DISH Network Corp (DISH) 2007 Q2 法說會逐字稿

Good morning, my name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar second quarter 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, Mr. Kiser, you may begin your conference.

Thanks, operator. This is Jason Kiser, I am the Treasurer here at EchoStar. And I am joined today by Charlie Ergen, our Chairman and CEO, Carl Vogel, our President, Bernie Han, our CFO, and Stanton Dodge, our new General Counsel. We are going to open it up for Q&A, but before we do that, we do need to do our Safe Harbor disclosure, and Stanton is going to take that.

Good morning, everyone, thank you for joining us. As you know, we do invite media to participate in a listen-only mode on this call. We ask that media not identify participants and their firms in their 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 am 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. Instead I would ask you to take a look at the front of our 10-Q for a list of those factors. In addition, we may face other risks described from time to time in other reports we file with the SEC.

All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements that we make wherever they appear. You should carefully consider the risks described in our reports, and should not place undue reliance on any forward-looking statements that we make. We assume no responsibility for updating any forward-looking statements that we make.

With that out of the way, I will turn it back over to Jason.

Thanks Stanton. Operator, I think we are going to go straight to Q&A. So you can open up the queue.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Vijay Jayant with Lehman Brothers.

Thank you. I really like this format. Can I ask Charlie to sort of address the competitive landscape. This quarter we saw some shift changes happening in terms of video subscriber growth. Can you talk about, has there been any real shift in the competitive landscape in the last quarter, in terms of the RBOC entry, promotions, and so forth? And is the housing market at all impacting anything?

I think that is a great question. The competitive landscape, I think is probably more competitive than it has been, primarily because the dynamics that are out there are, obviously you have got cable, who continues to have a good offering with the Triple Play bundle. And you have got really new entrants in both Verizon and AT&T with their own video offerings. Verizon obviously has a little denser population, where [dees] is more of a factor probably there with just more vast territory than AT&T, but they obviously have their own video service. That somewhat counterbalance from a DBS perspective, because there is a move towards more things like high definition and DVRs and advances services, where I think DBS has that advantage, in terms of those product offerings, both in terms of quality and in terms of probably hardware.

That is kind of going to be an interesting dynamic to see how that all kind of shakes out in terms of, because particularly as you go in the phone companies go for a little bit higher end customer, because of the cost of that service, then those customers want multiple HD, they want DVRs, and things like that. Satellite seems to be getting their fair share of that.

And then cable has some historical issues in the sense they have to move from analog to digital. And as they move from analog to digital, of course they have got to upgrade people to more set top boxes, and higher cost, and get people really don't want quite as many channels. And so that dynamic is an opportunity for satellite companies. That backdrop probably hasn't, gets more competitive, maybe it is not materially changed. I do think that the potential, potentially and I guess probably a little early to tell.

But I think potentially that maybe the biggest negative that is out there, it is not really competitive, but it is a macro economic viewpoint, in that housing logically may have an impact on any video provider, in the sense that if you have fewer housing starts, you have less growth in single-family homes to actually put video in. That growth has been pretty good the last 4 or 5 years in terms of housing starts. That has slowed down, it looks like it has and is slowing down some, in terms of new starts. That will be less opportunity for new video providers. That is somewhat of a disadvantage to somebody who's not , if you are an incumbent that is in a house that is okay, we get our fair share of new housing starts as an industry. So that may have an impact.

Then of course the subprime issue, where somebody actually has a house, but now has to give the house back to the mortgage company, you actually have people moving out of houses, and maybe they are moving to apartments, or moving back in with their parents, or God knows what they are doing. Now you have got a cable connection or satellite dish hanging on that house, but nobody is living in it. That could have an impact out there.

I would probably, I think our focus is to make sure we are well-positioned within all of that, and the things that we have done. We are strong balance sheet, we are very low leverage. Going off positive cash flow as a company. Make sure our operation, in terms of things we can control in terms of expenses, that we are doing all the right things there, we made some improvement this quarter with our expenses.

And then take advantage of those things, those opportunities for us, which we see today primarily as the play in that customer who doesn't necessarily want all the cost of digital cable, and that customer who wants ad advance service, whether it be DVR, or HD, or both.

Great, thanks, Charlie.

Your next question comes from the line of Tuna Amobi, Standard & Poor's.

Thank you very much, good morning, guys. I guess historically you haven't provided breakout of your HD DVR boxes nor penetration, nor have you provided the percentage of upgrades to MPEG-4 compared to MPEG-2. But you have Charlie, I think commented generally as to the tradeoff that you make, in terms of upgrade and retention verses churn, and what kind of factors that you look at as you decide to either upgrade, or spend more on retention.

So I guess this leads me to maybe the question of maybe, can you provide some more granularity on the model that you actually use, in terms of for example, what may be your target IRR as you look at a customer? And at what point at what churn level do you kind of, what kind of churn parameters do you factor into that model? And if you can also quantify any other parameters that go into your model. Because I think you said it is an ongoing process.

I am trying to understand, kind of the general factors that you look at before deciding how much you spend on upgrade or retention, et cetera, et cetera. And I guess you can also comment within that context on the economics of a new HD DVR customer, compared to a nonHD DVR , if I am making sense. Thank you.

It is a fair question. We don't provide that breakout. And not going to start that today.

Again, we feel like it is good information we have, that is good competitive information that is important to us. And we just don't release it, because we release all those factors flow down into our ARPU, cash flow, and turn and SAC, and you can see the whole roll-up, and so forth. The way we look at it is everything is economic for us. So all customers are not created equal.

So we, for lack of a better term, would give a rating to our customers, in terms of how long they have been a customer, what their ARPU is, how much investment we have in them, have they ever upgraded? When is the last time they upgraded? And then we would make it a fairly general analysis then, as to what we would, if we were to continue to invest in that customer, whether we wouldn't continue to invest in that customer.

Obviously a customer who spends $100 a month with you has been with you for 7 years is a lot more valuable, than a customer who spends $29 a month with you and who has been a customer for 6 months. So you take all those things into consideration, and then you decide whether you what you would do. In some cases if a customer may have to make an investment to upgrade, sometimes a customer doesn't have to make an investment to upgrade. It depends on the value of the customer to us.

We look at in terms of IRR, we look at the IRR and say we have this amount of capital where we make the best return. And today, that is still investing in a $600 and some dollar SAC in a customer. And it may be $700 or $800 on a high definition DVR customer, because his ARPU is higher, and he turns a little less. You run those dynamics.

And to make a long story short, if you take our total IRR, and our total length of a customer, it is not materially different whether it is a high-end customer or low-end customer. The numbers, the economics are the same. And so we might only spend $200 SAC on a low-end customer, we might spend $1,000 on a really, really high end customer. And the return on that customer in terms of an IRR, we expect to be generally the same.

Okay.

And then if there is another investment out there that is better than a customer, then that is where we would channel our money in something else. So if we saw something else that we thought could give us a better IRR, than getting a subscriber for $700, we would put our money there. There has been times where we bought our stock back, or bought bonds, bought debt back where we had excess cash to do that.

So I think in general you should feel confident that we are economic animals, and trying to basically run our business from an economic point of view. And we are not worried about the next quarter or the next two quarters, or what analyst is going to say, or whatever. We look at all the internal metrics and say, how do we build value for this company long-term? For shareholders that are interested in that kind of thing, then we are probably a pretty good company. If you are a hedge fund that needs to make a quarter number, we may or may not be good for you.

Okay. That's fair. Thank you.

Your next question comes from the line of Doug Mitchelson with Deutsche Bank Securities.

Thanks, good afternoon. I guess good morning for you gentlemen. Few questions for you. First is Major League Baseball, can you give a sense of what the contribution might have been to sub losses during the quarter? And was it actually profitable getting rid of Major League Baseball? Maybe the programming costs were actually greater than the value of the subs that you lost?

This is Carl. We publicly announced through our testimony in Washington, that we had about 50,000 customers last year that took advantage of the Major League Baseball package. We lost some of those, but it didn't have a significant impact on our business. In terms of cost, in terms of the MLB out of market package, that was an assignment like package that was marginally profitable for us.

But what we didn't like is the deal going forward, that forced us to carry a network that we haven't seen, at a cost that we didn't think was reasonable. And in a package that we didn't think would help the economics of our AT100 package, and be reasonable for our consumers. We saw some marginal loss from that in the second quarter. Again we didn't have much to lose. I know we didn't lose all 50,000.

The quality of the response that people give you from disconnects varies, but I would say it had a small incremental impact, but we felt that was in the best interest of the Company and our consumers going forward, rather than add additional cost in our package for content that we think is fairly widely available today, between ESPN and regional sports and other products that we already pay for.

And that would be the philosophy we take going forward. Unless we think it can provide meaningful incremental growth, we are going to try to maintain the packaging and pricing advantages that we have enjoyed over 10 years, so we can be competitive in the marketplace.

That kind of leads into my second question, then which is, and Charlie might get a kick out of this. I went back and looked at your last 41 quarters, so essentially almost from the time the company started service, and $101 million of sequential premarketing cash flow growth was by far the biggest you have ever done. So can you give us anymore insight as to why 2Q was so good on the margin side?

Well, I think, Charlie touched on it. And we have been talking about this, I think for at least the last 6 to 8 quarters, is that we have been focused on trying to improve our operating efficiency. And some quarters are going to be better than others. And this quarter was, as you point out record-setting. I don't know that we can sustain that.

But certainly we have worked very hard on improving our processes, our talent, investing in people and call centers, and in our DNS business, our technology has continued to improve over time, our two-room DVR has been helpful. The fact that we are redeploying boxes that we have put out in the past has been helpful. I think that we have begun to deliver, at least in this quarter some of the scale economies that we are intensely focused on.

And as Charlie said, we are focused on things that we can control. And some of the things that we can control is our customer care levels, our efficiency from a personnel standpoint. And we just happen to have a better than average quarter this particular quarter. Not that we are going to have peaks and valleys in that system, that we are going to spend more in certain quarters to get the benefit in future quarters, because we are playing for the long-term.

You probably recall probably 4 quarters ago we said we were going to invest in customer care. And open additional call centers, we have done that. We are beginning to see the fruits of those efforts. As I said, it may not be consistent on up and to the right for the quarter. But we saw some benefits of those activities this quarter.

Okay. Well shifting over to another cost item. The SAC costs were pretty impressive. Every time in the past that I asked Charlie about costs he has never been satisfied no matter how well DISH has been doing, so--?

That has not changed.

(laughter) I am curious, given where SAC costs are now, could they continue to be driven lower? And we know some of the drivers there, but beyond the multi-room DVRs and lower set top box costs and the lease model. Is there anything else that you are doing to drive SAC costs lower?

Well, we continue, obviously because we have on our own engineering company, you of course try to engineer costs out, and we have cost reduction models coming that will reduce costs, particularly on the MPEG-4 side. MPEG-4 chipsets were pretty expensive last year. They are still materially more than an MPEG-2 chipset. But as volumes go up, that will continue to decrease.

The hard drives, we have a little different philosophy. We could save a bit more on hard drives, but we tend to put a bigger hard drive in. As the cost of hard drives come in, we tend to spend about the same amount of money on a hard drive, just go to a larger size. We have strategic reasons why we are doing that.

We will continue to work on SAC. And again, there are certain customers we would pay more SAC for, and certain customers we would pay less for. And it may be bit more of a function of the marketplace, and what customers are available. This is not a time in my opinion where you would go out and lower your credit standards.

In fact you may raise your credit standards today, in terms of getting new customers. You may find that the better customers, the higher SAC customer, who is buying higher-end product, than the customer who can't pay his mortgage today, and has very poor credit. The marketplace may dictate a bit about where the opportunities are for us. And we just have to be disciplined, so that, and be in touch with the kind of customers that we are getting, and making sure that the SAC is relevant to the churn, and the ARPU that you get from the customer.

Last question for you. Some of us have harped in the past on lack of share repurchases, I guess for the moment you are looking pretty smart having a good balance sheet. Given that, I think your NOLs run out next year, and if not next year, certainly pretty soon. The inefficiency of the capital structure becomes more pronounced. Can you give us an update on what your thoughts are regarding the use of your excess capital for share purchases?

Well, I like where we are from a capital structure today given what is going on in the marketplace. I think your point is well taken, in the sense that as we move to a tax-paying, potentially a tax-paying customer, depending on what the opportunities are, depending on where the financial markets are, we will see what there is, what we might do to take advantage of that situation.

But I am not opposed to paying taxes. If I am paying taxes, things are good. So we are not going to run the company to never pay tax. But obviously there are things you can do to take advantage of tax situations that are smart business, in addition to and the benefit of saving taxes, and those are the things we will look at. I like where we are positioned today. We have got a lot of flexibility in a market that is probably not going to have as much liquidity and flexibility for other companies.

We are not leveraged for cable. There are some highly leveraged cable companies out there. And they may not be where you want to be. Some highly leveraged buyout things that have gone on, or are going to go on out there.

Odds are things are probably fine in the marketplace. But to the extent that there is any kind of recession, or correction in the marketplace, major correction in the marketplace, we would certainly be able to do well in that environment, and to the extent that the economy clicks along like it has been. I think we have shown we can do well in that environment, as well.

I guess is the simple question, which is do you think your stock is cheap here?

Well, I only talk on that personally. I am not selling any shares. So I don't know. We are always happy to see it go down if we want it to buy back, if it goes down enough. But today we like where we are today. And we will see.

We don't think the multiple reflects what we are doing on the top line at the EBITDA level, or at the free cash flow level.

We build value.

We will be opportunistic as we have always been.

We build value every day, is what we try to look at. And I think the Company is worth more today than it was yesterday. I think it is worth more today than it was 3 months ago. And that doesn't always get reflected on the linear line of the stock market, for a variety of reasons. Our focus has to be on building value every day.

All right. Thanks, gentlemen.

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

Thanks, good morning, guys. Couple of questions. First, marketing spend. I think you spent about $10 less per gross add this quarter versus last quarter in the discretionary line. Could you give us a little color there as to what the strategy was? Is it something you are doing sort of pulling back, because the consumer weakness out there, I mean there is no reason to throw money at it when we have got softness?

And Charlie, you have always been very candid about the Company's execution. Was there anything this quarter, obviously a lot of great things happening on the cost side. In this quarter you were a little disappointed in the churn number comes to mind. And I am wondering if you think that's a function of the marketplace, if you are happy with it, or you think maybe there were some execution missteps. Looking for a little color around the result there from your perspective.

Ben, in terms of the marketing spend, I wouldn't take that trend as a trend. I think the second quarter is traditionally weak for us. We think the opportunity is, again, as it has been for the past 10 years in the third and fourth quarter. We are not going to spend money just for the sake of spending money, and we are not going to run programs just for the sake of running a program.

We will be probably more aggressive in upcoming quarters as we move into our prime selling season, where we want to tell the market about our DISH DVR advantage, our two-room technology, our positioning vis-a-vis HDTV, the strength of our price points, how our value matches up to other operators' values. I think it is more timing than anything else.

That being said, we are judicious about how we spend, and we are looking at ways to spend where we can get the greatest bang for the buck. I think we have become a bit more focused. How we spend our money and where we spend our money, said differently we just don't do every tactic just for the sake of saying we can do every tactic. I think we have been a little bit more precise, but we will probably look to spend a little bit more as we move into our selling season. I think that was more seasonal than anything else.

And Charlie can speak to execution. I think as I mentioned we have done a better job from a call center standpoint, but we still have some variable cost issues in our operation that we need to address. We need to continue to be focused on operating leverage, principally in our DISH network installation area. And it has been good not great better than the past, but still plenty of work to do.

Got anything to add to that?

I think in terms of marketing. I think we have made some changes in our marketing department, we have a new executive in marketing today. I think part of the reason we haven't spent as much, we haven't had really, really in my opinion a lot of good stuff coming out that is worthy of spending money on.

And again a lot of what we have done, I told you I don't like to give away programming and we are actually not doing much of that now starting the first of August. We are not giving away our basic programming anymore. That gives you extra money then to go out and do some things on the marketing side of the business.

Operationally, we have got lots of room for improvement across the board. We are not out of control anywhere. But I am a perfectionist, we certainly can do better. It is really a question of getting our divisions to work together. Our engineering guys make a set top box, and there are things we can do to make that set top box work better, and not have people understand what is going on, and not have to call in, and all kinds of things like that.

And you mentioned churn, churn is always something that is a factor. We always would like to do better, but there are lots of things going on. I think our churn was actually a little bit better than it was in 2006 for this quarter. But you are always trying to find the right balance between what you spend in retention marketing and a lot of your churn you get today, is some decision you made last year or two years ago. And the timing of a certain promotion. I think there is room for improvement there too.

If I could ask just one follow-up on the product side. Homezone, the second version of Homezone, the HD version got a little bit of attention in the AT&T earnings release. Can you give us some color on how you think that product plays in the marketplace, if it is an important part of your strategy, their strategy in the second half of this year? If you think the integration of DBS and a two-way DSL/VOD pipe is something that is particularly powerful in the marketplace?

I think, first of all, I think AT&T would have to answer the question, but personal opinion for the Homezone, the HD Homezone product is a good product. First product was an MPEG-2, kind of a very complicated product, and I think that they have gotten a lot closer to the kind of product that makes sense.

I think a set top box that does as you can put DSL in to, and as an operating system it allows you to get any one of 500 channels live in an HD, and perfect picture on your TV screen, but you also have the advantage of being about to go out and get a Pay per View movie from the internet, 1 of 20,000 say on Video on Demand, as opposed to 1 of 500 maybe the cable operator is offering. Allow you to go out and get YouTube, or allow you to download music, and so forth. This is going to be a powerful product. I think that we have a lot of experience now with that kind of format. I don't think it is as complicated as some of the media centers are talking about, and I don't think it's as complicated as the original Homezone product.

There is a sweet spot there, where the consumer who wants a bundle, and wants a Triple Play, or a Quadruple Play, in my opinion, we have a great opportunity to make sure that every customer who wants a bundle, at least has video coming from satellite as a core piece of that.

Part of that is hardware and software and putting those two things together. And that is where we have a hidden value in this Company. In our ETC organization in the sense that they have shown time and time again that they from a digital set top box perspective, they tend to build better products than most. And we own a lot of our own intellectual property, so we have to do a better job of using that to our advantage. And we probably need to spend a bit more focus on that side of our business.

But I think, my vision of things out there are that the most people are going to want, you look at HDTV and that kind of thing, you are going to want to watch Monday Night Football in HDTV, and you are not going to get that through the web and the internet, you are going to get that from the best source possible, and I think that satellite delivers, despite all the feuds and lawsuits that are going on out there.

I am fairly convinced that satellite brings the best video quality for HDTV, it gives you the most choice and the most selection, so as soon as you add broadband to that in a seamless way, the consumers you have got something that gets you in every household. While we have 13.5 million subscribers today, we have a lot of upside in terms of getting more households.

Thanks a lot.

Your next question comes from the line of Tom Eagan, Oppenheimer.

Great. Thank you. A couple questions. On HD, Charlie, DIRECTV commented on the importance of having a critical mass of HD channels. I was hoping you could give us your thoughts on say how many channels you have to have, how many HD channels you have to have to grow your HD sub base. Or is it more about having external hard drive, like I think you may be launching soon about having external HD drives.

Secondly all the cable operators lost more basic subs in Q2, than I think people had expected, regardless of the seasonality. Our churn for DIRECTV was also a little bit higher than we had expected. You mentioned it was a little bit lighter than last year. But it does seem as though there are a lot of subscribers that are churning back and forth. Looking for your thoughts on that.

I will take the churn question first, and then Carl may want to jump in on the HD question. I think that, again, I think that some of the turmoil in housing business, probably showed up in cable first. They are the incumbent so they are the ones that got probably hit by that a little bit more. And so you end up with a little bit more bad debt. You see it a little bit in bad debt and receivables and that kind of stuff. And obviously a guy who can't pay his mortgage doesn't pay his cable bill, he switches to satellite, if he can pass the credit standards, which he might still be able to do in certain circumstances. Or if he is a satellite guy, he might not pay his satellite bill, and then go back to cable. That is what you would do as a consumer if you start having trouble paying your bills.

I think you are seeing some of that in the second quarter that may explain a little bit why cable lost a few more subs than we would have expected as well. Kind of too early to tell how that affects satellite and cable going forward. Satellite is not the incumbent in most houses, we are maybe a little bit more insulated from it. I don't think we are immune to it. I think that would be something that we are keeping an eye on every day here. And remains to be seen what kind of impact that will have.

On the HD content side, I don't think having 100 channels or 70 channels is as important as having good quality stuff that people watch. Word gets around they have got 70 channels but nothing to watch, that doesn't make much sense. I do think that I think DIRECTV is generally correct, 100 kind of channels, 100 channels of HD is kind of a good round number to get people excited about switching to satellite, and taking advantage of that.

We have over 50 channels today of HD. So we have more than anybody today. And obviously people who buy an HDTV set want to put content on it. I think there is some critical mass number.

Having said that, there is not 100 channels of HDTV that I would watch today. Probably only 30 or 40 channels of HDTV that are worthy of watching. And it is up to the programmers to come out with new and exciting things to make HDTV a little bit better. That is going to be the big driver. It won't be the 100 channels you have, it will be the fact that people like Discovery, who do something like Planet Earth, which is just a fantastic program to begin with, but even that much more compelling on HDTV.

As you see more and more of that kind of thing it is going to drive, it is going to drive people to HDTV. And I think there satellite has an advantage. While it will be a factor this year and 2008, 2007 will be a bigger factor than 2008, and it will be a much, much bigger factor in 2009, when we go through the digital transition.

It is our job to get prepared to take advantage of what we think is going to be a pretty big business in the next couple of years going forward. I don't know that it is that huge business, as big as people might expect this fall, because the TV sets are still expensive and still not as much content as we would like.

And Tom, I think you touched on the point that it is the marriage of the content in HD, and the marriage of the hardware in HD. And we think we are pretty well positioned there with our HD DVR, our ability to serve multiple rooms, the seamlessness of that product. We also think we are extremely well-positioned from a price point standpoint, where you can buy package an AT100 package for $29, and you can be in the HD category with a DVR at $49.

So we think it is the combination of the content, Charlie voiced his opinion on the critical mass. I tend to agree with him. But it is also the technology that delivers that content, and the price point and packaging at which customers can get into that content, as they spend money for HDTV in the marketplace. And we think we are pretty well positioned on all three fronts.

Great. Thank you.

Your next question comes from the line of Jason Bazinet with Citigroup.

Thanks. Two quick questions. I tend to agree with you guys that your stock is undervalued, a lot of clients we speak with, I think are using sort of legacy data points regarding the rural nature of your footprint.

And the reason it comes up is because you can imagine more people are focused on Verizon and AT&T's video rollout. There is a website that I think you guys run that suggests 90% of your customers are in the Top 100 DMAs. I wondered if you could confirm that data point? And I have a second question, as well.

I don't actually know the answer to that question.

I don't either.

It is Dishmediasales.com I think it is part of your push to sell national advertising.

Well, you know, you never know. It sounds good to me. We are not going away from our rural base if it is there. And I think you have just got to look at the macro trends. ARPU is continuing to increase $66 or $67. I do think we have got a good mix in many markets. And I think that is an advantage of DBS.

Because to the extent that we are weaker from a competitive standpoint in certain places, we have the opportunity to reallocate our marketing dollars, segment our effort, focus on places where our offering is stronger than it may be in other places. I am sure that mix moves around a little bit. But I am going to have to go find that website.

All right. My second question is when I go back to the '01 proposed merger between Hughes and EchoStar, I think you guys targeted about $700 or 800 million of synergies just from churn reduction. Given your sub base was about 17 million at the time, and your SAC was running in the mid 500s, it implied about 40 to 45% of your churn was actually between DBS and Direct. Now that you are almost twice the size, if any of those churn metrics between the two DBS providers has changed? Thanks.

Yes. I don't know that we ever did a synergy analysis that we did. Maybe some analysts did about synergy between churn.

It is probably less between the DBS providers today than it has been. Because we have new entrants in phone and cable has got a better product with the Triple Play. So it is probably that little bit less than it was back then. Of course the raw numbers would be higher, because the gross numbers are almost 30 million now.

Okay. Okay. Thank you.

Your next question comes from the line of Jeff Wlodarczak with Wachovia Securities.

Hi, thanks. This is Albert Lee for Jeff Wlodarczak. Can you talk quickly about some possible synergies of working more closely together with DIRECTV under [mullens] control, potential upside on sharing advertising platforms and how quickly can you realize these possible synergies? And I have one quick follow-up, thanks.

Well, as we said, it is easy to talk about, hard to implement. I think there are certainly things where there is commonality of interest. But there are also a lot of logistics to work through. Advertising is clearly a place where we think there might be some opportunity.

There are 30 million sub interconnects, there is a compelling opportunity for both us and the advertising community. We continue to have discussions from time to time. I wouldn't say anything is eminent. But I think we both see the opportunity, yet we both are pretty focused on what we need to do from our own business day-to-day. There is interest. It is not at the top of either one of our lists.

I used to work at Liberty. I think Liberty owning DIRECTV has pluses and minuses. Certainly they will be a strong competitor as they always have. We can see their offices and they can see ours, we know each other. To the extent opportunities present themselves, we will look at them. We are focused on running our own businesses to date.

I do notice that our lights are on later at night.

Okay.

Earlier in the morning. For what it's worth.

Great. And --

Actually, sharing stuff is at the top of my list, because there's clear stuff, but there is no advantage to either party, whether it is sharing back haul or advertising. There is also things, we went to auction together for spectrum, not a clear advantage to either party. And there is synergy there, and things we can do. It is difficult as competitors sometimes.

And you may think you have an edge, a short term edge in one of those things or another. It all has to kind of fall out. I think that there is certainly in excess of $100 million that both companies could put to the bottom line with some pretty simple things to do and plan out. Having said that, you have contracts and takes time to implement those things. And obviously nothing is really going to happen until Liberty has a bit more control, gets their deal done, and takes a look at that. But they are financial animals too.

And there are certainly things we have a common competitor in cable, and there are certainly things we could do there that make that lot of sense. It's a bit more difficult to share Spectrum, because our HD stuff is different, actually using different standards and MPEG-4. Some of that stuff becomes more difficult. It would have been nice to do it back in 2001.

Right. And as for the follow-up, just want to get your thoughts on the 700-megahertz Spectrum auction, and your participation, and then your latest thoughts on the potential broadband alternatives to the Telcos and the cable guys. Thanks.

I think two things are happening, one is we have to read the actual rules when they come out. We have seen the general press release, but the rules will obviously tell us a lot more. But we have participated in most auctions. I think we are competent and know a lot about auctions, and I think we will look and see what the rules allow us to realistically have a chance to gain some Spectrum. 700 megaHertz is valuable spectrum, there is lots of things that can be done with it, certainly strategic things that we would be interested in.

Having said that, I think the good news is that there is a fair chance that broadband becomes a commodity. And as you get, you got at least two pipes with phone companies and cable companies, you get a third wireless pipe, particularly if there is some open access components to that. And 700-megahertz goes a long way there, WiMax is a technology that is going to get you there. You have got Cities and municipalities doing things.

And then you are going to end up with DBS being less disadvantaged as long as there are multiple pipes out there, the thing that Sprint and ClearWire are working on, we would be less disadvantaged there. And then the quality of our video and that experience, where we believe we have advantages, significant advantages, will be more of an impact than the fact that we have a better video product today, but we don't have a broadband product today.

We will see how, it is not clear that DBS providers have to go out and have their own broadband path and spend that capital to do that, if others are going to do that, or other paths are going to become available. And it's unclear that the return on a broadband pipe, is going to be as good as the video return, as well. It is very difficult.

There are only two companies that are going to have a nationwide video play with virtually any HD content that is any good, and very, very good picture quality even on a 70-inch screen. And that is DIRECTV and DISH. And no phone company is going to have a nationwide play, and no cable company has a nationwide play. And they have all got to run some wires and maintain those wires in what is becoming an increasingly wireless world.

And it is our job to make sure we kind of go through the mine fields and figure out strategically how we make the best investment decisions, and so forth, and if there is opportunity to participate in broadband, we would like to do it, but we are not going to do something crazy.

Okay. Great. Thank you.

Your next question comes from the line of Jonathan Chaplin with JPMorgan.

Good morning, thanks for taking the question. Just wanted to follow-up on the earlier questions on some of the cost savings that you guys saw this quarter. One of the areas that you got a fairly substantial savings was on the G&A side. I think the disclosure in the Q was that that was driven at least in part by accrual for legal expenses that have come down. I am wondering how sustainable those reductions are, whether there was any element of that reduction that was one-time, and if there are further opportunities for cost reductions there?

And in terms of the savings you got on the call center side, wondering if you could give us a little bit more detail on exactly how those savings were achieved, if it a matter of consolidation of call centers? Or is this something that you are able to do now that a lot of your subs are with AT&T, and maybe some of the customer care was handled by them. I think you mentioned there were opportunities for further cost reductions on the call center side as well. I am wondering if you could give us some more detail on how those are to be obtained. And then one basic housekeeping question. The revenue share that you have with AT&T, where is that captured on the income statement? Thank you.

Well, I will start on the G&A and the cost centers and the call centers. We didn't really consolidate anything. In fact we invested more, and opened up additional call centers. And what we have been able to do is just increase the efficiency of that operation, and reduce the call volume, because we are doing the job right the first time.

So in previous quarters, we talked about making that investment, which we did, but we didn't see the benefit of that investment. And that is going to go on a peak and valley from quarter to quarter anyway. We are not looking at necessarily consolidating a lot of things. We are looking at doing better with the assets that we have, and getting greater operating leverage out of those assets.

In terms of going forward, I didn't say that we had a lot of opportunity in the call centers, I said we had some variable cost issues in our DNS area, which is our dish network services area, where we think we have an opportunity to increase our efficiency over time. As our technology gets better, as we work together as teams as we have some of the MPEG-4 technology in the field for a longer period of time, as we simplify our dish configurations, those are all things that have been going on for the past 5 to 6 quarters. We are not looking for material increases there, we are just looking for better operating efficiency.

In terms of G&A, legal expenses, they go up and down depending on what is in play at any particular time. But in general, on expenses we are looking to maximize the span of control of our senior leadership all the way down to the director level. We are looking at making sure we are doing things right the first time, and improving our operating efficiency and deliverables to the customer. In terms of where the rev share is.

In the same place as our core subscribers. The revenue is in the revenue that is captured by ARPU, the COGS, it is in our subscriber-related expense, the acquisition, and acquisition, just to different degrees verses our core customer.

The other thing I will point out, we obviously made improvements on expense side, and particularly on the margin side, the second quarter reflects your price increase, the full quarter of your price increase, and as you go through the third and the fourth, and even the first quarter of next year, you get programming cost increases throughout the rest of the year. And you don't raise your prices. So that tends to put pressure, second quarter ends up normally being your best margin quarter, and then you get pressures. That doesn't mean we can't make improvements and so forth.

But you have to, you have got to look at the raw numbers too as well as the percentages. So we still have work to do there. G&A as a percentage is probably not far off from perfection, 5%, that is, at some point you are cutting things you don't need to be cutting.

That is very helpful.

There is certainly room in customer care and installation service and that kind of stuff. Again, there you got to continue to make investment depending on the complexity of your product.

Thanks very much.

Your next question comes from the line of Craig Moffett, Sanford Bernstein.

Hi, good morning, guys. Two questions if I might. First, Charlie, your name has been mentioned in the last couple of months, as having been a bidder for ION, or the old Paxon assets, Intelsat, and you were even talked about as having considered a bid for Dow Jones.

I am wondering how you think about M&A, and what kinds of assets do you think it would make sense for you to add to the portfolio at this point? And then second, you just touched briefly on the DTV transition, coming up next year about a year from now. Are there any particular plans? And should we expect a meaningful increase in subscriber growth as we get close to the February 19th date for the digital TV transition next year?

One is we don't have any plans, honestly we don't have any plans in the newspaper business. But I imagine we are going to get thrown around as a bidder for anything that News Corp. bids for, we are probably going to get thrown in there. But we are not in the newspaper business. And that one doesn't seem to be a fit for, I would never say never. But we have a hard enough time knowing what the business we're in today, versus a business we don't know much about.

Having said that, obviously, Intelsat is a business we know about, it is a distribution business, it is a satellite business, ION was a distribution business, we know something about it. So anything that fits the category of recurring subscription from a customer, or technology, or distribution, or satellite, or wireless, those are all things that makes some sense for us.

The digital transition I think is something that we don't know how that is all going to happen and if it is going to happen in 2009. But we think as a technology player and as a wireless company, that the digital transition and having a network of people can go to peoples' homes and install things. If you look at all the assets we have.

We think that there is potential in the digital transition for us to play a part in the digital transition of America, and to the extent we play a part, we would only do that if we thought we could increase the value of our Company somehow. I don't think we have well-defined plans there yet, because we got, I think that we are putting things in place that would position ourself, should the transition really take place in 2009.

You sound like you are skeptical about whether it will.

Well, my political sense tells me that you have an election year in 2008, and if the broadcasters want to delay the transition, then they will get everybody scared they are not going to have product, nobody is going to be running for office, and have people lose their TV at the same time that they are taking the oath of office.

So politically the way it lines out is you may see an extension or some portions of extensions of it. And the 700-megahertz will put a lot of pressure to actually make the transition happen on time. Let's see how that plays out.

But it won't take, it really depends on what the NAB wants to do. And to some degree, it is in their best interest for the transition to take place. To the extent they want to extend it, they will probably be able to do it politically. I wouldn't bet the ranch it is going to happen in 2009.

Thank you, Charlie.

Your next question comes from the line of Spencer Wang, Bear Stearns.

Thanks, good morning. I just wanted to go back to the earlier question about SAC per sub, which was down. I know the equipment costs are declining, were there any change in demand for advanced services? And if you could tie that back into your ARPU growth, which has been decelerating a little bit. Was that a function of demand for advanced services, or just, I think you alluded last quarter to taking fairly moderate rate increases.

And then my last question is just, I believe in the past you guys have updated us on the call on CPE CapEx. If you could give us that number for the quarter. Thanks.

Do you have we CPE? Probably in there somewhere.

In terms of demand for advanced products, that hasn't slowed down at all. What the benefit of SAC is what Charlie indicated earlier, we are making things a little less than we have in the past. We are getting some benefit of scale. We are redeploying assets that have been through our lease program.

And in terms of ARPU, the decline in ARPU on a percentage basis reflects the decision that we made as a company in early 2007, to not take a rate increase on our most popular package. And so obviously when you don't do that, that represents a meaningful portion of your subscribers, your ARPU is going to decline. Also I think we've been --

ARPU didn't decline, it just--

The rate of growth is going to,

there is room for improvement there because we didn't raise prices on our [low end things].

In addition, Charlie mentioned this earlier, as well, we have been in a market with promotions where we have given away programming, and we are going to migrate away from that going forward. Our ARPU growth has not been diminished as a result of less demand for advanced services. It has been a function of decisions we have made to from a competitive standpoint with our various packaging and price points. So CPE --

During the quarter it was 217 million.

217 million?

Yes.

Thank you.

Your next question comes from the line of Lee Cooperman, Omega Advisors.

Yes, hi, good morning, thank you very much. Let me first say this, I couldn't think of a smarter group of people running a company than you guys, and I say that most sincerely. Secondly I will confess to being a hedge fund. The hedge fund with a very long term horizon, as you know I have been a long-term holder of the company's shares. And I am trying the best way I can to get inside your head, because I have such enormous respect for you as a business manager, and as really as an asset manager. And if I recall correctly I'm on the road, Charlie, so I don't have every number in front of me.

But I think our original stock repurchase program was announced in the fourth quarter of 2003, we bought back $190 million worth of stock at the end of '03, I think the stock was trading around 10% lower than it is now, around 33 or 34. In 2004, we bought about $800 million back, and the stock traded for the year between 28 and 40, my guess is we probably paid high-20s, low-30s, in 2005 we bought $363 million worth of stock back, in the high-20s, low-30s range. I believe when we announced a buyback program in '03, we had something like 10 million subs, a little bit more. Maybe 10 to 11, I think closer to 10. I think currently we have 13 million, 585,000 for the release.

And so I am assuming either you have other designs for your liquidity, or you see the world as being sufficiently uncertain that husbanding liquidity would make sense. You say you are economic animals with a long-term view, we seem to think the shares are undervalued. I want to see if you can let me inside your head and to help me figure it out. Again, I am very happy with you running the company, and doing what you are doing, because I think you are fabulous.

Again, the answer is really the same. And I might mention that I think in 2007 we actually took $1 billion off the table because there was converts, right?

Correct. That is true. That is a good point. I missed that, that is a good point.

We actually took $1 billion off the table, and that would have converted I think at around $44 a share. So we actually have, at least we look at it we had a pretty good share buyback this year. We look at it.

The second thing that happens is we're in some kind 10B51 or whatever, so we have to set a price, and we try to factor in the mood of the market, and everything else. So we set a price. That doesn't necessarily change during the quarter. So that just either happens or doesn't happen, right? And you are correct.

I think most of the stock has been purchased back in the, again I may be off a dollar or two around 30, in the 30. Public information around $30 is where most of the buybacks taken place. I think we have done, I think we have hit a nice balance between buying back stock and having liquidity for things we think are going to happen, for example, there is an auction, the 700-megahertz auction, it is going to take billions of dollars to play in that auction. We are not going to know the rules to that auction for a while. The auction is not until January.

There is a digital transition maybe happening in 2009. There is a tremendous opportunity in high definition television. There perhaps now are companies that are going to have liquidity problems of their own that are good companies, but just have liquidity problems. I think are we more cautious today? A month ago we probably are. Tomorrow may be a different day, and we would be less cautions. We evaluate it literally every day, and have a meeting on it every week and discuss where we are, and what the best use of our capital is. And right now, right now we are well-positioned for any number of things that we think may take place.

Good. Thank you very much. And not being gratuitous, but I am very, very comfortable with your calling the shots.

Thank you.

So is he.

Operator, this is probably our last question here.

Okay. Your last question comes from Robert Berzins, Post Advisory.

I always seem to end up getting the last question. But thank you for the opportunity. Congratulations to you guys for becoming the third largest pay-TV provider! That is something that the market didn't expect years ago and maybe you guys didn't even expect it either. That leads to my next question.

As you are growing larger and larger, on the programming side, do you think you will be able to take advantage of that size? Or is that benefit of size going to be outweighed by the fact that there are new competitors coming in, and thereby bumping up programming costs? In short, what are your thoughts about programming expense going forward?

Programming no matter what your size, the programming costs are going up. Even for Comcast, programming costs are going up. And programming costs in general are going up higher than the market's ability to go price the rate increase, right? Programming, again I don't know the exact numbers, but programming costs at least in the press, have been talked about going up 8 or 9% a year, and people aren't raising their prices by that amount. So that continues to be a challenge.

And I think there is a lot of strategy there, Major League Baseball is a typical example, where if all of your competitors are going to have Major League Baseball, and you have to pass that cost on to every single customer, maybe you should be the one guy that doesn't have the out of market gains, particularly if you can get them on the internet for half the price.

So there is lots of strategies you can play there. And I think at some point you are going to see differentiated video players, where everybody doesn't have exactly the same thing in their package. And we have tried to position ourself to have as much flex, I think we have the most flexibility in our contracts, in terms of how we play in that environment. And it is no secret that our boxes are interactive. It is no secret that we have the ability to have viewer measurement internally.

I don't think it is a coincidence that there may be a channel we take off the air, because we think they are charging too much money for it, because we may look at the Nielsen ratings and all the stuff, and we may have a different opinion about what our consumer base considers important. And we may consider the fact that viewer measurement of 13 million boxes is more accurate than viewer measurement of 2,000 boxes. I just think we are well-positioned there to make those things. We have made some really good calls on programming, we have missed a few. But long-term, I think we have a strategy of where we want to be in the marketplace.

As a corollary to that question, I guess the one thing you didn't mention, Charlie is the potential synergy between your yourself and DIRECTV was programming. Between the two of you, you are a Comcast size company. That means you can create programmers if you felt that was the need or opportunity. Is that something you have thought about? Is that something you will think about going forward?

I think Liberty has a tremendous expertise there. And to the extent that Liberty, I think we would follow their lead a bit more on that, to the extent that Liberty wanted to increase their presence in the programming business, and we would be their partner in a business deal that was fair to us. I think we would do that.

I think they are so good at that today, and they already have a fair number of programming assets, that assuming we have a good working relationship with them, we kind of look to then. They might look to us a bit more on the technology side as an example to do things from a technology point of view, that would help both of us. That is the way I would envision it potentially happening.

Now whether competitive juices get in the way of all of that, and human emotion and everything else is another story. You certainly could see the DBS industry creating content that made sense, and now I imagine Liberty would want to sell that to anybody who would want to buy it. But maybe people don't want to buy it. Who knows.

Well, congratulations on being #3.

DBS does have 30 million homes today.

Yes.

And growing. So--

Yes. Thank you.

All right. Thank you.

There are no further questions.

I think we are done. And I think we are back on in November. So thanks for joining the call today.

This concludes today's conference call, you may now disconnect.