DISH Network Corp (DISH) 2003 Q1 法說會逐字稿

Good afternoon. My name is Derrick and I will be your conference facilitator today. At this time I would like to welcome everyone to the EchoStar Communications first-quarter 2003 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 this time, simply press star, followed by the number 1, on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. McDonnell, you may begin your conference.

Thank you, operator, and thanks, everyone, for joining us. My name is Michael McDonnell. I'm the Chief Financial Officer here at EchoStar. I'm joined today by Charlie Ergen, our Chairman and EEO, David Moskowitz our Senior Vice President and general counsel, and Jason Kiser, our treasurer, who is dialing in from the road today.

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 and then we'll up it up for some Q&A before the end.

Before but before we get started, as most of you know, we need to do our safe harbor disclosures and so for that I'll turn it over to David.

Good morning everyone and thank you for joining us. As you know, we invite media to participate in this call in listen-only mode, and we ask that media not identify participants and their firms in your reports.

We also don't allow audio taping of the conference call and we ask that you respect that. All statements we make during this call that are not statements of historical fact constitute forward-looking statements whine the meaning of the plaza.

Those forward-looking 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.

Now, I'm not going to go through a list of all the factors that could cause our actual results to differ from our historical results or forward-looking statements but I'd ask you to take a look at the front of our 10-Q for a list of these factors.

In addition, we may face other risks described from time to time in other reports we file with the SEC. All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear.

You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements that we make.

Please also note that during this call, we will refer to certain measures of financial performance that are not calculated and presented in accordance with generally accepted accounting principles. These performance measures include EBITDA and free cash flow from operations.

Please refer to our first-quarter earnings press release which is available on our web site under the heading "news releases" for a reconciliation of EBITDA and free cash flow from operations to their most directly comparable GAAP measures.

With that out of the way, I'll turn it back over to Michael.

Thanks, David. Let's take a look at the quarter and we'll start with the total company. Total revenue for the quarter was approximately 1.36 billion, an increase of 3% over last quarter and 23% higher than the same period a year ago. Subscriber growth and higher average revenue per subscriber both contributed to these revenue increases.

EBITDA for the quarter was 277 million, an increase of 88 million over last quarter, and a hundred million higher than the same period a year ago. Operating income was 179 million, an increase of 95 million over last quarter, and 84 million higher than the same period a year ago. Net income for the quarter was 58 million. Earnings per share was 12 cents. These figures include approximately 20 million of charges associated with the redemption of one of our high-yield bond issues which occurred during the quarter.

Free cash flow from operations, which we define as net cash flows from operating activities less purchases of property and equipment, was 125 million during the quarter. This represents a $1 million improvement over last quarter if you exclude the $600 million breakup fee that we fade to Hughes from last quarter's figure. Free cash flow from operations for the quarter was approximately 36 million higher than the same period a year ago. It is important to remember that quarterly free cash flow from operations is subject to fluctuations in working capital and capital expenditures.

Now let's look at some of the DISH Network metrics.

During the first quarter, we added approximately 350,000 net new subscribers. This is 15,000 more net adds than the same period a year ago. That puts us at approximately 8.53 million DISH Network subscribers as of March 31, 2003. This subscriber growth was due to the success of a variety of factors, including the lowest digital price in America message, effecting churn management and increased areas where we offer local content. We currently offer local stations in 64 markets and plan to be in 106 local markets by the end of 2003.

Churn for the quarter was 1.36%, a basis point better than the same period a year -- a year ago. Average revenue per subscriber was approximately $51.48 per month during the quarter, our best ever. This represents an increase from last quarter of $1.18 and an improvement of 3.12 over the same period a year ago.

This increase from last quarter was primarily due to price increases, which became effective during the quarter, as well as increased availability of local channels by satellite.

Our cost of acquiring subscribers during the quarter averaged approximately $448 per gross addition. Including capitalized digital home plan equipment net of recoveries, that figure becomes $479.

This figure decreased by $10 from last quarter.

Turning to the balance sheet, at the end of the quarter, we had cash and marketable securities of approximately 2.6 billion, which includes 143 million of cash reserved for satellite insurance. We also had approximately 5.4 billion of debt as of March 31, 2003, which includes 2 billion of convertible securities. As we mentioned on last quarter's call, we retired 375 million of our high-yield bonds on February 1, 2003, their first call date.

On a straight debt per subscriber basis, we ended the quarter at roughly $630 per subscriber. On a net debt basis, that drops to 340 per sub. These figures railroad reduced from $703 per sub and $374 per sub as of December 31, 2002, respectively, as a result of the subscriber growth, debt retirement, and free cash flow from operations which occurred during the quarter.

Cash capex during the quarter was 60 million, with 27 million of that amount going for capitalized digital home plan equipment, and the remainder for satellites and general corporate purposes.

That's everything on the numbers. And so with that, I'm going to turn it over to Charlie.

Thank you, Michael. I just have a couple of items, in terms of things I think it would be important to you.

Obviously, the numbers are the numbers, so you guys are well-qualified to analyze those. But during the quarter, we did sign a -- strategically, we signed an agreement with SES Americom for the 105-degree slot for both KU and KA band spectrums, and entered into a long-term agreement for a new satellite to go in there. That strategically is important for a number of reasons.

For probably us and SES Americom but in speaking as far as EchoStar is concerned, obviously it opens up some additional capacity for us, allows us to do more local channels, more emphasis on HDTV, gives us a chance to re-enter the broadband business at the end of 2004 with perhaps an economic product as opposed to an uneconomic product, so we'll have a lot more details on those kinds of things in the quarters ahead, as we fine-tune that strategy.

We also hopefully can work with SES Americom and the rest of the industry to help set some standards for broadband, and make sure that satellite, certainly at least in rural America, will have a product that can -- that is -- can add revenue and help our company in the future.

The second is really legal. A couple -- a couple of legal cases that are coming to a conclusion -- well, (inaudible) -- I don't know if they're coming to a conclusion but they certainly will be decisions made in the next -- probably during this quarter.

One would be the local -- the distant network litigation with the broadcasters that's been going -- which has been going on for about four years, and you'll see in our disclosures this time that the broadcasters last week asked for a so-called debt penalty against EchoStar, both for distant and local network signal customers.

That obviously would have a material impact, were EchoStar to, in fact, lose that case and be required to turn off local subscribers as well as distance subscribers. Obviously, a judge could rule in any number of ways, including, not turning anybody off or rerunning your database and turning some people off or it could be just dependent on distant network signals and not local signals, so there's a wide range of outcomes potentially in this case.

None of which we can predict how it might come out or its impact. We would just know that if we had to turn off local signals, that would be a material impact. We're not sure why broadcasters would have pursued turning off legal customers, whether they be local or long distance -- or distance network subscribers.

We're not sure what their motivations are, given the fact that we've already settled this case with two of the networks and some smaller guys, broadcasters, and we've had a pretty good relationship, at least individually, one on one, with -- with most broadcasters.

Second, the Estate attorney general's investigation into our marketing practices is coming to a conclusion, and so ^ obviously that's something that could be material if the -- if the state attorney generals were to pursue an investigation of us. We'd have to defend ourselves on that. Obviously they may decide that that's not what they want to do, and obviously that would probably end up in some kind of settlement. So that one's probably going to come to fruition as well.

With that, I guess the third probably legal matter, just -- we're -- we went into arbitration on our claim against the insurers for the loss of EchoStar 4. That arbitration has started, but will be delayed over the summer until September, so I don't expect that we will have a conclusion to that case until the fourth quarter.

There's no downside risk, really, to EchoStar there, as there are in the broadcaster and attorney general cases, but obviously we feel like the satellite was a total constructed loss and believe that the insurers should be paying us for that satellite, and we'll await that arbitration decision as to if they have to pay and if so, how much.

So with that, we'll just take questions.

+++q-and-a.

At this time, I would like to remind everyone in order to ask a question, please press star, followed by the number 1, on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Marc Nabi with Merrill Lynch.

Hey, everyone. How you doing.

Good.

Just got three questions. They're relatively simple.

The first one relates to the announcement that came out the other day by Verizon that they're cutting rate on their DSL packages, and Charlie, just wanted to get your view. Obviously you have a relationship with SBC, and how that -- you know, that type of local -- potentially Chadtization (ph) of data prizing will affect the (inaudible) first one.

Second one relates to news corp, looking just through there are FCC filing about the Direct TV opportunity, and it looks like they're going to get very aggressive with their PVR and just talk a little bit about that and the opportunities of, you know, you've always been proactive in how you've marketed your promotions and your products, where you stand on your 521 and other devices as well.

And the third one relates just to capex. On the capex, you know, it looks like it was low relative to my expectations, and one of the -- a lot of that has to do with the leasing and the capitalization of the equipment. What's your thoughts going forward? It doesn't seem like a lot of people are doing the leasing proposition these days and could that change in the second half of 2003? Thanks very much.

Okay. Mark, a lot of questions there. In terms of broadband, I mean obviously I think the phone companies getting more aggressive is probably the -- the looser in that is probably the cable companies who have perhaps run their models and their build-outs on higher rates that obviously will face some increased competition.

Obviously, our -- our target market for broadband would not be customers who could get a cable modem or a DSL modem but rather those people that would be outside the reach of those technologies for the foreseeable future. Obviously, to the extent that customers have a choice for broadband, that's good news for the satellite industry.

Obviously, you, as a customer, could pick a DSL product up from a phone company and still get your video from a satellite company and that may be a better mouse trap for you than a bundled offering from cable.

So I think that's perhaps a -- you know, the first kind of sign that perhaps broadband could be less of a problem for our industry. I've always said I think it is a problem, you know, we probably got a dose of, maybe perhaps some good news there.

Obviously, you know, we hope we can work with -- with people who have alternative forms of broadband, whoever that might be, to offer our customers a choice.

As far as news corp, in terms of the merger, I haven't red their filing yet. I guess I'd answer it generally that we would expect, with or without a news corp acquisition, Direct TV has always been aggressive. They certainly have been even more aggressive over the last six months. They clearly have, I think, had outstanding performance. I think Roxanne has turned in a couple of really great quarters. They're getting -- you know, they have a little different strategy. They're going off a little bit higher-end customer.

A little bit higher ARPU customer, a little bit more emphasis on sports and a big investment in sports. That strategy seems to be working for them. They certainly had a -- seemed to hit, you know, on all cylinders in the first quarter. Our strategy is a little bit different.

We're diverging a little bit from who the customers are that we go after. But we've always expected it's going to be extremely competitive, both within satellite and cable and perhaps someday through fiber and phone companies, so the key to that is, you have to build an organization that's a low-cost producer.

So, again, my analogy is always the airlines get in price wars all the time, but Southwest Airlines seems to do pretty well through thick and thin because they've built a -- they had the discipline, they've built a structure, an infrastructure, that's a low-cost infrastructure and that's repeatable.

And that's what we've tried to do at EchoStar. It's not going to be easy to come in to the cable industry or even within Hughes (ph) and suddenly put that into a low-cost structure that would anywhere get down to where -- to where we are.

I'll give you a simple example. When it comes to PVR, tee vow disclosed this week that Direct TV pays them $3 a month. Well, that's -- you get a million customers, that's $36 million that goes out of the bottom line. EchoStar doesn't pay tee vow for PVR infrastructure.

Rather, we invented that ourselves. So that's $3 a month that we save our customers going forward. So that's an infrastructure that's -- that's -- that's difficult to change, in a short period of time, for them. We own our own call centers and have our own employees there. If that structure were to change, that's not something you can snap your fingers overnight and do. That will probably take years and years.

And your current provider is not going to give you very good service if he knows you're throwing him overboard. So those are things that, you know, if you build uplink centers in Cheyenne, Wyoming you're going to be a lower-cost uplink center than if you're in Los Angeles, cool California.

You're not going to pick up and move your uplink center very easily and when you do, it's going to cost you a lot of money. So I feel very good about -- about our infrastructure costs ^, and I think it's -- if the -- no matter how competitive it gets, the low-cost producer will do very well. And I think without question, we are, by a long margin, the low-cost producer in delivering digital bit, point to multi-point.

As far as capex, capex was relatively low in the first quarter. We're not changing our guidance on that. We expect to spend the amount of capex we've talked about. I think it's about 300 million.

300 million excluding the capitalized DHP.

DHP. DHP has lost momentum in the marketplace. We've kind of done that on purpose because -- because we have some changes to DHP that we'll institute in the second half of the year and we expect that that momentum will reverse. And so for the full year, it's -- you got to be careful about looking at us on a quarter to quarter basis, because you really got to -- most of the things that we do are long-term in nature, and we do things long-term in nature, that can have an effect, you know, depending on which quarter you're putting the investment in. So -- or quarters.

So as an example, we'll open up a new call center I think in the third quarter. That will affect some of our efficiencies for two quarters while we do that. We get the benefit today because we're -- all of our call centers have been open for more than six months, but every time you open a new one, you lose some efficiency. So I'd just warn you to look at the total picture over a long period of time, and the quarter to quarter stuff, I try to make sure that we're -- we don't get too excited when the quarter is good, and we don't get -- we don't get depressed if the quarter is not so good because we kind of know where we're going long-term.

Great. Thanks a lot, guys.

Your next question comes from Robert Peck with Bear Stearns.

Hey, guys. Great quarter. Just have a couple of questions here. Addressing more of the fundamentals in your sub growth, obviously you had great subscriber numbers here. Of your 64 markets, could you talk a little bit about how many of those markets are being served off two dishes, where you're going the capacity for that. Is some of it coming off 61 degrees? Will you be using 121 degrees to do some of it as well? I guess we're just trying to get a feel for how you're going to roll out 106 markets this year and how you get to 150 or so through next year, and what sort of costs that would entail as far as swapping out receivers, swapping out dishes, et cetera.

Okay. Currently, when the 64 markets, I think about 25 of them employ a two-DISH solution. That second DISH could be from 61-and-a-half R 148 again, we make that a customer choice. It's actually no charge to the customer if we want the wing channels. Some customers choose to have two dishes, some customers choose not to put a second DISH in because the channels on the wing are not of interest to them. And therefore, why put up a DISH if you're not going to watch it.

The-- to go to 106 markets, we have a -- SES has been kind enough to provide us an interim solution at the 105-degree slot late this summer that will give us capacity at the 105-degree slot. Prior to the launch of more sophisticated satellite next year, that goes -- that replaces the interim capacity at 105. So we get some capacity to increase local markets this summer. We get additional capacity next fall. In 2004, and that's how we grow hopefully beyond 106 markets.

The 121-degree satellite, we still don't have a definitive launch date on that. We had hoped to launch that as early as this month but there have been -- in the manifest, there's somebody else who got moved into the manifest ahead of us, so we have to wait hopefully for the next launch, which could be as early as July or August, but could be shifted out.

So you just -- there's no guarantee. We hope that -- I think we're relatively confident the satellite will launch this year. That does give us additional capacity, particularly for the international channels that we want to launch. So I think the -- the key is that the bigger picture, Bob, is that -- that the merger was important to us with Hughes because we needed capacity, and we just never have been -- never have been able to come to an agreement between the two companies to share capacity, even though I believe technically there's ways to share capacity today that I didn't know about prior to the merger. But when our teams work together, I think there are ways to share capacity.

So we still have that capacity problem when the merger was denied, so we've gone out and said we're going to, you know, get that capacity to do the things that we want to do, which is more local channels and not -- maybe not every single market but certainly the vast majority of the country, more high-did he have figures television, more international channels and more interactive and also broadband, potentially, if we can make sure we have a good economic model to make that work.

So we're trying to solve all those problems. There are still problems that exist. Piracy is one that we don't solve by ourselves but perhaps if news corp acquires Hughes, they will have a different emphasis on that, given that it's their security system. Which is in litigation today. Maybe that litigation gets resolved. Maybe news corp can solve their Pier see problem to the extent that they do that that would be good for our industry ^, good for cable, be good for us barks the several million people who don't pay for programming today would be forced to pay for programming at very little, if any, incremental cost from a subscriber acquisition point of view.

So I mean if I was -- if -- you know -- you know, just a simple example but if Direct TV is probably spending a billion-and-a-half dollars in subscriber acquisition costs this year, I think they've talked about adding a million subscribers, if they solve the Pier a see problem tomorrow, they would get a million new subscribers tomorrow, if my opinion. And I don't think it costs them a billion-and-a-half dollars to solve the Piracy problem. So, you know, that certainly is some opportunity for our industry and obviously, to some extent, it helps cable because cable is losing customers to Piracy as well. .

Did that answer the question? I don't remember what it was.(Laughter)

Actually, that's a great answer. The other thing I was wondering is, as far as the new slots that you'll be using, do you need more complicated, expensive, receivers and dishes?

Oh yes, the receiver doesn't need to change because, again, we've -- we've engineered our receivers for multiple locations. All we really are doing is taking the 61-and-a-half and 148-degree slots and condensing them on a single DISH. The DISH is slightly larger, 66-centimeter DISH as opposed to the equivalent of maybe a 50-centimeter DISH today, and it does require a new amplifier.

So it does require forks a customer who wants HDTV from us or wants a new local city, it does require us to go out and install some new equipment. That cost is probably going to be, you know, somewhere between a hundred and -- the cost is actually going to be somewhere between a hundred and maybe $150 to go out and do that upgrade. Some of that, obviously, could be borne by the customer.

But it would depend on, you know, obviously if the customer was going to buy $20 more per month from us in local and HDTV, that's probably a pretty good return on investment for us. To the extent that they were only going to buy local television from us, that might be something where we -- where we ask the customer to pay something. So we don't really know what we're doing exactly there yet. We'll experiment.

And as far as your competition from cable, can you tell us a little more, give us some more color around who is being attracted, where you're gaining subscribers. Is it getting harder since Comcast is firming up AT&T a little bit and have you seen any impact from any of the DISH buyback tack of problems.

We attack where there's a soft underbelly and that varies. I mean that varies -- there are some -- I think it's market by market. I would hate to make a general statement, but there -- there are really great cable companies who have soft underbellies in some markets and that's where we go. There are -- are some cable companies who are having some financial problems be but they still have great markets that they take care of and so we're not able to attack them as aggressively in those markets as we'd like to.

So it's across the board. Comcast is clearly got a focus on cable. They clearly have critical mass. But again, they've got a -- they've got to rebuild a foundation that's -- that's been a little bit out of -- a little bit neglected for a while. So there's opportunity within -- within their markets as well.

The buyback programs? You know, my -- I think that they -- they work temporarily. I mean, obviously they're going to be some customers who will go wherever the lowest dollar is, just like the churn that you saw between long distance companies.

Again, if somebody wants to play that game, there's nobody better to play it than us, and the low-cost producer wins. And so I can buy back cable boxes cheaper than they can buy back dishes. Let's put it that way. And I can -- I can do a lot more with PVR than they can with Video On Demand, and we're a hundred percent digital and they're not. So we have some advantages over folks that want to employ those tactics. I don't believe that those have been -- you know, they desperately don't want to show losses to Wall Street, in terms of subs, and so they've got to do some things to -- that may not make sense long-term financially, but that do make sense in the short-term, and again, we have to have the discipline.

We have to have the discipline to make sure the kind of things that we're doing are long-term in nature and not get emotional about things. Let's put it that way. But if it -- again, if it ever gets -- this industry ever gets aggressive and competitive and down and dirty, then -- then vis-a-vis everybody else, we'll be very successful.

One last question and then I'll let somebody else go. As far as the distant signals issue, have you given any guidance as far as how many subscribers that would actually affect?

I didn't hear the question. Can you repeat it?

Yeah. As far as the distant signal issue --

Yes.

-- have you given any guidance as to how many subscribers that would affect?

The only guidance I can give you is that it could affect as many as 60% of our customers, if -- if -- if the local and long -- and distant network signals were turned off. It could affect 0% of our customers if it goes away. We think it should go in terms of a -- and it could be anywhere in between that number. And again, it -- it -- it is -- it relates to their network signal so it doesn't mean that you would necessarily lose the customer, but it does relate to their network signals.

My gut feel is that you would lose a large part of the customers in terms of churn because they watch the network signals, you know, 50 or 60 percent of the time today, so I think you would have increased churn at lower ARPU to the extent that a decision ultimately went against us, and again, that would be dependent on whether we had to turn off -- I mean, there could be no turnoffs because we did it correctly.

It could be that we have to run customers through a database today, and then turn off customers that don't qualify under databases today. It could be that we'd have to turn off distant network signal customers only. And it could be we'd have to turn off distant and local customers today. I think the concern I would have, again the reason we have -- the reason we have battled the broadcasters on this, is we're -- we don't believe legitimate legal customers under the law should be turned off, regardless of what the interpretation might be by broadcasters, and so we ultimately had a disagreement about that with them and a judge has to decide.

For example, we believe that you can -- that you clearly can use two databases to qualify your customers. We use two experts that have been qualified by the broadcasters. One called decision world, one called decision -- one data world, one decision Mark. The broadcasters say you can only use one. You can only use one database. And we know that databases have flaws.

And so we use both. If the judge rules that we can only use one database, we clearly are going to have customers who should not have been turned on. Right? The judge then could rule that that institutes the death penalty. The judge could rule that that's not the debt penalty, that that was a difference of opinion and we have to re-qualify our customers through one database.

So this is one where I have no feel whatsoever how the -- how the judge -- judge might rule. It is pretty clear that one or both companies will appeal this case. We already had an injunction entered against our -- we basically lost this case and had an injunction entered against us in October -- sometime in 1999. We appealed that and we won the appeal. And then it got sent back down to the court to be heard again.

So I think this case is going to go on for a long time. You know, I would hope that -- that we could -- that we could have settled with broadcasters. We were able to do that with ABC and NBC. I think we -- we are not that far apart in terms of what we both really want, which is to give more local signals and protect the local broadcaster. We're certainly done more in that than anybody else has done.

But their motivations are unclear to me as to why they would be pressing this case, why they would be pressing to turn off 60% of 8-and-a-half million subscribers who are legal in local to local. They claimed in the merger process that they didn't want EchoStar to merge with Direct TV because there would only be one provider of -- one satellite provider of local signals, and the effect of what they asked the judge in this case would be to have only one provider, which would be Direct TV and potentially news corp.

So on the other hand, news corp owns fox networks and fox, you know, has a good relationship with fox affiliates and maybe there's a motivation there we don't understand, but it's going to continue to be something we have to work on and deal with and, again, when -- when we -- when it comes to the rights of consumers, you -- you just know that we're going to -- we're going to continue to fight for that and our customers appreciate that. And, you know, we lost -- we fought for -- against must carry. We took it all the way on to the Supreme Court. We lost that battle.

We haven't -- I don't think we've ever won against the broadcasters. You know, maybe this is the first time here. I don't know. Maybe not. Maybe they'll continue to -- continue their streak but we're going to continue to fight for customers, for consumers.

Thanks, Charlie. Appreciate it. Great quarter.

Your next question comes from Douglas Shapiro with Bank of America.

Yeah. Thanks. I guess I had two questions about news corp. The first one is that news corp's, I guess, offer to submit to cable program access rules, just curious, Charlie, if you think this is sufficient for the deal to be approved or is that sufficient protection for you guys? I guess the second question then is to the extent that news corp tries to reduce some of the retailer subsidies and bring SAC down, do you think there's also an opportunity for you guys to do the same and follow suit?

I guess I'll take the second part of the question. I think -- I think the main competitor remains cable, and I think that regardless of what Direct TV and/or Hughes or news corp would do, we would still be a lot more focused on what cable is doing, and if cable had DISH buyback programs and stuff, I don't think you're going to be in a position to lower (inaudible), regardless of what they may do. So I'm not sure there's a big correlation there.

The program -- you know, certainly there are public policy issues with the news corp acquisition of Hughes. I mean, you -- you're going to -- you got to look at the total picture. You've got perhaps increased ownership in local networks. The FCC is poised to raise those caps, those limits, next month. You've got multiple broadcasting stations you can own in a net -- in a market today.

You've got newspaper ownership with perhaps cable and/or satellite. You've got one of the four big networks owned by news corp, a studio owned by news corp, most of the motor -- some of the most popular cable channels, including sports, owned by news corp. Exclusive with the NFL. Both on certain games and on network and also on satellite. And then you've got a worldwide -- a worldwide -- you've got a monopoly in South America with Direct TV's Latin America's bankruptcy, you've got a monopoly (inaudible) in parts of Asia, through star.

So you've got a lot of potential for mischief and concern in terms of public policy. Obviously, those are things that we would think that the regulators would look at, and Congress and, you know, just as each merger is different, and so they'll look at -- there's a lot of different issues in this merger than ours and they'll look at that and I'm sure it will get a thorough review. There's foreign ownership.

You have to understand as Americans, do you want an Australian company owning all that media content and influencing the hearts and minds of your country. So those are things you got to look at. Having said all that, I mean I think that -- that -- that -- that the fact that they would make channels available under program access the laws exist today, one those laws with expire.

Two, that doesn't relate to retransmission consent where the laws are not tough enough, where we've lost all the battles from FCC when people refused to give us retrans (ph) and if our cable company didn't have Fox network, that would potentially put you out of business for a lot of customers, and even if you make program access available that doesn't address the price you're going to make it available.

So for example, there's nothing in those program cabling says laws to prevent a news corp from tripling the right to sports fees for Fox Sports. They could make Direct TV pay exactly the same price and the rate would go up for everybody. The problem with that is twofold. One is the consumer is going to be paying three times more than he should under a competitive requirement, and second, in theory, Direct TV could not -- wouldn't have to raise their rates because they're the only -- news corp would lose 35 cents on the dollar with Direct TV, and make a hundred cents on the dollar from all the other distribution paths out there, whether it be cable or EchoStar.

So you've got a lot of interlocking potential for -- for things that would be against the consumer and against public policy and, you know, the regulators will take a look at that and see whether they feel -- feel like there are enough -- enough checks and balances to make that work.

On the other hand, that's kind of one piece of it. The other hand, clearly news corp is -- is a -- first of all I got a -- I at least have a personal relationship with Mr. Murdoch (ph), so it -- in terms of things that help our industry, that's -- I probably have a better relationship with him than I have had perhaps with -- with Hughes folks, so -- over the years, so at least you can have a -- a conversation about things that are going for our industry, whether it be fighting Pier see or whether it be making sure that we have more consumer-friendly laws for satellite.

Clearly they bring another potential dimension to our industry. They can make our industry -- could under certain circumstances make our industry longer. The loser in that would be cable. It's unclear whether -- whether EchoStar would benefit or not from that, depending on how we manage our company. So it's clear that news corp, a news corp entry, would be, all in all, a negative for cable. It may or may not be a negative for EchoStar.

You know, we'll have to wait and see how the -- if the -- if the merger is approved, and if so, under what conditions it's approved, and then how -- you know, how we can manage our company and how we can compete out there.

I guess just to follow up on that one thing you sort of skirted around there was -- or you didn't express any concern about exclusivity of nonaffiliated programming. Is that something you'd have a concern about, and just in general, are you going to push for the FCC or the FTC to codify some of this and maybe using some stronger language than news corp's offered up so far?

I mean, I think -- I think we have always -- we're -- we typically are against exclusives. I mean, we have even done some internationally before, but we're typically -- you know, we prefer not to have any exclusive anywhere across the board because then the customer has a choice. But clearly there is -- there are ways for nonaffiliated programs to be done on an exclusive basis to the detriment of consumers and, you know, we'd have concerns that that was the case.

But we'll have to read their filings. We'll respond to their filings publicly. Again, I would think it's a mixed -- it's a mixed bag for EchoStar, in terms of the merger itself, and we'll focus on the things that we think are potentially detrimental to consumers and our industry, and to, you know, choice of consumers and we'll respond in the filings that you -- you know, you get to file and if the Justice Department requests, you know, information from us, we'll have to obviously -- we will and obviously supply it to them. But that will be the extent.

Okay. Great. Thank you.

Your next question comes from Tom Watts with S. G. Cowen.

Yeah. Congratulations, again, on a great quarter. A couple quick questions. You noted that some of the numbers did particularly well in some of the bad market channels and Direct TV had indicated they were doing well with the independent retailers. Can you give us more a sense? Is there a change in positioning there or a change in the incentives that are being paid to the retailers? What's driving that switch?

Well, you know, again, the independent retailer has always been the cornerstone of really what we've done. We've not had a lot of support from the consumer electronics stores in the past. We've certainly never had exclusivity within those markets, but we are in Radio Shack now and we are in Sears and we are in Wal-Mart, although with the exception of Sears, Direct TV is there as well and of course they're dominant in Best Buy and Circuit City, so they clearly have more distribution in the consumer electronics stores. We probably have slightly more distribution in the specialists, satellite specialists, and they probably do a little bit more direct, you know, in terms of direct sales to customers than we do.

But we're both doing well and, you know, I just thought their results were phenomenal, and that they have clearly, in the year that I've worked with them, I saw a change in focus. I think Roxanne brought some focus from a day-to-day point of view, a focus on the bottom line in some of the distribution paths that they've had and they've now focused that and they clearly are proving that that strategy is working.

And you know, our strategies have continued to work, and -- and our industry's continued to grow. When cable -- when cable's not growing in terms of video, so I -- I have no complaints. Again, I -- my -- I love to see satellite dishes on a guy's house, and I'm -- you know, I prefer it be an EchoStar DISH, but if it's a Direct TV DISH, I still feel better about it than if it was a cable sticking in the guys house. So ...

Okay.

You know, we haven't changed our emotion. It's still cable and that's where we've focused and I think that success breeds success and if we do well, I think that helps Direct TV and vice versa.

Just in responding to cable -- bundling of cable modem service, can you give us a sense of any productivity of your SBC arrangement and you suggested that customers can always go get their own DSL, but do you have specific expanded plans for DSL bundling?

Well, we're still testing. I would say that in terms of trying to bundle video and DSL, it's not without problems. We haven't been as successful in some of our tests as we probably would like to be on that. That doesn't mean that creative management on both sides can't solve those problems. And that's what we have to focus on. I mean, most of the things that we have been successful with the last 23 years haven't been instant successes. We typically -- I mean we started out with big dishes that were 10 feet in diameter and cost $20,000. They weren't exactly an instant success.

Uh-huh.

But we learned, and if you have the capacity to learn and you have the capacity to focus on your problems and solve them, and you got a little bit of tenacity, normally good things happen.

Okay. Then just a final question on satellite broadband. There's been a lot of speculation about your discussions with wild blue and choosing (inaudible) platform. I know presumably you've also looked at (inaudible) which is more of an industry open standard and that (inaudible) experience with. Where are you in that evaluation process, and what factors drive you towards one or the other?

I'll give you a general answer. First of all, Nolen Daines (ph) who had been on our board and started (inaudible) who did all the encoders in this business long ago has gone full-time with us, and is off of our board as of a couple hours today, and he's heading up our -- and he's head of our broadband division, so we've got an excellent person to focus on that, and he's not in this call.

He could give you a better explanation. But one of the things that we think is important is that we do come up with an industry standard. Certainly the things that wild blue are doing, we think, are interesting and we will evaluate, you know, everything that they're doing and we will also evaluate all the other things we see around the world in terms of kind of what the best mouse trap is.

We're pretty good at that. We've had a pretty good track record of that. We are the first company to commercially use MPEG II, real MPEG 26R. You know, in other words all -- the standard (inaudible) that's turned out to be the right decision. We evaluated most of the security systems in the world, and picked an unknown company called Nogra (ph) that has tended to do a better job than most of the people in the industry on security. So we're pretty good at evaluating the different aspects. We'll do that. We'll go through a thorough process.

Again, SES Americom is helping us with that and we're helping them to some extent. I think when we get through the evaluation process, that -- that many of us will have the same conclusion. If we do, we'll probably move forward. If for some reason, we have difference of opinions, we'll have to tread water a little bit until we can -- can get to a better standard. But, again, I would hope that -- that our industry, including Hughes, would settle on a standard, but we're prepared to -- if we think we have a better mouse trap, and somebody else wants to use it a proprietary standard, we'll probably go a different route.

We know it has to be an open standard. That's the way you get costs down. There's no way that, you know -- if you had a nice open standard for software on your computer, you wouldn't be paying a hundred bucks for windows 90 -- 2000 or whatever, right.

Right.

So we're low-cost guys. We got to put something out there. I'll say this: There have been tremendous progresses in technology for satellite broadband since we started -- since we started -- you know, since we started working with wild blue and star band years ago.

Okay. And now with -- do you expect to see that standard adopted before going into trials the fourth quarter this year or what's the timing of what (inaudible) might look like?

No. I think we'll do our trials with multiple vendors, to try and get a feel for who is going to be the best standard.

Great. Thanks a lot.

Your next question comes from Karim Zia with Deutsche Banc.

Thanks. Charlie, if you look back at the gross add trend, you know, over the last five quarters, it's essentially on a year-over-year basis accelerated every quarter after several years of decelerating. At a steady rate. I'm curious to what you attribute it to. How much is the addition of Wal-Mart and Radio Shack over the last year, and how much is, you know, any other factor?

Then also if you look at subscriber acquisition costs, specifically for the quarter, I think it's the first time I can ever remember seeing it go down sharply on a year-over-year basis, which is surprising considering last year the promotions were not as aggressive as they are now in terms of subsidies. Is there something else moving underneath that? Either lower commissions or lower box costs that you're taking advantage of?

I realize part of it may be lower percentage of subs that are coming in under lease, which is a higher SAC, but it seems like it's a pretty dramatic year-over-year decline, and is that the beginning of a trend? Thanks.

Okay. I mean I think -- I think our industry has always -- you know, has had -- has never really lost a lot -- as much momentum as the press has indicated, in terms of gross. Obviously as your base gets bigger, your net numbers would go down, even if your gross numbers are going up.

You know, I think there's a number of factors that have helped us. You know, the merger probably gave us better brand awareness, without having -- you know, than we had before. Fairly dramatically. The -- we have increased our distribution. I think our marketing campaign has been more effective than it has been -- has been more creative and a bit more simple to understand, so -- you know, and I -- you know, we continue to learn things.

But my experience has been that it -- that it -- it goes in cycles, and to the extent that our industry had a good first quarter, the cable industry, the net effect is the cable industry will react to that and will -- you know, will face stiffer competition in the second and third quarter as a result, and we'll react to what they do, and it kind of goes back and forth and, you know, good management will react to the things they see.

The second thing is, you know, a lot -- it -- there is -- you can get misled from a quarter to quarter basis because perhaps the first quarter, we got the benefit of a lot of the advertising we did in the fourth quarter last year, and then sometimes there's a delayed effect of that because you got to install the product and so forth.

So, you know, I think the war -- I think people watch more TV and they want to -- you know, they wanted CNN and Fox News and MSNBC and CNBC and Bloomberg and, you know, maybe the cable company didn't offer all the news they wanted. So our industry probably benefited from that.

You know, so, you know, we maybe got a little, you know, lucky there to some degree.

And then in terms of SAC, we spend less for a -- you know, a 24.99 customer than we do for a 600 -- $60 a month customer, so -- and our lease -- the main factor is, of course, your lease is less -- less prevalent in the last few quarters, so those are all factors.

And of course, you know, again, you know, we -- we -- we -- you got to trust us to look at all those variables inside. I mean, we have to look at SAC. We have to look at churn. We have to look at how we would -- what policy would affect those things. But your -- our total focus, ultimately, is long-term -- long-term -- to get, you know, free -- to be free cash flow positive. That's how we think we build value in the company, and all the other numbers are subject to a lot more manipulation in the short term -- in short-sightedness and short-term.

You know, we can go spend more capex and we can get EBITDA up and you guys would be real happy tomorrow, for next quarter, maybe next year. The cable industry did that for 30 years. But they never take in more cash than they spend. I haven't, don't, so forth and so on. Therefore they have less value.

The promise is that next year they'll take in more cash. Next year, next year. 10 years from now they'll take in more cash. And for us, we set out on a path to do that. We thought that was going to happen next year, and much of our debt, you know, comes due and we thought we'd have the to be able ability to pay some of that down. It turned out that we did a little better than -- that we were about 20 12 months early, that we did a little better than we thought we would do on that. But that's how we manage the company.

If you like -- if you want EBITDA and you want to focus on management on EBITDA, then buy a heavy capex company. If you want free cash flow and, you know, more cash than you spend over the long haul, doesn't mean we'd do it every quarter, doesn't mean we wouldn't do an acquisition, don't mean we would do some -- you know, something else, but if that's your focus, then we're probably something you want in your portfolio.

Charlie, along those lines, do you envision a point -- maybe over the next year -- where with the PVR, whether the tipping point is the 522 or some other break in the cost curve, where you make a big long-term bet on, you know, shifting your whole marketing emphasis to that product?

I don't think you'll see us do that. I think the products complicated. I don't think it's for everybody. People who have PVR love it, whether they have a tee vow or a cable box or ours, but it's not for everybody. There's people who -- there's people who just -- I mean, this -- we are a country where when you go in somebody's house, the clock on the VCR is blinking.

And a PVR is more complicated than that. So you have to be careful about -- about trying to put that in everybody's house. So -- and it does have more service calls, it is a moving part. It's -- you know, it -- it has the technology is changing rapidly, so I think -- I think that we have a lot of upside on PVR and we don't charge for it. For example, everybody else charges for it. There's an opportunity for us to charge for PVR.

We're looking seriously at that we think that could make some sense under certain circumstances. And clearly it's a stickier customer, at least so far. So we think there's some opportunity there. But by no means do I think it's going to be the majority of -- of our industry customers for the foreseeable future.

Okay. Thanks.

Your next question comes from Benjamin Swingberg (ph) with Morgan Stanley.

Thank you. Good afternoon. Comcast and Cox have both indicated that they think satellite penetration in AT&T broadband's markets is more than double what it is in their core, the old Comcast and Cox markets. Is that a statistic that you would agree with? And does it make any difference from your perspective if an AT&T broadband system is upgraded or not upgraded? Arguably their customer was as much of issue as their network structure.

Really boils -- it all -- you know, first of all, in general, Cox and Comcast are great operators and I think they did a great job and so forth, but it -- you know, you can't just say, well, I'm going to upgrade an AT&T system. There's a cost to upgrading that and do you get a return on that, and you have to upgrade the system, and then you got to go to go try to steal a satellite customer to get them back, right?

And if -- if your break-even is having 65% market share, and you've only got 60% market share, you know, we ultimately have to decide whether we're going to push you down to 55. And so it gets to be a real game of chess. And I think so we got more pieces than they do. So I think we get to move the board -- I think we're a bit more in control of the board than they are. I mean, we get to look at whether we want to go against Comcast in a particular market, based on what they do. And we don't make that decision in a vacuum. We look at the total market out there. But -- but clearly -- clearly there's a third of the country that ought to own satellite, regardless, right?

Yeah.

And clearly there's a third of the country probably that ought to own cable, regardless. And there's probably a third of the country that's going to be a battleground, and we have built EchoStar brick by brick, day by day, for 23 years, to be -- to be ready for World War III. Afternoon, you know, we don't go out -- we won't be the guys that launch the first nuclear bomb but somebody that wants to lob it -- you know, and I'm not saying that anybody will. But if somebody does, I'd rather be in our shoes than anybody else's.

Thank you.

Your next question comes from (inaudible) with UBS Warburg.

Yes. Thank you. Just one or two questions. I know you addressed a lot of the subscriber detail. At length. But I'm just wondering if you could give me a sense of sort of the rural versus urban mix of the net additions, which was obviously robust. But are you finding a little bit more traction in the rural markets given the superior offering, or can you give us any -- can you give me any color on rural versus urban mix for the quarter. That's number one.

And number two, giving the hefty cash balance and obviously having no bank debt to pay down, you know, could we go over the uses of cash again, going forward? You obviously have a free cash flow positive model, do not need all that cash for operations. You know, what's the plan with the cash? Are there stock buybacks in the future? You know, bond buybacks and so on. If you If you could elaborate on that. Thank you.

Well, the -- our growth comes from across the country in all segments. You know, if you -- if you had to make a real general statement, we probably skew a bit more rural, and Direct TV probably excuse a little bit more urban and suburban, you know. You know, just based on distribution. You know, there's Best Buys in the big cities.

They're not in rural America, for example. So -- but we've pretty much -- and I think Direct TV does too. We pretty much -- I mean, we have a product that's popular with all Americans, and clearly there's not as many rural customers left out there to go after, so I think -- I'm pretty pleased.

There's not any -- there's not any one segment or section or part of the country that would -- that we're dependent on.

What was the second part of the question?

Cash on hand --

Oh, cash. Well, the problem is that we saw that Adelphia (ph) was getting 46 -- their two executives are getting $46 million and so now all my executives want $23 million apiece and we got like, you know, 10 of those guys, so we got -- you know, so we got to look at that.(Laughter)

Of course that didn't fly. That didn't get to the compensation committee, so that didn't fly. You know, we look at -- I would hope that we have a better use of our cash than -- than -- than -- you know, you're going to enlist and you can buy back stock, you can buy back debt, you can acquire companies, you can pay it on -- you can -- capex and new satellites and new infrastructure. Again, we will do that -- you know, we'll look at that and make those decisions on a real-time basis, and today, the only decision that we have made is to buy back our debt. That was the best use in February of -- of our cash at that point in time, but we do have, I think, about -- how much debt do we have coming due next year?

We have a billion six twenty five that has a first call date in February of '04 and I think it's a hundred and four and change.

So, you know, we'll look -- we'll look for all the things that we think we can do with our cash and, you know, I think we're pretty conservative and, you know, we would -- you know, we'll look for things to do and that -- that could include acquisitions, stock buybacks, debt buybacks. It probably will not include big executive salaries. We did -- we bought a building yesterday for future growth. That was $40 million for expanded capability in Denver.

As we've -- those of you who have visited us, realize we're a little bit -- have been out of space for a while. We -- we are -- you know, we clearly have said we're going to spend a bit more in capex on satellites. You know, we had a choice to spend $2 billion on NFL for 5 years or we could spend two billion dollars on infrastructure and satellites and things that will last, you know, 15 years, and, you know, we -- we chose to go a different -- different direction there, and you know, we'll see.

I say that because a lot of the capex that you're talking about can be funded internally, obviously, without accessing the cash balance and 2.6 billion minus the 40 million for the building, you still have a lot less, obviously, and the market is attractive on the debt side, so I'm just wondering, aside from just capex, that the company can already fund, prudent leeks if there's anything on the horizon that would really drive the capex much higher (inaudible).

We just don't know. I mean, I think that we -- we look at stuff every week, in terms of how we might utilize cash, and we just haven't -- we haven't gotten to something that looks -- you know, that just looks so good that we'd do it. And that -- if -- we don't have -- I don't mind having cash in the bank. It's a nice problem to have. And it's certainly not burning a hole in our pocket. I mean, you know, we got a negative arbitrage. Our financials will look that much better when we get out of the financial arbitrage situation that we are.

We're certainly not an investment-grade company yet. We did get up particulars in our ratings but we're still not where we think we should be financially. From a ratings perspective. So -- and then we think there's opportunities that will come on the marketplace in the next couple of years. We want to be prepared to take advantage of those. So we're taking -- a lot of people have ideas. We're -- we haven't come to a solid conclusion on what to do, and, you know, when we do, you'll be -- you'll hear about it.

Okay. Thanks. And just on the first part of question, you mentioned the rural versus urban shift in general, but any change to the shift in those different markets as you have increased your net adds in the quarter?

I mean, I -- again, I think -- no. I mean, I think that we focus on -- if there's two customers in two different cities and one customer cost's me $400 a to get and he pays me $6 a month and one customers costs me (inaudible) I'm going to go for the guy that costs me 400 bucks and pace me $600 a year. $60 a month. And, you know, we have limit -- we do have limited capital, so we have to have the discipline to go after customers that we think will be long-term, good customers for us, that we can afford to buy, and we could get every customer in America that has Direct TV.

It just wouldn't be a prudent thing to do. I mean, I have a hard time because for you guys to really understand our business day-to-day as perhaps the people that run it, it's very difficult. So ultimately part of your decision-making process has to be, I think I'll invest in the people who hopefully know what they're doing and can present a track record over a period -- long period of time.

We certainly haven't presented a track record over a long enough period of time, but -- but we just don't sit down every day and say move SAC and move churn and focus on nearly as much stuff as you guys do because we focus on one fundamental, which is -- which is free cash flow and everything else flows from that. Once you -- once you decide how the decisions affect that long-term, then I'd think a management team is capable of making great long-term decisions. If you don't focus on that, right?

As we saw during the go-go days a couple years ago, and everybody, every quarter they're going to the CFO and saying manipulate the numbers, you can't have a business. So, you know, we'll -- we don't care what the stock price -- I say we don't care. We're not as concerned what the stock price is today or yesterday. We're very concerned about what the stock price is going to be 5 years from now.

Certainly appreciate the conservatism. Thank you, Charlie.

Your next question comes from Thomas Egan (ph) with Fahnestock.

I have a couple more questions on subscriber growth. Over at Direct TV, Charlie, they were saying that 40% of their new subs came from former cable subscribers that were taking a digital package and I was wondering if that's -- that's roughly the same for you guys.

And secondly, regarding local channels, wondering after 64 markets, what you've experienced in terms of the incremental subscriber lift in those markets that you offer in local channel. Thanks.

We couldn't afford the market data that tells where our customers are coming from. But they all -- all went in the balance sheet, so we were pretty happy. We didn't really care where we got them from.

The-- so I don't know -- I mean I think our marketing people -- I'm not being facetious. I think our marketing people have a pretty good idea of where they're coming from. It's not something that -- I know kind of where area -- what areas they're coming from, and I haven't really focused on whether they had digital cable or not.

The second part of that was -- what was the second part of your question, Tom?

It was in -- in those markets that you've launched, local channels, what incremental sub lift you've seen in those markets.

You always get a -- a one-month, two month kind of extra customers, you know, when you go into a local market because you've got a more competitive product.

Right.

But the 65th market is going to have less impact than the 64th market and the 66th is going to have less than the 65th.

Right.

So I'd say that the big markets, the lift in general that we're going to get, while -- if we had -- if we as an industry, if they had 440 more markets, we'll have some lift but it won't be nearly as much as (inaudible) started back in 1999, so I think there's -- it does help you in churn, it does help you in lift, but it's not going to be -- it's not going to be hugely dramatic, in my opinion.

Right.

Local to local becomes uneconomical at a certain point and we're not sure if that's a hundred markets or 75 markets or 150 markets. But it -- when it becomes uneconomical to do it, you know, we'll quit doing it.

So right now, what would you say that the take rate is for -- for those subscribers taking local in those markets where you're offering it?

There's nothing to take it. At the end of the quarter, we had $125 million of free cash flow. I don't know how to answer any other way. I mean, we -- we do look at those kind of things, but -- but at my level of things and I don't know, somebody here in this room might have a different answer, but --

Right.

(inaudible) it's not -- at some point you got to focus on big key issues, and, you know, we know that it's -- we know it's economical for us to light up the 64th local market. We know we get enough lift out of that that makes sense. And we know that ultimately that's a good long-term decision for us.

And in terms of -- in terms of subscriber growth, what -- any -- any more large retailers that you're thinking about partnering with?

I would say that we're pretty -- I mean we're -- we have always been comfortable with our distribution that we've had, and we're very comfortable with the distribution we have today. I think that if somebody wants DISH Network, for the most part, they can find it. So that doesn't mean that if there was an opportunity that came along where we thought we could increase our business, we wouldn't take advantage of it.

And there may be those opportunities in the future. I mean, I think -- I think there's -- you know, if you look at the European -- if you look at the news corp model, they come a lot more direct. It's certainly a lower cost way to do it. You can certainly even improve your churn metrics when you do that. They certainly have employed that method in the U.K. with great success. That -- you could see divergence in distribution.

You know, if they were to go all direct and we do something different. If they went all distribution, we'd do something different. So I think you're going to see some divergence between the satellite players, you know. You already see that today. They're going after a little higher -- they are going after it, and I think getting a little higher quality customer, a little higher ARPU customer than we are.

They're spending a little bit more money to do it, but that economic model seems to make sense to me, from what I can see from the outside. We're going a little different direction. I know that economic model makes sense for us, and we're probably not -- not after exactly the same customer anymore, and both of us, on the two bock ends of that, the cable guys, the guys getting squeezed in the middle because they're kind of going after that high-end cable guy and we're kind of going after the medium to lower end, and, you know, it works well for our industry and both of us have had some success over the last couple quarters.

Your next question comes from Rob Sanderson with American Technology. Mr. Sander Sanderson, your line is open.

Hi. Sorry. Two questions for you. One a little more on the operations side. The other a little more on the strategy. Operationally, churn, you put a -- a rate increase in February. Can you sort of -- you know, did you see any uptick in churn because of the rate hike, you know, giving everyone else now (inaudible) also and if so, do you expect that to continue in the March quarter?

And along that line, can you quantify or help us, you know, soft of how we think about the differential in churn rate on your PVR (inaudible) and then the second question, you know, what -- assuming that, you know, we do get a change in control of ownership at Direct TV and assuming they do play fair on the network content and support and things that were mentioned before, you know, would you expect to see a further divergence in strategy between yourselves and them or than we see today already, or would you expect them to maybe also (inaudible) down market or what's your general thoughts on that?

You know, first, I don't -- I don't think we've seen all the effects of the price increase. We get a little bit when you announce the price increase and you get somebody who gets emotional and says I'm going to switch. But my experience has been that the -- that the majority of that comes when they get their bill, and they would have been getting their bill -- and realize we bill one month in advance, right? So that means that we billed you in February. On average, it would have been February 15th.

That would have been a bill that would have paid through March 15th. And you would -- the vast majority of those guys would be disconnected in the second quarter, if they didn't pay their bill. So I think we have to wait for the second quarter to see the total effect of -- of the price increase. We got two-thirds of the ARPU in the first quarter, so we got -- we kind of got the benefit of the ARPU.

We probably didn't get all the -- all the pain, if any, if any, associated with the price increase. And one reason we don't think the pain will be too severe is, even 'with our price increase, where are you going to go to get a better price? Right? So you may -- you may not want to see your basic rate go up $2, but then you turn around and look for the same value somewhere else and it costs you $5 more a month.

You -- you know, you pretty quickly figure out you're better off staying, so we don't -- I think we'll see a better -- better picture in the second quarter on that.

In terms of diverging strategy, I think to the extent that news corp buys Direct TV, they're going to have it -- you know, they -- they control a lot of balls on the court at that point in time and they can decide, for example, to sign up with gem star, because they own 45% of gem star and 35% of Direct TV, so it makes sense to move money from the Direct TV pocket to the gem star pocket.

They can decide to pay more for Fox Sports. They can decide to -- they can decide to go after an Adelphia in buffalo because they won't carry Fox Sports or they won't carry Fox News on a basic tier, so they can go out -- they have a different reason for what they're going to use that distribution path for. It may not necessarily benefit the huge shareholder but it certainly will benefit news corp, so smart guys probably investing in news corp because that -- all the money flows there, right?

Yep.

You know, I've always thought you ought to do what John Malone does. Right? So he went out of Gem Star to news corp, right? You know, no, the guy's got a good track record. That probably makes sense. So who knows what divergence -- I think they would probably have a different strategy under news corp and it would probably be bad for those people on cable who didn't want (inaudible) tornado, they might be very panel if somebody would pay as much for fox news, play (inaudible) Comcast plays ball with them.

They probably don't get very aggressive in Philadelphia because they're getting their Mona different way and they're did getting a hundred cents on the dollar so they don't have to be aggressive for the people who play ball with them. So you can have a pretty good old, you know, you can have the masters, gentleman's club that's going to exclude anybody who is willing to compete. That's what you're going to get. I mean, that's what the American government is so far we're going to have big, big multimedia companies. There's going to be four of them, right? You know, I'm pretty sure Viacom is going to survive.

I'm pretty sure Disney is going to survive and news corp and maybe GE and NBC. Or maybe it's AOL Time-Warner. You know, there you're going to have about four of them that are going to control most of the content that people want.

Appreciate the color. Just the -- you know, I guess the one we're thinking back, back on the operational side, when we're thinking about, you know, churn and obviously sort of normal seasonality and maybe a little bit more, but nothing outrageous, is that the message you're trying to give her?

Well, I don't -- again, I think we're comfortable with where our churn is. We know that it fluctuates seasonally. We know that it fluctuates sometimes for events beyond our control, right? The external events. Wars, settlements of wars and so forth. But we -- we're comfortable with where our turn (ph) is, so that when it's all said and done at the end of the year, that based on churn and SAC and new adds and everything else, we're going to deliver 300 and -- no, about -- at least as much free cash flow as last year, right?

Right.

I don't know what that. 200 and something.

231 million after the breakup fee.

So all those balls move inside that court, right? But to try to pigeonhole each and every one of those, quarter after quarter after quarter for you guys, is not what I want our senior management team focused on. Right? If I do -- if I focus on all that, number one, they make short-term decisions that don't benefit our shareholders long-term, so we take a different approach.

And if you don't like this approach, don't invest in the company. The approach is, we have lots of variables. One of those is churn. Right? I want you to manage this company so that ultimately when you manage all those things, you maximize something called free cash flow. Net free cash flow. And do that on a long-term basis. Right? That's -- that -- that's the University of Tennessee business 101. I know they don't teach it at arched business school but that's the first course that I ever had which was take more money in than you spend and you're building value. I even heard Warren Buffet say the same can, and I don't know where he went. Probably University of Nebraska. Probably teach the same course there. All right. By the way, I didn't say anything about churn in that course or SAC.

Your next question comes from Todd Mitchell with Salomon Smith Barney.

Hi. Thank you. I was wondering if you could elaborate on an earlier comment you made. You said some of your relationships with the DSL providers were problematic. Is that an operating issue? Is it a management issue? Is it a tech chemical issue? The other thing I was wondering is, would you comment as to the number of PVRs you have in the field?

Okay. I didn't say they were problematic with DSL. I said that Weaver done a lot of testing and we -- and that, you know, the results are mixed at this point. And there are issues open-there are things that we have to do. Most of them are operational. Right? They're mostly operational. You got -- you got laws that we can't talk to their customers, right? Without the customer's permission.

So it makes it a different transition to talk about video at the same time you're talking about DSL. There are different databases that don't talk to each other, right? So you got to develop a way around that. So again, as I said, we -- most of my -- most of the things that we have done well have not started -- have started out with issues, and we've had to work around those issues, and, you know, certainly broadband is -- has not been successful for us so far with star band and wild blue and even our DSL tries. None of that -- none of that has been material to the benefit of our shareholders yet.

That doesn't mean we're going to quit, doesn't mean we're going to give up. It means we've taken a step back and said how do we fix some of these problems before we go forward. And then the second part of the question was?

PVRs and-e.

PVRs. We don't disclose how many PVRs we have in the field (inaudible) that -- I would feel comfortable to say we probably have as many as anybody else out there but -- we probably have more than anybody else out there, but it's not been a huge focus to for us yet. And quite frankly, the marketplace hasn't -- hasn't, you know -- isn't telling us to make it that an issue yet. So ... you know, it's all timing and -

Thank you.

You know, replay had bad timing, right? They spent tens and hundreds of millions of dollars on advertising and went bankrupt. So we try to -- we -- it's hard to guess the time -- it's hard to gauge the timing, but we know we -- we know we have a cost advantage, right? Everybody in the -- everybody else has got to pay tee vow or they got to pay replay or got to pay this or that. We do it at a lower cost than anybody else. It's all homegrown stuff and our technology is really good, those of you who have played with it. I.

Thank you.

Your next question comes from Eric Jacobson (ph)with ING.

Yeah. Three quarters ago or so, when churn was close to 1.6%, you guys had said you were going to expect churn to go about 10 basis points a year for the next couple of years. What kind of changed?

I don't know that anybody's changed. You know, we just -- we do focus on it, and it's kind of a backward question to ask us what our churn is going to be. I -- you know, we have some internal metrics that we look at that we manage the business to. But I -- I think that as you're -- I just think there's a natural tendency that as your base matures, that it -- it gears more towards churn than not. You have competitive threats from cable with DISH buybacks, you have the broadband challenge of us not being able to deliver competitive product today, and you have a renewed, invigorated Direct TV. You know, with or without news corp. So all those things, you know, force us to be on our toes, and I think that, you know, we're going to try some things that don't work and for a particular quarter, churn is going to go up. We're going to do some things that work, and churn's going to go down.

Typically -- and Jason -- I don't know if Jason is on the phone but Jason says to each of you guys every quarter that the money -- what we do today, what we're doing today, doesn't have an impact on churn for many, many quarters out. So, you know, our -- our first-quarter performance in churn probably meant we did something pretty right two years ago. And we could be making mistakes today that will increase our churn two years from now, or vice versa. So it's -- it's -- I mean all I can tell you is we focus on it. There's a huge cost to churn. There's a limit to what -- you know, it's a fraction of what cable is. Our industry has done a better job in general on churn over the last year. But it can -- it can change in a nanosecond on you. So, you know, we're always paranoid about it.

Great. Thanks very much.

At this time, there are no further questions. Mr. McDonnell, are there any closing remarks?

No, I don't think we have any closing remarks other than to say thanks for joining us, everyone, and we will be back in probably August to talk about our second quarter.

Thank you very much, everybody.

This concludes today's EchoStar Communications conference call. You may now disconnect.---