(FORTUNE Magazine) – Fort Davis, Texas--This small West Texas town has one dusty main street, a rattlesnake museum, and a closer association with rodeo than radio. It's a city where cowboys don't bother to hit "scan" on their truck radios because there's only one station, which broadcasts country music, commodity prices, and religion.

What most of the town's residents don't know is that there's a Star Wars duel going on some 22,300 miles overhead; it's Very High Noon for the greenhorn satellite radio business.

The last time we tested subscription-based satellite radio out here, in late 2001, there was only one choice: XM Satellite Radio, which so impressed us that we named it technology product of the year. XM offers 101 digital audio channels, including movie soundtracks, acoustic rock, opera, NASCAR races, trance and dance tracks, reggae, outlaw country, financial news, and "premium" sex advice from Playboy Playmates.

Now there's a new challenger in town--Sirius Satellite Radio--and it's blazing away with 100 channels of trip-hop, jazz, BBC and NPR news, lesbian comedy routines, classic radio dramas, heavy metal, disco, and Broadway show tunes, all raining down on the heads of the citizens in something close to CD-quality audio.

Is this town big enough for the two of them? Is it even big enough for one of them? To find out, we borrowed a Sirius-equipped car and headed to the radio-starved mountains of West Texas to see if the Sirius service is good enough to challenge market-leading XM.

The verdict? We've got ourselves a shootout. After a slow start, Sirius is making the right moves to be competitive.

Both XM and Sirius have major challenges ahead, including competition not just from each other but also from new terrestrial radio technologies that let local stations broadcast in high-quality, digital radio streams. And neither is close to signing up the millions of paying customers needed to offset the billion-dollar startup costs. XM has attracted some 500,000 customers, who pay $10 a month for the service (Playboy is $3 extra), plus $200 or more for the special receivers to decode the digital streams coming from space. Sirius, plagued by technical delays that gave XM over a year's head start, has some 75,000 subscribers, who pay $13 a month on top of similar hardware costs.

But both companies recently have dodged some major financial bullets, and both will get a boost later this year as automobile manufacturers install XM-or Sirius-ready radios--they're incompatible, unfortunately--in scores of new car models.

Although it costs $3 more a month than XM's basic service, Sirius offers a compelling mix of commercial-free music streams. (Many of XM's music channels contain ads, but nowhere near the 15 to 20 minutes an hour of commercials that "free" FM stations inflict on their listeners.) Reception was crisp and clear all the way on our 900-mile test drive, even in stormy weather and in the mountains, although "talk" channels were occasionally muddy --a result of Sirius's system of diverting higher bandwidth to music channels. The programming mix included the requisite "decades" channels--'50s, '60s, '70s, and so on--and several flavors each of pop, rock, country, R&B, jazz, world music, news, sports, gospel, and Spanish-language stations, plus specialty channels like bluegrass, folk, and classical, and even channels devoted to gays, liberals, and conservatives.

There were puzzlements, however. Of all the possible songs available in various formats, why did we have to listen to Simon and Garfunkel's "A Most Peculiar Man" twice in 24 hours on the folk channel?

Newcomers to satellite radio typically channel-surf extensively before settling on the six or so channels of greatest interest. The high-end, touch-screen Kenwood receiver we tested even came with a separate remote control to make scanning simple.

XM got a welcome boost late last year with the introduction of Delphi's SkiFi receiver, a versatile modular system that allows customers to listen to their XM service not just in the car but also at home and in a portable boombox receiver. Before, most customers who wanted to listen to XM both on the road and at home had to pay for separate subscriptions.

Sirius won't have a boombox until the end of this year, but this month it is unveiling a couple of portable systems, including one from Kenwood called Here2Anywhere ($100). The Here2Anywhere receiver snaps into either a car adapter or a home stereo adapter ($70 each). There's also a portable system coming from Audiovox, called the SRS Satellite Radio Shuttle ($100). The Audiovox system has a wireless FM transmitter that beams the streams to the car's built-in stereo system, a trick that XM's hardware partners had not matched at presstime. Almost all satellite receivers have the ability to display both the artist's name and the song title, which, coupled with the rich variety of music, is a major selling point. But the Audiovox system also has a button called S-Seek that allows users to "store" favorite song titles and be alerted whenever they are being played on any Sirius channel.

In the end, the choice between Sirius and XM--or more broadly between satellite and terrestrial radio--is less about technology and more about programming. Even in big cities, let alone places like Fort Davis, there's no way for local stations to match the quality or the breadth of selections on satellite radio. (When was the last time Ravi Shankar or Thelonious Monk were heard on the airwaves in Ozona, Texas?) FM radio today isn't about playing interesting music for the amusement of listeners; it's all about delivering demographically attractive consumers to advertisers. Giant radio holding companies like Clear Channel Communications craft scientifically selected playlists that are designed specifically to avoid shocking listeners with unfamiliar music. That's why you hear the same songs over and over. And that's why I think the future of satellite radio is bright.

Which one would I choose, XM or Sirius? Until the two companies agree to a common technical standard, one that would allow hardware companies to build receivers capable of decoding both services, the choice probably comes down to the next car I buy. Sirius has exclusive partnerships with Ford, BMW, and DaimlerChrysler. XM is backed by GM and Honda, among others. Porsche intends to offer customers a choice. And of course you can choose between XM or Sirius when retrofitting your current car.

Nobody wants to pay for a receiver that may be useless in a year or two, and it's reasonable to question whether XM and Sirius, both of which have huge financial hurdles to overcome, will be around in five years. My guess: They will be--the spectrum for satellite radio is too precious a resource to go fallow. Cautious consumers might prefer XM, which is about a year ahead of Sirius in both subscribers and technology. However, my fondness for National Public Radio (a Sirius exclusive) and my belief that I shouldn't have to listen to commercials if I'm paying for a radio subscription make me inclined to go with the upstart. But, as they say, your mileage may vary.

For more tech advice, see Peter Lewis's weblog at www.fortune.com/ontech.