DISH Network Corp (DISH) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Tina, and I will be your conference operator today. At this time I would like to welcome everyone to the EchoStar third quarter earnings results 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. Kaiser, you may begin your conference.

Thank you, operator. Thank you for joining. My name is Jason Kiser, I am the Treasurer at EchoStar. I am joined by Charlie Ergen, Chairman and CEO, Carl Vogel, our President, Bernie Han, our CFO, and Stanton Dodge, our General Counsel.

Before we open up for Q&A, we need to do our Safe Harbor disclosures. For that, I will turn it over to Stanton.

Good morning, everyone. Thank you for joining us. We do invite media to participate in a listen-only mode on this call, so we ask that the media not identify participants and their firms in the reports. We do not allow audio taping of the conference call, and we ask you respect that. All statements we make during the call not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to materially different from historical results, or any future results expressed or implied by such forward-looking statements. I am not going to go through a list of all factors that could cause our actual results to differ from historical results and forward-looking statements. And I ask you to look at the front of the 10-Q for a list of factors. In addition we may face other risks described from time to time in other reports that we file with the SEC.

All cautionary statements we make on this call are only as of this date, and are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports, and should not place undue reliance on any forward-looking statements that we make. 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.

Typically we go straight into Q&A, but I think Charlie will have some opening remarks, before we start the Q&A.

I don't have a lot of opening comments, other than it was a solid quarter except for churn, and churn was very disappointing, and as a Company at that level of churn is unacceptable. I just didn't do a very good job as CEO in term of managing that as well as I would have like to have, as well as we did as a company.

You will see a number of factors in the 10-Q, but the major factor really on churn is, and probably the good news is, it is a bit more controllable if we execute as a Company, and we just didn't really execute operationally. We haven't really executed very well operationally during the last six months.

That is really simple things like answering your phone, and making sure you do installs right the first time, and making sure your product works, and making sure that you have a good marketing message in the marketing place, so we just haven't done a very good job on those primes, and we focused on getting better at that, and make sure that we get involved in a little bit more strategic opportunity. I am looking forward to spend a little bit more time on the operations, so I can manage that better.

With that, we will take questions.

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Kit Spring with Stifel Nicolaus.

Maybe if you could talk a little bit about how long you expect churn to remain at elevated levels, and then talk about your HD satellite capacity, if you have any plans to launch satellites to catch up with DirecTV? Thanks.

Thanks. I think as long as we're not, as long as we don't have operational excellence you would have more churn than you normally would have.

The good news is it is a really solvable problem for us in the sense that the first step we take is, as opposed to our credit standards have been the same for the last six or seven years we have actually tightened that credit standard in the last 60 days, so obviously some of our churn is from bad bids that we wrote a year ago or six months ago, right, the second thing that we have done is you notice we don't give away free programming the level we have before, and you heard me talk about how I hate free programming.

One of the reasons I hate free programming is because it does produce churn, when the free programming goes away. We have had $10 off for ten months for a fair amount of time we haven't -- I think we stopped that in first of August or so, August 15th we stopped that, but we have got those ten months of free ten months going for another six or seven months, so the good news is we have weaned ourselves away from that, and some of our competitors are getting into that kind of thing, and there always ends up being some churn.

Third thing we have done is actually turning people off sooner, so we haven't changed our metrics, in terms of how long people before you turn somebody off, and there is always that tendency in these times for people to give people a little long to pay, and we have actually taken the opposite approach of turning people off a few days earlier than we have historically, because we have to pay programmers.

And so one of the things that makes no, if you take a long-term vision of the company you certainly don't want to have a customer who is truly not watching your TV but he just hasn't paid you because he has moved from his house, that got repossessed by the bank, and he moves from his house, in with his parents or back to an apartment, and you're paying the programmer for somebody who is not really watching you, but the guy never called to you tell you that his house got foreclosed, so we have actually reduced, turned people off a little faster, so all of those things have some short-term impacts on churn, but long-term you put yourself in a better position.

The next thing you have to do is your operational excellence is you have got to make sure that you are meeting certain metrics in terms of your customer service, and you want to reduct the reason people are calling you, because every time they call you have a chance to lose them, and all you can do is keep them, and you have to answer your phone on time, and make sure that simple things like install it correctly, train your customers how to use the a more advanced product, such as DVR, HD, and those things, and we just haven't done a very good job of that.

You have to take the approach that you have to figure out, as opposed to just hiring more people to answer the phone calls, you need to figure out why they are calling and solve those issues, and that is something that needs more attention from me and from our senior management to do a better job. We have certainly capable people, but they need some mentorship, in terms of making sure they are looking at the bigger picture of how you go about doing those things, and we have done those things for a long period of time, but we haven't done as good a job there.

As far as HD, we have three satellites, it is unfortunate because we had two satellites scheduled to launch this year in time for the HD selling season, but with the Sea Launch and Proton both being shut down for a period of time, those launches have slipped into next year.

We actually have three satellite launches next year, which will give us the ability to do HD even better than we do it today, although we certainly are on par from a market perspective, ahead of cable and on par with DirecTV although they have more local cities than we have today, so we probably haven't done a good job on our marketing message to let people know that we have an awful lot of HD product, but it is a very strong solid part of our business, and we have three additional launches next year, which should put us in a very, very, very strong position from an HD perspective, so I think the first one of those is scheduled for the first quarter, and the second one the second quarter.

Okay. And on the accounting for those launches, have you paid for some of that already, or does that all occur next year?

Stan, do you want to take that?

We have definitely paid for it, a portion of them, the vast majority depending on the satellite, might be a little bit left, but we pretty much paid for the whole thing at this point.

I would say we paid more for the satellites than we have for the launches. The satellite CapEx is to some degree, you know, farther along than the launch, you pay big payments right when you launch.

Yes.

For the launch, but the launch is less expensive than the satellite.

Okay. Got it. Thanks.

Your next question will come from the line of Tuna Amobi with Standard & Poor's.

Thank you very much. I guess the first question I have is on the gross adds. Can we get some more color as to where your gross adds are queueing now, in relation to direct sales and independent dealer channels, and with regard to the negative impact on gross adds, I think you mentioned promotions, slowing economy, and housing market.

Can you comment on each of those, a little bit more color around those factors would be helpful just to get a sense of what you are seeing out there? Separately, on the AT&T relationship, I think you alluded to what AT&T said earlier about the decision that is forthcoming by the end of this year. Can you tell us what you are hearing as to what might happen with regard to that relationship, and any contingency plans that you have made one-way or the other? Thank you.

I will start with the AT&T question and move backwards from there. Obviously AT&T, we don't speak for AT&T, so we always certainly defer to them in terms of them, and when they want to make a decision. Obviously we value them as a partner, and they are our single biggest customer, so they are our most important customer from that perspective in terms of size.

I think the relationship is strong, and that there is good teamwork between our companies, but ultimately they have to make a decision. At least they have indicated, at least what I heard they indicated they will make a decision on the BellSouth territories, and pick a single provider for their territories. Obviously we are having those discussions.

We hopefully believe we are the stronger partner for them for a variety of reasons, but they will have to make the decision. Should they choose us, it us, it sets a whole, it is one set of issues. If they don't choose us, obviously we'll have to compete in the current AT&T territories against them, so we will be prepared as a company either way, and obviously it will impact our business, either in a positive or negative way in the short-term. In the long-term, that range will see how you execute depending on what they do, so --

All right.

I don't know what else I can say other than defer to AT&T for whenever they are going to make an announcement about that.

The gross adds channels, I think if you look at a macro point of view, the economy is in a much weaker state today. I would say that the odds are that we are either in a recession today or shortly headed for a recession from a macro point of view. You clearly have, if you look at the total video subscribers out there, it was pretty low quarter as on industry for new video connects.

The positive side is DirecTV did very well, so they have shown if you have good marketing, execute your operations, and have good things can happen, so that is a real positive, and obviously they have set a very high standard for the third quarter, and they should be congratulated on that. I think Jason's team did an excellent job.

FiOS has shown that they add a fair number of subscribers. There is still new business out there. You add that against the back drop of fewer housing starts, so there are fewer customers to go around, and not only fewer housing starts, but people who, really if you go down to some subdivisions in America today, every other house has a 'For Sale' sign, and that particular house may have a dish on the roof, or may have cable running into the house, and there is nobody living there. Those guys, those people have moved back into an apartment or maybe moved back in with their parents, or whatever, so you have that kind of back drop where it is a much more competitive environment because of the economy, so we think that that, we are prepared for that.

We thought we were going to be prepared operationally which we probably weren't, but in terms of our marketing and so forth, I think we are very prepared for that. We have certainly a customer who leaves us, isn't going to get a better value somewhere else, and certainly there will be a day when somebody will move into that house, back into that house because it is going to be owned by the bank and the price is going to go down, and ultimately somebody will buy it, and I think our value, you know, one of the our strongest points is our value message, and that becomes more important in kind of a weaker economy, so I think we are well-positioned there.

From a promotion point of view, I don't want to mislead anybody. I listened to a bit of what DirecTV talked about in terms of their high-value customers. We are still getting high-value customers, we don't release the percentages that buy HD and DVRs, but I don't think there is anybody in the industry whose is doing a better job than we are, in terms of getting high-value customers and the expanded service customers. We are certainly doing very well there.

On the other hand, we also work at the lower end of the market, too, where we are the largest Hispanic provider and you're going to have more churn in the Hispanic community, because of migration patterns, and they tend to move a bit more. We do prepaid, we have a pre paid service where customers can only get the service with a prepaid card. We don't have a lot of SAC in that model, but you obviously have higher churn there. We work pretty much soup to nuts in the marketplace, and we think we are pretty well-positioned for the things that are going to be coming down the pike, but I certainly think from a macro point of view the economy is going to be a drag on, a bigger drag than maybe people have expected on all kinds of services.

That was very helpful. Any comments on the channels that I asked about?

We don't give, we don't really break out our channels of distribution. I would say we are strongest, historically have been strongest in the satellite professional. We are probably weakest in the, today we're probably weakest in the two areas, we are certainly vis-a-vis our competitor we are weaker in the retail, kind of big box stores, like a Best Buy, and they do sell our Sling product now, so we are finally in there, and we are also a little weaker in the phone company business. Obviously DirecTV has about 75% of the country in terms of the phone company business today, and of course the phone companies have been good partners for both of us, and we are a much weaker distribution there.

The trends of the channels have been pretty much the same. Sounds like what you're saying, right, no negative trends in the channels that might be affecting the gross adds trends on the long-term, just the macro weakness that you spoke about?

I would say in general that is true. We will have to wait and see how the total economy affects all forms of distribution. You can imagine that perhaps retail sales for big box guys could actually suffer some. That probably won't hurt us as much as other people, satellite specialists may have a tougher time. If they haven't banked some money, they may have a tougher time in a tougher economy. That could hurt us.

Phone companies probably are going to be, they are pretty well off financially, probably going to be successful regardless. Obviously direct sales is something you can control, and I think DirecTV has talked about maybe half their business is direct sales, so that's something that you can continue to control no matter what happens.

Thank you.

Your next question will come from the line of Doug Mitchelson with Deutsche British Deutsche Bank.

Good morning, and then afternoon. A few questions for you. First, I know you talked about execution issues and some of the macro issues related to the churn, but also in the past there has been periods of uncertainty in the overall economy. You have become pretty conservative in your capital, both on the SAC side and retention side, clearly both of those numbers are well below peers. Is it fair to say that you are being awfully conservative given the economic back drop, or is this purely execution and macro?

You have to balance a lot of metrics, but you will notice that we did $379 million of free cash flow. That is quite a bit more than our competition, but we spent a lot less in retention marketing, so we have to evaluate whether we lost some customers we wish we hadn't lost, and we had spent some more money in retention marketing, to where that balance really we thought we had that pretty much, we pretty much look at that every quarter. We thought we pretty much had that right.

I think we probably in hindsight should have spent a little bit more in retention marketing, and obviously we could have bought, in a sense you buy your churn right down. On our SAC, we are in very good shape vis-a-vis our competition, and obviously to some extent that you want to grow your business, you could spend a little bit more money on SAC, but that is against a back drop of weakening economic conditions, and sometimes you don't want to swim upstream, and if you have a real long-term view of things, there is a time to be aggressive, there are times to be conservative, and we try to find the balancing spots there. I don't think we did the perfect job of that, but obviously we have delivered an awful lot of cash to the bottom line.

Just drilling on your SAC a little bit, all in your SAC was $617 of gross add including set-top boxes you sold. Is that a number that you have initiatives in place, or based on it pricing you're getting on set-top boxes you think could continue to go down? Is it has been down --?

I guess the answer is it could go down or go up depending on what we decide to do, and a lot of that depends on the revenue that you are getting from that particular subscriber, and the expected churn rate for that particular subscriber, so if we look at the kind of revenue projections we have for advanced services, we would say we could probably spend a little more on SAC, if we look at the churn that we experience, we would say there are some customers we better spend less on SAC for.

And so we really will spend a fair amount of time on segmenting those markets so that the high-churn customer like prepaid, we don't spend a lot of SAC on that customer, so it is still an economic customer for us. And a high-value customer who may be an HD customer or DVR customer, that we could spend more than $600 on, because that is a higher ARPU customer, a lower churn customer, and what you see is just a conglomeration of all of those numbers, and it has been fairly consistent in that low to mid-$600 range, and we continue to reevaluate depending on what the marketplace does.

If I can drill on one component of set-top boxes, I think in your scintillating EHC filing, which we got to look over this weekend, it mentioned in the first half of '07 only a slight decrease in average selling price per unit for set-top boxes to EchoStar, so a slight decrease in first half '07 versus first half '06, so that would imply that you are not getting further savings on set-top boxes. Is there more --

Two factors there. One is we are doing a lot more MPEG-4 boxes, with hard drives, bigger hard drives, so you have a much more expensive set-top boxes. The second thing is because we we are spinning off the engineering side of our company. They have a transfer price to DISH Network that does include a margin to them to run their business, right, so that would have both of those things would have the effect of raising your hardware costs.

On the other hand our volumes are very high, and we continue to cost reduce our product, and that is reducing our cost, and when you balance all of that out, you saw what you saw in the filing.

All right. Two last quick questions. The first one, for the EHC business, to sell to third parties you are going to need, investors will want some confidence that there is a workaround for the Tivo patents, or you will win that lawsuit. Any comments you can make on that?

You know, kind of hard where we are. We know that the hardware patents have been disallowed by the patent office so far, which is very good news, although TiVO can reposition and try to get those back, so that's the hardware side. We're fighting two software patents.

Software is a bit easier to deal with than hardware, but we are hopeful that we are going to win the appeal case on that side of the business. And we know that, we also know the court ruled we owe Tivo something like $90 million, which we reserved for as well, so I would say it this way. We believe we are right.

We don't believe we infringed, and we want to totally go through that legal process because we believe we are right, and notwithstanding some of the pressure courts on the Court of Appeals, obviously the judges there are very astute and knowledgeable about patent issues, and we think that is a better place for us than a jury in Texas. It is a bit like instant replay in the NFL. We have to have, the tie would go to Tivo, and we have to have irrefutable evidence to overturn the call, and we think we will do that.

Regardless of whether we over turn that call or not, Tom Rogers at Tivo I have known for a long time, and if we are able to win, we will have a conversation with Tivo regardless of that about how we can work together, and if Tivo is to prevail on any portion of their patents, we will still have a conversation about how we can work together, and the relative nature of those negotiations and the strength of those negotiations, will depend a lot about how this Court of Appeals rules.

All right. And lastly the spin off documentation kind of implies that the primary reason for the HC spin-off, is that you felt the operations were undervalued within the overall company. Given that as it was laid out at the documents, that it is free cash flow negative, that you have fixed margins in the set-top boxes business, lots of uncertainties, and you will have to invest to build out all of these businesses before you can grow, can you highlight for investors what exactly you felt in these operations was the most undervalued?

I think what is undervalue is just our expertise. I think we have one of the finest if not the finest set of digital engineers in the world for digital set-top boxes today. We clearly have some underlying technology. I think we clearly have some underlying technology that we clearly control, and what the Tivo case will go a long way towards talking about how strong our DVR position is and intellectual property.

With the acquisition of Sling we get another fundamental building block for digital technology. We have the ability to write software and operating systems outside of the people we have to buy that from, so we have satellites that are underutilized today, so we think we can build value there, but you are correct, it is not a slam dunk deal.

It is a bit like starting EchoStar all over again, and then we had some core values and core expertises, but we had to go put those into money-making business, and that is going to be a challenge for us. There is no guarantees we'll be successful, but we think we will be.

The other reason for the spin is it also helps us, it is a bit easier to manage the business that way because the technology group has focused on DISH Network as their core customer, obviously a cable company or a phone company maybe wasn't willing to buy from them, but as a separate company they'll have the ability to go around the world and compete and sell product, and we think there is good value in that.

We looked at the valuations of Scientific Atlanta before they were sold or valuations of General Instruments, and some of those people we think we have some value there. But there is business opportunities internationally, that we hope to take advantage of, and we will see how we do.

Thanks for the time.

Your next question will come from Vijay Jayant with Lehman Brothers.

Thanks. Charlie, there is a billion dollars buyback announced in your form ten for the new company. I am assuming your ownership economically will be similar to DISH Network. If the valuation is cheap, you're sort of implying the technology company could go private. Any thoughts on that thinking given you believe the values there? Second, one housekeeping question. Your total C P CapEx in the quarter and I will have another follow-up. Thanks.

Do you want to take the CapEx, Jason.

The CapEx is 241 million.

Did you hear that, 241 million for the CX CapEx. In terms of the spin and the billion dollars buyback, we think that makes sense to be -- to have that in place depending on what the marketplace does, and it doesn't go beyond. There is no logical thinking beyond the fact that from time to time we bought our stock back when we think the market has under valued us.

Moving to churn, Charlie, is there any way you can disaggregate the churn between volunteer and in-volunteer, and you mentioned the most stringent policy put in place. Want to figure out how much was management decision versus the economy and the macro factors and any color on that?

We don't break that out publicly, but I would say the churn levels we have, we had mother volunteer and more involuntary and it is a general statement than we like to. II would say from a big picture perspective from a big picture perspective you would like to manage your churn in the 1.6% range over obviously that's going to be seasonal and your summer season is going to be a little higher and your winter might be a little lower, but you try to get into some kind of -- you try to get into some kind of situation like that.

Market conditions could affect you a little bit, and so there might be a where you would want be higher so you don't swim upstream. There might be a time when you want to be lower. I think DirecTV believes they can drive it materially lower from where they are today, so obviously other people have different opinions about that, and we will see how we go out and execute.

I think we have got to have, our people have to understand in our company that we have to operate efficiently, and once you operate efficiently, you have very minor adjustments to churn and they are very visible to you. When you are not operating efficiently, management tends to make excuses, and tends to focus on other things than just doing their job, and here we have got to have a no-excuse mentality, and focus on what we can control and good things will happen, and I think DirecTV showed us that, and showed the marketplace that, and therefore that is what we will focus on.

Just finally, the nine satellites being spun off with the new company, obviously we don't know what satellite is providing what channels of programming. Are they typically satellite that are more in the FSS side, or are there sort of satellites actually going to be delivering DISH Network programming in the new spin company?

I think correct me if I am wrong, Jason, but three are FSS satellites that really have nothing, and six are DBS satellites, I think, and none of the DBS satellites are core to what we deliver to consumers today, with the exception of 61.5 where we have international customers, and a few local-local customers.

All of those international customers are being transitioned, can be transitioned as market conditions allow can be transition to do our 118-7 slot, and all of our local customers can be transitioned to our new spot beam satellite that launches late next year in the west, so the core DISH Network service will be at 13.7 million subscribers are all Western, our 129, 110, 119, 148 locations, and all the DBS satellites stay there that are necessary for that.

Thank you.

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

Thanks, Charlie, first on the gross asset, how many of your adds came from AT&T this quarter?

I don't think we disclose that, do we?

So if I just look I guess at the net adds.

Ask AT&T.

Sorry?

You would have to ask AT&T.

Okay. So we know what they produced in net adds, and about two-thirds of their footprint is covered by you and about a third is covered by DTV, so if I just base it on the footprint distribution, it would suggest that 80 to 85% of your net adds came from AT&T, and that you got very little, almost nothing from any other channels. Is that basically how it shook out?

I just can't comment on that. I would say that we look at it as a percentage of gross adds, and I would say we are less dependent on the RBOCs than our competition is by a long shot. So if you apply that math, you should apply that math across the DBS spectrum, and we are, it is good news/bad news. We are less dependent upon RBOCs, but they obviously with their bundles and marketing and ability to be talking to customers on a daily basis, have some ability to market as well. That is why AT&T is a very valuable customer for us.

Did you notice a slowdown in activity from AT&T during the quarter? Did they add less this quarter than they have in previous quarters?

I just can't, I just don't like to speak for AT&T. That is really up to them.

(multiple speakers)

Our churn was higher than we would like to have it.

Okay.

The whole quarter I could summarize with, our churn was higher than we would like to have it. We have got some work to do, particularly operationally, although there is a lot of other things going on, and our cash flow was extremely good on the positive side, and that's really it. And the rest of the stuff becomes strategic, in the sense I think we positioned ourselves strategically particularly with the acquisition of Sling, with the potential spin, which you can read in the Form 10, and how we have set that up, and with things that are going on in the marketplace, we think we are well-positioned, but strategically, but we have got to do a better job of executing operationally.

On the churn front, have you seen an improvement yet in the course of the fourth quarter, or are some of the macro factors that drove higher churn continue to be a source of pressure in the fourth quarter?

Well, we just don't, I think all I can say is we don't give forward-looking statements particularly right, but I would say this. If we improve operationally, we will improve. If we don't improve operationally, we won't improve, and I would imagine that the macro events that are going in place, I don't think are getting any better for the foreseeable future. Right?

I just think that the economies, this is just me talking. I have no insight here. It is just that I think, the economy will face some tough pressures for the foreseeable future, notwithstanding what the Federal Reserve can and will and won't do, and our job is to position this Company to take advantage of that if that is what happens. I like the fact that it is a little bit choppy out there because I think good companies can perform well in them, perform better than their peers and it gives you an opportunity to gain on people. When things are choppy. When things are good you can cover up a lot of mistakes, and unfortunately we made a few mistakes that probably got covered up by a good economy, and they probably hurt us this quarter because we didn't operate efficiently.

I guess what we will be wrestling with is given that that some of the drivers of churn are out of your control, they are driven by macro factors, to what extent can you really bring churn on control, without knowing how much of it is driven by economic factors, as opposed to competitive factors? It is just difficult to figure it out.

Look, if you look at DirecTV and I think might have improved churn or certainly didn't do, they actually were in the I think in the ballpark of where they wanted to be from a churn perspective, and they operated in the same environment we did. That tells me that for us it is more of an operational issue.

Do you think they have a less economically sensitive customer base than you do, though?

We certainly have on the lower end. We probably have a larger Hispanic group, and we a prepaid group that is probably, that particular group, although it is a big minority of our customer sincerely probably a bit more economic sense, but the vast majority of our customers and their customers probably are a little bit better technically savvy, skew a little more rural, and are probably skew a little higher end, so NFL Season Ticket probably from their perspective would skew a little higher, and particularly this quarter.

Thank you very much.

Your next question will come from the line of Bryan Kraft with Credit Suisse.

Thank you. Two questions. I guess first, Charlie, when you look at opportunities outside of the core U.S., direct business, I guess what are you most excited about? Obviously you talked about fixed satellite services and the equipment manufacturing and the new spin co.

Do you think there is, or are you looking at any opportunities internationally to get into the direct-to-home business, and secondly, if you look at just one more question on churn, if you look at churn in terms of the RBOC channel and the direct to retail channels, has the RBOC channel brought the churn up at all, and the reason I ask it seems on the surface more difficult to correct a problem in that channel, than one that exists more in the direct or the retail channel? Thanks.

Second part, I think the RBOC channel, we probably learned with AT&T along the way, but I think we are down that process far enough down that process that there is not a huge difference between what we do and what AT&T does, and we certainly had some learning experiences to go through there. That has been the past.

As far as international opportunities in the direct-to-home business, typically there are some opportunities made as a minority investor and some direct-to-home businesses, it is difficult most countries in the world don't allow us to be the majority owner, but it is a business we know well. It is a business we have all the building blocks in place, so it is a business that if there were opportunities internationally we would certainly look at them, and hopefully over the next few years, there will be opportunities to do something on an economic basis around the world. In terms of similar businesses to what we do in the United States with DISH Network.

Great. Thanks.

Your next question will come from the line of Craig Moffit with Sanford Bernstein.

Good morning. I wonder if I could just dig into the churn issue a little bit more. You talked about your sub-base as sort of broadly similar to DirecTVs. Can you provide any specific detail on what portion of your subscriber base is subprime on a FICO score basis, for example, and how your mix looks in different pools of demographics?

Yes. I hope none of our businesses is subprime, other than prepaid, and prepaid is a very small part of our business although it has grown a little bit, but that business certainly churns higher, right, and certainly in prepaid somebody has enough money to buy it for one month, and the next month they can't buy programming to become a churn statistic, so I don't know how many times I can say this.

I always say that I believe that the majority of our churn issue in this quarter was that we didn't operate efficiently. We didn't answer our phone in the kind of metrics we believe we need to do. We didn't do our installations as well as we needed to, we didn't audit those installations and have penalties for our guys who don't install.

We didn't get our marketing message out very well. We didn't produce product that met our failure rated hurdles. Those are core blocking and tackling kind of operational issues, and we have historically done a much better job than we have over the last six months on those metrics, and we need to get back to fundamentally operating at those levels.

I know --

That is my fault. That is really a CEO who probably wasn't in the depths of those operational issues as much as I should have, and I will have to get in and understand those things a little bit better and I am doing that.

And I notice that at Time Warner, for example, they said that their losses were concentrated, about half their losses came from the bottom 10% of the subscriber base in the broadcast basic-only customers. CableVision saw weakness in their low end customers who weren't even overlapped with Verizon, but they were seeing higher involuntary churn rates, so DirecTV has in their marketing or in their press kit has demographics that are clearly at the very high-end, but like Wobegon, not everybody can be above average, so I am just wondering if the whole market is not above average where are the low end customers concentrated? Is it your sense that you have more of those than the market overall, or more of those than DirecTV, for example?

Again, I would say that I don't have any evidence. I would say that cable typically has the vast majority of low end customers, of lower credit analog-only kind of stuff. They are probably going to skew a little more in that.

Satellite in general is going to skew a little higher, because obviously we are getting a fair number of people buying HD, DVRs, and so forth that buy higher, and we also skew a little more rural where perhaps where the demographics, where the economy is doing okay, particularly farmland right. But versus DirecTV, I would think that we would, that we skew a little less than they do on the high-end for a couple of reasons.

One is they were out in the marketplace two years before we were, so they got some of the early adopters for a couple years that we never got a chance to get. Second, I think they have things like NFL Season Ticket, that we have never had that will skew a little higher for 10% of their base, and third they do a much better job from a marketing, branding perspective than we do, in terms of people associating a greater value with DirecTV than perhaps with us, and probably for it they don't do things like prepaid that we do.

Again, all that far is a very minor part of it. You put all of that together, and I would say that in general cable skews a little lower end, and DirecTV skews at the very top end, and we are somewhere closer to DirecTV than cable.

And one last question if I could, Charlie, and somewhat more personal question, but there has been a lot of speculation about with the spin of the technology assets, that your personal interests might be more in the technology side rather than the DBS side, and there is obviously ongoing speculation about an AT&T partnership. I wonder if you can just talk about how you view your own role in the Company going forward, and your own proclivity for this to remain a public company, private company or do partnerships, mergers, that sort of thing?

I really don't know how to answer that, other than I remain extremely interested in the satellite business, or the DISH Network business, and I am extremely interested in the technology side of the business too, and it is kind of picking which two kids you like the best. We love them both. In my case, I love all five of mine.

Thank you, Charlie.

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

One quick question on the spin. Is getting a favorable tax-free spin from the IRS a necessary condition for proceeding with the spin or even --

Yes.

Rule against? It is? Okay, thank you.

No, it is not?

We have asked for a ruling. We feel fairly comfortable we will be able to obtain a ruling, but if we turn out to be wrong, we will evaluate whether it makes sense to proceed with the spin or not.

It would be a big negative if we didn't get that.

Okay. Thank you.

Your next question will come from the line of [Stanley Martinez].

Thanks. Good morning. Related to the ECH spin, I just wondered, question maybe for Bernie or Jason, what the value of X-ECC's NOLs is? I have them estimated at 447 million, post the 73 million cash taxes, or 22% of earnings before tax in the quarter. I saw in the Form 10 that there was a $23 million NOL being transferred. What is the implication for full cash taxpayer status at EchoStar Communications? Is it still looking like mid-'08 or late '08, and then related again to the tax-free spin-off of EHC, does that have any implications for the value of EchoStar Communications goodwill, or does it change or increase the value of ECC's tax base in its own shares, and if so, might that give management any additional flexibility strategically?

First of all, with respect to the NOL question, I think you could find in our 10-K at the end of last year what the NOL was at the beginning of the year. Obviously with the amount of earnings and cash flow we are generating as a company, we are burning through that at a pretty rapid rate, and you can figure out by the end of '07, you can probably estimate pretty closely what that remaining balance will be.

In the Form 10 itself you will see in the financials we have EchoStar Communications Corp. is made up of a lot of different companies within ECC, and the NOLs that have accumulated over the years have been tracked company by company, have also been shared while we have been under one company, going forward to the extent we spin off they would get sent off according to which companies move over to the spun-off company, and the Form 10 largely reflects what we believe that to be.

So sounds like I am ballparking about the right place then, on the NOLs?

This is Charlie, I hope we pay tax every where.

(laughter)

My goal in life is to pay tax. That means we are doing good.

(multiple speakers)

We have budget deficits. We are trying to help out the government.

With respect to the implications of the EHC spin for ECC, is there anything there in terms of revaluing the goodwill, or the tax basis in the shares, that we should be thinking about at the DBS level?

Everything I think we are thinking about relative to the spin you can read about in the Form 10, so I would refer to that.

Your next question will come from the line of Thomas Eagan with Oppenheimer.

Great. Thank you very much. You guys launched PocketDISH a couple years ago. We haven't seen a lot of any impact from that. You guys went ahead and bought Sling Media. Was wondering if you could talk a little about what you saw from the early results out of PocketDISH, and what made you want to go to Sling? And I have a follow-up. Thanks.

PocketDISH hasn't been a material part of our business in part because it is a little bit harder to sell, and they didn't get real good retail distribution of the product. Having said that, it also, what it has shown and what we have learned from it is that people do want their video to be portable, and it did go into our thinking of Sling Media acquisition in the sense, that if you want to have mobile and portable video, Sling plays a major role there.

It is a fundamental technology that allows you to do that, so you can imagine going to your hotel room and being able to watch television or going overseas, and being able to watch television, or perhaps watching television on your phone. Those are pretty fundamental issues that people are going to deal with going forward, and Sling gives us a great fundamental building block to be able to do that.

I don't think it is as dramatic as the DVR building block that we have, but it is right up there, and we probably didn't do, we had the first DVRs out in the marketplace, sold more DVRs than anybody else and we are probably not considered the leader in DVRs, so I don't think we want to make that same mistake again. That is why Sling was an important acquisition for us.

And then just as a follow-up, DirecTV said that they saw pretty considerable box cost reductions, so for example on the HD DVR box going from $399 in 2Q of '07, down to $299 so the drop of $100 over the course of two quarters, and then more reductions by 2Q of '08. What are you thinking in terms of the level of box cost reductions say on the HD DVR box? Thanks.

I think there is kind of conflicting things are going on. One is costs do continue to come down, particularly on MPEG-4, so those costs continue to come down. Having said that, that is on a per-box basis, and again we are the only company that really puts two receivers in one box, so we have some advantages there.

We don't get as big a cost reduction for our customers, because we only buy one box where they buy two boxes from our competitors, so I think we are already ahead of that curve a bit more than our competitors maybe, but the second thing is that we are putting more, we are making the boxes better. Today our HD box has a 500 gig hard drive. There is nobody in the market with a 500 gig hard drive but us, so we are competing against guys with half that size hard drive.

There is a reason why we want to be a 500 gig hard drive, so we put more in the box, and the second thing is our spin company will be selling boxes to DISH Network and hopefully others, and they have to have, even though it is a small margin they have to have a margin to run the business. Those conflicting things happen, so the answer is yes, box costs will come down, but they are going to become, they will have more features, be more feature-rich, and how that affects SAC, those conflicting forces, we have been fairly consistent where we are in SAC.

Thank you.

Your next question will come from the line of Jake Newman with [Credit Suisse].

That is CreditSights. Thanks.

Sorry, sir.

That is all right. Thanks for taking the question. I wanted to ask about ARPU. In thinking about the expansion, the penetration of HD, and if I do my math right, the ARPU growth at EchoStar does not look as strong as I thought it might be. Can you say anything about what factors may be at the other end of ARPU hampering it?

The biggest thing that hampered ARPU is that we gave away free programming, right, so --

Is that DISH Network?

We have millions of customers getting $10 off a month. That affects ARPU in a negative way. That changes when that free programming goes away.

Right.

We clearly are double-digits less ARPU than our competitors for similar customers, so we have room on the ARPU side.

As far as HD penetration goes, do you think you are keeping up with your competitors after you listen to what they have to say?

I don't know exactly what they, I don't know their exact numbers, but I would say it this way, I think that from high-end customers, added services for that high-end customer, whether it be DBS and HD, I think we are doing very well vis-a-vis the market. We would like to do better, we would always like to do better.

On the three satellites--?

I will say it a different way. I think that the whole digital transition into HD and all those things, you know, I sat in on these conference calls a year ago, and cable was going to kick satellite's tail on HD on this, that, and the other, everybody said, well they have a local advantage, and the fact of the matter is that both satellite guys are doing local to local HD today, although DirecTV has more cities than we do, but our new satellites will help us get there.

I think we will do very well in that digital transition environment. I think that has the ability to help our industry grow going forward.

Satellite launches, three satellite launches next year I think will add about 300 million in CapEx. Are there places where you will be trimming CapEx?

We are going to spend money where we think we have an opportunity to make money on the CapEx expenditures. I don't know what else to say. We are pretty prudent on how we spend our CapEx. Let me put it in perspective, we made $379 million in free cash flow.

We took the free cash flow and bought Sling Media. Our competition spent that $370 million and more to retain some customers with new boxes, new antennas, the K band and that kind of stuff. History is going to say, I think both of those were good investments, don't get me wrong, but history will say which guy made a better investment. I don't know the answer to that, but my gut feel is that Sling Media was a better use of $379 million.

You only have limited capital. You only spend it certain ways, but Sling Media was a point in time that either we acquired the Company, or we would have to go out and develop that technology ourselves which would have taken us two or three years, and we had intellectual property issues and all kinds of stuff.

To retention marketing is something we can dial-up or dial down in a moment's notice, so I think the end of the day, you have to take a look at what you are investing in EchoStar, as you would invest in a management team that hopefully has a long-term vision where it is trying to go, and we are fortunate that we are strong financially, and have a good capital structure, to take advantage of all the things we see out there, and I think we probably didn't, all I can say is I didn't do a very good job on the churn side, and we need to do a better job there. Other than that, I think it was a pretty solid quarter.

Operator, I think we will take one more question.

Thank you, sir. Your final question will come from Spencer Wang with Bear Stearns.

Thanks. Good morning. I was wondering if you guys could just talk a little about some of the new rules that the FCC is proposing to impose on the cable industry, and more specifically it sounds like one of the initiatives that they are looking at is making the cost of programming cheaper for cable competitors like you guys, so can you help us quantify the potential savings there, and maybe share with us your thoughts on wholesale a la carte in general? Thanks.

We are all for anything the FCC does to hurt cable as long as it doesn't hurt us, but we are one of the few companies that has been in favor of a la carte. We think the more choice you give customers the better it is for our business, because you give customers what they want, but there are things that the FCC has looked at that we think hurts cable and we think hurts us.

Things like HD must carry, and perhaps I think there are other things from a program access point of view that could be negative, so I would say there are some things we are in agreement with cable on, that the FCC has maybe gone the wrong path, and there are some things the FCC is doing that we think makes sense, to bring a more competitive playing field.

Having said that, that is being driven by the phone companies in my opinion. I wouldn't say we are the most powerful company in Washington. In fact, I would say we are probably the weakest company in the media business and Washington, and we are very fortunate that when Congress or the FCC will take time to listen to us, but I think a lot of the stuff is being driven by bigger companies than us.

Charlie, can you give us a sense of how much maybe you pay more for programming than cable on a per sub basis, perhaps?

It just depends. I would say relative to if you just took the generalization that Comcast probably pays the least, and a rural cable company out there with 100 subscribers probably pays the most. I think that as the third largest video provider, and as a company that from time to time has had to take things down, we have a long-term programming maybe you want to speak to this, Carl.

I think Charlie pretty much said it.

We don't certainly enjoy the rates that we think Comcast gets, but we are the third largest operator. I think if you look at our programming costs, and how they have increased over the years, I think we have got a good handle on those, and they are certainly not above market, and suggest that they are below.

We defend our packaging with the honor of our children, and in case my five children are listening, I love them, too, but for the most part I think from a programming standpoint we are extremely competitive. We are also a place that built in business for a lot of programmers, and put a lot of things on that others may not. We have little if any conflicts with content that we own, so I think we are pretty well positioned from a programming standpoint.

Great. Thank you.

Thanks. We will be back I guess by the first of March, I guess, late February, so thanks again for participating in the call.

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.