather than the open standard favored by the high-tech industry (at least Microsoft). The broadcasters’ favored standard is licensed by iBiquity, a company which, not coincidentally, has substantial broadcaster ownership.

Broadcast radio serves the market niche of local news and information that satellite radio, with a national reach, can never adequately fill. And broadcast radio is an advertiser-based service, valuable to both advertisers and listeners. Until broadcast radio begins to look at new technologies as opportunities to develop rather than enemies to avoid, its prospects will remain flat while satellite radio grows skyward.

A former FCC commissioner,Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.