DISH Network Corp (DISH) 2001 Q3 法說會逐字稿

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Good morning. My name is Michael and I will be your conference facilitator today. I would like to welcome everyone to the Echostar Communications quarter three earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press the number 1 on your telephone keypad, questions will be taken in the order they are received. If you would like to withdraw your question, please press the pound key. I will now turn the call over to Mr. Jason Kiser.

Thanks for joining us. Actually Mike, I think that you are going to lead after.

Yes, I will. Thank you everyone for joining us. This is Michael McDonnell, the Chief Financial Officer here at Echostar. On the call today we have Charlie Ergen, our Chairman and CEO, David Moskowitz our Senior Vice President and General Counsel and of course Jason Kiser, our Treasurer. I am going to give you a quick recap of the financial performance for the quarter, then I will turn it over to Charlie for his comments, and then we will open it up for some Q&A at the end. But before we get started, as most of you would know, we need to do our safe harbor disclosures. So for that I will turn it over to David.

Good morning to everyone and thanks for joining us. As most of you know, we do invite media and investors to participate in a listen-only mode on the conference call. However, with respect to media, we do ask that you not identify participants and the firms in any reports that you do. We also require that there be no audio taping of this call. All statements in the call, and in our 10Q, as well as statements made in the press releases and oral statements that may be made by us or our officers, directors, employees, or others acting on behalf that 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 statements. Factors that could cause actual results to differ materially are a total or partial loss of satellites, delays in construction of any of our satellites, unsuccessful deployment of satellites, inability to settle our outstanding insurance claims, a decrease in sales of digital equipment or related services to International Direct-to-Home providers, decrease in DISH network subscription growth, increases in subscriber turnover, and increase in subscriber acquisition cost, inability to obtain retransmission consents, inability to retain necessary authorizations from the FCC, patent issues, our increased increases in competition from cable, DBS, or other satellite operators, future acquisitions, combinations, strategic partnerships and divestitures, the introduction of new technology in competitors, changes in regulations, the outcome of any litigation that we are involved in, general business and economic conditions, and other factors described from time to time in reports that we file with the SEC. In addition to statements that exclusively describe those risks and uncertainties, you are urged to consider statements that include terms like believes, belief, expect, plan, anticipate, intangible, and the like to be uncertain and forward-looking. All cautionary statements that we make should be read as a being applicable to all forward-looking statements wherever they appear. In this connection, investor should consider the risks described by us in this call and in our written reports filed with the SEC and should not place undue reliance on any forward looking-statements. With that out of the way, I will turn it over to Mike for summary of the quarter.

Thanks David. Lets take a look at the third quarter, and we will start with the total company. Total revenues were over $1 billion, an increase of 6% over last quarter and 46% better than the same period a year ago. Continued subscriber growth was the key driver behind the increase. This is the first time that quarterly revenue has exceeded $1 billion and we view this is as a very significant accomplishment by our company. Pre-marketing cash flow was $425 million or 41% of the revenue in the quarter. This represents a $37 million improvement overQ2 and a $163 million better year-over-year. Pre-marketing cash flow for the nine months ended September 30, 2001 was approximately $1.164 billion. EBITDA increased to $155 million, a record number. As we continue to lever the economies of scale inherent in the DBS platform. That's an improvement of $21 million over Q2, not withstanding the fact that advertising cost were approximately $18 million higher in Q3 than in Q2. EBITDA for the nine months ended September 30, 2001 was approximately $340 million. This was the third consecutive quarter that we have posted positive EBITDA. Operating income was $75 million, an increase of $12 million over the last quarter. Finally and perhaps most importantly, we have positive earnings coming in at $3.1 million for the quarter for any of our share. Now let's take a look at DISH network. Subscription TV revenues increased 4% from the second quarter to $921 million as we continue to grow the DISH network subscriber base and realized incremental revenues from existing customers. Despite what has been one of the toughest economic environments in recent memory, we added 360,000 net new customers during the third quarter. Year-to-date, we have captured approximately 60% of the incremental DBS market share. We are reiterating our guidance of 1.5-1.75 million net new customers for 2001 not withstanding the difficult economic environment. Our average revenue per subscriber was approximately $49.26 a month, a slight decrease from last quarter and an increase of $3.90 over Q3 of last year. The decrease in our [R2] from last quarter is attributable to the effects of I Like 9 promotion, which was introduced in August. While this promotion has a near term negative impact on [R2], we believe that its long- term effects on subscriber growth and churn will be positive for our company. We expect all [R2] to decrease slightly from the Q3 level for the remainder of the 2001 as a result of I like 9 promotions. For the quarter, our cost of acquiring subscribers averaged approximately $392 per gross addition. Consistent with last quarter, we continue to believe that 2001 sac will be less than our original $450 per subscriber estimates. This amount does not include equipment cost capitalized under our digital home plans. Turning to the balance sheet at the end of the quarter, we had cash and marketable securities of approximately $2.3 billion, which includes $128 million of cash reserve for satellite churns. This balance is net of the effects of the $50 million investment in StarBand that was done during the quarter where by our ownership in StarBand was increased from approximately 19% to approximately 32%. We also had approximately $5 billion of debt as of September 30, 2001, which includes $2 billion of convertible securities. On a straight debt for subscriber basis, we ended the quarter at roughly $782 per subscriber. On a net debt basis, that drops to $444 per subscriber and further assuming conversion of the convertible securities net debt per subscriber recommend approximately $133. Cash capital expenditures in the quarter were $191 million with about 38 million of that going towards the construction of new satellites. On a year-to-date basis, total capital expenditures were $493 million with approximately 33% of that amount going towards the construction of satellites and approximately 67% going towards capital equipment under our digital home plan and general corporate purposes. For Q4, we expect capital expenditures were approximately $150-200 million. That's everything on the numbers. So with that, let me turn it over to Charlie for his comments.

Thanks Mike. I will just make general comments. First I think during the quarter, I think for us is a very solid quarter. We accomplished the things that we needed in terms of continuing to build a foundation; particularly foundation that I think is going to drive in a very tough economy. I was pleased to see that the industry do well in the quarter, I think that the momentum was gained in the quarter across the board and I was also pleased to see some steps that are indirectly going to benefit us that our competition has taken to view piracy more seriously and take some steps such as not putting cards in some of the CE stores and those steps are some of the beginnings that will help put some discipline back in our industry. There are still slightly quite a bit further to go, and obviously piracy affects everybody in our industry and the Pay TV business including cable. So, to the extent others are taking serious steps that are helpful. Additionally I think, you are starting to see some discipline on the satellite side, that you are started seeing some discipline in terms of going after good customers who are going to stick with you as we all realize churn can be a cancer in our businesses and so that helps us also focussed on those issues and makes our job easier, although we have always been quite most focussed in the industry on that. In terms of how we have done, while it does not necessarily show up in a subscriber account vis-a-vis the second quarter, we did build momentum in the third quarter, July which was a high point in churn and low point in subscriber growth for us in this year, and we built there obviously, you guys look at the quarter to quarter stuff, we look at obviously on cost and effect and we probably had a good fourth quarter and first quarter, fourth quarter last year, and first quarter that we probably got some subscribers, that the subscriber growth was great, in fact we got subscribers in other times, which we would not have gotten, put the discipline back in place and then grow your momentum from that discipline. That's we have done with two overwriting criteria, one is we had to do a credit check and get a commitment from our customer or two, we have to get many upfront for the equipment that covers of that cost of the equipment up from the customer. While we had to do one of those two things to the extent that we, in the past have given up, and sold equipment at a big discount with no commitment that openly turned out to be a mistake for us. By putting that discipline in place, which we were able to do in the second and third quarters of this year we can look forward to reductions in turn in the future. Really all the fundamentals for us have improvement in terms of momentum per subscribers sac while higher this month actually underlying sac is actually poised to come down slightly for our industry, I think that the continued upwards spire has probably stopped at least for the near term and the realization that everybody wants to get a better return out of the customer, I think that R2 suffers a little bit because of the economy, may be it is going flat for a while because of the economy that is about the only negative out there from in terms of momentum. And it was clear that, while we are not recession our chair has proved that we are resistant to that and I think you have seen that our industry is probably one of the, it is a pretty good safe haven in an economic turmoil. People are traveling less, they are staying home more, they are watching TV more, and we have really not seen much of an impact of the economy or the September 11th incident at this point. So we continue almost as if those things never happened in terms of our business as it moves forward itself. We have no guarantee that it is going to continue, looks like the trends of people watching the news, staying in home, getting more of entertainment dollars that we offer satellite companies, whether it be pay per viewer or basic subscriptions, probably both are well for our industry going forward in what may be tough economic times for a while. I know a lot of people want to know about GM, in our discussions with GM, again I am not going to comment on that, beyond saying that we are continuing discussions with General Motors and GMH about combinations of our company ... certainly are serious about that, company and are focussed a great deal of time and attention to that, but we are also well positioned because of the outcome we are well positioned as a company. Obviously we think is the best thing for their shareholders and ours to put the companies together, but if that does not happen, still a very sound financial company with our $2 billion of cash and fundamentally sound from a management and a business unit perspective. So, this is a kind of current environment, personally we like the best because we are going, ....it is easy for a lot of companies to look good when the economy is great and money is free flowing, but when money is tight, the economy is weaker, the cream is going to rise to the top and all the things that we preach and all the things that we have done from a discipline point of view, are going to pay dividends for us and I think we are going to shine as a company, the losers being those companies who did not save for any day or did not have the discipline in place to function in this kind of environment. We are prepared for [Must Carry], which starts January 1, 2002, we have added a lot of new cities this year in preparation of the [Must Carry] that we have the ability to put up all the channels and we hope to be ready or plan to be ready on January 1st, 2002, our Echostar VII satellite does not look like it is going to be launched in time for January 1st and therefore we are using our outline capacity to make sure that we comply with that law, of course we still have the opportunity to overturn that law, Court of Appeals has not ruled yet, and we are hopeful that we will get a favorable decision there although we are not counting on that going forward. We made an additional investment in StarBand in the quarter. We think that their technology is the best technology in the market place today. We are convinced that two-way satellite technically works now. We are convinced that with proper design of satellites in the future and cost reduction of the hardware that we can make that an economical broadband strategy, particularly for Rural America, we think that it is an economic advantage about 30 million homes in America and so we plan on pursuing continued investment there, but we are going to go slowly as the economy does not dictate spending a lot of money on that; the market place in rural America is not running away from us, there is not underneath much money as quickly as we might have thought a year ago on that and that we can make sure of the technology develops and we can maintain that economics but are very, very committed to that. Other than that, I think that again as I said, it is really a solid quarter for us in the economic times when we are not that we could produce, and I think we have been able to do that and more importantly, we have laid the foundation for continued growth and continued momentum, certainly over the next several months, and we do not anticipate the economy getting better, yet we know our business seems to be getting better. So, with that we will take questions.

I will remind everyone, if you do have a question, please press the number 1 on your telephone keypad now. Your first question is from Marc Nabi of Merrill Lynch.

Hi Charlie, this is Marc Nabi. I had a couple questions on the promotions you have put forth, I Like 9, the digital home plan, may be now you that you had three months for I Like 9, and you have had more for the recent programs, what are your customers doing today, your incremental customers, would you say, they would rather have the lower cost for the I Like 9 or do they want to spend, that you know.... still 45-60 hours per month in that range to get the whole house setup with satellite service.

Really what we do is a little bit of both, I mean, maybe it is not exactly 50-50, but it is a little bit of both and I think the dividing line is people want more than two receivers tend to skew towards the digital home plan and those customers who want one or two receivers tend to skew towards I Like 9. We obviously believe in our business enough to believe that we would like to buy up whole house if we can, and so both of the plans worked for us and again what I like about it is, both of them we think, get good quality customers that aren't as to likely to churn on us compared to some of the practices we might have had in the past.

Now, as you have principally reminded me, my next question with respect to churn, I would have thought that churn would have fallen slightly from the second quarter, at least upon my calculations it looks like it was roughly 1.75% based upon on 10Q. July was the worse month for churn, but are you seeing even a better decline, further decline in churn rate on a monthly basis going into October about to hit November, may just give us an indications on a going forward basis of what you are saying.

Yeah, you are exactly right. Churn in third quarter was almost identical to what it was in the second quarter. I mean really our third quarter was almost a mirror image of the second quarter across the board, almost on all respects. We are seeing reductions in churn now, again the fundamental thing that we have.... that we have really had two factors that have got churn above where we like it to be; one is piracy that we do not control, that is an indirect, we have customers who can go and get several hundred channels of free and all the sports leagues for free and Pay-per-view movies for free by just going and getting omn these pirates on the internet or whatever, and how good a job we do, we still charge for our service. So, we lose a few people there and till that piracy gets better and on control in the industry and that's nothing that we control today. And secondly, in the last year in the fourth quarter and then in the first quarter we had some promotions where there wasn't an commitment where we did sell the hardware below the $199 and that wasn't a commitment on peoples' part and those customers tend to churn at a higher rate. So we do expect, we already seasonally have a better churn. We did see churn come down in August and we did see churn come down in September. And finally, I feel embarrassed even to mention this, but I have to, in a sense that, one of the ways that we have going to cut churn and really was like Pegasus a couple of quarters ago talked about this, and it actually was a great idea and we stole it for us to use as well. Some of our churn comes from our retailers and we actually have now done the analysis where we know we have retailers that we lose money on. Their churn is so high that we actually lose money on them and our charge back provisions and the way structured things; they can actually make a fair amount of money even after our charge back provisions. So starting November 1st, we have changed the subscriber economics for high churn retailers so that the economics flow the other way so that even if they have high churn based on what we really willing to pay on sac for those retailers who have high churn, we would at least make money on them, should they decide to continue to do business with us, or hopefully they will get their discipline in place to get their churn under control. And that starts November 1st, just to give you example, top 2% of our dealers have over 10% of our churn, so if we correct that simple problem it is at least 10% quite off the bat in churn reduction that we will get just from that alone and we should put that in place earlier and once we have heard Pegasus just talk about that; the light bulb kind of went off, you know, in our head about that and it took us a full quarter to get the feeder programs done to be fair to our retailers to make sure that we had accurate data. But we do start there November 1st, and that going to be, I think we have done all the right things on churn with our promotions and now we are working on the retailers that we sell to in making sure that they understand that the churn is a common problem between our companies and if they are going to have high churn, they are going to play, we are gong to have less sac on those customers, so that they can be economical for us.

Great with just one last thing and I will be brief over this one. You had said in the third quarter you anticipated that the ESPN programing costs would have gone up and then your subscriber related expanses would have gone up and then your subscriber related expenses would have gone up as a percentage of revenues well. Yet, we saw the opposite occur between the second and third quarter actually went down by 200 basis points. I just want to know when do you expect that number to go us as, you know, contracts with ESPN get renewed and things of that nature.

ESPN, I think, actually goes up in September; we did not see much of an impact on that price increase in the third quarter. You will see that flow in the fourth quarter to some extent, but at the same time we have some prices going up. Obviously, we are renegotiating contracts with over six million subscribers. We are moving some programing costs down and, of course, not all subscriber-related expenses are programing. We get we made great progress in keeping that. Again, we have an open, again Jason I am not sure that call centers and things like that, our call centers are matured, so we have not had ...

Yeah, that's not in there but I think the key thing there Mark is we negotiate some contracts that happen all throughout the year. They are not just done any one moment in time during the year. If you would look back over last year for instance you would see a dip in those programing costs in the third quarter of last year as well. So, there is a little bit of seasonality to the main element in that number.

Okay great, thanks very much guys.

By the way, I did not mean to say that our top 2% of our dealers have 10% of our churn, the 2% worst dealers that we have in churn are 10% of our churn and they would not necessarily be our best retailers.

It would not be our high volume retails, although we said we have high-volume retailers who have a lot of churn, but I probably missed what I spoke what to say, I don't want to confuse people. Okay, next question.

The next question is from Ty Carmichael of CS First Boston.

Thank you. Charlie I just hoped that you might be able to provide some perspective on how the I Like 9 promotion effect the nature of demand through the third quarter and, you know, that's what you expect to continue and I know in the 10-Q you indicated that you are leased through January of next year, but as you look at effect of demand that's something you would continue through remainder of ... throughout the course of 2002.

I would not say that the promotions we had prior to I Like 9 had probably gone stale. They had been out there for about a year and we really had not changed much, and so I think I Like 9 breathed some new momentum into what we were doing as a company, and did the home plan as you can see by the numbers continues to gain momentum as well. Having said that, I think, that our competitors had a great promotion going on with NFL and that's a top one for us when you can ... and so while we started to see increased demand starting with August, you know this is not a bad thing I mean the competitions saw increased demand as well as with their NFL promotion and of course beyond the buyer. While we had commitments on many of fronts, they did not have some of that discipline in place, and so they took advantage of, you know, obviously some customers ... if you do not have to put money upfront you can get something for free without a commitment and you are more inclined to do that, particularly you can get free NFL, but we expected that and we knew that that was going to be a challenge for us and that why I am really pleased about the third quarter as we knew we are up against a great economic offer to consumers, but we have also learned our lesson as a company that those kind of offers come back to haunt you a couple of quarters, two quarters down the road when those customers do not have the commitment and makes them easy to go away and may be football season is over, you know may be you live to regret some of those decisions and so we did not want to get into that and, you know, I warned our people that we had to stay in course and keep that discipline in place. But, I Like 9 is in good momentum, I don't think we will continue it we don't have plans to continue it after January because, I think, there is a promotion that will probably get stale and we are hopeful that by January, there is a lot more discipline in the market place and we are not ... we don't have to do something more aggressive than we would like. Because normally, I don't think we have to be this aggressive, but our competition has been very, very aggressive and we want to keep our momentum.

Okay, and the pre-marketing cash flows improved ... the margins improved nicely sequentially in the third quarter providing further evidence that the business model is ramping nicely and I am just wondering a lot of that improvement though was driven off of the reduction in subscriber-related expenses as a percentage of the overall revenues and, I guess, to followup in the last question, would we expect to kind of maintain that level and build off of it going forward or do you anticipate as you perhaps re-negotiate some, you know, the ESPN contract that perhaps the pre-marketing cash flow margin comes down a little bit in the fourth quarter and going forward, you know, ramps no later as the business matures.

I would say that I don't look particularly look any one quarter, because of the way all the things move around, but obviously we thought we would be at 40% for the year we are clearly going to do better than that, I don't think 41% is necessarily an aberration, but I would not look forward to get particularly better in the short-term but long-term I do expect it to get better as the business matures. You just get advantages ... I mean if you find a new contract you get might get no fees for the first year, right, but you pay the second year. So, when you really look at the longer-term forecast for us, you can see the pre-marketing cash flow in general continues to pick up for the next five years, you know, as we get improvements in our economies scale of our business.

Sure.

Ty, I don't think you can necessarily hold the level on programing costs portion of the subscriber-related, but having said that hopefully some of the other more fixed elements in your business plan continue to leverage as you are seeing them leverage and hopefully make up for that difference.

Okay.

By the way, when you, this is pretty going to be pretty scientific business but as your programing margins goes down and certainly ESPN increase in September is a critical factor then you raise your price. I mean, so you are going to maintain those gross margin dollars because you need that, you know the model has to work. The customer's measure programing cost that go up you are going to up ... I think everybody is in the Pay TV business today. My expectation would be that almost everybody is going to be forced to rise prices on an annual basis because programing contracts are fixed and I generally have increases at the minimum of the CPI and typically more than that typically double or triple of that in terms of going up every unit. It is not anything you can do about it because they are legally binding contacts.

On that front, with regard to the business money, it continues to show nice sufficiency gains on the customer service, while [_____] really deter that or slow down the trend would be you expand your customer call centers ... are there any plans to do that in 2002 or ...

Yeah, we will open up a call center in 2002. When we do that, we will lose some efficiency for about six to nine months while we do that. Typically, we lose some efficiency the quarter before we open it up because we put the investment in and then we typically have ... they are not sufficient as our current call centers for the two quarters while we first operate them and then typically they fall into the efficiencies that we have. So, I would expect that we would open up a call center in the first or second quarter of next year. I slightly had an impact in December this year as we are make the investment and then it clearly will have an little bit of an impact in the first quarter, but I think Jason you ran the model on this, I think we are going from our sixth to out seventh call center?

Right.

The impact is not any worse or dramatic when we went from the second call center to the third call center.

We were actually doing pretty good in that business, to open up them up, it was much quicker and we are able to get the reps, and get them trained in existing environment. So, you don't see nearly the efficiency hits that you used to see in the past.

Okay. And then I guess lastly ... if you can just provide on overview of the competitive landscape particularly the cable and on that front just how, you know, your plans for the roll out of the ... or how the roll out of the 501 set top boxes is coming along and also if you can just update us on the 721 set top box and what are your expectations of this two devises would be as a competitive alternative to cables offerings?

I guess I will start with ... we know we are the low-cost producer in the video business, by a fair amount, over almost every competitive out there. So, we know that fundamentally, dollar, we get more bankrupt by a further large margin over the or even closest ... everybody is fairly distant and second to us whether it be cable or satellites. So, we have a great deal of confidence going forward that ... as aggressive as we need to and still maintain some financial discipline over everybody else, it is clearly cable far more aggressive over the last year as they have lost subscribers in record numbers to DBS and we expect that's going to continue. But as money gets tidier and as highly leverages as they are and as they go to fundamental management changes and consolidation and so forth, we think that there will an opportunity for us to continue to pick away. You know, we would like our position in the competitive landscape even more than in the past because money is tight and we are the low-cost producers. In terms of new products, again, one of the great advantages that we have in our [_____] product ... it continues to gain tractions in the market places we control. We don't license that technology from a dealer or replay or Microsoft, so we do not have to pay a $10 a month fee or any thing like that. Our customers don't pay for the PVR feature. There is no question that we are the leader in PVR today, even though we may be not from a brand name perspective, but certainly from a number of units out there and our goal is to go out and get a million units out there. To be the first company to have million units of PVR and then obviously at that point, we think some economies scale in terms of advertise in their activity come into place, we think, we will be there sometime by the second half of next year. Of the 721, we will roll out later this year; we don't expect any material volume in that product. It is a very complicated product for consumers in tie end and it is one that traditionally sells a little [_____] electronic stores, but we are not strong in distribution and so the way we think we would sell that product is partnerships with DSL providers and broadband providers, and I will just have to see how it goes ... it is a great product, all that technology is being used and some other products for next year and again we develop all that in-house and we think that's a real asset for us, but we are expecting material sales next year, but we are not expecting material sales this year, but the progress is like anything with software is going a little slower than I would like, but the product will roll out this year.

Thank you very much and congratulations on a very good quarter.

Your next question is from Adam Simon of Goldman Sachs.

Thanks a lot. Charlie, I guess you touched up on this in your remarks, but just to get a little more detail on the [Must Carry], if on January 1st, it goes into effect and if the [_____] are not up, would you have an estimate or a rough estimate as to hemi-markets you would take down?

I think we could take down several ... we may take down several markets and I guess our baseline plan today is we won't take down any markets and we think we can do that with our flanker locations where we have kept our drive with capacity there. But, if we do take down some markets, it is going to be a couple or several because we take down the market where really have a few number in subscribers and lot of [Must Carry] channels, you know, and therefore you free up a lot of capacity. When you take down a market that has 22 [Must Carry] channels and you only have several [balanced] subscribers, its not going to be material impact to your company ... you save a lot of channels. There is no question that the economics of [Must Carry] have made some markets that were economical today ... they will become uneconomical on January 1st. We may make some tough choices where we look at it and say even if we lost all those subscribers that we have in that market for local, it still makes the economic sense to take those cities down and, you know, we are financially competent enough to make those decisions and we continue to evaluate that. On the positive side, [Must Carry] is going to help our business in the cities that we are in because many of our customers want PBS or WBE or UPN or some of the strong independent channels. We have not had those channels up before. So, cable has been able to attack. Our industry is not having all the local channels and so I think in any of our markets, [Must Carry] will be a positive for us, even though it is more than a financial burden.

Okay. Some of you really have not talked about not much, I guess, the delay about new interactive services, you go to these industry conferences and you guys show off some critical stuff and yet we don't really hear much about it. Can you give a progress on ... update on the progress with some of the open TV applications you are working on and what really ... what are the issues there and when can we see something, you know, a substance roll out of the market place?

First of all, the price we have been shipping for 18 months now is all interactive compatible and as such the first step is to make sure that we don't have to go back and replace the box to make interactive compatible and we spent and $5 to $10 extra a box because we think there is revenue for us and having said that, there really are not thorough applications today any where in the world not withstanding what you hear in the UK for activity that are as economical as video when you consider the bandwidth you use and the customer service cost with the interactivity. So, we think there are some maps that are going to make a lot of sense ... we are working with open TV and others to do those and [_____] which we hope to have that by year end on one of our models, but we did not as we told you early in the year, we do not have one penny in our business plan for any activity. This year we are working on our plan for next year. I assume we will have at least a penny in there for next year for interactivity, but it is not something that are not going to try to baffle you guys with. We have a lot of revenue coming in from it even next year. Having said that, we do believe it is going to be significant revenue over the long haul for our industry and I think our technology is best positioned to use it, but there is still not a lot of people who sit and watch TV and just change channels and that's they all want to do ... they do not want to interact with it. So, we do think, you know, and gambling is an interactive thing that, you know, that's the most exhaustible thing in the UK, which can do that in the United States from the most part so. We have to just play by year end and we have learned a lot from what [________] we have learned a lot from Sky has done, but we don't see the return on investment beyond just putting the technology in the boxes today.

Your next question comes from Robert Kaimowitz of SG Cowen.

Hi, good afternoon. Regarding boxes shipped from ETC, how many boxes were shipped altogether both internally and externally?

I don't think we have ever released the number of boxes. We certainly are making millions of boxes. We probably are one of the top two or three digital set top boxes manufacturers in the world today. Fairly, clearly that business had some increased shipments primarily to Canada every quarter. There is a good momentum for that business in canada in the fourth quarter as well as the seasonality traditionally is pretty strong at this time of the year, but I don't think ... and it is an hidden asset of EchoStar, take all the boxes for ourselves, we don't primarily ... and we spent our technology money on ourselves and we think we lead the world today in PVR technology and set up boxes from low cost designs and I don't think anybody designs them cheaper than we do so, it really is focussed on helping DISH network. This does not show up, if we are scientifically on it, we have a pretty big market capital on that particular product, but we would have to sell stuff for a profit for DISH network and it would not integrate the kind of synergy that we want.

In terms of the PVR unit then how many users would you say you have as of today?

Could you repeat that?

Sure, how many PVR users do you have today?

I don't know we released that number, I think our goal is to get a million in release that we get a million and be the first one to have a million and we think we are going to be in the second half of next year.

Do you think it is a little bit behind the schedule that you would have originally set for yourselves or are you happy with the results of the PVR take up?

Yes, because assets will higher on PVR, so we probably have gone a little slower in this economic environment doing otherwise it might have, but I think we are being conservative there, but we can push the [_____] anytime we want to and getting takes up of PVR, but at this point we are trying to make sure that customers pay extra pay for that product to keep our sac in line with our normal product. To an extent that they were willing to invest a little bit more in PVR per customers that needle can move, but we are moving a lot of them more then anybody else, we don't get any extra revenue for it today till we have a lot of applications to advertise and there are activities going on with it and that's just not ready in the market place anyway. So, we are hopeful that is going to be a factor in the second half of next year.

So you have done some internal studies on where the economics converge in terms of just taking the head in providing the PVR unit at all levels?

We have done that, and we just think that the economic model moved with the economy. In the last six months, we got pretty close to where our sensitivity line was and then it, kind of, moved against us with the economy. So, it's now ... that economic model is now ... we are not real close to that line in my opinion. I just think that we like most people are being more conservative these days and the market place is not running away from us and hard drives continue to get cheaper and bigger, our technology continues to get better and you know I think we will look for signs for improvement in the economy before we push it up a lot more beyond what we are doing today.

And last question is that you converted some notes in the quarter ... some of the convertibles, what is the impact on your interest expense going forward?

It was really just the final term in our preferred securities and I would day that the interest impact on a perspective basis if you look at the Q3 actually that's a better indication, it is diminished.

Okay, great.

We were applying interest on converting that was in the money. And I think it was an analyst or a shareholder who pointed out how stupid we were to ask and we cleaned it up and we cost ourselves a few million dollars. That was the bottom line there.

I would remind everyone if you do have a question, please press the number 1 on your telephone keypad now, and please limit yourself to one or two questions. The next question is from Armand Musey of Salomon Smith Barney

Charlie, this is Armand Musey from Salomon Smith Barney. A Couple of questions ... first of all, can you tell us the percentage of subscribers you added this quarter that came through your direct sales channel as opposed through retailers?

It is not a big factor, direct sales, we do direct sales, we had done direct sales for a long time within the 10% kind of range, it might take a month, might go higher than that, it might go lower than that, but is probably has been in the historically in the 10% kind of range, we certainly have some opportunity there in the lower sac to the extent that we go more direct, but our retailers are doing a great job for us and at the same terms and conditions that we would expect then to sell for, and quite frankly that they are ahead of us, day in and day out and as long as they are ahead of us day in and day out their product is going to get the majority of the business.

Okay, could that mean that there would be a huge difference in sac between your direct sales versus one through the retailer, is there any sort of push to expand that?

Couple of things, one is, we do not pay a lot of exclusive fees and things to retailers to keep cable or satellite companies out. So we don't have and we only pay based on activations. So, we don't have some of the fundamental tax problems that others may have in the first place. So that's why, and this was not a big incentive for us to get into a direct model. Number two, while you are correct, your sac would be lower the more you sell direct. You have some hidden cost in customer service and churn that you have got to take into consideration and one reason we continue to lead this industry in customer service, is that I think we have got some retailers who are servicing people on a local level and that's just not, you don't normally get a consumer like electronic store or our sales person in Denver does a very good job of customer service on the ground that if you get a problem. So, when you add all the costs in, we are very comfortable with the economic model of our satellite specialist, we are also comfortable with that. We have to got to keep them on us and we are comfortable with the fact some people just want to buy direct, but we are not out there trying to consciously move that direct number up beyond what the market place is ready to accept.

Okay, one of the issues that your investors is talking about in terms of long term subscriber acquisition cost is the fact that hardware costs are going up, the advance that top boxes are obviously somewhat more expensive moving from putting essentially one box in every subscriber you are adding to potentially multiple boxes trying to get two or three boxes in a household to completely replace cable. Can you give us any metrics on how the cost of hardware in each home has changed, at least hardware for each gross add?

Well, I guess I will term it this way, that the actual cost of basic hardware continues to come down, not in the kind of big jumps we had a couple of years ago, but does continue to come down. Having said that, the number of set top boxes per home had steadily, you know, I think when we started this business it was about 1.1 per home and its may be 1.5 or 1.6 added to 2 per home long term right, but when you do that the way we do on an economic basis is, as we add more hardware in the home within sophistication such as PVR, our number two in the number of set top boxes as we expect additional revenue from those customers or we don't make that investment. So, I think your basic premise that hardware cost or number of hardware costs in a home will continue to maybe go up. I think you also will expect increased revenue and lower churn if you are smart from those customers to make that investment and where I see it going is two things, one is, I think there is a recognition throughout the satellite industry at this point of time is that sac gone $600 is probably not the kind of model that you want, all end, I am talking about true sac with marketing and everything and not the way we do sac, which is much more inclusive than most people do it, but when we look at all-end sac you got to be, you know, $500 is probably the right kind of number and all of us are higher than that today. So I think you are going to see some improvements there and the second thing is that I continue to believe in technology as I spend time in our engineering, we believe that there are technologies and improvements in chip set that will allow us to bring the cost of second and third and fourth, you know, boxes and TV sets down to minimize spaces, so that ultimately it is not a big cost and [_____] that was in the labor, so we are really attacking it on two fronts, one is to make sure if we do make the investment in customers that we get a return and two, to continue to invest in technology and engineering to bring the cost of additional steps down. And I think we are going to lead the way there.

The next question is from William Kidd of Lehman Brothers.

Good afternoon Charlie. With respect to your outlook on cable competition, can you give us some feeling on may be three, four, or five years out, how you see satellites competing the digital customers who wants broadband and you know what will be your tools for, but still when you are not competing well against, relatively in that battle.

I guess, I would say I continue to believe with every... again I look at financial ... I will take a model of cable and put it on the same basis that we do at DISH networks, I count my sac the same way they count sac, and you know our model is so much better you know, than their model, which shake the imagination. It is just nobody analyses cable companies on exactly the same way they analyze the satellite companies, so it gets kind of confusing to people. But there is no question that cable has an advantage in incumbency and cable has an advantage in two ways, and the two-way product is the compelling product. So we have to attack those two things; we are attacking that as a company two ways, one is our investment in StarBand and the fact that we believe, we are going to have compelling products in broadband in rural America where cable is not going to have it and we think that is a big advantage and secondly, we have to partner with those folks who have alternative means of broadband in the urban areas whether that be wireless or whether that be through phone line such as DSL, and you know, we continue to develop that kind of products like the 721 and negotiate with companies who have DSL marketing plans to try to make progress there without a spend the $1000 to get a customer that we are going to make $5 a month time. So, we are trying to do it on a rationale way with an economical model that works, and we have not been able to move this aggressively in all fronts as we would like to, but we see a light at the end of the tunnel, and I think that we will be strong competitors in the cities per broadband, with DSL and wireless methods, and I think we are going to be exceptionally strong competitors in the rural areas for broadband, and you know, anyway I would look at it at the end of the day is for a company that wants to take in more cash then we spend, and that's the way we build economic value for our shareholders. You know, all these financial metrics at the end of the day, what really counts is how much cash you take in versus what you spend long term, and I think we are extremely well positioned, for any investor who wants the company who actually does that, and that's we were focussed and our strategies continue to focus on back metric long term and DSL and broadband will play a role, the timing is the key. We have passed on huge investments there that would drain $400 or $500 million a year and only get 50,000 subscribers. So, that's just not a model that makes sense for us today.

Clearly, you deserve credit for the way, the way you have grown Echostar, as it pertains to StarBand, will you be studying the companies ambitions differently than [GOHART] has got, he was talking about your aggressive nationwide consumer service, co-marketed by Echostar, but it was independent of Echostar and will StarBand now be kind of a duck-tail product with Echostar and no longer kind of pursuing its own ambitions on its own, I guess that's one part of my question and secondly, is Microsoft's relationship with StarBand has at all changed.

You have to ask StarBand as relates to Microsoft, but my understanding is that they are still a shareholder and that relationship is still sound. From what I know they are still strongly participating. StarBand has made a fundamental change to a wholesale model from the retail model. So they are at this point only wholesaling their service and therefore they do not have any sac. StarBand itself has no sac for new customers, but they don't get the difference between wholesale and retial price. So, Echostar is buying StarBand product on a wholesale basis and selling it at retail; Echostar keeps the retail piece and StarBand keeps the wholesale piece. That's a better model from a cash conservation basis for StarBand and reduces their risk. Their fundamental premise has to make to sure that their product works correctly, the customer service is to up to speed, those are the fundamental things that they probably did not put in place initially and which they have put in place today, and then its Echostar and others job to go on create demand for the product and we have just waited for their fundamentals to be in place, so we did not go and create a lot of demand and then they could not have the customer service aspect of it. So that's really the fundamental difference between what StarBand did before; we are happy with the wholesale-retail model, that what we do in video. So we are very happy to do that in the broadband basis and we are out there spending money to acquire broadband customers that we are going to stick primarily in rural America. We are not trying to get them where there is DSL or cable competition.

Okay, Thank you sir.

Your next is from Vijay Jayant with Morgan Stanley Dean Witter.

Hi, a couple of questions, first on the delivery of distant signals, there was a mediation process that seems to come to a standstill. Charlie, can you give us an update on where that ends up and, sort of, time limit on that?

I will allow David to answer that one.

Hi Vijay, as you know, the 11- circuit struck down the injunction that it had been issued in Miami. So, there is no injunction in governing EchoStar and remanded the case to the federal court in Miami, to hold an evidentiary hearing. The timing of that evidentiary hearing is really up in the air, it depends on sadly on the timing on whether a new judge will be appointed, the old judge in the case passed away, and new judge has not yet been assigned. After that happened, there will be discovery process leading up to a hearing in which we think ... what we have been asking for long. At the same time, the court of appeal also has decided in our favor on a couple of other issues relating to a small number of subscribers that we should be able to serve and the network said we should not and finally the court of appeals ruled against us in some of the constitutional issues and we feel pretty strongly that the court of appeals ruled improperly on that ... they did not give a lot of consideration to it. Consequently, we talked to Larry Tribe who feels pretty strongly about the constitutional issues here as well and signed on to our brief asking the court of appeal to reconsider that. So, there are a lot of moving pieces. It is really not possible to predict, when this thing would move forward in Miami with any degree of certainty today. But the developments we had certainly been positive, you could never predict what the court will do in the end.

Second question, I think that Echo V is the only satellite at 110 degree West longitude, if that is correct given the recent anomalies, is there any talk of moving satellite to 61.5 to 148?

I believe that at 110 we have ECHO V and ECHO II. So, we do have backup there and the anomalies ... I think the momentum we saw in ECHO V, that was there in the second quarter, so that's kind of old news and I think we have one spare tube that we have lost in the quarter. So, I think we have lost three tubes out of 48 and we need 32 to work and usually we suffer some mortality there. So, I don't think there is any life threatening there in ECHO V. We have three momentum wheels by the way and you can operate ... some people have operated a spacecraft with no momentum wheels, you just use more fuel, but you can certainly operate it with two momentum wheels that we have, and you came with one momentum wheel typically.

One follow-up question on ... can you just tell how many StarBand units are out there and what the losses were in the prior three quarters on an equity account of basis since you have accounting for it now?

I don't know how many StarBand units basis StarBand has in Mike ... you can answer the equity.

Could you just repeat the equity question again, I am sorry.

Now that you started to report your equity loses in StarBand, can you sort of tell us what that was?

Yes, effectively what happens is you have to go all the way back to the original investment that we have made in StarBand during the second quarter of 2000 which was $50 million and then you have a variety of equity pickups that come through to amortize that $50 million down to 0 between the second quarter of 2000, I believe that stops in the second quarter of 2001.

Okay great. Thank you.

I also got corrected here. ECHO V is the only bird at 110 but we have three birds and realize that it's just a local service and obviously ECHO VIII is going to go in there as well. But we have three birds at 119, ECHO II, ECHO IV, and ECHO VI and either one of those can be moved over to 119. ECHO II is not in use at all today. It is fully in orbit sphere, but it is located at the 119 relocation and we could move that in a week's period of time if we needed to and again our core service is F-119, which is why we don't have ECHO V at 110. Okay?

The next question is from Robert Kaimowitz of SC Cowen.

It's a follow-up question regarding the capitalized sac expenses ... is it still $75 in the first three quarters ... has that changed since last quarter?

I think that sac has ... if you look at capitalized sac; it was more than $75.

Yeah, capitalized sac was about $160 for the third quarter.

$160 with regard to every gross ads or net ads?

Gross.

Every gross ad.

Yes. And I think the key there is ... again there has not been enough on cable that may be everybody has not quite picked up on ... as we get ... you can put your visionary gap on as you get more digital home plan costumers out there and you get return to equipment, you don't have any sac, or you need to capitalize when you put out our return box to our customer again. The cable has always been and historically they have been able to do that, because they have been around for 20 years but we are now building a base that we can continue to pick product from with no sac in the future. So what you are going to see is that the flexion point where we capitalize expense for digital home plans starts to go down at some points we think that will start to happen in some time next year, you know as it ramps up and certainly starts ramping down, that makes a lot more sense to us than selling a product to customer for $49 who then churns on getting you off their back. So, we think that other people will trying to emulate what we are doing because the financial metrics makes sense.

Have seen the distant or when do you expect to see this [_____] is actually going to actually work in favor in that way and if the customer does not return the box what recourse do you have?

If they does not return the box, we have a signed commitment from the customer and the credit card that we can charge them for the hardware, so from an economic point of view, we are actually indifferent as to whether he returns the equipment or not. Having said that you have some percentage of consumer credit card fraud, you have some percentage of customers where you don't put the box back and you are not able to charge them and that we expense to sac today we reserve it in expenses today. So, you know I estimated percentage there and I think that in terms of, we think capitalized sac will continue to grow and in some time next year it will start going down. As you get replacement but, you know, it depend on the churn rate and depends on the continued popular digital home plan exactly and we actually have not answered more precisely Rob, we have not finished our budgeting process yet, and won't finish our budgeting process for the year till probably December, so I don't know where that flexion point is, generally Jason could you ...

Remember Rob the key thing there is that the digital home plan is just barely over a year old ... probably year and quarter old and the people that came in under that program signed up for one year commitment, so the material numbers have not even run their course yet to get the boxes back.

I understand that, but I just wanted to see this in the near-term ... your thoughts that might lead you to believe your thesis is correct.

If you say ... if you ask me is $75 is really a great long term, it probably is, but it might be three years now before you start approaching that kind of number.

Yes, Jason has hit it right on the head, I mean, what we have got here is a promotion that is relatively new and so you know the majority of the boxes that have been capitalized on the balance sheet are still in the customer's homes and they are up and running. So, you know it is not that as though, there is an enormous amount of customers that have turned off relative to the number that we have activated.

But the bottom line here is that people that have come off it have got the boxes back. It is just not a material number for you to see number move down. So, the pieces hold.

In the quarter, are you still seeing an average of around 2.5 boxes per home or has that changed?

It went up a little bit in the quarter, because of the I Like 9 promotion was ... if you are one or two box customer, I mean, two reasons, one is I Like 9 promotion to one or two box customer tended to skew towards that and we introduced a new acquired product that allowed, which has really allowed four receivers to be hooked up, without a switch. So, no switch and four receivers and so that has increased the popularity of the digital home plan with four receivers, three and four receivers which we view as positive and that is probably the main reason why you saw positive capitalized equipment go up in terms of digital home plan, but those are absolute very best customers in our heart and our highest R2 customers, and you know because we got a credit card we were confident of ... and those guys go through more rigorous credit checks we are pretty confident about our ability to get the boxes back or have those customers pay and also just long-term those customers will churn less than other customers we have, because we have got their whole house wired up. One of the reason we have not checked the [_____] we got these early adaptors with one receiver, that's four or five years ago, you know for most part we sell one receiver to customers and what people did was they just kept cable on the other room. They kept basic cable, the digital cable came along, down the street, they had a choice of going out and buying two or three more boxes from one of the satellite providers or just hooking everything on to digital cable on a special promotion from the cable company, and we have started losing and are continuing to lose some of those customers as an industry to digital cable not because people did not like our product, is because we only put one receiver in for these guys, you know, for three or four years ago and now they want the whole house wired up. And we had not reacted properly to that as an industry, and certainly we are just now starting to react to that phenomena and that is probably you know 10% a month and last year we were ahead in the same about the digital cable. Now, I think we realized that they stealing some of our customers because of wiring the whole house up. So, you know, we tried to make strategic decisions to put our selves in position to not lose those customers in the future.

Your next question is from Ray Schleinkofer of Thomas Weisel Partners.

Most of my questions have been answered, but you could may be just address kind of on a longer-term perspective we have got programing access rules that are scheduled to sunset in about a year or so. How are you thinking about that or is there anything that ... any steps you are taking to sort of prepare for that, and have you have been talking to the programers on that basis?

There are four program access requirements and again, it is just not our industry, I think anybody that is trying to get in this business whether it be a new entrant or a phone company is also in that same cast, and we are against the kind of loopholes that [COM CAST] has done ... they have taken things off satellite so that they don't come under program access rules. There is no guarantee how the congress and the SEC will ultimately come down in this issue. I think it is going to be a fight by a lot of people beyond the satellite folks and the consumer groups and other potential new video entrants, because it will be impossible for them to compete without program access and it would be my expectation that program access laws actually will probably eliminate some of the loopholes like [COM CAST] and will probably be extended for a period of time in 2002. No guarantees of that to the extent that they are not for the most part our contracts that are longer term in nature and where six million subscribers were probably not as vulnerable as some other smaller companies or new entrants would be. Those laws went away, but at this point, it is not a material fight on our radar screen. It may become so next year.

Thanks guys.

Your next question is from [David Abram] of Abrams Capital.

Hi ... a couple of questions. Number one, can you update us on Vision Star, where it stands, and then number two, on the I Like 9 program ... are you ... when you charge that 9 bucks a month, are you just recording lower revenues for this customers or there is also some sac that you are associating with that program.

There is sac with those customers because we subsidized the retailer pay activation fees and installation, per installation on that and we record only the revenue we get from the customers. So, that is what knocks down our, it has a slightly negative impact on our revenue and our [R2], because as an example the customers only buys $9. Now realize most customers buy programming beyond and not the top 100, but when he only buys $9 we only record $9 of revenue. And we still record sac of activation fees and installation fees and so forth, but the sac is lower, because the customers paid us $199. So, he is not a $550 sac customer, he is a couple of $100 lower than that in terms of the customer.

It is just the lower sac investment and lower return for the first year model.

The next question is from David Allen of Morgan Stanley.

I am Corinne [_____] calling in for David Allen. Two quick questions, the first one is what was the I Like 9 sac for the third quarter and also the second one is do you have any idea what kind of subscribers make up the I Like 9 program with the subscribers migrating from analog or making sac instead of digital or anything like that.

The sac for the third quarter was 392, the all end sac including [Captors] was 551. That was up about $8 on the sac and the all end sac was up about $35. Almost all the increase in the all end sac was in marketing and probably, in other words we spent, just to give you an idea, in the first quarter we spent $27 million in marketing and in the second quarter $27 million in marketing and in the third quarter, we spent $45 million in marketing and that is about $26 or $27 more per gross activation that all went into sac, we count all our marketing in sac, so that was more than 100% of increase of a normal sac and it was about 85% of the increase in the all end sac. The reason that is important is and the reason I am happy about where we are is that the amount of money we spent in marketing is a percussor to how well we do the next quarter. So, you can see we spent $27 million in the first quarter, we had a slower second quarter, we didn't spent much in marketing in the second quarter because of the economy which had basically a flat third quarter. We did spend a lot of money in marketing for us in the third quarter, which would usually foreshadow a stronger fourth quarter as that marketing effect has a lag effect, you don't just run advertising today and people rush out and buy your product tomorrow. It typically has a 30 or 60-day lag effect, so that is why I think we started seeing momentum in August and September that continues into the fourth quarter, and we don't advertise quite as much in the fourth quarter, because we got good momentum going into the Christmas selling season, so we will probably advertise more than $27 million but probably not as much as 45 million. That was really part of the question?

Yeah the I Like 9, whether or not you know the demographics.

Yeah. The I Like 9 customers, you can have a lot of details on that, but it is popular with people of analog cable who might be otherwise switching to digital cable or more likely don't have digital cable as an option. We did get a different ... there is no question we are getting a different section of the market where satellite had not been appealing to them, you know, on previous promotions that we have done. So, I think we are happy about the new set of demographics, we think it is good demographic which really analog cable customers who either can't get digital, that is probably the predominant case. Four, just look at the digital cable and decided satellite makes more sense on the I Like 9.

Okay, great. Thanks.

Your next question is from [John Stone] of [Latin burgh Foreman]

Good morning, the question I have is concerning the long-term effect of HD TV, I mean, just as having Must Carry, has created a bit of demand FOR bandwidth that is attached to your system, clearly HD TV channels require a lot more bandwidth in the long run as well to the extent that it becomes more of the standard rather than the current transmission standard. Isn't that going to provide a lot of pressure for the bandwidth capacity for your system, and how do you plan on addressing it?

Our answer is yes, it will put pressure on bandwidth, and the answer is you better be the guy who has most bandwidth, which we think we are, either be it cable or any other satellite competitor, we have most bandwidth. So, we are the best positioned for those kind of events. You are not going to see HD TV in my opinion on many cable systems, if any. It certainly is not in the 1080 format. You are not going to see a lot of it in competition with [Must Carry], if [Must Carry] is upheld, because you know, the [Must Carry] is going to pick a lot of bandwidth. So, we think we are very well positioned where there are any constraints on bandwidth. #2, that is the reason we have two spot beam satellites ready to go in the next six months. One is backup in case we have a launch failure or any kind of problems, and two, it just, you know, doubles our bandwidth in terms of complying with [Must Carry] and allows us to be more HD TV. So, we have made the investment and the capital expenditure to do two satellites at a time when people want ... I think that will prove to be the right decision, and I think we are just super well positioned, obviously the best position we could be as an industry is that we can combine ... you know it is one of the compelling reasons to combine Echostar and Direct TV, because then you do not have to duplicate the bandwidth long term and you free up a lot of bandwidth for HD TV, [Must Carry], and those kind of things, and more cities, and more competition to cable. You know that is one long speech, but it is one of the driving factors in our strategy to approach GM about putting the companies together.

I can't disagree with you there. I rather note that I concurred with your findings on that. As far as StarBand, you have made close to $50 million investment, do you think that StarBand is going to need additional cash injections, and if so are you planning on, when do you think this is going to be, when do you think this might occur, and how big do you think they might be?

To the degree that StarBand settles, they probably won't need additional cash, you have seen that growth requires capital and I think that is probably true in your case, that is probably sometime next year, and I think we are willing to continue to invest as long as the technology makes progress, and as long as there is consumer demand for the product. You know, if it comes to a point where they need additional capital, you know we are certainly going to continue to evaluate the situation at that time to the extent that they are not successful, which we do not think is going to be the case, but to the extent they are successful they won't really need any more cash; they will just go away. That is not the problem they want to have. I think the problem they want to have is to be successful, which requires more satellite bandwidth and more use of cash to get customers who like the servers.

Can you give us an update on the progress for the next StarBand satellite?

We have ... along with StarBand, we have finished the design of that satellite, we have not ordered the procurement of that satellite and we will make a decision again at year end on that. And again, a lot of that will depend on where the market place in the next couple of months and so forth. But we have done heavy lifting there and we are ready to go as soon as we decide that it is the economic thing to do.

Great. Thanks very much.

The next question is from [Karim Zia] of Deutsch Banc.

Thanks. Charlie, on churn, recognizing that there are some uncontrollable elements to it like the piracy and the economy, has the intrinsic level of churn, using the business runs at, changed much, do you see it eventually getting back to 1.5% or lower.

Again, it depends, from me, I will run a more complicated formula which deals with the sac I have, the R2 I have, the margin I have, versus the churn I have. So, it is four moving parts there as to what kind of churn you can accept when all of our customers are graded equal. But if you have to generalize, to generalize I would think we are pretty comfortable at anything less than 20% annual churn, almost every model makes sense. And there is no question, we are starting to find out as an industry that we can manage churn by changing our business practices, right? So I just think you are going to see more discipline there. [Pegasus] has started the ball rolling with their red light, green light; you are seeing Direct TV make some moves. We are certainly making some moves, particularly on November 1, 2001. I do not like, I feel very comfortable on anything less than 20%, I think they will come in under that for the year, I think we will manage with that for the foreseeable future, that seems to be 18% is better than 20%, 15% is better than 18%, so cut down and hope for ... I think there is about a 10th of a percent at least in piracy that there is nothing we can do about by ourselves, so we think our competition ultimately will get that under control, and we probably, at least 10th of percent we have just been stupid like selling to the wrong kind of dealers. Once we put those two things in place, we are back well below where we think we need to be from a churn factor. And I think you will see progress in that on both those fronts in the fourth quarter and in the next year.

Thanks. On Digital HomePlan, it looks like as a percentage of gross advertisements, it is running about half of new additions. Is that sustainable, do you think, are you unlocking pent up demand of a certain segment of the market and it will trail off over time.

We do not know the answer to that. We like to have programs out there about half and half that is kind of the sweet box for us. But we won't be shocked if it dropped to 40% or 30% or went to 60%. It can vary, but it depends. The difference between customer investing in equipment or us investing with credit and commitment, we are pretty indifferent from an economic point of view, which one they choose, and I think it gives a credit to our marketing department guys for a couple of different plans that seem to be very popular with a wide variety of customers. Everybody likes to get in the stuff for free and no commitment. A 100% took it, but unfortunately 50% did not tend to pay in the long term. We have taken the tough steps to not get into that market place.

Thanks, and lastly, any thoughts on outlook in light of the economic conditions, it sounded like Direct, actually kind of intuitively had very strong on a comp basis September sales. Did you see the same sort of thing related to July, August, and what do you think that means, and are you willing to put some kind of boundaries around next year, in terms of net adds at all?

I would say that for the year we started out as an industry, pretty strong in January, and as an industry we lost momentum up until July, and I think our industry regained momentum back in August, and I think that momentum continued with September 11. I just do not think, if anything, it had a slight positive impact, it surely did not have a negative impact, and it had a slight positive impact for our industry. So, we can say that the momentum continues even in the phase of a weakened economy, I mean the signs are really good. We are kind of a lean indicator, if I were to bet, I would say that the economy is probably looking pretty good this second or third quarter next year, because we started seeing the down ... I can remember talking about forecasting that the economy was going to slow a year ago to you guys. It did not become evident to a lot of other businesses till six months later, so I think, I am cautiously optimistic about the economy long term, but I am certainly cautiously optimistic about regardless of how well our industry can move forward in it. You guys do not see this, because you don't see the trends. And yet, you look at historical data, but I think that at least for our company, we have put the things in place for improvements in churn, improvements in sub adds, and continued R2 growth once we get to the distortion of the I Like 9, the continued margin improvement long- term, the continued EBITDA and earnings growth, and that is what business is all about in terms of building value, and we have over $2 billion in cash for acquisition opportunities or opportunities for companies who may have great companies, but may have limited cash, and this might be a great time for us to make strategic place, I just like where are, and I like where are today better than I liked it last year, because everybody looked like at last year.

Good enough. Thanks Charlie.

Operator, we ought to have time for one more call.

All right, your final question is from David Kestenbaum of ABN AMRO.

Great. Thank you. Can you give us the outlook for 2002 as far as the subscriber adds and are you comfortable with the consensus EPS at roughly $0.70?

We have not finished our plan for ... I am not trying to dodge the question, we have not finished our plan for 2002, but in general, we think that the economy will be weak in the first half and maybe stronger in the second half. I think that is a reverse of what we saw this year where the economy was a little better of the half and not so sure in the second half, so I think, from a baseline perspective, we see as a company, not a lot of change in our fundamental course in terms of all the fundamentals that we focus on. I would think that sac would trend down a little bit, I think churn may trend down a little bit, I think, if you can do those things the subscription growth at least for our company be in line with where we are this year. I think we are going to be solidly in the range for the rest of this year that we gave you between 1.5 and 1.75 ... we are going to be very solidly in that range. I think our second half of the year is going to look very much like our first half of the year this year even in a weakened economy. So, it is never as good as we like. I mean, we are perfectionists, and we would like to get 10 million subscribers next year in one year, but I think we are going to see continued growth, we are going to get more subscribers than the cable industry is going to get, we are going to get more subscribers than our competition in DBS are going to get, and we are going to deal with strong fundamentals and discipline to continue to improve the marketing cash flow, EBITDA, and earnings.

Okay. Can you comment on why there was fundamental shift in the past year ... you clearly opted for Direct TV? But during this quarter, on all the key metrics, as far as they had higher net subscriber additions, lower churn, and lower sac, can you just talk about the shift?

I think they had a strong promotion. I think that they have done some improvements in their management team and got more focus, I think they had an extremely strong promotion that we did not think fundamentally made sense for our company because there was not the upfront commitment, a long term commitment or upfront money. So, I think that they did a great job and I am pleased to see that the industry has got some momentum, but for our company, we think that we did exactly what we wanted to, and we did not go and chase customers that may not be customers for us next year. We are going to stay the course and make our best. That is the right thing for us to do and I think they traditionally have done better with NFL football than we have, and their CE distribution, which paid dividends for them. So, it is a big market out there. I think they are going to get their first share of customers. We do not place the value of our customer on how well they do. We try to build value in our company on how well we can do. I hope those guys get ... I mean I will be the happiest guy in the world if those guys get a million customers every quarter, with the kind of customers we get and the kind of economics we get, we get as a company, because we build value and our industry looks better vis-\u00e0-vis cable as a result of it.

Okay, thanks.

I think that is it. We appreciate it and we will be back, I guess after year-end and sometime in February or March 2002, and in the meantime we will stay focussed on trying to build our business.

Operator, we would like to conclude the call at this time.

Thank you for joining today's conference call. You may now disconnect. - 02[NO AUDIO].