DISH Network Corp (DISH) 2001 Q1 法說會逐字稿

Good morning. My name is Lee, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question and answer period. If you would like to ask a question during this time, simply press the number '1' on your telephone keypad and questions will be taken in the order that they are received. If you would like to withdraw your question, press the pound key. Thank you Mr. McDonnell, you may begin your conference.

Thank you and good morning. Thanks for joining us. My name is Michael McDonnell, and I am the Chief Financial Officer here at EchoStar. I am joined today by Charlie Ergen, our Chairman and CEO; David Moskowitz, our Senior Vice President and General Counsel; and Jason Kiser, our Treasurer. I'm going to give you a quick recap of the financial performance for the quarter, then I'll turn it over to Charlie for his comments, then we'll open it up for some Q&A at the end. But before we start, as most of you know, we need to do our safe harbor disclosures, so for that I'll turn it over to David Moskowitz.

Good morning everyone, and thanks for joining us. As you know, we invite media to participate in a listen-only mode on the conference call. We ask also that when you write your reports you not identify participants and their questions. As you also know, we forbid taping of either this call or transcribing of it, as well as taping or transcribing, of the web cast replays. Now the statement under Securities Act, all statements contained in this conference call, as well as statements in our Q and in press releases and other old statements that are made by us, officers, directors, and employees acting on our behalf but are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Those statements involve known and unknown risks, uncertainties, and other factors that could cause our actual results to be materially different from historical results or from any future results expressed or implied by those forward-looking statements. Some of the factors that could cause our actual results to differ materially are a total or partial loss of one or more satellites due to operational failure, space debris, or otherwise; delay in the construction or launch of our seventh, eighth, or ninth satellite; unsuccessful deployment of those satellites; inability to settle outstanding claims with insurers; a decrease in sales of digital equipment and related services to domestic or international, direct or home service providers; a decrease in dish network subscriber growth; an increase in sub turnover; an increase in the sub acquisition costs; an inability to obtain certain retransmission consents; our inability to retain necessary authorizations from the SEC; inability to obtain patent licenses from holders of intellectual property or to redesign our products to avoid patent infringement; increases in competition from cable as a result of digital cable or otherwise; direct broadcast satellite, other satellite system operators, and other providers of subscription television services; the introduction of new technologies and competitors into the subscription television business; a change in the regulations governing the subscription television service industry; the outcome of any litigation in which we're involved; general business and economic conditions; and other risk factors described from time to time in our reports and statements filed with the SEC or in our oral statements to you. In addition to the statements that explicitly describe those risks and uncertainties, you're urged to consider statements that include terms like believe, belief, expect, plan, anticipate, and tend and the like to be uncertain and forward-looking. All cautionary statements that we make should be read as applicable to all forward-looking statements wherever they appear. With that out of the way, I'll turn it back over to Mike for a summary of the quarter.

Thank you David. Let's take a look at the quarter, and we'll start with the total company. Revenue for the first quarter was 862 million, an increase of 7% over last quarter and an increase of 52% over the first quarter of 2000. Subscriber additions and increased revenue per subscriber were the drivers of this revenue increase. Pre-marketing cash flow was 351 million, which was an overall increase of 16% over last quarter and an increase of 89% over the first quarter of 2000. Pre-marketing cash flow was over 40% of total revenue this quarter, which is up from 38% last quarter. This increase is a result of greater operational efficiencies. During the quarter, we achieved positive EBITDA of $51 million compared to a loss of 42 million last quarter and a loss of 88 million during the first quarter of 2000. The achievement of positive EBITDA is a very significant milestone for our company and is the result of the establishment of a subscriber base, which generates recurring revenue which is substantial enough to support the cost of both new and existing subscribers. We continue to expect positive EBITDA for the full year ended December 31, 2001. Our net loss attributable to common shareholders, exclusive of nonrecurring charges of approximately 92 million which were recorded during the quarter to reflect estimated losses on strategic investments, was approximately 75 million or ¢16 per share. Total net loss attributable to common shareholders, inclusive of these nonrecurring charges, was approximately 167 million or ¢35 per share. Now let's look at results for the DISH Network. Subscription TV revenues were 794 million, an increase of 14% over last quarter and 67% over the first quarter of 2000. This increase was driven by subscriber gains, higher revenue per subscriber. We continued to experience significant subscriber growth as we added 460,000 net new customers during the quarter, exceeding the 455,000 net new customers who were added during the first quarter of last year. This figure represents 57.5% of net PBS additions for the quarter. We do expect a one-time increase in subscriber churn during the second quarter of 2001 due in part to our first ever price increase in our basic package, since it went into effect on February 1, 2001. Notwithstanding this potential increase in churn during the second quarter, we continue to expect to be able to manage churn below industry averages during the remainder of 2001 and continue to estimate between 1.5 and 2 million net additions for the year assuming that the US economy continues to grow at a slow pace. Revenue for sub was approximately $48 ¢23 a month during the first quarter. This represented a $1 ¢76 increase in ARPU last quarter and a $4 ¢38 increase over the first quarter of 2000. More AT150 subscribers as a percentage of total subscribers increased Digital Home Plan penetration and price increases on certain of our programming packages, which took effect February 1st, increased ARPU. The exploration of our free premium programming promotion on January 31 also contributed to the ARPU increase. During the first quarter, subscriber acquisition costs, exclusive of amounts capitalized under a Digital Home Plan, were $432 per sub. Turning to the balance sheet, at the end of the quarter, we had approximately 4 billion of debt, which includes 1 billion of convertible securities. On a straight debt per subscriber basis, we ended the quarter at roughly $705 per subscriber. On a net basis, debt per subscriber at the end of the quarter approximated $479, and if you then convert conversion of our convertibles it was approximately $304. Cash capital expenditures in the quarter were 149 million with about 72 million of that amount going toward the construction of new satellites and 63 million for leased equipment under our Digital Home Plan. And finally, we ended the quarter with cash and marketable securities of approximately 1.4 billion including 78 million of cash reserved for satellite insurance. That's everything on the numbers, so with that, let me turn it over to Charlie for his comments.

Thanks Mike. And I have a lot of comments, as in, I think we executed in the first quarter in the way we wanted to, for the most part, particularly in our key variables in terms of pre-market cash flow and maintaining SAC at a lower than industry average churn and lower than industry average, but at the same time increasing our ARPU. The only thing that we could do better was if I get a better CEO on strategic investments where I think we wanted to be very conservative and write-down those investments to realistic levels based on what the stock market has done. Realizing that the market maybe overreacting, we believe that some of the investments that we have, but nonetheless we want to have a very clean balance sheet, and so we really had about $92 million of write-downs there that really are my fault in terms of not being smarter in how we invest. So other than that, I think the rest of our team pretty much hitting on all cylinders, and we did have the benefit of an economy that wasn't quite as bad as maybe people thought. We did have positive GNP growth and, of course, that obviously, we know that we are not recession-proof, we know we're recession-resistant, but we know that any kind of slowing economy will have an affect on us. So the economy, while we started seeing it slow last August, it slowed down from the pace, but it hasn't gone into a negative growth at this point. So that certainly helps us as we move out. I think we're excited about the rest of the year in the sense that we have some new products, our 501 with PVR rolling out now, new products later in the year that we think will help us, but we continue to have competitive pressures. Certainly cable is more competitive now, once the values have increased for satellite dishes across the country. Certainly our competition in DBS business has become more aggressive in the second quarter with lot more advertising. So certainly, we have our work cut out for us to maintain our lead in DBS in terms of new growth, but again, that's where the focus of our company as. We do expect churn to increase in the second quarter, primarily because of our price increase, which we know has some impact, and the reason it'll have a little bit more impact, we think in the second quarter the normal as we have our first time price increase ever on our most basic package, it went from 1999 to 2199, and again, because that increase, actually the increase was, actually 7 point increases in margin. It started happening in the February bills, but those people would become susceptible to churn in your April-May time frame because their bill is not due until March, so they don't pay in March. They ultimately get churned off in April, some in May, and maybe even a few in June. So we think that'll have some impact on us. There're, of course, other things that could have impact, the primary one being the economy, depending on what it does in the second quarter or so, and we have not any indications by the way the economy initially is picking up, the more stock markets come back a little bit, we haven't necessarily seen that in our marketplace, and so we're very cautious about the second quarter. Stock market usually predates the economy by about 6 months, so even the second and third quarters could be, we would somewhat cautious about it. I think other people are a bit more optimistic about the third quarter, but I don't think that we're getting optimistic yet until we start seeing more signs of the economy is in fact rebounding. So with that, I think we'll take questions.

Our first question comes from William Kidd.

Congratulations on the growth results. Charlie I was wondering if you could just provide some of the details about how you beat the streets, and how you just produce such great results in the quarter? Was it the promotions? Was it the distribution channel? If you could just give us a little bit more color.

I don't think, again, we don't focus on the street. I think we focus internally on what we think is our ability to execute on our, and one quarter doesn't make a company and one quarter doesn't make the year. Things can. . . I try not to get too excited when things go right, and I try not to get too overexcited when things don't go right, when some of the wheels fall off. So we try to maintain a balance there. I think we did what we, we probably did a little better than we thought we were going to do. I think some of that was some momentum, I think we had in the fourth quarter that carried over. I think the economy didn't go negative on us, and I think we stayed focused on our business, but I think those of you that came out and met with us in February or March, I don't think we did anything different than what we talked about. Our plans offered and we set ambitious goals, we don't always hit them. In this particular case, we hit most of those goals in the first quarter.

Can you give a little bit more color in terms of how is Digital Dynamite continuing to play a role in the growth, and was it of the same levels as the prior quarter? And on the same lines, in terms of recovering the equipment, ones the Digital Dynamite distributor returns, can you give me some insight as to how that equipment is recovered?

Okay. I guess the best way to do it, hold the numbers, maybe Michel knows what's up ahead. The Digital Home, now it's called Digital Home Plan, by the way, instead of Digital Dynamite. You can look at that much, the amount we capitalize each quarter to see the growth and that would be the best way to do it. I know it was 63 million this quarter, might be a little less in the fourth quarter. We'll look at that number. That's the best way to track that. It continues to be, but it's certainly a minority of our business, but it certainly is a material part of our business. We think it's a smart way to do it. Today you can walk into a Blockbuster and buy a complete satellite system for $49 with no credit card commitment, no annual commitment, and you're buying a $21 package. On our Digital Home Plan, you've got to give us a credit card or one year commitment, minimum price is about $35 a month, and we own the equipment if you churn. We think we're getting a better classic customer. We think that's a better model. We think that ultimately it's a lower churn. As Digital Dynamite has grown in popularity, I think obviously you'll see our competition respond to that for reasons that's competitive perhaps, and also because I think it makes more sense from an economic point of view, but we have our hands full. We have not executed probably as well as I'd like in terms of getting back all the equipment and hitting on all cylinders. I would say, from an operational point of view, Digital Home Plan, we still have some risk that we need to execute. We know the business plan makes sense. I think the execution risk, there's still some there. The way we do that is though from a balance sheet perspective and, maybe might Michael you want to jump in here, we take the percentage of boxes that we get back, and that's what we capitalize if the percentage that we don't think we're going to get back or whatever our historic run rate is, we are strengthening our reserving those boxes so you won't see a, we don't think that there is a risk today that you're going to see some kind of hit to our balance sheet because of Digital Dynamite. We're being very, very conservative there, but I would say that I will have to give us a C- in terms of execution on Digital Home Plan today, and part of that's because of it's new presence. It's a very difficult project for us, and that's pretty good. We started to added it up last year, so now we're up to a C- on it, but I think that strategically it's the right thing to do. For example, I think you've compared us with cable. They've probably got billions and billions and billions of dollars in analog boxes on their balance sheets, then taking the reserves or write-offs for those, they go in for digital cable, and they take those boxes out. What do they with them? They've got to write them off at some point. Additionally, the digital boxes that are put in people's homes today are first generation kind of digital boxes. They don't have hard drives or inner activity or some of the things we think are going to be important, and they get significant risk even with their digital boxes on their balance sheet. So I think we have a clean balance sheet. We're putting in our most state-of-the-art equipment now in Digital Home Plan and with our new 301 and 501. We're reserving or expensing the percentage that we don't think we're going to get back. Some day, I mean I think the key is you got to, you want the same numbers I want as the CEO, and we don't want to floor sales and how we're doing some, so, and that's a longwinded answer.

The amount that we capitalized during the fourth quarter, just to add to everything Charlie said, was 39 million.

And could you clarify, I didn't think that BellSouth was a big contributor, and not going so low yet, but can you clarify whether or not BellSouth or Superstar conversions or any type of more kind of external type growth factors played a role in the result?

I would say there was some minor positive from, I would say that the Superstar or C-Band conversion was price consistent. BellSouth was an incremental, and that was certainly a minor positive that probably not a recurring second quarter positive for us, when we get most of BellSouth done. There's still some we're doing, but we got most of it done in the first quarter, so that's probably a minor positive. I don't know if there was anything else that was materially different. There was probably some carryover. We didn't get into backlogs and that kind of stuff because we've always got a backlog as a company, but there was, I think there was some truth to the fact that there were some weather related issues in the fourth quarter of last year. With EchoStar, we get a shovel, our guys get shovels and get up on the roof, and we still put it in, but they probably only say they can only put in 1 a day, instead of 2 a day in that kind of environment, so we probably had some, some slight carryover from that as well.

Thank you so much.

Your next question comes from Rob Kaimowitz.

Hi, this is Matt Karnes on Rob's behalf. A quick question for you, out of the 63 million that you spent under the lease program, how much of that is, I guess, sitting in a warehouse as inventory and how much would be deployed out to the consumer?

A 100% of it would be in the consumer' home of that 63 million today.

Okay, so there's no. . .

. . . and the customer is paying for it, and the customer has a minimum of a one year commitment to us with a credit card, backed by a credit card.

Okay.

So if that customer were to turn on us, we have the ability, assuming there is no fraud and there is credit on that guy's credit card, to charge this credit card, and we have the ability to go in and get the equipment back. The customer has an incentive to send his equipment back and not be charged for it.

Okay. And do you have like an approximation in terms of the penetration of the Digital Plan?

No, it's not, it's a minority of our business, and you can see the growth on the capital items.

Assuming that 100% is moved into the home, in any particular quarter. So what you're saying. . .

What's that?

We only capitalize it when it's moved into. . .

Oh, we only capitalize it when we move it into the home, and if the customer purchases the equipment on a purchase basis which is the standard DBS model, we just expense everything, so it's not on our books at all.

Okay, so when. . .

So the Digital Home Plan, you'd have to look at, you could figure out generally what our gross subscribers were. I don't know what they were, but the 460,000 net subscribers, the minority of those customers, are Digital Home Plan customers.

Okay.

Okay

Alright, thank you very much.

We are, just to finish up on that, occasionally we do get some inventory back, and again, that becomes less of a SAC cost when we deploy that, because we've already grabbed some expenses on equipment. Now we've got to redeploy it again. That's the advantage of Digital Home Plan, is that we don't get SAC in time, and if it's a Dig customer, we don't get SAC multiple times. On the same, for every new customer, there's not always the SAC cost associated with a new customer other than installation. Okay sorry.

Your next question comes from Vijay Jayant. Sir he has just withdrawn his question. Your next question is from Armand Musey.

Congratulations guys on a really fantastic quarter.

Armand, how's the golf lessons?

I may have to take you up on the offer. Could you give us a little breakout on the ARPU? You had a nice increase this quarter, and you're looking for a great increase over the balance of the year. Do you see that coming from incremental subscribers? Or how much of that is coming from incremental subscribers coming into the higher level? How much of that is from price increases? How much of it is from existing subscribers appearing? Could you give us some kind of color on that?

Yeah, ARPU growth is about $1.75, something less than $1 would have been from the price increase. The price increase went into effect, really was from the March bill, so we didn't get a full quarter of the price increase. Some was when the premium exploration realized that we probably, that we were giving away free premiums, that we were, once those customers went to paying customers, they obviously got kicked in, that was probably another ¢30 or ¢40 at least in terms of ARPU growth, as that rolls off, and there is still a little bit more of that to roll off as well, and as I'd understated, as we said in our third and fourth quarter conference call, that was understating ARPU last year, and then we had some normal growth, where because most of our incentives and particularly where we paid higher stock, you are required to buy more programming from us, obviously we have some normal growth. And that primarily comes from new customers as opposed to old customers that are upgraded. So I would expect that, again, we've said that we expect to get to $50 by December. I do expect some increased ARPU in the, I think, the majority of our increased ARPU is going to come in the second quarter, and then it will, in the first and second quarter, there is still some in the second quarter from the premium exploration and the price increase, and then you're down to normal growth in the third and the fourth quarter. So you'll have a better feel from where we are, our ARPU-wise. But I think we were pleased with the ARPU growth in the first quarter.

Do you have just data on what the typical new subscribers coming in versus your existing subscriber, or just versus your overall average?

Generally just close the entire, it's generally higher. I think what you're seeing is that the DBS guys are going to narrow. I think you're seeing the other guys stay in that. Even with price increases, their ARPU has stayed in the fairly narrow range for about 4 years, and ours has steadily gone up several bucks a year. And I think what you're seeing is customers are pretty much the same. They're willing to spend 'x' amount of dollars for video. We are still going to have that discrepancy with the other DBS providers, where they have, at least for the next year or two anyway, where they have the professional sports leagues, and they get several dollars of ARPU that we don't get, although it is not profitable, not directly profitable ARPU for them. So when you start looking at our ARPU versus their ARPU, you're starting to see that the general net margins or net gross dollars are about the same on our customers. So we're pleased that we've made that progress, because we have a long way to go. We started out with only one sat license. I think we had about 50 channels, and we're charging $19 for programming. So our ARPU initially was $19. In our first, I remember when we were stacked at $27 ARPU one quarter. So I think we're continuing to make progress. I think that ultimately the DBS guys, all things being equal, if you take the sports out of there and you take any price differences out there, we're a little bit less expensive, generally, in our packages, that we're about the same, we are going to be about the same on ARPU. All your models, you run that ARPU out there at higher than ours in the future years. I think that's a mistake. I think you've got to get those, I think the ARPU, and I've seen models where the mark, where people show their ARPU, maybe $10 higher in their margin, exactly the same as our margin. That's just not the case out there. I think our margin is higher on a little bit lower ARPU. Their margin is a little bit lower, because of the sports and higher ARPU, but over time, 3 years from now, you're probably going to see us pretty close.

Okay, so you think you guys still have a couple of years to catch up and then ARPU will flatten out a little bit more?

Yeah, they may always get a dollar or 2 more ARPU because of the price differential or because of the sports, but our margin should be about the same.

Okay, last two questions are much quicker. I noticed just in terms of back of the envelope calculations, it looks like your churn was pretty good during the quarter. Do you have any differences in terms of subscriber retention policies or anything due on those lines that would account for keeping churn in line?

No, I think we haven't, but I think churn is a day-in, day-out problem. I think it really boils down to having a good price value. If the guy churns on you, where is he going to go, and is he going to get a better deal somewhere else? And I think that we can do a better job on churn. I think that it kind of goes in peaks and valleys. You get a little bit lazy when things are going good and then you've got to clamp down on it. It depends a lot on your policies are proper when you get a customer. As an example, that guy pays you $49 and no commitment, I guarantee, you're going to have a higher churn rate in that guy than the guy who gives you a one year commitment or a credit card. Isn't any question about that. So the more you can credit check your customers, the more you can get 2 receivers into their home, the more you can get good customer service to him, all those things are going to minimize your churn. We historically have done a better job than the video industry, but there is no question that's something you've got to watch and there's no something that they can spike up on you on a moment's notice. So we can't fall sleep on that one.

Okay, last question. We understand that you've installed no StarBand systems during the past quarter due to some interference issues. Could you elaborate on what the status of that is?

Okay. . .

And how. . .

We shipped StarBand units in January and February, I think

I'm sorry, none in March?

In March, I don't believe we sold any. There were some installed because retailers still have them in stock, so we didn't not let them install those, but we didn't ship any. We started shipping a week ago, again, the product. We had an interference problem. It really was StarBand had an interference problem with he player and how it was set, in a very small number of instances, and it was primarily because StarBand wasn't keeping the guy on the phone long enough to probation the system, and we take that seriously. As satellite operators, we don't want anybody interfering with our signal, and we certainly don't want the StarBand guys interfering. So, we took a very conservative approach to that and made sure that we got all those traded out and got our people double trained and got StarBand operationally a little bit sounder to take care of that, and we are shipping the product today, and there is a good demand for that.

Okay, fantastic, so you are shipping today?

We are shipping StarBand today. We have been for a week.

Okay, fantastic. Congratulations again, and when you come to New York bring your clubs Charlie.

Yeah. You guys don't want me to play golf, everyone's talking about self-taught.

Your next question is Vijay Jayant.

Hi Charlie, couple of questions. First on, can you comment was there any impact from your direct marketing initiatives that you had started?

There was some impact from direct marketing initiatives. We'll have to take the rifle approach where we might go into a marketplace. There was some impact there. It still is not, I'm still personally disappointed that we're not doing a better job of that, but we certainly had some impact. It just wasn't as efficient an impact as I'd like to see. I think it was the direct rifle approach, there is a formula that should really work well and the key is to find that formula as to what works, and I think that we're kind of around the edges of that today, and I'm still disappointed that we haven't found a real magic formula that works in multiple locations. But there's no question it's the right strategy. There's no question it's more efficient than trying to blanket the entire United States with advertising and hoping that 'x' percent are going to buy your product, because we know, for example, if a cable company raises rates in a particular market, we know that in that particular market we can get more buying for our buck in marketing in the months around that price increase than we would blanketing the whole country. So we know that strategically, we know enough to know it's the right thing to do. We just haven't executed as well as I would have liked there.

In terms of your leased proposition, can you just tell us what proportion of your retail base is offering that right now?

I don't think we give out that, it's a minority of our subscribers, and it went from 39 million capitalized expense to 63 million, and you could figure out what our stock is, and how many subs we have, and you can probably walk into some kind of, close on some kind of percentage there. But it's material, but not anywhere close to the majority of our business, and we hope it grows because we think it's the right thing to do, but there's still an awful lot of folks that want to own equipment, and it's a new selling proposition for a lot of our retailers, and it does require credit card and a commitment, so the customer is harder to get. It's a harder sale from that perspective, so we'd like to see it be half of our business. It's not there yet.

Has there been an increase on EchoStar's books in terms of capability for fulfillment for your direct channels and is that some number in your mind that you want to get up to?

I think I understood the question. Has there has been an increase in direct capabilities of sales for retailers?

Yeah, I mean for your leased propositions via direct channels.

We don't really blanket that way. We have installation and service companies. Again, we own that company. In the majority of the country, it is our employee and our truck and our uniform that does that. We also have regional service providers who also appear to the customer to be a DISH Network employee not a third party, but they have the same standards we do, and the purpose of that is to service the customer if they have a problem with existing equipment. It is to install for any of our retailers, for example Sears may sell on the floor but not have a retail service installations network, so we do that for them. So a large numbers of our retailers are focused on selling, and we're focused on the installation service side. And also, it helps us retain customers where a dealer may have moved or no longer be in business and nobody is there to take care of the customer. So that's the purpose of it. It serves more purposes than just Digital Home Plan. I would say that we are 3 years into a 5-year plan for that company. It's a very difficult organization to put together and maintain; that's why we want to do it in-house because it's to quick, the same way we want to have our own call center operators as part of our pyramid foundation we talk about a lot and having a solid foundation, and we've made a lot of progress there over the last couple of years. We have a long way to go, but we can essentially do today the entire country, service and installation on any installation, might be a StarBand, a 2 way satellite, might be a satellite system, hopefully some day a DSL kind of connection, we can do those kinds of things, and that's the first step. The next step is doing it more economically. We certainly spend a little bit more than we need to if we were hitting on all cylinders, and that will come with time.

My final question Charlie is any comments on some announcements about the Hughes and Sky Global combination, and investment community I think believes that the best combination with Hughes is probably EchoStar. How do you see this playing out?

Well, I think clearly the announcement that General Motors made that they are getting into a continuing discussion with News Corp certainly puts News Corp in what I would call the driver's seat to maybe get the deal done there. Having said that, obviously for shareholders, the greatest synergy, and therefore probably the greatest value, at least in the value, is some kind of combination between GMH and EchoStar. I can't really comment. So, really nothing's changed since February in all those cases, and certainly, there is different issues between the different companies, but other than that, I really can't comment other than obviously what I read. I read that News Corp and GM are in serious discussions, and we, as a company, we have to manage our company to be prepared for no matter what happens in the market place obviously we keep an eye on what happens with GMH, whether that would be part of another organization or a standalone organization or an organization that we could partner with in some way. So we are actually prepared for any eventuality, and I think that for the most part we are, and I think under most scenarios that we run as hypothetical they would range from positive to highly positive for our company. Most scenarios are probably not so great for cable, and obviously, News Corp is a formidable company, and personally, I love to compete against the best. I want the absolute best competition out there because that will bring us the best in our company, and we'll see how good we are. So I look forward to anything that allows us to compete, whether it be cable or any other company out there.

And just to conclude on that, is EchoStar capable of making an offer that could get accepted?

Well, I guess I would say EchoStar is capable of making an offer. I think that's probably true. I don't know, I think any offer that is acceptable would be up to the GMH shareholders and the GM shareholders. They would have the ultimate say in that. So I can't predict how they would go.

Thanks.

Your next question is from Thomas Eagan.

Great thank you. I have three quick questions. Charlie we know that many of the rural cable operators are having financial difficulty, for example Classic. If you were to estimate, what portion do you think, of your new subs, came from say Classic or maybe even Galaxy.

Not material amount. We do know that obviously we'll target an area where a cable company is having problems, but I don't think in the scheme of things in the first quarter that there was any material change in where our customers were coming from. I think it still continues to be a good rural market, and those kind of cable systems market for us, but the percentage, in terms of raw numbers, but the percentages continue to grow to be more urban customers.

Great, and Charter mentioned yesterday that they won about 12,000 satellite subs from their dish-buyback program in Q1. Could you try to assess what you think of the success of that plan? For example, are they are getting better luck against DIRECTV or do you think that certain cable operators in general are having more success than others? Thanks.

We haven't seen, during the first quarter, we didn't see any impact. We still haven't seen any impact. It comes up occasionally, this year, where it probably didn't at all last year, where we occasionally get a customer who says I went to Digital Cable, and so we know that that's out there. Certainly, we know the cable industry has turned out some satellite dishes, not a lot, but they have done some. We certainly think the majority are coming from DIRECTV primarily because they have more to turn out than we do, since they have 60 something percent of the market. So statistically, and I think probably even a higher percentage in their market share is probably coming from DIRECTV primarily because they have older units out there. If you are an early adopter that had a DIRECTV system back in 1995, it's probably a pretty archaic receiver and Digital Cable may actually be in that particular case a better product. If you got a current generation DIRECTV or DISH Network equipment, I doubt it's very easy to turn them out because the Digital Cable product would be inferior. So it's a factor. The way I look at it is the Charter offer, as odd as it seems, has about $300 or $400 cash or credit on your bill, and to switch off, what happens when that credit's gone? I think they're going to lose the customers. So all they're doing is trying to keep, they're playing a shell game to keep the numbers up for Wall Street. We saw the phone guys do that. We saw the Internet guys do that. You can't make money. I mean you've got to make a return some day. They've got huge investments. They've got huge capital. I can get EBITDA with capital expenditures all day long, alright, and someday you analysts have to look at what the capital expenditure is, what the return is on those capital expenditures, and what people's balance sheets look like, and when you do that, you're going to love satellite versus cable, and some day, I guess, we'll just go into some Charter area, and if I offer $300 or $400 for your cable bill, I'll have 99% of the customers in that city, and we might, I wouldn't want to do 12,000 in the quarter, we'll do 12,000 an hour.

Right, and then lastly. . .

So, I don't know, I might wake up on the wrong side of the bed someday, you never know what will be.

And then lastly, if you could talk a little bit about, maybe with some detail, about what went into say the 467 SAC per subscribers who aren't leasers?

First the SAC, I mean if there is SAC on all customers, you've got a Digital Home Plan. The only thing that we capitalize is the hardware set-top box and dish in the outdoor unit, right. So we're very conservative there, and then, of course, we have a reserve for units we don't get back. I guess, in general, SAC was a little bit lower, maybe, than we even expected. We weren't as aggressive with the advertising. We made a strategic call, but this is a philosophy that could be wrong. As consumer confidence continues to come down, it's not a time when we think that advertising, in general, will be as effective as when consumer confidence is going up. So we don't do a lot of advertising today, except in these selected markets. That may or may not be a mistake, but we think that advertising rates are going to come down too as the economy has softened and a lot of guys haven't quite blanketed in on their advertising rates. So that's another reason that we try to get a little bit of improvement in SAC, and that can hurt you because advertising doesn't necessarily have an impact the day you advertise. It has a long-range effect. So as you cut advertising, you can see that you might lose some momentum in future quarters and that's always a risk for us. So we have to balance that out. But in general, I'm still of the opinion that the economy and the consumer confidence is still dropping enough that advertising today is not as an effective medium for us, as a company, in that we probably should save our money for when consumer confidence starts on the way back up. We haven't seen that yet.

So if you were to compare the SAC for, gross SAC, for the non-leasers in Q1, a 467 versus say Q3 and Q2 last year, what was different about that? What went into the SAC in Q1?

Nothing different in SAC. It's still the installation, the advertising, the hardware, the subsidies on the box, the whole smear. The way I look at it is well here's what I want to know as the CEO, and I think it's what you want to know. I want to know every cost that I have as directly attributable to getting that customer. So our SAC is, first of all cable doesn't have SAC, and if they did it would be a hell of a lot more than ours when you really get all their numbers, on an apples-to-apples basis. Secondly, look at our competitors' SAC. They don't count the subsidies that they have from their manufacturing company in their SAC. We do. We count all that in there. They don't count some of their marketing expense in their SAC. So it's always, we don't know exactly how NRTC is treated in those numbers given that they don't get the lion's share of the income there. But we know that our SAC, apples-to-apples, is always somewhere in the neighborhood of $50-100 less than what always is. If we didn't count our subsidies to our set-tops, to our own sales, we pick up from our own market expense our SAC would be another $50-100 lower than what we report. So again, we just do it. Some day we'll get rewarded for that, right. It's just because I want to know, if you let your people play games with their numbers, then they'll play games with everything else. So it's just not an issue you want to get into. And there are lots of people playing games. They clearly state how they, other people clearly state how they evaluate SAC, and cable never got into the SAC game. It's probably, never got into that game. The other thing you've got to look at SAC is you've got to look at SAC versus churn. If you've got higher churn, then your SAC is obviously higher, so you can figure out your own formula there, but I look at SAC per net sub. I look at what does it cost me to get a net new sub, or what are my costs attributable to do that? Because if my costs are, let's say the evaluation of a sub is $2000, and it's costing more than $2000 to get a net new sub, I'm better off buying treasury bills, and obviously we still think we're in very great shape there. But you can see those trends. I don't believe those trends are good for cable at all, and I think the trends are not as good for others as they are for us.

Great, thank you.

Your next question is from Ty Carmichael.

Thank you, and congratulations on a great quarter. Charlie a question, typically the seasonal patterns of the business have been such that you'll have more subscribers in the second half of the year than you do in the first half of the year. Would that still be your expectation for 2001 given the strong performance in the first quarter?

That will be my expectation if we have a positive economy. The seasonal factors aren't quite as great for us as they are for our competition because they have more consumer electronic stores. My experience has been that we typically do better in the second half of the year than the first half. They typically do a lot better in the second half of the year than the first quarter, as an example, because of their distribution path. I think that the first half of the year would be a pretty good indication of where we end up, and I think that we should do better in the second half than the first half if the economy grows. I'd be thrilled if the economy would grow 2% a quarter. Then I think that we'll hit our targets. I think if the economy were to decline by 2% a quarter, I think we'd have a tough time making our numbers.

Okay. In the past, you've talked about your PVR strategy. It's a key part of where you want to see the company in the future. Just if you can give us a quick update as to what your expectations are for 2001, having now rolled out the offer to the consumers? And then also for perhaps 2002, what percentage of net sub adds, or gross sub adds, would be the 501 type box?

I guess, I'd say our goals are, I kind of make simple goals, our goal is to do more PVR devices this year than anybody else, and our goal is to be the first company to have a million PVR devices. We won't hit a million PVR devices this year. We're being a bit more conservative on our production of the product because we don't know how people are going to adapt to it. We don't really have the marketing. We're just starting some marketing in the marketplace, and our software is still not perfect on the product yet. We're releasing the product because it's good enough, but there are some key software things we have to add to it to make it, in my opinion, a truly competitive product, and that's probably not going to happen until sometime in June. So the real impact of the 501 will be in the third and fourth quarter, as we have the right product for the marketplace at the right time. But there's no question in my mind that there is a whole segment of customers out there who want digital cable, our cable, who are going to love the 501 PVR, and that's going to be a compelling reason for them to switch to Dish Network because cable, in theory, can give you channels, and cable, in theory, can give you a guide now and most of the channels that we give you, but cable is not going to be able to give you the ability to save time, watch movies without tape, pause, rewind, fast forward, and skip commercials.

Okay. And also Charlie on the satellite broadband front, I was hoping perhaps you could maybe give us an update on your strategy on that front given some of the struggles that StarBand has encountered. Does Wild Blue become more important to you where you want to go as a company? Also, have you given any further consideration to developing your own type of platform on that front, or are you more going to take a wait-and-see approach and see how Wild Blue develops?

We still think the right approach with broadband for us is to partner with people who know how to do it, and that includes both, that certainly includes StarBand who is doing today and doing it technically today. It certainly includes Wild Blue who, we believe, has an economic model that will work if they can get the technical issues resolved, but they say that it remains to be seen until you do it, right.

Yeah.

And with StarBand, well they've technically got it correct. Obviously the $69 is not as economical in the marketplace as we'd like them all. So obviously they have economic hurdles to overcome, and they have plans to do that. So we're very supportive of both Wild Blue and StarBand. They do different things. StarBand today has technically achieved the milestones, I believe, that are needed. They have work to do on economics which they have plans to do, and I'm sure they'd be happy to discuss with anybody. Wild Blue has achieved, we believe, the economic model but still has to achieve the technical model, and of course, they have plans to do so. So we believe those two companies are probably the companies that we would work with on a satellite delivery. On a terrestrial basis, we think there may be some wireless folks and some DSL folks that make some sense for us. But we don't see EchoStar as the key provider of capital to do that because no matter what we can't get the kind of returns in those businesses we can in our video business and our active business and advertising business. So with scarce, if we had unlimited capital, I mean, we would probably try to do more there, but with scarce resources in term of capitals, I think we're down to a billion in foreign cash, we want to focus that on our core business.

Okay, thank you very much, and congratulations on a great quarter again.

Your next question is Marc Nabi.

Thanks. Charlie to further along on Ty's question, what do you do with Visionstar then, if you talk about this whole broadband play, it's just another angle way to get into broadband?

Well Visionstar, of course, we still has some SEC applications out there to get control of the company. So that's a question that you probably should ask their folks, but Visionstar as it is today is a one-way, in general, is one-way transmission scheme, so it is not a two-way scheme. So, therefore, it is a, I mean Visionstar is really a store and forward type technology, and we think that makes some sense with some of our products that we've got coming out. We think there's a need for that. We didn't want to duplicate, we don't have necessary plans to duplicate what Wild Blue or StarBand were doing where they've got 2 way satellite. So we think there's a place for all three of those business plans. It doesn't mean everybody will execute, doesn't mean the SEC will ultimately approve our transfer of control, but to the extent that all of that happens, that every body executes, we think you'll see all 3 of those companies.

Okay, and also, I was trying to just to get a, you talked about churn in the second quarter going up, I'm just trying to figure out magnitude. Is it the levels of DIRECTV headset, the 17 level, is it 2% for the second quarter? I mean you've done such a great job and say for the last several quarters of keeping it between 14, and as high as 15, but how high would you anticipate it to go? You've always given a range.

I don't have a range. I think it will be, I think first of all seasonally the second quarter is always higher than the first quarter, so I think if there were no factors external, you'd have a higher churn, and you can kind of look at those percentages and get a historical perspective, and I don't remember what they are off the top of my head, but tenths or 2 higher in the second quarter, and I think that's going to happen. I don't think we're changing anything that's going to make that change, and then I think we've got a one-time hit, which really happens probably in April and May, on the price increase. I just know that a price increase, if you've never done one, for a certain segment in your population, is going to have an impact. Now we may get those customers back a month or two later, right, and they may show up as a net add, but I think we'll lose some there. The only other concern I have early in the second quarter, so you got to leave a couple of tenths of a percent for seasonality and that would be my guess at least, and then you still have the economy that, in Colorado for example, they turned off 13% of the people last month from power because they couldn't pay their power bill, and that's like three times more than ever in like the history of Colorado or something, I don't remember what it was. Well, those people probably aren't paying their satellite bill if any of them are our customers. Now they more than likely bought from Blockbuster for $49. I plan on having all those customers, but to the extent I have those customers and they're worried about their power bills that tripled. I'm going to lose some customers, and that's the factor that just wasn't out there last year. And so I'm paranoid. I don't sleep at night when people's gas bill and utility bill goes up, because I know before they pay me, they're going to pay their heating bill and their gas bill. So I want to be the most important bill other than your mortgage payment, your food, and your electricity, and to do that we got to turn people off, as soon as they don't pay us. We have to have all the methods and win-back teams and stuff to keep our customers, and we've got to get good customers upfront, and that I think you heard DIRECTV talk about it. We have exactly the same problems they do. They put exactly the same kind of things in place that we think are necessary, and I think cable's got the same issue. You don't see it so much in the east, but in the western part of the United States utility bills are skyrocketing, and it's going to affect the customer whose credit card's on till, maybe losing his job, and he can't pay his power bill, different scenarios than we've had over the last 10 years economically.

Just out of curiosity Charlie, of the net adds or of your subscribe base, and if you can give this, what percent are on the east coast versus the west coast?

I don't actually know that, but it skews a little bit higher. Two-thirds of the population is let's say eastern Mississippi and one-thirds western Mississippi. Our bay skews a little higher than one-third west of the Mississippi for two reasons. One is it's more rural area, and two, our look angles are better there. So we would skew a little higher west than the normal population by certainly several percentage points.

Okay, also, DIRECTV had said about 30% of their customers had taken second sets. With your releasing program I would assume, that was one thing we had talked about at Vale that you're trying to get more of your new customers, as well as your existing customers, to go forward and take second or third sets within the house particularly with local channels. Have you seen that phenomenon occur? I mean, what percent of the population of your subscribers are taking second set-top boxes and things of that nature?

We haven't released a percentage, but it's probably not too materially different than what other guys talk about, but yeah, we think second sets are an important part of the business, and we're getting more interested in that now because we have our new 301 product which is the new generation inner activity and all that has to be stopped. So you want that even in your second box as you want to put a good box into the second box. So as a percentage of our Digital Home Plan customers, it is far greater than the percentage that takes two boxes in that particular environment. It's a much, much, it's a majority of the people who take second boxes in that particular plan, which is another reason we like it so much.

Okay, and just one question on customer service. Again, you've done a great job on your customer service cost side, going down, actually the cost per average sub being below $4. Does that sub maintain itself at those levels? I mean, should it pick up? I know you've always been so focused on customer service. What you really see happening?

Well, what you see there is operational efficiency gains because we didn't open a new call center in the last 6 months. So what you'll see there will be an ebb in the flow. When we open up another call center, let's say at the end of this year, maybe the fourth quarter, you'll see, I would imagine the customer service will maintain this kind of efficiency or somewhere in that range unless we have some kind of outages or something that drive calls. But when you start up on a new call center, you go inefficient for about six months in that particular call center, and it'll drive those numbers back up a little bit. So I would say we might see some small improvements until we open up a call center, and then we'd see some lots of efficiency. But the reason you see efficiency here is because I think the last call center we opened, we opened two in the third quarter, and that really hurt our customers. That was going to peak kind of costs and then we've probably improved since then.

Okay.

But, we, I think if you look at it we improved efficiencies relative to the percentage of our business in both G&A and customer service. I mean you've got to. We focused, the economy's a little bit suspect, we decided that we're going to out there and try to focus on efficiencies in our balance sheet. So we are prepared if the country were to go into recession or if the economy were to stay stagnant for several years that we'd be prepared in that environment. And if the economy turns around and starts going great guns again, we're in great shape. We're prepared for it. But, by gosh, if it's a little slower, we're prepared for that too, with a billion in foreign cash and a lot of efficiencies in our business, still a lot to go, but we're closing in on 6 million customers who are paying us almost 50 bucks a month. We're in fair control of our own destiny.

Great, and one last thing, just, a lot of press has been on this MITRE study, Northpoint. Could you just talk a little about that, as far as your view? I mean, they said, I guess, that while it could interfere, there are ways around this interference.

Well, I've kind of bit my tongue on Northpoint for a long time because while we look at it technically and all the experience I have in 20 years, we were pretty confident it wasn't going to interfere, notwithstanding the hype that they were changing the law of physics, which I didn't think was true, but I wanted to wait till an independent agency came out with a report, and they have come out with a report, and it clearly states there is significant interference from a Northpoint terrestrial-type plan to DVS, and they didn't even test. I don't think that 148-degree location, a 175-degree location, some of the other locations, that may have come into play over time. So it's only going to get worse, other than that study, so it's clear that an independent agency has said there is significant interference. They did go onto say that there are some remedies, but the remedies aren't practical. The remedies are making higher towers for Northpoint, which they'll never get zoning for. They'll have zoning problems that will reduce their power, which means they're not as efficient, they don't transmit very far, or you can move the satellite dish. So I can't imaging going to customers and saying, okay, the FCC just approved some terrestrial guides and we're going to have to move your dish from the back of the house to the front of the house. I wouldn't want to be on the FCC on the end of those customers' call. I think it is clear that if Northpoint hadn't been politically connected, if Northpoint hadn't deployed all the campaign contributions, all of them have done a great job in Washington, they've done a great job as trying to portray themselves as little guys with a new idea, but the fact of the matter is that the study is in, and these guys interfere, and I don't believe that there's any possible licensing that can be done for them or any kind of possible arching of their spectrum given those results, and I'm not saying they interfere. An independent agency is saying they interfere. So Northpoint has their own spin, but their spin obviously is that you've got to change dishes and change tower heights and change power levels and they have a magic physics thing that works well. MITRE studied the Northpoint transmitter, so the magic does not work. That was pretty much out there in a bad way. We will be active. We kept our mouth shut because we wanted to be sure. We're sure now. We'll be active on that front.

Thanks very much.

Your next question comes from Robert Peck.

Yeah, hi, most of my questions actually have been already asked, but I just have a couple of quick ones here. First of all on Echo 6, we understand from the Q, I guess, there's been some anomalies there. Could you talk about those anomalies and is it currently covered right now? I know the insurance goes through July this year, but if there is a failure in August, does that cover some of the anomalies that have already have shown? How does that exactly work?

Okay, I'm going to let David answer the back part of that, but we did have a tube that turned off that we weren't able to restart, and we kicked in the backup, and the backup's working, so there is no loss of any service out of EchoStar 6. That happens occasionally from time to time. The additional factor is we think that also potentially is one of our thrusters has sprung leak, and you never know for sure, but there might have been one of those small little piece of sand-type meteors that hit the satellite and then caused a static discharge and then all the transponders got tripped off, by the way. They just all restarted, except one, and maybe that led to a thruster, I think, I maybe wrong, but there is something like 12 thrusters or something. We've turned that one off. We have spare thrusters. That's not a factor in the station keeping the satellite. So at this point, if all that holds true, there's probably not anything to file an insurance claim on, because there is no loss of anything. Our insurance runs out in July, or whenever it runs out, to the extent that we don't bind insurance in August, and to the extent that we had an event, unrelated though to the last event happened, then we wouldn't be covered. If we had an event that was related, if the thruster that's turned off now related to some kind of problem in August, I think we'd still be covered because it would be an event that we disclosed to the insurance company that caused future problems. Having said that, we don't anticipate that the thruster or the transponder turned off is going to be, today, is a problem, and again, I'll say it again, the real way to insure ourselves is to always have an extra satellite up there, and god willing, we're going to have 2 extra satellites up there in 9 months. So that's the only way to protect ourselves from closing down 6 million subscribers. We think that's a prudent use of our resources, but at this point, the only satellite I would say that we watch and have concerns about is EchoStar 4, which, obviously, we have an insurance claim on it and is only operated under half capacity.

Great, okay, and actually one more question. Going back to some of the stuff Vijay was asking about, we've all been following News Corp and DIRECTV and what's going on there. How about the other angle in Pegasus? There's been a lot of questions out there. Could EchoStar come in here and make a move on Pegasus? You've mentioned in the past you'll consider strategic assets. Does that appeal to you? Is it even possible? What are some of your general thoughts there on an EchoStar Pegasus type of merger?

I think they have interesting assets. I think there's, I don't know what their relationship is with NRTC or DIRECTV, so it's a bit of a question as of now.

Okay great, one last question here is actually on must-carry. Could you talk a little bit about how many local markets are you in right now? And at the end of the year, are you with spot-beam satellite getting up there? How many could you expand to? And if for some reason the spot-beam satellite did go up successfully, how many would you have to scale back to?

Okay, we're in 35 markets today. We opened our 36th market on May 18th in Birmingham, Alabama. The number of markets that we can go to, the different scenarios are, the worst case scenario is that both our spot-beam satellite have failed and full must-carry is upheld by the courts. In that particular situation, we would take down some cities. They would obviously be cities that would do two things, one is cities we don't have a lot of subscribers in, and two, cities that have a lot of must-carry, cities or channels. So we would have to take down some, I don't if there would be a lot, but we'd take down some, and the ones we take down would probably ones that aren't that economical for us today. In fact, we might save a little bit of money, who knows. The next case scenario is that full must-carry is upheld. One of our satellites gives up, then I think we're comfortable with the 36 cities that we have, then nothing comes down. If we give both spot-beam satellites up we probably, and full must-carry is upheld, we may be able to increase, under certain circumstances, to as many as 50 cities, but that depends on how many stations are allied to must-carry. They have until July 1st to do so, we don't know that number yet, and of course, the best case scenario is that must-carry is struck down by the courts, both of our spot-beam satellites get up there, and we can grow higher than 50 cities by a fair number. And again, that would depend on getting retransmissions sent and so forth. So we're pretty prepared for every scenario out there. We're not betting the whole company on one launch, and we're still on track for a fourth quarter launch of our first one. So we hope to be ready for must-carry, and having said that, we think there's a fair chance of overturning the law. It seems to be unconstitutional to us, and when we look at it, there seems to be a lot of, the balance of the argument seems to be more heavily weighted in our favor, and while you never can predict with certainty the outcome of a trial, we think we've got a good shot there.

Great. Thanks Charlie. Great quarter.

Our next question comes from Robert [_______________].

Yeah, just a couple of remaining questions. What are the near-term and longer-term sales prospects of the third parties from the EchoStar Technologies Group? Do you have any comments or any inputs to share with us on that Charlie?

Yeah, I think it's a good, first of, I guess I should have mentioned this. I think we're probably a little disappointed in our technology group in terms of total sales. Some of that was that they shipped out everything they had in December, and they didn't ship much out in January as a result of that. So there was a little bit of timing issue on that, but I would say that you're not going to see much growth in the technology group for at least the first three quarters because we only have two other customers besides EchoStar, and their focus clearly is on getting the 501 and a new 721 for us done. So I don't let them focus on somebody else's stuff, even though it would be good business for us. Having said that, I think that we really are going to be the first company in with the right products at the right time with our 721 models. Some of you've seen that, how they came out. That product is already being ordered by Bell Canada. I think that's going to be a fourth quarter phenomenon. I think that other people will order that product as well, and I think that product has the potential to be a bigger product than the other products that we've sold in the past, and so while I think this year we probably won't achieve the same level of success and ETC externally as last year, it looks like we've got some great products that in 2002 we should be able to take the benefit of. There is no question that ETC is a standalone company. It's [_______________] Atlantic or Motorola. I mean it's making a lot of digital set-top boxes. It's just that 90 something percent of them are going to DISH Network at no profit. Alright, so you guys really have a hard time valuing that company, but trust me, there's an awful lot of people in the world that want digital set-top boxes who'd like to own that company.

As a related and final question, do you foresee the possibility of adding on some new customers besides the first two?

Yes. I think that the 721 product is really a kind of a first stab at a home gateway product and adds customers who are in the data business who want to combine with the video business. So I think it opens a lot of strategic opportunity for us. And I think that we'll have, Bell Canada is our first customer, DISH Network is a customer of that product, and I think you'll see more of those announcements over the summer.

Great. Good quarter. Thank you very much.

Next question comes from Adam Simon.

Thanks a lot. Couple of things, one, I think you implied this Charlie on one of your previous answers, but with the new 301s rolling out, if I'm a Digital Home sub taking two boxes, am I going to get two 301s or is the second box going to be a more basic version of one of the older models?

Starting June 1st, you'll get two 301s. Today you may or may not get two 301s, but starting June 1st, you'll get two 301s.

Alright. Now from an. . .

. . . which we think really simplifies things. I mean that's one of the operational mistakes that I think we probably made early on as we entered two different models. They operate a little bit different, causes some problems.

For new equipment now though, you would assume that the incremental capex per sub would be a little higher to the extent previously the second box maybe was a little less expensive?

Yes. The capex is a little higher because 301 is a little bit more expensive as it has more memory, more interactivity, and so forth. Having said, we think it's reduction in churn, happier customer, and future revenue from the interactive services that we hopefully will get out at some point. We're not confident that there is any ARPU numbers in interactivity this year. It's certainly been, we've talked about it for a couple of years. We're very cautious on when it becomes a reality in terms of extra revenue force. We think that's a 2002 event. We have nothing really in our budget this year for significant revenue there, and so we're not hyping it at this point, but we want to be prepared for it.

Okay. Yeah, I know you haven't put out numbers here for the percent, but let me take a stab here. Assuming about $230-240 of capex per sub, I'm coming up with about 35-40% of your gross adds actually taking your Digital Home Plan. I mean this looks like a great product that's really driving sub growth. Any comments on that as far as those numbers? I understand you're not officially going to give an exact number, but am I in the ballpark with that?

That's a good try. I don't know, what make of calculator do you have?

I've got a 12C.

That's not the brand I buy.

Okay. Last question on GM and Hughes, the one thing that people point to precluding an EchoStar-Hughes merger is regulatory concerns. I was wondering if we could get your thoughts on that, and if there were any concessions that you might have to make, what might those be? Thanks.

Well, I think regulatory, first of all, no one can predict regulatory. I don't think you're going to go to, certainly the justice department, they don't tell you what they're going to do because they analyze things, and I think combining one DBS company is a bit counterintuitive on the surface because it's combining two companies, but the key question the justice department would ask and the SEC and Congress and everybody else would be, when you look at the total picture, is the consumer better off and is there more competition. And I think if you analyze that with knowledge and with facts that you could come to a conclusion that in fact something of that with the synergies that are involved, the sharing of bandwidth, the competition in rural America, you certainly have some issues you have to address or certainly some things you'd have to talk to the government about, but I think you can come to a conclusion that's probably something that ultimately would pass muster in this environment. But that's a decision other people have to make. That's a risk the shareholders take. That's also a risk we would have to take as a company. And so you'd have to be pretty confident. That's not something you take a 50-50 shot on. That's not something you're going to take a shot on, it's the preponderance of evidence, and the preponderance of facts is in your favor. So I think there is still some research being done on that, but I think that that's the only logical stumbling block, in my opinion.

Alright. Thanks a lot.

We have time for one more question if there is one out there.

Thanks.

This is the last one.

Question is from David Allen.

Quick question on your programming costs. I saw that ESPN raised rates on some of the small cable operators by about 20%. Any comments on your deal with ESPN and some general programming comments?

ESPN also is raising our rate a like percentage. I believe that rate increase comes in the third quarter. So it obviously doesn't affect the first quarter. It won't affect the second quarter. I think that programming rates in general are going up. We've achieved a level of, kind of, big five status now. So you're not in a situation where we're looking at future discounts. I think on average we can look for price increases from programmers going forward, and I think that as a company, and all of us face this in the video business, I think we all will be looking at the possibility that you have to have annual increases in your rates, because your costs are going up or you've got to drop services, and we're looking at both of those. We're seeing there certainly are channels that our contracts run out that have rate increases that people want, we just dropped the service. And if it's the service that, we ask our customers all the time, do you want a rate increase or do you want to not be able to see the fly-fishing channel, and lot of times people say, no we'd rather have our rates stay the same or not go up as much. So we have to balance that. I think you'll see different strategies out there. You may see some companies that want to have every single program, but they're very expensive. You'll see some people have to drop some channels. I wouldn't be surprised to see some fairly well known channels that had to be dropped if their prices get too high. So the good news is we can chart our own destiny a little bit better than most because we talk to our customers, we communicate with our customers, and we're ubiquitous, and so we have some advantages in that. Now I have had some experience in dropping channels, and it's a good experience to have because we know a bit, we know a bit more on how to do that or not do that and so forth, but. . .

Can you ever imagine a time where you would have something like ESPN will be an A La Carte service?

No, I don't think that, in ESPN's defense, I think that to be an A La Carte service, their rate would have to be so high. Add some legislation to this because they get half the revenue from advertising.

Right.

. . . that they'd lose out their advertising revenue. That means their rate would have to be so high and probably you might only get 15% of the people to buy it A La Carte. That it's probably not the right business model for us or them. ESPN has been a good partner for us. They were one of the first people to sign up with us. We have a lot of loyalty to ESPN. There are other folks that wouldn't even give us their programming early on, so, and they're raising everybody's rates. So they're not singling us out. I think where you run into problems is where our rates are, I mean, we are in the top five MSO kind of companies now. We ought to be treated like that, and to an extent we are, we're not going to have any problem with programmers to the extent that they want to go back to the old models of charging DBS, because the company's more money, they won't have some problems, but we won't anticipate any problems at this point. I mean, I think we have a good relationship with our programming partners, and from time to time, there is going to be some scuffles, but smart people, rational business people figure it out.

Okay, thank you.

Alright, thanks. Any comments anybody else?

No.

I think we'd like to conclude at this time operator.

Thanks to everybody for joining us. We appreciate your continued participation.