DISH Network Corp (DISH) 2006 Q4 法說會逐字稿

Good morning. My name is Jodi, and I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar Communications fourth quarter 2006 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 session. [OPERATOR INSTRUCTIONS] Thank you.

I would now like the turn the conference over to Mr. Jason Kiser, Treasurer of EchoStar Communications. Please go ahead, sir.

Thank you, operator. Well, thanks for joining us. I am joined today by Charlie Ergen our Chairman and CEO; Carl Vogel our President; David Moskowitz, our Executive Vice President and General Counsel; and Bernie Han, our CFO. So, I think what we're going to do today is, we still need to do our Safe Harbor disclosure. and I'm going to turn that over to David. And then, we're just going to go straight into Q&A. So, I will let David cover the Safe Harbor.

Well, good morning, everyone. And let me add my thanks to you all for joining us. As you know, we invite media to participate, listen only, on the call. So, we ask the media not identify participants and their firms in your reports. And also remind you, we don't allow audio taping of conference call and ask that you please respect that. All statements we make during the call that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. 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 the forward-looking statements.

I am 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 would ask you to take a look at the front of our 10-K 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 we make during the 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 we make. We assume no responsibility for updating any forward-looking statements we make. Also note, that during the call, we will refer to certain non-GAAP measures, which are reconciled in our 10-K or on our Investor Relations Website. With that, operator, we're going to open the floor up for calls -- for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Anthony Noto.

Thank you very much. I was wondering if you can provide us an update on your view of an investment in a broadband strategy? And if you're seeing any type of impact in any markets from the efforts of the telcos as they roll out FiOS? Thank you.

This is Carl. In terms of our broadband efforts, they're essentially consistent with what we've talked about in prior quarters. We continue to look at ways to offer a broadband alternative to our customers. We haven't found anything that we see particularly compelling at this point. As you can tell from our results, we're pretty pleased with our core business, but we do understand that we probably need to get further along in broadband going forward.

With respect to FiOS , I don't think we've seen any more competitive push in those markets than we see with our cable competitors in other markets. So, I wouldn't suggest that FiOS has had a significant impact on us in any particular market.

You've seen an acceleration in a number of key trends, gross adds, net adds, a reduction a churn, an acceleration in RPU growth. I was wondering if you can provide commentary behind what you think has driven that acceleration and improvement in churn? Thanks.

Sure. This is Carl. I am sure Charlie has got some thoughts as well. I think in terms of acceleration of RPU we've always had -- we are still substantially below our closest comp in terms of DirecTV. But I think our RPU acceleration has been principally driven by the rate increases that we've taken on some of our higher end AT packages, a movement of our customer base around the MPEG 4 platform and purchasing more high definition content, which comes with a higher RPU and generally those customers buy more premium services as well. Existing customers upgrading from, again, from some of their AT packages into HD packages as well.

So, I think we've got a product that is appropriately priced and packaged for our segment of the market, which has helped us from a churn perspective. We've been able to increase RPU effectively by adding new services. We had the only HD DVR in the market, for example, for a good portion of 2006 and we've been able to move our RPU's up as a result. We've been able to mitigate churn as we make these new products available to our existing base.

The one thing that we haven't done is, we haven't scaled our business as we would like. We talked in prior quarters about the investments that we've made in call centers and human resources to staff up our call centers, our service centers as well as our installation group, and that has compressed our margin a little bit. But it's investments that we thought made sense for us in the long run. We hope so see some improvement as we move into 2007.

But I think our success has been the consistency of our package, the fact that we've got products that people like and use. The phenomenon in HD has been very helpful for us. I think we also had a strong fourth quarter because we had the NFL Network in a number of markets where others didn't and we had it at a price point that was very attractive. So, I think overall for the fourth quarter we're pleased with the revenue trend. We've got work to do on the cost side.

Great. Thank you.

Your next question comes from Doug Mitchelson.

Great. Thanks. A few questions. Maybe we'll just take them one at a time. First, Charlie, would you talk a little bit about the capitalization of the Company? To me, it seems dramatically underleveraged especially in light of the strong operating execution this year. Many of your peers are at higher leverage levels, which should give you some breathing room to take your financial leverage up as well. What's stopping you from pursuing such an option or what are your latest thoughts on that?

Well, it doesn't make sense to borrow money unless we've got a place to put it to use. We, of course during the first quarter this year, of course, we bought back about 24 million of our shares by taking our convert out, there was $1 billion dollars. So, we're putting money to use where we think it makes sense. We made a couple of international investments in terms of a satellite for China. And putting in a project that hopefully we're a small part of a very, very big market for mobile television, a small investment in Korea for mobile television and audio video. So, it is a question of putting money to work and we don't want to leverage just for leverage sake.

And we've always said we think we should be around $500 to $1,000per subscriber. We're obviously below that on a net basis, so we're obviously underlevered from where we think we could operate the business. But it makes sense to leverage when we think it's -- we still have -- we ended the year with $3 billion of cash. So, we're not sure exactly why we would do that. But we look at our capital structure every day and try to make the right decisions long-term for our shareholders. And it also, as we see other people leverage up, then it opens up opportunities strategically for us versus the highly leveraged companies, when -- if we're not particularly -- if the marketplace were to change rapidly.

And when you can have a stock market go down 400 points in one day, who knows what can happen in the marketplace. And then everybody is going to say, "gee, those guys had a good strong financial capital structure. And weren't they smart?"

Okay. The fourth quarter sub number was pretty terrific. Have there been any changes in your credit standards or any other part of the filtering process related to acquiring subs?

No.

The third question, when you think back to your decision to transition to a lease model and what you were hoping to go see in terms of benefits related to costs savings, being able to get the set top boxes back; can you tell us, has that been tracking as you have expected? And are you getting the SAC savings that you hoped for and has that reached the point of maximum benefit for SAC costs or is there more to come in 2007 and 2008?

Well, I think versus -- well, I think the lease -- leasing made all the sense in the world and I wish we'd have done it sooner. Because every box you get back does reduce your SAC going forward. I don't know whether you can pull that exactly from the financials, but it has obviously been growing each and every quarter in terms of saving us actual cash dollars. The way we account for SAC and the way SEC requires us to account for SAC is probably a little misleading in terms of -- I look at it from a net basis. I look at it from a cash basis in terms of what it costs us, which obviously is a little bit lower number than the SEC's reported SAC.

I think strategically it was one of the mart smartest things we've done. And it also has another benefit in piracy, in the sense of we're leasing boxes and we own the boxes. A different set of rules and regulations from a legal perspective and we're able to control piracy a little better on a leased product than if we sold the product. So it also has helped us get into customers for a lower cost by giving them a free box. So now, you have you to balance that by the fact that obviously we had DVR's and HD DVR, so we have some set top boxes that we lease today that are more expensive than perhaps some of the lowering stuff in the past.

So, you have you a balancing act between retention marketing and upgrades and new customers who are going to be higher RPU customers but have a more -- because they're buying HD services or DVR services but the cost of the boxes is more. And I think the leased product probably pays even more dividends for you in that environment, particularly as we have been shipping MPEG 4 boxes throughout 2006. They're going to have a pretty long shelf life because we don't see a new technology replacing them.

Given that commentary, do you think SAC costs then will be up, flat or down in 2007 on average?

I don't think we make projections, do we?

Had to try.

I think we're going to manage the business. We're economic animals. So, we try to make decisions where we actually get a return, not because Wall Street wants us to do it or somebody writes a report or we see somebody else do it. I have this real selfless interest. Like I own a bunch of shares. And I really would like to maximize that return some day. And so, that's why we try to make longer term decisions and I am selfish because because I am a shareholder.

Well, thanks for your time. I will leave it at that.

Your next question comes from Jeff [Bronchick]

Thanks for doing the call, Charlie. Congrats on another strong quarter. Can you talk about your decision to swap to independent provider?

I don't know if I can make the quarterly ones but the annual ones just seems to be the right thing to do.

Well, it is much appreciated. Can you talk about your decision to swap to an independent provider for your distant network signals? How is that going? Do you still expect to see material churn from a distant network shut off in December and the first half of '07? And then maybe a little more granularity on the subscriber related expense line. Carl kind of touched on it but no one is more focused on costs than you are. Do you think it's peaked as a percent of revenue? How much do you think can you drive out of that expense line? Thanks.

On the distance signal, I think so it is a real feather in our cap in the fourth quarter. We had 900,000 customers that lost their network signals. You saw the kind of trauma that it caused Mediacom when they just lost one Sinclair station and you can imagine customers who lost all their network stations. It obviously -- and our churn actually went down year-over-year. And so it was -- obviously all that effect, I think to your question, all that effect of this distant network signal litigation probably didn't all hit in December. But probably the majority of it hit in December. But some people obviously had to make other arrangements and it probably grew into the first quarter. Some of the negative effects will probably go into the first quarter a little bit.

Having said that, and one of the things that we did was, we obviously upgraded a lot of customers, rolled a lot of trucks, did a lot of retention, put our a lot of offers and incentives to save a lot of customers. The other thing that happened, of course, was an independent company leased a transponder from us. As part of that transponder lease they put up distant network signals. And again, I have read this publicly that they said there is somewhere around 100,000 subscribers who subscribe from them. So obviously, the vast majority of those 900,000 customers were able to get local signals from us. Some of those customers were not and continued to get distant signals from a third party. And some customers switched to our competition, whether it be in the satellite or cable side of the business.

But it did not end up being catastrophic event for us. And it could have been without a lot of focus and a lot of hard work on people's part. There is one advantage in the sense that that third party, if people buy the DISH Network platform, that third party can sell a distant network signal to anybody in the United States. Whereas under law, as a satellite provider of local signals, we can't sell a distant signal, where we do a local signal. And we do local signals in 96% of the homes in the United States. So, to some degree, we took a lot of pain in the fourth quarter but there are some residual benefits for our DISH Network or for people who have our equipment because they can buy religious programming from Dominion who is completely independent company and then can buy now buy distant network signals, even if we provide local signals, from a completely independent party. So that's a possible positive for choice for customers that they didn't have before. So we're really pleased in how we've managed that process.

When it comes to expenses and subrelated expenses, I am not happy where we are. I think that one of the things that's great about the way we've built the Company is that we're very -- we do most things. It is our own call centers, for the most part. For the most part, it is our own installers. It's our own design team to manufacturer our product. And one of the things that we really have to do a better job of is have those teams work together so that we minimize the calls and the costs to begin with. And so, if we don't manufacture it right or design it right, then we get calls and service calls. And if we don't install it right, then we get calls and service calls.

If we don't take care of the customer we get customer service calls, and that is the part of our business that's gotten more complex when you realize we have two tuners and the box, you realize that we have dishes looking at three satellite locations now instead of one in the old days. You look at -- we have HD product. We have standard depth product, we local signals, we have distance signals from -- that they'd have to talk to somebody else, religious programming from somebody else. All of those things have complicated our business problem by 3X or 4X. And so, we've got to make sure all that complication then gets communicated in a much simpler way to our customers. And that because we control most parts of our business, we actually make that -- even though behind the curtain it is very complex, we make it seem very simple to a customer.

So we have a lot of work to do there. And I don't know -- we don't make projections so we have a focus on that. We didn't make the kind of progress in 2006 that we would have liked to have. And it remains to be seen if we'll make that progress in 2007 but it is certainly a focus for our management team. And we strengthened our management team as a result of our focus there. We've got some new people in positions that we think can help us and bring us some new ideas and we'll see how we do.

Thanks a lot.

Your next question comes from Tuna Amobi.

Thank you very much. I've got a few questions as well. I will take one one at a time. Still on the distant network issue, Charlie, have you got any indication from FOX News Corp, perhaps if they might soften their opposition as a result of the Liberty transaction with DirecTV? Is that something that -- I know they had a vested interest in that, due to their ownership of DirecTV. And now that that deal happened, is that likely to change anything that might happen during the appeals process?

Yes. It's really a non-issue now because the courts have ruled we don't have a distant network license. And so, I have always been a bit confused as to why they were so opposed to that, given they were selling the company and given that we're a customer of theirs for other product. But they always have a method to their madness, so while disappointing, I never really totally understood what they were trying to gain there. But having said that, it is a non-issue now because we don't have a license but there is a third party who does have a license. And that company continues -- that company now -- there was a situation where broadcasters, we could only sell distant network signals to 4% of the homes, and of those, just the ones that qualify.

They've now created situation where any third party could go sell to -- it could be multiple third parties in this industry, could go sell to 100% of the homes for those people who qualify in that population. So I never understood the logic of the broadcasters and particularly, since we're going to pay them $100 million. But it was one of the great things I love about business is that we can try to make rational decisions and not get emotional about things and other people may do things that just don't make any sense. And at the end of the day, we'll try to grow our business but we saved $100 million.

Next on the fixed satellite services, it seemed like you're finally ramping up that area. I see that you just did the Artel deal. So, the question is besides the defense market, what other markets potentially are you targeting for that service and how do you quantify the revenue opportunity from that over the next couple years?

I think Carl will take that?

In keeping with the EchoStar theme, we don't provide guidance going forward. But we have a group inside of our organization, led by Mike Kelly who has been with us a long time, that is going out to various users and, FSS capacity. We think there is an opportunity there. We think that given what's going on in the launch in satellite market that our inventory is valuable. And for competitive reasons, I am not going to talk about specific clients, but we see opportunities in numerous verticals, and we've got a sales force to do that.

Artel is a good example in the government space, but we're pretty much -- pretty open to talking about making capacity available to anybody who wants it in very, I think, attractive orbital slots at very attractive prices. So, we will continue to talk about those opportunities as they present themselves, but we have a full time team that is responsible for marketing our excess capacity. We're reasonably pleased where we are so far but there is a lot more opportunity there, especially given what we see as a market that could become constrained here shortly given KU capacity in the market.

Okay. And final question. And Charlie, this might sound like a far-fetched question. On the issue of TiVo, is there anything that you see in terms of the intellectual property of TiVo that might make the Company a potential candidate for interest in acquisition, probably as a way to resolve this litigation issue? Is there any additional property that you would think TiVo brings to the table that could be of interest to EchoStar?

Well, I can't speak to EchoStar's interests but I think Tivo has done a good job with their branding and so forth. I am very familiar with the intellectual property that they litigated with DISH Network. And again, we remain confident that that is a case we ultimately win. We have reserved on the balance sheet $94 million based on the jury awards primarily against us, but obviously that number doesn't --

If I can restate the question a little bit -- (multiple speakers).

Tell you a little where we think our legal position there is. And that depending on how that all comes out, we would probably -- of course we do things different with our set top boxes than others. And so, I just don't know how they relate to other people. But obviously from a DVR perspective, not only did we make the first DVR's, and we think ours work and operate better and are easier to use. And the big difference is is that we're a distribution Company, so at the heart of our Company is hundreds of channels, thousands of channels coming into our box. And TiVo is a hardware manufacturer and they don't have -- they have to rely on somebody else's distribution path. And I think the marketplace has moved on. Many of the feature sets, in fact, I think all the feature sets of DVR functionality are now in chipsets. So fast forward, rewind, pause, there is nothing really unique about that anymore.

So, you don't think acquiring TiVo improves your competitive position against cable operators in any way, it sounds like?

I haven't really thought about it. I think the way I think about it is that our DVR, which works quite a bit better than cable operators DVR's and where we control the software and we control -- we have quite a bit of intellectual property ourselves in the DVR space. We think that that gives us a distinct advantage vis-a-vis the cable industry in terms of how they do it. And we haven't -- I don't think we've done a good enough job in exploiting that advantage and we need to do better at that. But I think that in the DVR space, we're positioned as well as anybody. In the HD space, we're positioned as well as anybody. And in the best value for the buck for TV, we're positioned as well as anybody.

In the broadband business we're not positioned as well as perhaps some major cable companies but we've got good partners in the phone companies. And a customer can work with us and AT&T and get broadband and video from us and phone from them and cellular from them. And so we think that we can go along way to limiting that disadvantage. And for the really rural areas, we're start to go ramp up to sell the Wild blue system. And again, that gives us a broadband product that's attractive to some of our rural customers. And we have a lot of rural customers. So, we're well positioned in the marketplace, but obvious there is always competitive threats that we have to keep an eye on but just to put it in perspective, we had a record year for gross activations last year. So we're 11 -- we're 13 years into the DBS business. And from a gross activation perspective, at least from a DISH Network EchoStar perspective, we haven't peaked yet.

And yet, the industry has gotten competitive and lots of new services for people and lots of new choices for people. And yet, for whatever reason, 3.5 million people chose to come to DISH Network last year. And we just need to do a better job of keeping the ones we had. And we did a better job last year than we did the year before, despite some adversity. And hopefully, we continue that trend.

Thank you very much.

Your next question comes from Ben Swinburne.

Thanks for taking the question. I will just ask two. Maybe I can start on the high def point, guys. You're a clear leader today in HD. You're seeing it in the numbers. DirecTV has got some big plans this year. You're using some of your satellite capacity to do FSS and looking at some other options and I think actually in the 10-K you even say you don't have firm plans for all the capacity. You've either agreed to build or lease. How should we think about your HD position relative to DirecTV? Who seems to be taking -- moving to a leadership role in '07? On the national side and then also locals, I think you've said you'd go to 50 markets by the end of '07. Where do you think you go ultimately long term and before the economics start to not make sense? And they I have one follow-up.

Sure, Ben, this is Carl. I think we kind of talk about actuals versus about what we're going to do, and we recognize that DirecTV has an aggressive plan with respect to HD. We have done extremely well with HD. I still think our price points are going to remain much more attractive than DirecTV with or without discounts.

I think our system is considerably simpler than DirecTV Ka band system, which will allow us to hopefully improve our variable costs and still be pretty attractive to the rest of the market. In terms of additional local markets launches, we will talk about those as they come to fruition throughout the year. But suffice it to say that we're pleased with where we stand with HD. We don't plan on backing away from HD. We think we have an advantage with our HD DVR product and we think we have an advantage with our HD pricing. In terms of additional content, additional markets, we can add to that as we move throughout '07. So, I don't know if you want to add to that.

No. I think we've always said strategically, we're don't want to take -- we're not going to take a back seat to anybody in HD. I think the disadvantage for satellite guys has been -- the advantage we've always had as an industry is we can do national signals much, much, much more efficiently than the cable industry because we use the bandwidth once, not multiple times. So, we clearly have an advantage there.

In the local side, we've had a disadvantage but because of new generations of satellites and so forth and local spot beaming, of course, we're able to eliminate that disadvantage where markets are large enough and the economics make sense. So suffice it to say, we believe we have the capacity to go to HD markets where the economics make sense. There is a fairly large cost of backhaul and satellite costs to go to market, it is obviously much greater than the analog space. So, you really can't get down as far as analog space. Part of how deep we'll go and I think part of how deep DirecTV will go, will be; Can we share some of those backhaul costs and share some of those costs going forward?

It is interesting. We do HD in the spectrum we have today in the same size dish that we have today, so a small dish and DBS spectrum. DirecTV has gone a route where they invested in Ka band primarily because they got the satellites in the acquisition that were designed for data. It is an unholy alliance to some degree to turn those into video. The new satellites and as they get them launched. And we'll do a better job. But it is a fairly large dish, and it is fairly complex in terms of switching that's required. So when you talk about control and costs you have to realize how complex your system is. And I think we're very well positioned in HD to have a material cost advantage over cable companies, particularly because of our national presence, and perhaps DirecTV because of the way they've architected their system in Ka band. So, that remains to be seen.

I could probably argue their side of the equation as well. But we'll have to wait to see but I like where we are in HD. And the unknown really is; What the adoption of HD is going to be? Clearly, it was more in 2006 and it gained a lot of momentum. It's certainly not at porosity levels yet to make hugely material impacts to anybody in the industry yet. It is still single digit kind of, maybe slightly double digit kind of product. But there will be a day that everybody buys -- there will be a day when any TV set sold will be an HDTV set. That may be 10 years from now. But I think it is a positive for the satellite industry. Let's put it that way.

And if I could go back to the margin question on the quarter. Carl, you mentioned call center investments. It would seems there would be some seasonality to the subscriber related expense as well in the fourth quarter. I would assume there is some labor costs running through on retention marketing, which would be higher in 4Q with people buying HD sets, asking for DVR's and along those lines. Maybe you can correct me if I'm wrong. And then, any comments you guys might have on extra innings going over to DirecTV, if that impacts your business at all?

With respect to the seasonality, your point is well taken. I think, certainly, the buying season for high definition sets is well recognized as third and fourth quarter activity and a little spillage into the first as well. And given the activity around the NFL and the Super Bowl, et cetera, we did see an uptick in that. Charlie also alluded to the fact that the distant phenomenon. With 900,000 customers that -- at risk, I think our DISH Network services guys, led by our former CFO Dave Rayner, did a great job in getting techs to take their trucks and live in motels and do whatever we could to swing dishes and add off antennas and that obviously came at a cost. So, yes, there is some seasonality there.

Also as we've mentioned numerous times on this call, we see a great opportunity in HD and we are spending retention dollars to upgrade customers as they see that opportunity in return for a commitment and generally for higher RPU's. So, it's not just giving away the store but there was some seasonality.

With respect to MLB, it is funny. I have some history here since I was the Chairman and CEO of PrimeStar. Some of you may remember that company. Who had the exclusive rights to MLB through a relationship with FOX. Our view on MLB and sports content in general is that if a customer on any platform has enjoyed that product, it shouldn't be taken away from them. We generally, don't like exclusives. We think that for the consumer it is best to have as much product available from as many sources as possible. And let those sources then battle it out in the marketplace with their pricing and packaging and the features of their hardware, their bundle or something else along those lines.

So, with respect to exclusives on products that have been widely distributed, we don't think that is particularly consumer friendly and we've made our points known to the Congress. And we will continue to make our points known. But we like a world where content is available to as many sources as possible. Some people ask me; How do I feel about the NFL? I think the NFL is a little bit different but it is something that we ought to keep an eye on. I give DirecTV credit for actually going out and creating the NFL Sunday Ticket, which didn't exist before DirecTV existed, which was very difficult to deliver except to a satellite platform. And I think that that's a little bit different discussion than taking away a product that's been available to not only EchoStar but cable companies as well, and I don't think that's particularly consumer friendly.

And just by the way, it is not to our grief either. We bid it, and we bid it with an opportunity to subdistribute it because we believe in exactly what I just described.

The other thing on margins is -- obviously, the other thing to keep in mind that our price increase was essentially goes in effect around the first of March last year. And then our programming costs, depending on our contract, those programming costs continue to rise during the year. So, you historically have seen a little bit of slippage of margin through the year and of course that trend continued in 2006. Certainly we'll deal with -- I think one thing great about management is no matter what happens in the marketplace, you deal with it. And any kind of programming, particularly exclusive, comes with costs and it tends to raise your costs to all your customers. And so while you may -- you could lose on the one hand a customer who has a specific need for something, you gain on the other hand where everybody doesn't want to pay those costs. Right?

And we've had enough experience where we've lost some programming contract because of contract disputes, we just couldn't get to deal. Where we've lost some customers who wanted that product and yet we've gained customers because we didn't have to charge everybody for a channel that nobody wants to watch or most people don't want to watch. So, it has pluses and minuses, and we'll -- we start from the perspective of consumer and say, "Why not do the right thing for consumers?" But if the Congress and everything else don't do the right thing for consumers, then we'll deal with it.

Thank you, guys.

Your next question comes from Vijay Jayant.

Thanks. Charlie, DirecTV made some comments that once their arrangement with BellSouth ends, I think it's one year after the merger with AT&T, that they will try and get into the whole AT&T platform. And also, that they have probably more subscribers, given BellSouth is more aggressive. Any thoughts on how would you characterize your relationship with AT&T and the prospects of EchoStar maintaining that relationship, both the one year after the merger closes that DirecTV has the rights in BellSouth [directory]?

I think our relationship with AT&T is as good as it has ever been, and we continue to -- I think one of the advantages in the things that we have is that we actually have a manufacturing design team, engineering team, and I think that a lot of -- AT&T has got a couple different business plans that makes some sense. They do put a dish in when they can't put in their Lightspeed. They have a plan for Lightspeed, which they don't really need our help particularly on.

And then they've got what I call hybrid customers who perhaps want a satellite system for mass video but want a broadband connection for video clips and video-on-demand and those kinds of things. And that's an area that we're working with them through the Homezone product and products in the future that will allow them to seamlessly put that product out for their customers. We have a contract with AT&T and we know what those rights are and we don't -- so, any questions about what AT&T might do with BellSouth customers are probably better addressed by AT&T than by us.

Just following up on that, any update on how the Homezone product is getting traction? Is it -- any issues with the technology right now and when do we get HD DVR version of it?

I can speak -- I think the technology works. I think that -- I am only speaking for personal perspective of uses. The technology works. I think AT&T can give you -- would be the right people to ask in terms of the deployment. I know that they're testing it and I don't think they've gone full deployment. But they'd be the right guys to ask about that. They are -- they do wanted an HD version of that and because we moved -- we kind of threw them a curve balance ball in a sense because we moved the HD and MPEG-4 because it was the right long-term thing to do. And so, we've got to make an MPEG-4 version of the Homezone and obviously that's in the works and we'll be in the market place this year.

I think that from my perspective, and we do spend a fair amount of time with AT&T, we are continuing to work out the kinks in the installation side of that business and the provisioning side of the DSL. But again, you can talk to them but the feedback that we get from our technicians that are involved in that is, even though there is a greater level of complexity, the product seems to get better every day. The more installations you do, the better you get at them and we're pretty pleased with that relationship and are very, very interested in supporting that.

Thank you.

And it is not just AT&T. We have other telco providers, and we have another half dozen telco partners we work with and it is a material part of our business. We're not probably as reliant on it as DirecTV is with May Qwest and BellSouth and Verizon, but it is still a material part of our business. We have a common enemy in cable, and we're not trying to get in there necessarily in their broadband space or voice space. And so, there is a common goal of putting together essentially a triple play or quadruple play for customers in a way that gives them the benefit of choice and one bill if they want it and two bills if they want it. And I think those are the things that we can work to our advantage going toward.

Having said all of that, our core business, irrespective of all that, remains very strong just in our core video business, going to customers and blocking and tackling and making sure that they get -- if they want the best video product out there that we get our fair share. It is unclear at this point -- it's clear that some want triple plays and quadruple plays and bundles. It's clear that some people want it. It is not clear that the vast majority are moving that direction. Yes, that cable industry is most have reported. I think that as a total industry, their video subscribers is probably flat to slightly negative in terms of video subscribers.

They may have moved between analog and digital but the number of subscribers is flat to down. The satellite industry had perhaps a record, or certainly a very strong fourth quarter on gross adds and churn was, I think, improved on everybody's part. At EchoStar, we had a record year. So, I think it means that some people want a triple play or whatever and perhaps those people are getting -- cable is getting their fair share of those. But an awful lot of people are pretty happy to have a cell phone from one provider and the best video from somebody else and maybe a broadband connection from somebody else. And we're getting our fair share of those customers.

And it probably has -- it certainly hasn't moved to the kind of bundles as fast as perhaps a lot of the analysts report might have predicted last year or the year before. It doesn't mean it won't happen in the future, it doesn't mean it won't change, the market won't change but if anything, the momentum is probably -- I don't know if it is won but certainly the fourth quarter was a good satellite quarter.

Thanks.

Your next question comes from Kathy Styponias.

Hi. Thank you. I was wondering if either Carl and/or Charlie could talk about your experiences in the Los Angeles market? How important of a market is it for EchoStar? What -- how have gross subscriber trends, additions been in that market and what do you expect them to look like as Time Warner Cable starts to roll out triple play later this year? Thanks.

We love L.A. L.A. has been a good market for us for a long period of time. I think Time Warner will be a formidable competitor but I wouldn't discount Adelphi and Charter in those markets either or Comcast while they were there. So, I think there certainly will be some economies of scale on the cost side, but I still think we're extremely well positioned with our price point.

We're extremely well positioned with the depth of product that we have in terms of our DVR, et cetera. We do extremely well there in the ethnic market, specifically Latino. We again offer that at a very attractive price point. We have excellent distribution there. We know DirecTV does well there, as well as we do. Certainly, having their base there for now. So, I think that we will continue to focus on L.A. because it is a good market for us. Time Warner will be a formidable competitor.

I'm not going to talk about what our expectations are in 2007 but I think we did pretty well this year because of the way we positioned the NFL against Time Warner and others and may have gotten a little bit of lift there that we may not be able to sustain. But overall, as I said, we love the L.A. market. We've got great distribution there. And we will continue to focus on that opportunity.

Basically we like every market. There isn't a market that we don't like, whether it be Alaska, Hawaii, Puerto Rico to the 48 states. The signal goes every where and I don't believe you can drive down the street anywhere in America and not see one of our dishes today. You may see a few more in L.A. than you see in Boston but per capita. But I think one of the great things about satellite is that we do go everywhere. And our only incremental cost is if a customer actually wants our service. So, we don't have to run a line by everybody's house whether they want our service or not.

Thank you.

Your next question comes from Tom Eagan.

Great. Thank you. I was wondering, a chance for Carl, if this is any particular source of subscribers, say for Mediacom because of the Sinclair dispute or any of the former Adelphia as they transition to Time Warner and Comcast? And secondly I was wondering if in Q4 and for the year, what percentage of gross adds took the HD DVR? Thanks.

I don't know the HD DVR question. And Jason is telling me we don't disclose that anyway. In terms of -- as Charlie aptly pointed out in an answer to the previous question, we like all markets. And where we think we have an opportunity to increase our subscribers, we go into those markets and have done so with Mediacom and we'll do so going forward. And interestingly enough, we see our friends in the cable industry doing to same things to us when we do things like Court TV and [Life Signs] so it's fair game for everybody. But in terms of; Did we have a specifically higher percentage of our growth out of Mediacom versus transitioning Adelphi market, I don't have that data in front of me.

But I -- again, we focus our marketing and our messaging pretty much to a national audience. We may gear up or gear down in terms of certain promotions based on what's going on in the marketplace. But I think as Charlie indicated, we had a pretty good year across the board in terms of gross to net adds. And we do well in some markets based on the activities in those markets but I don't have the specifics.

I think we know from Mediacom -- didn't they publicly disclose they lost 30,000? And we know for sure those customers didn't go to a cable company. So therefore, we know those customers in theory went to probably a satellite company or to an offer antenna.

It gives you -- but I think the broader question is that the satellite industry has always paid for retrans. So, we pay for what we think is a very important product for us and we're very happy to have the networks and local affiliates as partners and as programming partners. And we pay them a fair price for our product. We've always done that. And our company fought hard for the right for them to be able to do that and us to do it and everything else years ago. Cable historically, has not paid for that product. And yet they will pay a lot of money for ESPN but nothing for ABC and ABC gets higher ratings than ESPN. So, I think the broadcasters rightfully have thought that might be a kind of a weird situation.

So I believe that -- certainly as a Company we will help any broadcaster who is in a retransmission situation where they might lose a distributor. We certainly will be there with our trucks and our advertising and our people to help them make sure that customers are not disenfranchised. But what is probably going to happen is that, for the first time, cable operators as their retransmission deals come up will start to pay the kind of money that we do as DBS companies to broadcaster. And as they do that, our costs don't go up but our competitors costs go up for programming and today they're getting their free ride.

And I think that while we've had lots of disputes with broadcasters over the years, it is certainly one thing the broadcasters and EchoStar are on the same page for. And I think we have a very good relations with local affiliates and broadcasters. And we've obviously -- it is a factor where we see our competitors costs going up more so than ours for some of the most important programming. In fact, programming that people watch about 50% of the time.

So, the cable industry is in a tenuous situation, and they can be very aggressive and like Mediacom and say they're not going to pay. And to the extent that people have the kind of guts that the people at Sinclair do, I think that obviously Sinclair has disclosed they're going to get a lot of retrans money. I think, somebody else has -- I think CBS has disclosed they're going to get retrans money. And I think there are some other companies, next to ours that are maybe disclosing retrans Post, Newsweek and they're starting to be real numbers. And that's not all going to come from satellite.

So, an interesting dynamic that's going to happen as we move forward. And my understanding is that most phone companies are paying for retrans today as well. So, it levels the playing field in an area we've had disadvantage and perhaps an opportunity for those -- if the cable operator wants to not pay, then it is an opportunity for the satellite industry.

Right. Thank you.

Your next question comes from Jason Bazinet.

Thanks so much. You guys have obviously created a lot of economic value in the U.S. market. If you look at some of the other satellite players, they've made more aggressive forays internationally. And I was just wondering as you think about deploying your capital for the maximum return, what is it historically or prospectively about the international opportunity that makes you think it is less attractive than what you can do in the U.S.? Thanks.

I think it depends on what you're talking about. Today, we look at every investment and say, "where would you put a dollar? Where can you get a return?" And today, again, the model hasn't changed in 13 years. Every time we go pay $600 for a subscriber, we think we get very, very good return on that company. And our internal rate of returns are are certainly at the very high end of the video industry. And so we don't -- so we're continuing to put money there.

We also look around the world at places we can put money and where we can get returns. The problem that you run into is that most of the international projects that we see we can't get the same kind of return as we can get in the United States. Having said that, obviously a project in China, we don't know what the returns might be but we know that for mobile video, we know they have 400 million cell phones today. Probably 3:1 over the United States. We know they have a population of 1.2 billion people and we know they're going to make cheap pretty handsets. So, we think that perhaps there is an opportunity there that might -- the returns could be zero or negative or they could be the kind of returns that are better than we see in the United States.

So second, internationally you typically as an American company can't really control the operation. And therefore, it is less attractive to us to not be involved in the actual operation of what's going on because we think we have a lot of value add to give there. And of course the spectrum and so forth typically go to foreign national -- the companies inside the countries and so forth. And then in some cases News Corp. has already -- the countries where we probably could play in, News Corp. is already well positioned there. In the U.K. and Italy and so forth and so on.

So, we continue to evaluate those opportunities and where -- we think that the international part of our businesses is one we would like to grow, but whether we can grow it or not depends on what kind of deals make sense for us. For some strange reason, we just don't do deals to do deals. We kind of like to do deals that we think have a high likelihood of success and unfortunately those are harder to find. And if you do find them, the private equity guys typically outbid you.

All right.

So, we'll see what happens.

Your next question comes from Steve Mather.

Charlie, your customer acquisition strategy seems a bit focused on high growth via low price offer. I was just wondering if you think you may be leaving a little money on the table considering how low your monthly is relative to some competitors? I was wondering if you can give us a little perspective on that balancing act right there?

I don't know. I don't think all the cable industry and the -- I don't think all of our competitors together had got 350,000 net video subscribers in the fourth quarter. So the question could be that our strategy needs to change or it could be that maybe their strategy needs to change. Right now we're going to -- if it is not broke, don't fix it. We're not really getting low end subscribers, we're averaging $63 of RPU per subscriber. So, I do think that there is low entry points and there's some people that we obviously get some customers that aren't that economical for us that come in at low prices.

But the fact of the matter is, once you've seen our service and you see all our channels, we find that on average that we get our -- I think the average customer has, at this point, about $60 to spend on video. If you look at what they spend for cable and us, it is around $60. So, they have about $700 a year to spend for video. And it doesn't vary all that much, and we just try to give them the best bang for their buck for $700. And around the edges, our strategy probably maybe should change and there's things we experiment with all the time. But quite frankly, as I said I in the strategy with our guys, I don't know how to improve -- I don't know how to tell them how to improve based on kind of how they're doing it right now.

Our business model isn't necessarily driven by rate increases, as you can see from our '07 plan, where we didn't adjust rates at all in our AT100 package. We bumped them a bit in our AT200 and 250 package, but we took some of the sting out of that by making product available on a package basis with our DVR Advantage, for example at 49.95. And with an opportunity for a customer to upgrade into a premium service or multiple premium services. And I think our strategy to move RPU is to continue to focus on HD and give the customer the incremental value rather than just ratcheting up rates for the same fundamental content.

So, I think that strategy is the strategy we put in place in our original business plan in 1994 and one that's worked pretty well so far. As Charlie said, we may be leaving a little bit money on the table. We continually to talk to our distributors and our marketing folks and our customers to see how we can sell more product. But our model isn't rate increase driven per se, and I think you'll see us continue to try and maintain our position as best value in digital television, which we are.

Good point. Thanks.

Operator, I think we've got time for one more question.

Thank you, sir. Your next question comes from Craig Moffett.

A couple questions if I could. First, at CES a couple months ago you talked about how you're all about DVR. I wonder if you can just update us on DVR penetration rates? I think a caller earlier asked about HD TV penetration rates but I didn't pick up an answer. Second, if you could just comment, I may have missed it, but I couldn't find in the K the amounts capitalized under the digital home plan for retention instead of SAC. And then a last question about C band if I could.The rate of acceleration in the decline of C band would suggest that it is getting close to the point where it almost gets shut down entirely. I'm wondering if you could just comment on that as a closing remark?

I'll start and I am sure Charlie will have some pointed closing remarks. In terms of DVR penetration, the reason you didn't hear the HD penetration is we don't give out that number and so we don't give out the DVR penetration either. But suffice it to say, our current marketing plan is definitely geared to putting more DVR's into our home, into our base. We're pleased with that product. We continue to focus that product. It has high customer retention value. In terms of the mix of our sales, we don't disclose that number.

With respect to retention capitalized versus expense, my finance guys are telling me that's not in the K and that's not anything that we've ever disclosed in the past. But I can tell you our primary retention plan is for customers that have been good customers for us. We look to upgrade them with additional equipment. There is often a charge for that equipment. Where appropriate pursuant to the accounting rules, we recognize that charge as revenue and we recognize the associated expenses with the install. So I think our disclosure is relatively complete in that regard. In terms of C band, I will defer to Charlie and let him close up with any other additional comments.

Again, I think we have a marketplace where we have advantages and DVR we think is an advantage for satellite and our Company. C band, the last thing I saw, I think the business has been declining -- I think the major decline, when we started there was about 1 million C band paying subscribers. We acquired a company. We transitioned the vast, vast majority of that. I think the last thing I saw there were something well short of 100,000 C band customers left. So, it is probably not a material impact on our business going forward.

I think that that probably wasn't a big factor in our growth the last couple of years, quite frankly because it was only -- there is not a lot left there. But I yes, I imagine the C band analog business for sure is probably not around this time next year when we talk about it. Because most of the programmers are taking -- it is not economical for them to leave their signals up there and they're going to go digital. On the margin, I think that's probably good for cable guys and satellite guys because we'll each get a little bit of that business. But it is, again, less than 100,000 customer to say spread around all the video providers. So, new home construction is more of a factor where you get 3 million new homes or something. So, that's it. I think we're back early May.

Early May.

Early May and we appreciate your joining us today.

Thank you. This concludes today's EchoStar Communications fourth quarter 2006 earnings conference call. You may now disconnect.