General Motors cut the price of factory-installed options of XM Satellite Radio in its 2007 vehicles, chopping the cost 39 percent in an effort to boost the flagging satellite radio industry and GM’s own cloudy financial picture.

The XM radio installations will now cost $199, as opposed to the old price of $325. The Detroit-based automaker said that more than 90 percent of its 2006 and 2007 model-year vehicles offer XM as either standard equipment or as an option.

Chance Patterson, vice president of corporate affairs at XM, pointed out that the discount didn’t apply to the packages of options that automakers like GM often put together, like a “sun and fun” package with a six-CD player, six-speaker sound system, and XM radio.

“We’ve had great success with General Motors,” he said. “This is another milestone in making XM a key part of their new car market.”

XM, and its rival Sirius Satellite Radio, have seen a slowdown in the growth of the satellite radio industry after early predictions of much more rapid growth.

Even worse for Washington, D.C.-based XM, Sirius has actually been gaining ground and closing the gap in the number of subscribers the two services can boast (see Sirius Gains in Satellite Wars).

In May, XM CEO Hugh Panero acknowledged “the satellite radio category has seen an overall softness at retail during the second quarter.”

XM currently boasts 7 million subscribers, compared to New York City-based Sirius’ 4.7 million subscribers. However, Sirius expects to have 6.3 million subscribers by the end of the year, and it added over 600,000 net subscribers during the second quarter. XM added 398,012 net subscribers in the same quarter.

Mr. Patterson disputed the notion that Sirius was closing the gap with XM, pointing out that both companies have churn rates of about 1.8 percent of subscribers who drop the service. “Because we have several million more subscribers, you have more people churning off,” he said.

He pointed out that 900,000 subscribers had signed up for XM last quarter, while 800,000 signed up for Sirius.

To gain ground, XM signed a deal last week with Alltel Wireless to sell its programming to Alltel’s cell phone customers for $7.99 per month (see Alltel, XM Make Mobile Music). The company also signed a deal with Google to offer targeted advertising to satellite radio listeners.

However, the company has been dealing with an expanding probe by the U.S. Federal Communications Commission of problems with the modulators in its satellite radio systems spreading transmissions to surrounding vehicles, as well as an investigation of its marketing practices by the U.S. Federal Trade Commission (see FTC Probes XM’s Marketing).

Shares of XM rose $0.33 to $11.34 in recent trading, while shares of Sirius fell $0.09 to $3.66, and GM shares dropped $0.29 to $30.25.

Building in XM

GM has built more than 4 million XM-equipped vehicles since 2001, and the company has more than 50 vehicle models with XM. The satellite radio service comes standard on all of GM’s Cadillac models, and 2 million Chevrolet vehicles include XM.

The 2002 Cadillac DeVille and Seville were the first vehicles to offer XM as a factory-installed option back in 2001.

Sirius, on the other hand, has deals in place with Ford and Chrysler to sell factory-installed versions of its satellite radio equipment.

To entice customers, the automakers offer free trials of the service. GM includes a free three-month trial of the service with its factory-installed XM vehicles. However, some Ford models come with three years of free Sirius service, and Chrysler has one year of free Sirius service.

According to GM, though, the price cut is simply the result of economies of scale and engineering efficiencies that allow it to pass along cost savings to its customers.

“XM Radio has become a must-have feature for many customers, and demand just continues to grow,” Mark LaNeve, vice president of GMNA sales, service, and marketing, said in a statement.

XM was glad for the boost that it expected in its sales.

“The strong support of General Motors and its customers has been a key factor in establishing and maintaining XM’s leadership position in satellite radio and in-car entertainment,” said Steve Cook, executive vice president of XM’s automotive division.

With the GM price cut, XM hopes to expand that lead over Sirius once again. Also helping out is XM’s DJ Bob Dylan, who is premiering his new album Modern Times on the service later this month.

Contact the writer:MCohn@RedHerring.com