DISH Network Corp (DISH) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Amy, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the EchoStar Communications second 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 and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I will now turn the conference over to Mr. McDonnell. Sir, you may proceed.

Thank you, operator. And thank you for joining us.

This is Michael McDonnell. I'm the Chief Financial Officer here at EchoStar and I am joined today by Charlie Ergen, our Chairman and CEO, Jason Kiser, our Treasurer and David Moskowitz, our Senior Vice President and General Council who is calling 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 open it up for some Q and A at the end.

But before we get started, as most of you know, we need to do our Safe Harbor disclosures.

As you know, we do invite media to participate in a listen only mode on this call, so we ask that the media not identify participants and their firms in your reports. We also do not 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 within the meaning of the Private Securities Litigation and Reform Act of 1995. Such 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 such forward-looking statements. I'm not going to go through a list of all of the factors that could cause our actual results to differ from our historical results or forward-looking statements. I'd ask that you take a look at the front of our Form 1-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 S.E.C. 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 any undo reliance on any forward-looking statements that we make.

Please also note that during this call, we will refer to the non-GAAP liquidity measure, free cash flow. Please refer to our second quarter earnings press release, which is available on our website, under the heading "News Releases" for reconciliation of free cash flow to net cash flows from operating activities, which is it's most directly comparable GAAP measure.

I would also note for those of you who may be interested in EBITDA, that our 10-Q contains a reconciliation of EBITDA to net income.

Now let's take a look at the quarter. We'll start with the total company.

Total revenue for the quarter was approximately $1.41 billion, an increase of 4% over last quarter and 21% higher than the same period a year ago. Subscriber growth and higher average revenue per subscriber both contributed to these revenue increases. Operating income was $223 million, an increase of $44 million over last quarter, and $77 million higher than the same period a year ago.

Net income for the quarter was $129 million, an increase of $71 million over last quarter, and $92 million higher than the same period a year ago.

Basic EPS was 27 cents compared to 12 cents last quarter and 8 cents the same period a year ago.

Operating income, net income, and basic EPS for the quarter include the benefit of a reduction in subscriber acquisition costs of approximately $34 million, primarily related to the receipt of a reimbursement payment for previously sold set-top box equipment as part of a litigation settlement.

Free cash flow, which we define as net cash flows from operating activities, less purchases of property and equipment, was $151 million during the quarter. This represents a $26 million improvement over last quarter and a $118 million improvement over the same period a year ago.

Free cash flow for the quarter ended June 30,2003, includes the impact of the previous discussed litigation settlement, in addition free cash flow for the quarter was decreased by a $50 million satellite deposit paid to SES Americom. It is important to remember that quarterly free cash flow is subject to fluctuations in capital expenditures, asset and liability balances, and other factors as discussed in our quarterly report on form 10-Q.

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

During the 2nd quarter we added approximately 270,000 net new subscribers, that puts us at approximately 8.8 million DISH Network subscribers as of June 30, 2003. This subscriber growth was due to the success of our marketing promotions as well as increased areas where we offered local content. We currently offer local stations in 70 markets and plan to be in approximately 100 local markets by the end of 2003.

Churn for the quarter was 1.67%, average revenue per subscriber was approximately $51.60 per month during the quarter, this represents an increase from last quarter of 12 cents, and improvement of $2.75 over the same period a year ago.

Our costs of acquiring subscribers during the quarter averaged approximately $408 per gross addition, including capitalized digital home plan equipment, net of recoveries, that figure becomes $441, this figure decreased by $38 from last quarter.

Subscriber acquisition costs for the quarter were reduced by the $34 million benefit related to the litigation settlement that I mentioned previously. This settlement reduced per subscriber addition costs by approximately $49.

Turning to the balance sheet.

At the end of the quarter, we had cash and marketable securities of approximately $2.8 billion, which includes $135 million of cash reserved for satellite insurance.

We also have approximately $5.4 billion of debt as of June 30, 2003, which includes $2 billion of convertible securities. These figures do not include the effects of the $500 million convertible bond transaction which was consummated with SBC in July, nor do they include the effects of the $245 million bond redemption which we announced on August 4th and will close on September 3rd.

On a straight debt per sub basis, we ended the quarter at roughly $610 per subscriber. On a net debt basis, that drops to $307 per sub.

These figures were reduced from $630 per sub and $340 per sub as of March 31, 2003 respectively, as a result of the subscriber growth and cash increases which occurred during the quarter. These amounts also do not include the effects of the SBC convertible notes and the bond redemption.

Cash Cap Ex during the quarter was $98 million with $29 million of that amount going for capitalized digital home plan equipment and the remainder for satellites and general corporate purposes.

Capital expenditures do not include the $50 million satellite payment made to SCS Americom during the quarter. This payment will be reflected as a deposit until the satellite is launched and placed in service.

And with that, I will turn it over to Charlie.

Thank you, Michael.

I think that the good news is I don't have a lot to talk about. Because I think in general it was a good quarter for us. And everything pretty much is tracking to -- to plan, at least as good or better than we expected.

Probably the only negative that I -- that I felt like is not really a negative, because I think it is still within the plan that we have, but certainly churn at 1.67% is a little higher than it was last year when the quarter was 1.6%. So that is certainly something we probably could do a better job on.

I think that we were -- we're pleased to see that Direct TV's churn was I think only about 1.5% for the quarter, so it gives our management team something to work on that says that, you know it is possible to get churn down in the second. The second quarter, historically, is a high churn quarter, the 3rd quarter is a high churn quarter, so obviously our competition has done a better job than we have there. We have room for improvement.

On the -- on the positives side, I think, you know, in terms of things that really affect us long term, I think, we had quite a few things that went on in the 2nd quarter. The SBC deal that we did with a major commitment on their part to us, in terms of investment, and the fact that we strategically are taking a little bit different approach, and have entered into an agreement where SBC will have some flexibility in -- in marketing our product under our brand, and -- but actually making it a one stop shop for their customers and bundling with their other telecom services whether it be local, long distance or DSL, that obviously is -- that remains to be seen, you know, the success of that plan.

Obviously we have a lot of things to do to execute to make that -- that work, but, you know, both of our companies are committed to that. We've been working together for over a year.

We feel very comfortable with their management team and their focus. And while, historically phone companies have not done well with the video business, we think that -- that SBC is -- seems to be the most serious about it, the most focused on it, and we think that -- that we have a great chance to - for success to improve both of our businesses with that particular deal.

Second, we were able to obviously retire some debt in the first -- I guess that was in the 1st quarter we did it, we retired some more debt that will be effective in the 3rd quarter.

Again, as we have moved from a -- a user of capital to a net producer of capital, obviously we want to -- it is important to for us to get rid of some of our high paying, high interest debt. obviously a stronger company than the amount of interest that we pay.

And that was the best use of our capital on the day that we made those decisions. And -- and in these situations.

The third thing is Miami litigation, where we certainly had some major exposure from the -- the lawsuits that had been brought by broadcasters, kind of balancing the right of broadcasters versus consumers. We -- we obviously were successful in surviving the death penalty, both the local local, and to DISH network signals that the broadcasters were pursuing, that were bigger, and it was pleasing to find the court found that we were in compliance with the law based on our actions recently. But we were disappointed that the -- the Miami court took away some rights of consumers, for example, grandfathered rights or some waiver rights.

We were very disappointed that the court ruled that we couldn't use two data bases. We think that it's pretty clear that we should be able to. It's pretty disappointing that they didn't allow us to use interference on our data base, we think that the FCC granted that right.

We are disappointed that the, so-called, DMA rule was interpreted by the Miami court not to apply, because we think that has some errors in it. So we appealed that. We appealed that.

And so if -- if we had -- were to lose on all of those -- those methodologies, in terms of using multiple data bases, DMA, interference, grandfathers, waivers, then we still had some exposure. We've reported that in our 10-Q, to you, that we thought that could be -- that would be something less than 30 cents a month in ARPU, that it could increase our churn, if we had to turn all those customers off by about 1 percentage point. On an annual basis, it would obviously be a small fraction on a monthly basis. So while those amounts are not huge, they certainly would be negative.

I'm pleased to report that this morning that the Court of Appeals has granted a stay on the injunction that the Miami court ruled on. They believe that there are issues that we have brought up that merit further review. We are hopeful that the Court of Appeals will find -- to be multiple things they could find, they may find that the Miami court erred, they could send it back to the Miami court, you know, and so forth and so on.

But the gist of that is, is that we will not have to, in the 3rd quarter, terminate subscribers who we think are, in fact, very legal subscribers. We have a chance to continue to pursue this court to increase the rights of consumers and increase the number of customers who are eligible for DISH and network signals.

And so, that is very good news for us, it's very good news for American consumers, and it is pleasing to fight a battle that we feel passionately about and have a higher court agree -- agree to stay what we think is, in part, an erroneous decision down in Miami. So that continues on. But certainly we have a chance for improvement over what we've disclosed to you in the 10-Q.

From a satellite perspective, we just launched Echo 9 last week. And, of course, the launch was successful. That satellite does two things for us; one, it has the first commercial KA band payload, so we get a chance to really go out and do live test of broadband and really play around with that, so that we can make sure that the economics of that will work for us before we make major investment there.

Secondly, it has the KU band payload that will increase our ability to deliver high definition television, local channels and international channels to our consumer base. So we're pleased with that.

The satellite certainly has a few more orbital maneuvers to do, it certainly has to be checked out and put on station. But we are through the major risk. We are not without risk. When you put a satellite -- before you put a satellite in service, but we certainly are through the major risk that is uncontrollable on that.

I think that is -- you know, I think that, also say that the economy seems to be, in my opinion, perhaps picked up a little bit. A couple of years ago we told you about this time that we thought it was slowing down. I think that the -- we're going to start the see the effects of tax cuts and low interest rates and we start to see, while very slight at the moment, we are certainly seeing some better confidence for consumers than -- than perhaps we saw three months ago.

So, it's too early to tell whether that will be a continual trend, but certainly we become a bit more optimistic in our business as we move forward. The SBC deal gives us some confidence to make some investments in broadband and other things because we have a little bit more critical mass out there.

And again, we continue to get subscribers in greater proportions than the entire pay TV business, we actually have gotten, in this quarter, more subscribers than everybody else combined since the cable industry was primarily negative.

So, all in all, I think we are on track for most of what we're doing and, you know, we have, obviously, room for improvement and, you know, we'll focus on those areas but our main focus is really strategically what we do long term and things that we can put in place that will return value to our shareholders long term. So with that, we'll take questions.

At this time I would like to remind everyone, in order to ask a question, please press star, and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q-and-A roster.

Your first question comes from Mark Nabi with Merrill Lynch.

Thanks very much. Hey, everyone. How are you doing?

Good.

Just three questions, one relates to capital expenditures.

Echo 10, I just want to ensure that you put in your 10-Q about -- it looks like you are spending $340 million over the next several years. That is -- is that in your capital plans when you have thought about this or is this new information just based upon the language, number one?

And also, number 2, what are your capital expenditure budget for 2003? That is the first area.

Second area, Charlie, you spoke on the first quarter conference call that you wanted to get more aggressive on A: personal video recorders in the back half of this -- of 2003; that your digital leasing plan would be, again, revised and resulting in higher SAC in the back half; and obviously PDRs too, I want to hear what's going on there.

And, third, any thoughts on all of this NRTC / Direct TV settlement and also Pegasus, as far as what do you want to do with respect to going out and aggressively going after those subscribers, or doing and maybe you can just comment on that? Thanks.

That is a lot of questions, Marc.

First from a Cap Ex perspective our guidance was external to digital home planner guidance was $300 million in Cap Ex. I would say that we still believe we're on target for -- for that. That is still our best guess in terms of Cap Ex.

We'll spend a little bit lower the first half of the year than that run rate, and obviously, EchoStar 10 and some other things we've done will -- will increase our Cap Ex. The SBC deal also will have some impact on Cap Ex as we had to do -- spend for a lot of computer integration and systems integration there. So -- and then with the economy being a little better than we think, and we're a little more confident, then I think that, you know, we're comfortable, we believe that the time to spend Cap Ex is not when everybody is saying, wow, things are great, you gotta be a little bit ahead of that curve.

And we are a bit more confident proceeding forward and we probably were under -- you know, we did not spend a lot of Cap Ex last year in 2002. We are spending a little bit more than probably average in 2003, and depending on how we feel towards the end of the year, we'll look at 2004.

Echo 10 is -- I guess I'd point out is -- EchoStar 8, you know, has a few problems that we point out in our 10-Q, it did have a solar panel that did not perform properly for a while. It is our -- we have two local, local satellites and they're backup for each other. But we have -- with 70 markets, we don't have back up for 70 markets today.

So EchoStar 10 is really - does two things. One, it gives us complete backup to those 70 markets, which is a -- the best insurance policy we can have. And obviously to the extent that the EchoStar 7 and 8 are working, it gives us some additional capacity for advanced services. So we think the satellite makes some sense economically but it also is part of what we normally would be paying on insurance. It is a better way to insure our business. That is the reason why we're building Echo 10.

It was something that we had conceptually thought about, but we pulled the trigger based on, you know, EchoStar 8 problems that have since been made -- resolved, but it made us think about what we really want to do from an insurance perspective. So that is the reason that the -- we're doing that.

On DVRs, we think that -- our personal opinion is that DVRs are revolutionary and will change viewing habits of people. We've told you long ago that we think that DVR is the way that people will go, not the big file servers and , and even the cable industry will have to go to DVRs, I think you will seen that borne out in the years to come.

People want control of their television. They basically want-- DVR , once you use it, you really can't watch TV another way, it saves you time, it gives you control of your live, you don't have to sit down and watch America's Idol at 8:00, you can do it whenever you want to, and you can just fast forward to the end of it.

So DVR's what we think are revolutionary . To the extent that they are, we think we are the best positioned company in DVRs, we own our own technology, and are not pay paying a fee to an outsider, we've developed the product in house. We have three new DVR products coming out this year, starting with the 510, which is in production today, which is the first real use of a DVR that has up to or more than 100 hours of storage. We have a HD, DVR coming out that will record HD as well, this year. We are very well positioned.

We made a strategic decision in the quarter to charge for DVRs for certain of our customers. So if you are a -- a basic subscriber that is only $24.99 your charge would be $9.99, if you are a top 100, top 150 customer, it is $4.98, if you're an everything package, you'll get it for free.

That's done for two reasons, one is, the marketplace is quite a bit higher than that in terms of DVR prices, so obviously we're leaving money on the table. Second it allow us us to now go out and activity promote our DVR product, essentially lowering some of the up front costs to consumers, realizing we'll get some of that money back in the monthly charge. And third, it adds value to our packages by giving people a reason to go up to our higher packages where we make more money to begin with.

So, it makes good economic sence for us, it's ability to get DVR in front of more people. The $5 a month fee is a more than fair price for the product and the increased storage space that we have now.

We will grandfather those customers that are already getting DVR parts for us, but for the most part there will be no change, we will not start charging them, at least not today. So, it doesn't really have an affect on existing customers. But going forward, that is a major change for us. We think that -- we're very excited about DVRs, you'll see some promotions from us starting at the end of the month where the DVRs, for the first time, will be involved in our promotions.

We're a little bit delayed in the digital home plan roll-outs that we talked about earlier in the year, because some of our new products that are not ready for that digital home plan. We anticipated it starting around the first of August. With that, we don't think we're gonna be ready until mid-October now with that. And so that will be delayed, and that will have. -- to the extent that we're delayed beyond October, that could have, you know, some negative impact on us.

But again, because we have -- because that is something new that we're doing and something that is -- kind of taking that to another level, it is not really going to hurt us, we don't think, other than missing some opportunity there.

On NRTC, Pegasus, I don't really know that I have any comment there. I read what you guys read. And the paper, obviously, from a Direct TV perspective, they can divide -- he they have successfully divided and conquered NRTC, probably and Pegasus, that's probably a valid strategy for them to do that.

Obviously Pegasus will have to make some decisions and, you know, obviously we don't -- we are not privy to all those details and don't really know how that ultimately will affect what goes on in those territories.

Other than to say, you know, we stay focused on our business and, you know, we try to get our fair share of the customers out there, and we figure that ultimately all of that litigation will be resolved. And that, you know, we have to -- to compete against the toughest cable guys and the toughest satellite guys out there, and we have to just be better than they are, no matter what. And that is really -- that is -- you can't always get lucky out there. And sometimes you gotta actually perform. So that is where we focus.

Great, thanks very much, Charlie.

Your next question comes from Tom Watts with SG Cowan.

Hi.

On high definition local, a lot of people -- cable is certainly claiming that they have an advantage down the road. You have -- you have some capacity to put up HD local. How many markets do you think you would do? Is that something that you might look at Echo 10 for? Could you look at other capacity from SDS to do that as well?

I think it is -- I think this is probably one of the biggest unknowns, at least from our perspective strategically. We don't know that there's a economic model for us to do HD local to local in terms of doing every market, since it's a tremendous amount of bandwidth to duplicate a product that we already deliver nationally.

It will be interesting to see how broadcasters -- we think that -- you know, as satellite operators, ideally we would broadcast a HDTV national signal, the local broadcaster would somehow share in the revenue with the national broadcaster, and that would be the most efficient way to do that, and of course both satellite operators could do that with the bandwidth that we have and do that very efficiently. It makes less sense to do that 212 different times. And certainly the economics of that fall apart, and with -- except maybe in -- maybe, maybe in the biggest markets you could do it, but even that, you know, is unknown at this point.

So I think we have a lot of work to do there. And that may be some hard fought contest on HDTV, both with the FCC and the Congress and with broadcasters. There may be affiliate guys on one side and national guys on the other side and so forth. So it would be interesting to see.

I think that the cable probably on balance has some advantages for -- on balance, probably has a little bit more advantage on local to local HD today. We certainly, as an industry, have a major advantage on national HDTV channels. It may be the HD rights start getting segmented out a little bit differently, so you may see sporting rights that are HD rights, regular rights, and those HD rights may be on satellite, or cable, and a lot of things are gonna happen there.

So, all we can do is position ourself to put ourself in the best position for what may happen and make sure we can cover all of the bases, which I think we have done with our SCS deal, and with our Echo 10 and our satellite. So, I think, we are well positioned there. But we don't now how it turns out ultimately.

You think that --

And, you know, obviously -- the other thing we've done is, we've made our HDTV set-top boxes compatible with the terrestrial signal from the broadcasters which, of course, consumers get for free and realize that digital is much different from analog, either you get a perfect signal or you don't.

So many of the problems that consumers have had with the traditional antenna, because they get, you know, ghosting, and wavy lines and sparkles in the picture and when somebody - when the clouds come over, they lose their signal - half their signal, that won't happen in digital and they will be pretty pleased that when they put an (opera) antenna up, they get a perfect HDTV signal. So, we think that to some extent there will be some revival in the outdoor antenna or the one you can put on your roof, in your attic, because you will get, for free, your local HDTV products and again we put that tuner in our HDTV boxes so we are compatible with that.

And just a second question as -- as we're projecting expenses associated with your SES relationship, what sort of -- what should we look at on an annual basis?

Well, that remains to be seen. It depends on how, you know, how that relationship and -- and how that expands. But I would point you to our 10-Q which gives you kind of the next five years of what we will spend on satellites, and TTNC, and satellite-related expenses. Obviously SES is a portion of that.

That gives you some idea of what kind of commitment that we have to continue to -- to build and put satellites up. But realize that with a -- with a subscriber base as it approaches 9 million, you would only have to get a little bit more money out of each customer, because you have some new services to justify those kind of numbers. And we think that all those things that we're doing are - really everything that we're doing is economic for us. In addition, some of the things that we're doing provide us safety and backup as well.

Okay.

And then just a final question, you are launching a number of additional international channels. What sort of pricing we will see on those, and will it affect that they have an R-FU and where is the timing on that?

Okay.

The timing is we'll launch those channels- we'll continue to launch channels probably over the next year or two. We just launched Korean channels, I think we have Chinese channels going up. We'll have additional channels as perhaps some of their current contracts run off with current providers and they switch to us. It will be a gradual thing.

The -- we have -- it doesn't have the a -- I tell you, the impact on R-PU in general is really relatively no impact. The prices on the national channels range from, you know, $9.99 to probably $39.99. For just the international channels, some portion of those people also take our traditional programming, but the R-PU of the international customer is not to dissimilar from our average customer, so it doesn't have much of an impact one way or the other.

Okay. Thanks very much.

Your next question comes from Ben Swinbern with Morgan Stanley.

Thanks, good morning.

Charlie, on the SBC arrangement, can you talk about how much pricing flexibility that SBC has on the co-branded product? And to the extent that it -that they are very aggressive pricing that and it impacts your business - negatively impacts your business, what protection do you have in that event or have you priced the wholesale firms so attractively that you don't even care either way?

Well. I guess I would say it this way, that the SBC deal will be accretive for us if one of two things happen.

One, we get incremental subs we otherwise would not have gotten. So, to the extent there is a sub out there, who's got cable modem today and -- and cable video, because they- they would rather have satellite video but they want a high speed connection, and SBC can give both of them to , that is obviously a incremental sub for us. And to the extent that a customer would -- would stay on longer, in other words, would churn less because they have a bundle, and they have all the services they need, or they receive some kind of discount, then that is also a positive for us.

So, if one or both of those things happen, obviously, this is very accretive for us and it should be accretive for SBC as well. To the extent that all they do is get subscribers that we otherwise would have gotten, and we don't -- and churn is not improved, or for some reason is negatively impacted, then obviously the deal would be negative for us.

Again, you know, our best guess is, going into this, and having a lot of discussions with SBC, and a lot of research, and, you know, year of test marketing, we believe that the customer will be stickier, stay longer. And we believe that they will -- they will get enough incremental new subscribers to make up for any -- any subscribers they get that we otherwise would have gotten, so that, in fact, the deal is accretive for us.

Again, that is our best guess. It is a different strategy. There are some risks involved with it. They do have to -- they -- they have to -- they don't have any control over the retail price of our product. It is what we set.

They obviously have some flexibility when they bundle that with their products, because they obviously can discount their products in a bundled fashion and, obviously, the consumer could infer that some of that bundle comes off of our product as well. So, you know, they -- they would -- you know, they are more likely to have a $99 package that includes, you know, video and long distance and local and DSL and they might have a $99 package and it might be a $125 package if you individually priced all of those things together. But our price of our product would be the retail price, less some bundled discount potentially and they have some flexibility there.

Got it. Thanks so much.

Your next question comes from Thomas Egan with Oppenheimer and Company.

Great. Thank you.

Charlie, with the SBC deal, how are you going to account for subscribers? Are you going to, for example, have some numbers that are the owned and operated subscribers and then another series of subscribers that have anything with SBC, and then I have a couple of follow-ups? Thanks.

A good question.

We don't know the answer to that yet. I mean, I would say that if, to the extent that their subscribers became material, I think we would break them out, you know, as separate entities.

Right.

And account for them separately. Just as I think that Direct TV did with NRTC.

Right.

But, you know, we do receive a fair amount of economics from those customers, so it's more than, say, the NRTC would provide.

Right.

We would probably break that out if it becomes material. Because we want to track that too here. So, I mean, I think, the things we look at here, we want to make sure that you guys have visibility to, at least, the major things as well.

Okay. And on the churn, I may have missed it earlier in your comments, but for the balance of the year, with what is happening in Miami with the local channels and so forth, what do you expect the churn to be, you know, for the end of the year?

Well, again, I think that -- I guess do we give guidance on that?

Again, I think that we're tracking with them where we reasonably think we would be. It doesn't appear that Miami now will -- will have any kind of a -- you know, we have obviously been very, very conservative on our -- our DISH and network signals in terms of scrubbing that data base every week, and we probably, unfortunately have turned off some people that the court ruling today may have not -- may have allowed to stay on, and that probably has had some minor negative impact.

We probably will continue to be very conservative on the DISH Network signals until we get a final ruling. And so that will have some minor impact, but it won't have any material impact between now and the end of the year, would be my guess, from a Miami perspective.

But I think that we have -- churn -- churn typically happens for things that we did last year or last -- you know, two quarters ago, or three quarters ago, and those things come back to, depending on what you -- what you try, those things can come back and affect you. And it is one of those things where, again, we're comfortable with churn. It is very low.

It is one of the few times that -- that, you know, our competition in the satellite business has done a better job than we have. So, obviously, you know, we have more focus on it. But you have to also look at that in the context that our SAC is considerably lower, so economically, you know, we should be aggressive enough to have a little bit more churn. We've diverged a little bit from our competition in terms of the type of customer we go after, and they have gotten a little higher quality customer, churns a little bit less, and we get more customers.

Additionally you have to look at -- at retention marketing, and we've chosen not to be as aggressive as -- we don't spend anywhere near the several hundred million dollars that our competition spends on retention marketing. That tends to be a short-term churn saver. You know, if a guy calls up and he was going to churn, you give him some free programming, or you give him some discounts, or give some free equipment, he was gonna churn on you some day anyway, just like a guy writes you a bad check, he's gonna write you a bad check some time in the future, so, we have not been as aggressive there.

We could possibly revisit that and be more aggressive there, but I don't think that you'd see us give the kind of - giveaways, the kind of dollar amounts that perhaps other people spend on retention marketing. And so we just got to go out and get good customers and we gotta - we have to have -- I mean, our philosophy really is, if a guy is churning where is he gonna get a better service, better price, better product than we have? And if we can execute on, you know, being the lowest price industry leader in this industry and give people the most flexibility, and give them the best customer service, then give them the best hardware product then people should not -- should not churn.

And finally, you know, we have one uncontrollable out there, which is piracy. And, you know, it is funny. It kind of works, but as Direct TV, if they go out and do counter measures, then pirates switch over to DIrect / to DISH Network and we have higher churn and to the extent that we control piracy, you know, it kind of switches the other way.

And ultimately, we've got to get the industry together to kind of focus on piracy as a joint effort, as an industry, and they've had their own lawsuits and things with their provider, and you know, those things may go get settled out and hopefully, well be able to focus on that as an industry. And that's one that probably has as big a impact on churns as us or anything else.

And the other thing is that, you know, when the cable guys are all sitting around and doing their marketing campaigns, I'm not even aware of anybody who even goes after Direct TV today, I think almost all of the stuff that I get in the mail is specifically attacking DISH Network.

So obviously, at least from a cable perspective, their marketing research tells them that where they are losing subscribers is to DISH Network, and so, you know, they're willing to pay 4 or $500 bounties to our customers to get them back. That's gonna have some impact.

When you are the leader, we were 115, 119% of the industry, you know, this quarter, when you are the industry leader, we were two-thirds of the DVS business, that, I don't know how you -- it is hard for me to go to my management team and say, hey, guys, you are screwing up. We need to do better.

I mean, those are pretty impressive numbers in terms of market share. Then, you know, they will attack us. You will not attack the guy that's only getting 30% of the business, you're gonna attack the guy getting 70 percent of the business. So almost everything that we see is a feather in our cap.

We are proud of the fact that they are coming after us directly. It is helping us with brand name awareness. People are starting to, you know, people are staring to ask the question, you know, really look at DISH Network in a way that they haven't in the past and on the other hand we have to be that much better.

And if I look at the second half of -- '03, I know that your primary competitor is cable but with the NRTC / Direct TV filament, you know, it might be expected that Pegasus might not push marketing as hard in the second half. So, what would you estimate, if that's the case, what would you estimate that the likely uptick in subscriber adds might be for your guys, thanks?

I don't think it will have a lot of impact. I think that -- I guess I look at it another way, I don't think that - until this gets resolved, I don't know that -- I mean, obviously if the NRTC members gonna give their subscribers the Direct TV for $150, after a few years, they really wouldn't have an incentive to market today, because you obviously would have a hard time making those economics work.

So -- so ultimately all of that has to get settled out. And at some point, you know, obviously there is -- it is -- I would not say at that time NRTC has been particularly aggressive or other members have been particularly aggressive for the last couple of years, because you have a situation where Direct TV and them are at zero sum gain and you have a partnership where each partner is trying to kill each other. And now you've got a situation where NRTC has done a separate deal without the other members - or the major members, and you've got maybe three ways - with three people looking at different sets of economics and each one of them are not working as a team. And that is disfunctional... And, you know, ultimately that -- that does not survive long term. So ultimately there will be some functionality built back into the marketplace.

Great.

And, you know, we'll have to be prepared for that.

Thank you.

Your next question comes from Bob Peck with Bear Stearns.

Hey, Charlie, I was wondering if you could give us, maybe, a little more color around where your net adds are coming from? Are there any particular cable operators you continue to plunder, or is a good percentage coming from Pegasus area? Can you just give us some more color around your net adds?

They come from wherever we want them to come from. Again, we would target -- you know, most of what we do is still relatively target marketing. You know, obviously we -- there's not any cable operator that is immune to a DISH Network attack.

But obviously if we have local, local in a market where a cable operator has raised price by 9% and has given lousy customer service and doesn't have broadband, that might be a more lucrative market for us than trying to go against the cable operator who didn't raise his rates and is bundling broadband for $29 and so forth. So we really - it really just depends.

It's a little bit like the game of Risk, if you ever played the game of Risk, where cable operators out there cannot control every country in the world, right. So they have to pick their spots that they're gonna control. And so if the Comcast is gonna say, "Well, I'm gonna control Philadelphia, and I'm gonna put all my resources into Philadelphia, but I can't be as aggressive, in, you know, in Austin, Texas as a result. Well we're gonna go attack Austin, Texas before we go attack in Philadelphia then. So that is just, you know, that is the way that we look at it.

And, you know, that -- that is one reason, I think that you see our SAC a little lower than the industry average and, you know, we're able to go in there and -- and really focus on where we want to do it. But we essentially we get customers from all over the country. We -- you know, we have -- we can move the needle on any market in the country if we're willing to spend the resources.

And, you know, we -- we're continuing to modify the model and, you know, things change, because obviously when you go in and -- go in and target a particular market, then you get a reaction from your competition, but then they have to give up something somewhere else. That is why cash flow is so important.

That is why looking at free cash flow is so important. There is just really nobody out that's coming close on a free cash -- I mean, I can go spend a couple of billion dollars in Cap Ex and increase the EBITDA significantly, but at some point, you know, you have to pay back your debt.

I contend there's cable operators that will never, ever pay back the debt that they have on a subscriber base that they have today. And the cable industry subscriber base is not growing, has not really grown for about three years. And it is not going to grow. So they hope to get some value added services in DSL, but that -- that appears to be coming more of a commodity, the phone companies are getting more aggressive there, the phone company is getting almost 40% of the business today.

As that becomes neutralized, that is a positive thing for satellite operators. So, you know, I -- it is -- you know, there is always risk out there. There is always things that we worry about but -- but this general, you know, we're very pleased with the position that we're in today.

Kind of a side light, I mean, one of the things that we try to do, is, at the same time we're doing all these things, it is to make sure that our balance sheet gets in order. I mean, as the economy slowed down, you know, we immediately started focus on improving our balance sheet, we have $3 billion in cash - over $3 billion in cash today. We have great flexibility in -- in terms of -- of how we moved forward, whether that be strategically and -- and -- or whether that be deleveraging, you know, or buying back equity, we have a lot of options. And -- and that is a great place to be, given the uncertainty in the world and the economy right now.

And as far as one of your cable competitors, CableVision, they recently got their satellite up, I guess. Could you talk about what kind of threat that you see from that satellite and when and if it would make any sense for you to maybe buy those assets and probably more particularly the actual frequency, the spectrum that may be valuable to DISH.

Well, I mean, I think that we're obviously aware of the satellite, we're obviously aware of CableVision, the company, we have a tremendous amount of respect for their management team. I mean, they've been a pioneer in video for a long time, and very innovative.

I don't know their particular business plan, other than what's been articulated, which doesn't make quite to -- doesn't make lot of sense to me, so I know that I'm missing something on it. But I don't know what it is.

The asset, we really have chosen to go a different way. You know, which is to make sure that we have some additional capacity in the -- over by the 110, 119 slot, with the 105 slot for SES and with our launch to 121.

They are trying to go to the FCC and prevent us from getting to auction the two other championships, the 61.5 and then obviously, you know, hopefully the FCC does not fall for that ploy. And, you know, we obviously have more capacity, 61.5 than they do today. So -- and we utilize that slot and have a lot of customers with two dishes.

So it's hard to know exactly what they have up their sleeve. But the , you know, it can -- I do believe that people can enter this market. I do believe they could be successful and I do believe that we will face increased competition.

Success breeds competition and as our industry becomes more and more successful, we're gonna get more competition, and that may very well come from the cable industry represented by CableVision. I don't think that the cable industry needs any more help. But, you know, they are out there.

You know, I don't any that there's -- the assets themselves -- I mean, obviously assets at a price makes sense to us. But they've -- they appear to me to have a lot more money in that project than it would be worth to us.

One last question and I'll let somebody else go.

As far as the baby Bells, can you tell us when we might see something from Bell South and Verizon and would that be more akin to a QWest type of deal or more of an SBC type of deal? And as part of the SBC deal, I just wanted to confirm, you still can continue to market and get subs yourself in those areas, right?

That's correct.

We -- we don't have any NRTC deal out there, I mean, you know, I think that we try to be aware of the history of this industry and those things that have worked and those things that haven't worked. But basically SBC in Texas can sell DISH Network, and all of our retailers can sell DISH Network. The retail price is the same.

And the difference is that SBC will be able to bundle that product with other telecom services. They will also take the SAC and churn risk and the bad debt risk on that customer and their set of the economics as a result of that will be different than our normal retailer, just kind of a risk-return ratio. So we hope what happens is, we get some of those customers that are leaving us today for cable because they have high speed access. We are hopeful that we get some of their customers who also are Cingular wireless customers, something that the cable can't offer. And we hope that ultimately some of our retailers can bundle some of the SBC services as well, so that they have some additional ammunition so it helps their business, and DISH Network just becomes more prevalent in the marketplace than it is today.

Thanks, Charlie.

Your next question comes from Jeff Wlodarczak with Wachovia Securities.

Hey, guys.

Charlie, can you comment on how many current subscribers you have in SBC markets?

We don't release that geographically.

But I would say that I think that SBC has 13 states? Is that right? And I would say that those 13 states are weighted, you know, are -- that if you take those 13 states, it is a higher ratio than say, if you took 13 of the 50 other states, I mean, it is a higher per state ratio on those 13 states.

Okay. And then what percent of -- of.

You know, I -- I think that SBC is, again, I would say this: their management team has focused on video for a lot longer. They see -- they've been more aggressive with DSL. We've had a year to work with them on some test markets and -- that did not go as well as either one of us liked. And you know, as management team you look at what didn't work and how you fix it, and this is how we believe we fix it, and they believe it is the same thing.

So they -- they were the ones that, you know, we just -- and, again, we get a chance to work in the management team and you get to see whether you resolve issues and conflicts, and whether you have a spirit of compromise, and whether you have a spirit of trying to be successful, as opposed to saying, you know, the NRTC / Direct TV relationship works, where it is not that way today. And, you know, we feel really good about it, but we still have to execute, and we have a lot of hurdles ahead of us.

As far as other phone companies, I mean, I don't know what the -- strategically they will -- they will plan to do, whether they'll enter the video business, or whether they'll enter it like a QWest or whether they would want to do something more compelling. It 's very possible that they would do something with our competitors as opposed to us. You know, I -- I think that strategically we're -- we're focused on SBC right now.

Sure.

And what percent of your current -- that subs -- those subs rather in SBC markets, what percent do you think are gonna swap to the SBC bundle? And do you care if they do that? Is there some sort of renumeration.?

We would care. If they -- if every one of our customers went to a SBC bundle and our churn went up, or our churn stayed the same, that would be a slight negative for us.

Okay.

To the extent that they -- everybody unswitched to SBC and they stayed on for several more months, that would be a positive for us. So there is a - the sensitivity analysis that we've done, and charted out, that would tell us where we -- you know, where we break even on that. And our expectation is, that to the extent that our customers would switch to a bundle that we would actually, we believe, in most circumstances, come out ahead because, we believe, we would have a sticker customer.

Okay. Fair enough. And then, one last question, can you provide more visibility on your refinancing plans through the back half of this year and into 2004? Thanks.

The -- the -- I -- you know, again, I'll tell you -- answer it a more general way, we have over $3 billion of cash. So, every day, I mean, every day, a lot of my focus is now is what do we do with that?

We have a list of -- of investments, acquisitions, and that is one thing that you look at. And you say, you know, gee, if I can get better than a 10% return somewhere with no risk, that, you know, can I get a 20% return with some risk, you know, those are some -- can I get a 50% return with some added risk? We look at all of those things, and obviously have nothing to announce there. Nothing that has really peaked our interest that we're close enough to, and then, second thing you look at is, gee, what if I bought back debt, you know, what is my return on that, what's my risk / return ratio on that?

We've made two repurchases of debt there where we think our return is the greatest and where our debt stays outstanding longer.

And the third thing is to look at, hey, what about equity, you know, do we have converts out there? Stock in general? You know, in terms of equity, and look at that based on, you know, balance versus your cash and liquidity needs. And then you also look at -- if you say, hey, none of those things make any sense, then the fourth thing you look at is paying dividends, which normally wouldn't be on the table except for the new tax law, it's a little bit more attractive.

I hope as a management team, we could find something better to do than that, but it is not bad for shareholders. So you look at all those four factors, you - every day you evaluate those things. And then you make the calls on how you are going to do it.

We obviously think that we -- you know, based on our performance, we really should be an investment grade company. We believe that the bond rating agencies are always, you know, six months behind, you know, in terms of -- they always downgrade the bonds after the company's gone bankrupt, right? Well, I'm looking for a rating agency that will actually tell me beforehand, you know, as a investor.

And so, they're always behind because they are looking on historical data and so we think that obviously-- you know, I've told you, on our bond road shows, I told you, you know, we'll try to be in a -- we should be a investment grade company and we think we're on the path to do that. And obviously we don't have a use for cash today, so we're not in the marketplace to raise more capital, you know, until when and if we had a use for cash. We obviously have some opportunities. And next year I think there is about a -- I know, when, February? There is a billion six, we could call a billion six in -- is it -- is it February for the billion six.

February 1st.

That certainly is date that we have marked that we look at. To the extent that we will do some or all of that.

I mean, you may say, and you had strategic opportunity, then maybe you are in the marketplace for, you know, reduced cost. Obviously our SBC deal with 3% interest is a reduced cost to capital for us. Obviously we bought 9% money back with that. So that is a net -- arbitrage in that that is positive for the shareholders.

All right. Thanks.

If anyone has any advice, we're happy though listen, by the way. It does not mean that we'll do it, but we will listen.

Your next question comes from Ariea Forcas with UBS.

Yes, thanks. Good afternoon.

A lot of the questions have been answered, but just to touch on, sort of, the bundle versus no bundle a little further, I know you are gaining subs pretty much everywhere, as you mentioned, but it sounds like you are seating the bundled customer somewhat to the SBC relationship.

Could you talk about what percentage of your subscribers use the cable operator for data only and then use you for video? Is that really the future of the satellite business, is the opportunity there still to use video only customers and the bundle goes to telephone.?

Then lastly, just to follow up on the last question in terms of the uses of cash and the attractive cost of capital there, obviously, can you talk about the -- the merits or the objections to, you know, paying a dividend or obviously giving some of the cash to the shareholders? Thanks.

Yeah.

On the first part, I don't know the number of our customers that have a cable bundle but also get video from us. You know, we have some customers who do that, we have some customers who actually take basic cable and use us for a tier. I think that the numbers are -- are probably low double digits on both of those counts.

My concern is that when a customer does go to the cable broad band product that he typically has a digital cable system. He typically has multiple TVs in his house and can get, at least, the analog on multiple TVs in a efficient way.

So, I think that we lose some of those customers, other than piracy, piracy, moving, you know, and financial hardship, probably, that bundle is probably the next things that -- probably fourth on the list where we are losing customers. And that played into our thinking in terms of the SBC deal. We don't have control.

The way that the FCC ruled on DSL and the phone companies and major kind of controlling the phone lines in the future, at least it appears to us, ultimately there is not a way for us to bundle independently of them, high speed DSL so it made sense to work with them and -- and make sure that our brand name was protected and the things that were important to us protected and yet still gave customers some economic reason to carry our products.

That is a major shift for us, and one that time will tell whether that makes sense or not. The -- the -- fortunately, if DSL were to become more commoditized, then I think that customers, obviously, will take the best video source and the cheapest, high speed source. You know, at that may become less of an issue for us.

You would, you know, based on recent statistics I would say at that we're less concerned about high speed cable access than we were three months ago, but that is just based on trends from reporting in the 2nd quarter, but we're still keeping our eye on that.

We certainly are still focused on broadband via satellite to rural areas where they would not have access to a DSL line or a cable line. It they are still going to be in tens of millions of homes like that in my lifetime, and, again, those customers could be economical for us. You know, we have a full scale project, you know, looking at that.

But we wanted -- we learned our lesson from our investments in the past and, you know, we lost a couple hundred million bucks, about 150 million bucks doing that. We would prefer to make money next time.

And I forget the last part of the question. Oh, dividends, I think that I tried to answer that. Dividends is one of the things that you look at. I would not want to give any expectation that we're gonna pay a dividend.

It would certainly be farther down the list than other things that I would like to do, you know for our shareholders. First on the list is to put our capital to use in the marketplace either in growing our business or -- or through internal growth or acquisition where we get the best return for our shareholders long term, right? And again we look at things that would return long term, not next month or next quarter.

Secondly, you -- you -- if you can't find something, you don't want to go chase something just because you have excess money, then obviously we would probably still be in a bit of a delever mode. And then third -- third on the list is kind of, yeah, maybe you look at a dividend at some point in time where you -- the customer -- you know, where investors can count on a small dividend from you, and, you know, it fits into their portfolio in a different way than it does today. I would rather do number one or number two first.

Any desire to own content or any other, sort of acquisition, from a strategic directional standpoint?

Well content, in general, we shy away from content. We are trying to really be a good partner for our content partners and be kind of switch on for them.

I think the kind of content we'd look at would be more niche kind of things, you know, we have small equity interest in some international stuff. Or - or maybe some interactive stuff or something that is kind of out of the bailiwick of our current major content providers, and there might be an opportunity for us to do some things there.

AS far as major content, it's just too expensive for us, it's not something that we are knowledgeable about and we don't want to compete with our -- our content providers.

Okay. Thank you.

Your next question comes from Douglas Shapiro with Banc of America Securities.

Yeah, hi.

I had a couple of follow-ups on the -- on the SBC deal. The first thing is just to clarify, no kind of -- you talked about this already, but can SBC explicitly market a price below your retail pricing or it is just that they can effectively put a lower price within a bundle and leave it up to the customer to infer that but they can't explicitly take out a full page add, comparing their price to yours? That's number one.

Number two, what safeguards are in place if SBC ever would want to move some of these subs off your network down the road? If they were actually to pursue some kind of, you know, fiber network or alternative facilities?

And then third is, if you'd just talk about about how the customer service works, you know, if there is two one that they handle and a tier two that you guys handle? Just more detail on that. Thank you.

Well, some of the things those details will be worked out over -- over time, like on customer service.

They have -- they can do whatever customer service they want to, or they can utilize us to do customer service. They pay us for it. So they have a lot of flexibility in how they decide to do that.

In terms of bundling the price, no they can't write a retail ad that says, you know, DISH Network $39.00, you know, SBC $31.00.

Right, that they cannot do.

But obviously they can -- again, the regulations are different in each state. This is outside of my regulatory realm, but they obviously have some restrictions on what they can do on a bill regulatory wise. But the net effect of it is, they can very well say, get local, long distance, you know, DSL, video and they could show all of those prices adding up to $125 and they can put a big bundle of discount on there and show it at $99 if they wanted to.

Right

And, you know, how they allocate that, they have some flexibility on how they allocate that within the - with the major restriction being regulatory environment and how they present on the bill. So it is -- could they -- I guess the question is could they -- could they go out and real little mess up our marketing? I think that we've -- we've -- we have a meeting of the minds with them, and it -- and the proper contractual language to make sure that doesn't happen.

But there -- there could be some added confusion, if it says SBS/ DISH network, is that gonna be more confusing than DISH network by itself? Yeah, it could be. But the alternative of doing nothing, we did not think, was as good.

So there is some risk for us, we gave up some things. In any business deal you give up something, we gained some things, I hope we have a relationship with them that as we work through this, and some things will work for us, and some things won't work, and there will be some things that don't work for them, that we work to, you know, make it work for both of us.

The contract really is irrelevant. Ultimately we either have to work together with them as a team, and -- and try to focus on improving their business and our business and -- and the economics for both of us, or no contract really helps you.

If you get in a situation where it is a zero sum game where you are working at cross-purposes with your partner, then you end up in this type of NRTC deal that, you know, that our competition is involved in and we just don't want to go there. And, you know, we're -- we're -- the deal is not a tremendous long term deal so they obviously -- there are safeguards against them moving our subscribers to -- to opt it to another platform or to fiber, per se.

But obviously to the extent that they were to build their network out with fiber to the home, and they decided they want to do their own video contracts, they ultimately could do that. We'd present it a different way, which is by working with SBC and showing that we're a good partner and showing that we can work together, even if they go fiber to the home, they're gonna need a satellite head in for that signal, they're gonna need programming contracts. We're going to have, obviously, hopefully, millions of customers at that time, and hopefully there's some -- some economics for both of us in doing that.

And -- and also, you also realize that the Internet and the video - and the satellite video are all going to combine in a different way that we cannot even envision today. So, you know, you -- you can fight technology or you can embrace technology.

It -- it has been my -- my strategy and experience that we're better off -- we will not always be successful, in some cases we'll make mistakes, but it is better to embrace technology. You know, had the cable industry embraced satellite technology, even through PrimeStar, had they really embraced it instead of fighting it, they would be in a much better position today. Instead they fought it, they fought it, they fought it, now they're trying to fight with state taxes, because they've been trying to unlevel the playing field, but we have a better technology than they do. They missed an opportunity.

Now you see CableVision getting into the business. You see, you know, they would like to get into the satellite business. But, you know, they did not -- they should have embraced it back in 1984, 1986 or 1990, 1992. They missed a lot of opportunities.

I don't want to be one of those companies that is that shortsighted.

Just as a quick follow-up, have you -- have you had a retailer chat since you announced the deal? And what kind of feed back are you getting from the retailers in those markets?

We've had a retailer chat, in fact we have another one tomorrow. I was not on the one that we first did. But I think that obviously SBC's only in 13 states, so there is not a lot of feedback from outlets, but in the 13 states there is some concern that we've somehow deployed -- that retailers may be some disenfranchised.

I would say just the opposite part of the impetus of doing the deal is we believe our retailers need a lot of weapons to compete against cable out there. And to the extent that we can give them a bundle offering at some point, because the relationship only strengthens their hand. The fact that SBC will advertise our product only gives us more brand awareness.

Will there be a retailer that will lose a subscriber to SBC, yes, it will happen. But, you know, we -- with you know, you always have competition, right?

I mean, they lose -- we have retailers who are only sell DISH Network and they lose subscribers to Direct TV as well, so hopefully they have got more ammunition to compete against both the cable, and satellite guys, and SBC is part of that. Overall, this relationship, if we execute on it , overall the relationship will have more good things for retailers than bad things.

But, you know, only time will tell. They don't like us selling to Radio Shack if they are not Radio Shack, they don't like us opening up a retailer in the same town that they are. They don't like inexclusive territories. In fact, most retailers would like to have the entire United States as an exclusive territory, right? And, of course, I would like to have all the programming exclusivity. I could be the only company selling video, but it just doesn't work that way.

So you gotta be the best. And if a retailer services his customers, is the most knowledgeable and his community does the best installations, does the best service, he won't lose any business to -- to a phone company. If he's a shoddy operator, doesn't do very good installs, don't answer his phone, doesn't follow up with his customers, then he's not gonna compete very well again the cable company for that matter. So, you know, it is life. Okay. Thanks a lot.

Operator, I think we'll take one more question.

Yes, sir. Your final question comes from Michael Pace with JP Morgan.

Great, thank you.

I was wondering if you could discuss your strategy going forward on rate increases, and then a quick follow-up?

Well, you know, obviously the -- the -- you have two things you can do.

I mean, you know, in general the costs of programming will continue to go up, you know, every year. We don't see -- we don't see a scenario were your overall programming costs are going to go down, no matter how many subscribers you get and so forth.

You know, particularly it sports, but also as -- as some of the general entertainments guys vie for products. So, you know, we have to -- we have to do one of two things, we have to be so dadgum efficient that we can get productivity increases to cover those cost increases or we've got to pass some of those on, some or all of those on to consumers. So, our strategy really is to, - we can have a bottom line margin that we look at, and we kind of draw that line in the sand and say if we start dipping below that line, then we have to raise our price.

In the meantime, we go out there and do all the things we can for productivity increase and - and everything that we can do. When I say margin I really mean, you know, it is really not - it is not margin percent it is margin dollars, okay? And -- and that is one reason that we did the DVR price, by doing the DVR price for people who buy DVR from us, that puts less pressure on us to raise price for our total -- total population.

And if you don't want DVR, you don't have to pay for it. If you do want it, you are paying for a good service, a good product, a 100 hour hard drive, that's bigger than everybody else has got out there, it's got better features than everybody else has got out there. That is a fair price, and that -- that makes us add revenue without having to raise price on our normal programming.

So I would expect that -- having said all of that, I would say that you can - both in the cable industry and the satellite industry, I would be shocked if you don't see - continue to see annual increases in prices to consumers on about the same level that you see in the past, even with productivity increases. The cable guys are out there buying subscribers, at 3,000 - $4,000 a subscriber, do I not know how they ever get paid back on those guys, so they gotta raise price. Got to. They have to raise price more than the cost - they have to raise price actually more than their costs go up, in my opinion, to get their money back, particularly with the Cap Ex that they've spend.

Sure.

You mentioned DVRs again, what exactly is that costing DISH to produce?

Less than everyone else builds them for. No one builds them cheaper than we do.

We don't pay a monthly fee to somebody else. We - you know, we don't buy them from -- if you look at Motorola or Scientific Atlanta, they have markups, they make profits, we buy them from ourselves. We're good.

You know, we're -- what can I tell you? DVR is our product, we're well positioned. I mean, if you are out there saying, man, I think that DVR is going to be a, you know, a great thing, well there is some companies that you could invest in. But number one on my list would be us.

I think we're that well positioned in DVR, as long as we execute, and again, we've got three new models coming out, we have to get them out, make sure they work, and we don't have any snags. I mean, we have some pitfalls out there, but I -- you for, our customers like the DVR, we've improved the product. We weren't quite ready, you know, last year, we weren't quite ready the first half of this year, but we feel very confident now where we are.

Sure, fair enough.

And is there a way to break out what your percentage of churn or percentage of gross adds are versus local to local markets and markets where you do not provide local into local services?

There is a way. We've always looked at it internally. I mean, in general, we have less churn where we have local / local.

Great.

I mean, I think that is a blanket statement, and then - It's not always the case, I mean where you have real rural areas, and you are providing DISH to network signals that would be a different --that's probably the lowest churn, right? And then where you have local areas where you don't have local to local distant networks or local to local that is probably your highest area of churn, in general.

So, you know, the 70 markets that we're in, ' could figure out the 130 markets that we probably have the higher churn. But it is -- it is funny, it is different by market. If -- if a cable company company comes in and runs a massive advertising campaign on TV, and direct mail and attacks DISH Network and pays you $400 to switch over to them, we lose those customers for 16 months while they give them free programming. So we lose them for 16 months and so our churn goes up in that city a little bit, right? For, you know, while they run that campaign and then 16 months later we get them all back. Cable does not report to you that they have a $400 SAC on those customer, they have 400 plus, they don't report that they have 600, $700 in SAC to get one of our customers that we stole from them two years ago. And we get them back because they - after they experience cable, right, absent the -- absent a high speed access product they come back.

Great, thanks a lot.

Employees leave and they come back too. You know, it is amazing how it works.

The grass is always greener, but -- but we actually -- we actually find it is a little more green here than sometimes people think.

All right. Thanks for the calls, we'll be, again, around the -- we'll be back in November.

The latter half of October, first half of November.

November. And with the 3rd quarter, and -- and hopefully things will continue.

Operator, we would like to conclude the call at this time. Thank you for joining, everybody.

Thank you for participating in today's EchoStar Communications 2nd quarter 2003 earnings conference call. You may now disconnect.