DISH Network Corp (DISH) 2008 Q2 法說會逐字稿

Good afternoon. My name is Hamilton, and I'll be your conference operator today. At this time I'd like to welcome everyone to the DISH Network quarter two 2008 earnings 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. Jason Kiser, we'll now begin your conference.

Thanks, Hamilton. Thanks for joining us. My name is Jason Kiser. I'm the Treasurer here at DISH Network. I'm joined today by Charlie Ergen, our Chairman and CEO; Bernie Han, our CFO; and Stanton Dodge, our general counsel. Before we open it up for Q&A, we do need to do our Safe Harbor disclosure, so for that I'll turn it over to Stanton.

Thanks, Jason. Good morning everyone. Thanks for joining us. We invite media to participate in listen-only mode on the call and ask that you do not identify the participants or their firms in your reports. We also do not allow audio taping and ask that you respect that.

All statements made in this call that are not statements of historical fact constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by such forward-looking statements. For a list of those factors please are refer to our 10-Q. 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 not place undue reliance on any forward-looking statements. We assume no responsibility for updating forward-looking statements.

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

Thanks, Stanton. Hamilton, I think we'll just open open up the line for any questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from the line of Vijay Jayant.

Good morning, James Ratcliffe for Vijay. A couple questions. First of all, the topic of churn, what's driving the higher churn? Can you disaggregate it between voluntary and involuntary and particularly within voluntary what's driving people to leave? Are they just canceling service to cut their family budget or are they migrating to other providers? And secondly if you could talk a little bit about CPE CapEx it seemed to be on a gross add basis flat year over year but you're now paying margin to SATS, so is that a mix of boxes with a lower cost mix this year or was it purely box cost cuts? And finally what was total CPE CapEx in the quarter? Thanks.

Okay this is Charlie. I guess in talking about churn, it's probably four things that have been driving it. One is economic. Obviously the effect on housing and the total economy has some effect on you when customers can't pay their bill, they either down grade or drop off completely and watch free TV, particularly on some of your low-end type customers. Second issue would be piracy and fraud. As you know our system has been compromised and it's compromised in two ways. One is you can get a fairly simple smart card to put in and beat our system, but there's been an in-flow now called free-to-air boxes, where you actually can get a set top box that takes the MPEG-2 signal and because you -- because they have hacked the code, allows you to light up all of the channels for a free-to-air box. So customers who are legitimate customers today and are paying us $600, $700, $800 a year suddenly in this kind of environment see a flee market on the internet they can get for $150 or something a box that lights up the channels they're watching and paying for for free, there's a percentage of people who are going to do that.

Third thing then is really competitive offerings in the marketplace, as the biggest being probably the phone companies and FiOS and U-verse, where there are a lot of introductory offers and offers out there that they -- and I think they had about -- close to 350,000 net additions in the second quarter so they're taking those -- some from us and some customers from others. Obviously on the hi-definition front we haven't been as competitive as we would like in the second quarter, particularly versus DirecTV. And finally, operational inefficiencies really in two ways. One is just our total overall customer service in terms of are we giving customers a great experience and we are doing everything right so customers don't have to call us. And we certainly made some progress there and we certainly have room for improvement there. And also from a marketing perspective, are we getting our message out in terms of the things that we do better than anybody else, which I think are significant. So those are kind of the four areas that would not only drive churn but also affect gross additions.

So let me give you a long-winded answer., I guess because one of those things we don't control, which is the economy, so we don't focus a lot of times on things we don't control. What we have done is made sure we're solid financially and we have a solid balance sheet, good capital structure, and so we're well prepared, make sure we have a pretty good cost infrastructure in terms of how we run the Company. So we're about as well prepared as we can be for economic downturn , which we think, obviously, many people say will continue for awhile, so we're about as well positioned as we can do there, but there's not much we can do in that economic environment. We certainly don't want to spend money chasing customers in a way that's not economical for us. We don't want to start lending in the subprime kind of crazy things to do things to drive numbers if it doesn't make sense. We have to have the courage to stay the course for long-term gain at this Company.

The other three things we can do a lot about. Operational efficiencies, again I think we made some progress and we're answering our phones on time, e even better than our internal metrics today, so we're delivering a better customer experience than we were last quarter, and we got room to go. From an HD perspective, while it didn't affect the second quarter particularly a lot, the third quarter we actually launched successfully our second satellite this year -- after suffering a failure earlier in the year -- and that satellite will be online by end of this month. And so that's going to help us in terms of giving us more coverage, more -- it has higher power so it gives us better service to our customers for better signal quality to our customers and frees up some more channels for hi-definition television.

Additionally, starting as of August 1st we were at 114 HD national channels, I believe , DirecTV talked about being 100 channels last year. I think the latest thing I saw they were at 95 channels on August 1st, so they talked about last year having 100 channels and they didn't meet that goal. We were actually the first Company to have and have today, I believe, 114 national HD channels, including one that's in 1080 P for video-on-demand, so -- that's true video-on-demand, so we've made progress there although that's in the third quarter obviously, not in the second quarter.

In terms of piracy, and the fraud initiatives, we have started -- we started last month sending out a new generation of smart cards that will help eliminate the free-to-air box and piracy problem. It takes some time to send those out to all of our customers and its incremental gains as we find certain segment groups that we turn off first, but we're committed to going after anybody who's stealing our signal, and making sure that anybody who goes out and buys anything in the piracy or set top -- or free-to-air box is going to lose money on it because it's not going to work. So the three things that we can do something about, we've got things in progress and I'm pretty pleased that we have action plans to deal with all those. As far as --

Yes, the customer equipment CapEx for the quarter was $2 13 million and yes, that does include, obviously, the markup that we now pay to EchoStar for the set top boxes and you see that a little bit in our SAC the last couple quarters. Since we started paying the margins to EchoStar, you can see our SAC has been, indeed, a bit higher than it's been in the past. The difference between the second quarter and the first quarter fluctuation, I would just attribute that to normal fluctuations we see quarter to quarter in our SAC metric.

All right.And just to follow up could you talk a bit about how you're positioning yourself for the long-term business at AT&T versus DirecTV? Thanks.

Well, as you know AT&T has notified us that they are not renewing the contract -- or I should say that they said it'll expire. The contract really allows for them -- required them to give us notice if it wasn't going to extend beyond its original date and so they've given that notice. They've also given notice of a repayment of the $500 million investment that they made in EchoStar and both of those things were contractually allowed by AT&T, and I would say that from a big picture, I'm not sure -- you'd have to -- I mean only AT&T can answer this question, but I don't think at least we, at DISH Network can't read a whole lot into that. They contractually were allowed to do that. Our loan from them was at 3% interest. Probably their CFO looked at that and made a very logical decision to say that doesn't -- we can probably do better with that money. Their operations people probably said that we're probably in a better position to have flexibility if -- flexibility going forward and video, if we want to stay with the VBS partner it w'd be better to talk to multiple partners than one and see what the best deal out there is,

So we have to be ready as a Company. All I can say is we don't have anything to say. AT&T -- only AT&T can talk about what their true intentions are but we have to be ready one way or the other. We'll be ready with AT&T, or we'll be ready without AT&T. Obviously our relation -- I think our relationship with AT&T has been good. I think our teams generally -- genuinely like to work with AT&T and their management. I think that the teams have worked well together. I think the product offerings from DISH and AT&T markets has been successful and I think the product is working well for AT&T. But on the other hand, they're going to look at the marketplace and decide what's best for AT&T and that may include DISH, that might not include DISH, and they also may have other strategies that they're pursuing. So we'll have to -- we don't know where they'll stand and we'll be ready with AT&T as a partner or we'll be ready to compete , and that's the job that we have to do at our Company and we think we can do either one.

All right, thank you.

Our next question comes from the line of Jason Bazinet of Citi.

Thanks so much. I'm looking at your valuation and it seems to me that it's pretty compelling at these levels, and I -- obviously the Market has some concerns about the churn but if you look at the other big issue the Market's grappling with the two to three year outlook on CapEx, so I was wondering if you could just comment on a couple things. Have you made a final decision regarding where the 700 megahertz spectrum will ultimately reside, DISH or SAT? Second, in terms of the FCC proceeding regarding carrying local channels in both HD and standard def, what sort of incremental CapEx would you imagine if there was an adverse ruling out of the FCC. And then third, should we expect anymore satellite launches over the next few years other than Echo 15 slated for 2010? Thanks.

Well let's take the satellite launches. We have a satellite being launched by a Canadian company in the fourth quarter of this year that we have leased all of the capacity on that should be operational by the first of next year. We then have Echo 14 launching, I think, end of next year and we have Echo 15 in 2010. I think it's reasonable to expect that we would launch something in the neighborhood of one satellite per year and end up with ten satellites in our fleet that are operational. And while they have 12-15 year lifetimes, I think we're on a path of one a year to add capacity, both for HD mand --I mean, from FCC mandate, as you mentioned, for hi-definition must carry, and replacement and so fourth.

The CapEx question,from a big picture we finally got to where we want to get to, which is where we thought we'd be last year when we were delayed on our launches and then, of course the last one in March failed. But we now have enough capacity up to switch our systems to truly MPEG-4 technology and so we think that from a CapEx perspective, that's not material changes to what we're doing because of the way we designed our system to be -- to go to MPEG-4 in a transitional way as opposed to all at once. We can upgrade our customers as they go to hi-definition television. Not all of our customers going to to hi-definition television tomorrow. We think that's over the next three, four, five years that they switch and we'll upgrade them at the time. We're starting to shift almost exclusively MPEG-4 product and certainly by next year we'll be shipping exclusively MPEG-4 product to new customers, so there's no CapEx -- there's no additional CapEx for those customers because they 're HD ready, whether they start with HD or not. Because we lease boxes, we have more flexibility there.

Probably the unknown is where the FCC would come out with some kind of dual analog and digital carriage under a must-carry scenario and in that case we wouldn't have the satellite capacity to do that and we'd have to either spend additional capacity over time and find new spectrum for new satellites or we'd have to take down some existing markets in local analog business today. So the FCC has been pretty prudent about that. If you looked at their past rulings they clearly understand at the staff and commissioner level that satellites don't have the same kind of -- that satellites have capacity constraints from spot beams in a way that cable doesn't have a constraint and I don't anticipate that the FCC would put some kind of mandate on a DVS industry that we can't physically technically do today. And obviously, they were prudent in the sense that they -- for the HD must carry gave some amount of time to go out and build new satellites. We still have spectrum constraints that we have to deal with, but at least they get enough time to build a satellite, so I don't anticipate that but it's a risk factor.

And then --

And the hundred megahertz is in DISH, today, fair?

Right.

Bernie, is that right? I don't --

Yes. The question was more about the intention.

Well, I think the 700 megahertz, I think it's a great frequency. It has a lot of great attributes. We think it's a real asset of DISH and we have a lot of strategic plans that we're looking at is the best to how to deploy that. Obviously there's nothing we can do until early next year when that spectrum becomes available on the digital transition, assuming the digital transition takes place as scheduled in February of next year and we'll certainly have our strategic plans done before then in terms of how we might utilize that spectrum. But it certainly gives us a chance to do some things. Obviously we'd look at it more from a video perspective and we think it allows us to do some things in the video space that we can't do today.

Thank you very much.

Next we have a question from the line of [Gary Rehan] with GR Advisors.

Hi.. It's obviously difficult to exactly track this but it appears based on the ARPU that the churn must have accelerated later into the quarter. Am I correct in making that assumption? Is that something we can read through into something that's happening in the overall economy?

I don't think you can -- no, I don't think you can read that into it. I think that I would say it this way. Our churn is -- it's seasonal and I think we've tracked -- in general we've tracked our seasonal norms with the exception that it's a higher -- it's always been -- it's higher this year than it was last year, right, but it's been seasonally higher at every level -- or every quarter -- or every month, so it's tracking. The trends that are out there seem to be continuing trends and seem to be consistent. And again, I don't -- I can't give you -- I can't quantify this, but some of it's the economy. But I think that everybody's that issue, right, and you can see trends and certainly DirecTV has been able to overcome that so far.

The other trend that's unique to DISH is really the piracy fraud thing, which we uniquely have, and I think that's a factor that we'll get a handle on as we get our new security system in place, and I think then we'll know -- we'll be able to quantify that at that point, but we can't today. But it's certainly a material item in churn. There's no question about that. Just go on the internet and talking to people and certainly some of the undercover investigations that we're doing now, we certainly have evidence that that's a material part of the churn for us today. And then it's hard to know how much of it -- I think we've probably done a better job of customer service and I don't think that is probably as great of an issue as it was, maybe in past quarters we've done a better job there.

Thank you.

Our next question comes from the line of Craig Moffitt of Sanford.

Hi. Charlie, I know you may not be able to comment extensively on the TiVo litigation but I'm wondering specifically what your contingency plans are in the event that the Delaware court has not taken the case and if you have to go in on September 4th, potentially with the risk of having to shut down as many as four to six million DVRs, what kind of contingency plan would you have in place to do or what exactly would you do if that turned out to be the case?

Well, I really can't comment on all of our contingency plans, but let me put the TiVo litigation in perspective for you. One is TiVo is -- on September 4th we have a hearing where TiVo has said that we didn't -- it's a very narrow issue but the issue is that we didn't comply with the injunction of the court, and the court said that we had to turn off infringing set top boxes, DVRs. It in no way restricts our ability -- and what we did was we designed around the TiVo patent and patent law encourages people to be innovative and our guys were very innovative and used some very sophisticated algorithms and so fourth to design around the TiVo patent. And obviously as they explain the TiVo patent to the court -- to the Court of Appeals and everything we know that we've designed around that and gotten external confirmation that we have successfully designed around that. We then turned our boxes off and downloaded new software to them and turned them back on again, so we believe we comply with the injunction. I don't believe that TiVo is going to -- I believe that we'll prevail at that September 4th hearing and we will be found that we are not in contempt of the judges order.

If we were to be found in contempt, again hypothetically -- which I don't think is going to happen -- we would immediately go to the Court of Appeals for a stay of that. I don't think TiVo is going to change patent law that you you can't design around patents. I think that's a pretty soph -- I think that's a principle that's been in patent law for a long time and I don't think that's going to change in this case. There's just too many cases out there where people have been able to design around patents in very similar situations. So we certainly will go to the Court of Appeals. Additionally, we're not prevented from -- there's nothing that TiVo has accused us of today in the courts for September 4th that says we shouldn't be able to ship our own -- ship products today, so we continue to ship DVRs that don't infringe today.

Having said that, obviously at some point, I believe we'll prevail but TiVo -- we're going to have conversations with TiVo one way or the other about how we work together. And again, I'm just stubborn. I know this case inside and out. I've sat through trials. I've sat through the engineering models. I've sat and had the best and the brightest explain this to us, and I'm just stubborn. We don't violate their intellectual property today, and I want to prove that. And so we're going to go to the September 4th hearing and see who is right and so far, TiVo's been right. So far TiVo has won the court cases, and at some -- let's make it clear, through the Court of Appeal process we have to pay for intellectual property that the court says that we violated and we're going to have to pay them for that.

Now we've changed that intellectual property in a way we don't violate that anymore and I'm just stubborn enough to say, why am I going to pay for something that we don't violate and it's one of the great things about our technology that we were able to completely change the software. We were found not to violate the hardware, only the software , and we changed the software, and I think it's a real feather in our cap to our technology. It's a feather in our cap that we can design around it. It's a feather in our cap we can turn the boxes off and restart them with new software, and our bet is that we prevail on the September 4th hearing. Having said that, that still doesn't mean we won't have a relationship with TiVo, because I think we should. I think there's ways we should work together and I've said for the last year or so that at some point in time we should have a relationship, but we wouldn't go into a relationship where somebody accuses us of something that we don't do.

Thank you, Charlie, very helpful.

Next we have a question from the line of Ingrid Chung of Goldman Sachs.

Thank you. So first, Charlie we're actually a little surprised that you're on the call today given your comments last quarter. Did you cancel your vacation> And then secondly, in the 10-Q, you state that 15% of your gross adds came from T in the first half of '08. Could you break that percentage down in terms of what Q2 looked like versus Q1? And then following on the same topic, did some of your competing channels in the former BellSouth systems show any sort of pull back as you ramped with AT&T there?

One is we got our 10-Q and everything done so I could here because I didn't think we'd get it done until next week as we normally do, it takes a little longer.; And because we have some operational efficiencies and Bernie and the staff did a good job we were actually able to get that early, , so I didn't have to change anything. But I did feel like a loss of subscribers was worthy of me being here and I'm glad I was able to make the call. The AT&T, we don't -- I don't have it broken down between first quarter and second is quarter in terms of percentages, that's just the general overall percentage. I don't know if you want to add something Bernie?

It was higher in the second quarter, as you'd guess, with the expansion of our relationship with AT&T.

Okay.

That's about all.

And it's a mix -- it's a mixed bag with AT&T in the sense that as you sell them in a situation, you lose distribution from other forms of distribution, so it's not all incremental gains. When we picked up the BellSouth territory it wasn't all incremental gain. Obviously AT&T delivered new sub from that form of distribution we weren't getting, but we lost subs from some of our traditional distribution paths. Additionally, AT&T because of U-verse actually competes against the satellite providers, so where they have U-verse they're more inclined -- not more inclined, they do sell U-verse first over our products, so our current customers call them they may try to switch them over even though they have DISH today. So it's a bit of a mixed bag, but overall, AT&T has been a positive impact on our business and relationship and obviously that's something we think would continue for whoever they -- whatever they decide to do. If they stay in the satellite business with somebody it's probably an overall positive, but there's ways to -- there's ways that you would go either way in terms of strategic things you could do. And this is one of those things where you have some good choices in life and all of them are good, and I like to be positioned that way as a Company where we have good things we can do in the marketplace, and I think we are positioned that way.

Okay, great. Thanks. And then just lastly, in terms of marketing, now that you do have the HD content, how much more aggressive are you going to be in 3Q?

Well, I think as soon as our next satellite gets turned on we have a chance to be more aggressive than we are today. We're a little bit more aggressive today, obviously, and we're doing a couple different things. One is the first big thing we do is we have the only all HD package, so if you go out and buy an HD TV set and you don't want to put anything on it that's not HD, we're the only guys that have a system to do that, right? It starts at less than $1 a day so that's pretty aggressive but it's aggressive in a way that it's -- from a pricing point, it's pretty aggressive from a programming packaging point. as well. If you go to a cable company before you get it you're probably buy $50 of product before you get your first HD channel just as an add-on tier so it's competitive in that market.

The second thing that -- and more important is that we're able now for the first time to go out with our total MPEG-4 product and we wanted to do that last year but we just didn't get the satellites up because there had been launch failures for other satellites and we got delayed, even though our satellites were ready to launch. And so now we can go to our total MPEG-4 product. That means when we put boxes out in MPEG-4 those boxes are going to last a long time and whether you want HD TV today or just be HD ready that system works for you. So when you buy our MPEG-4 product, it means that -- we call it Turbo HD -- when you buy that product from us today, it means it works on your HD TV set, it works on your regular TV set and it means that if you don't have any HD TV sets today it'll work on all your TV sets in your house and it'll work on any TV you be -- if you buy HD in the future it'll work on that TV set. So total fool proof from a technology point of view going forward. So we're putting those -- by putting MPEG-4 and Turbo HD together, by going to new encryption system that secures our signal, by utilizing technology such as sling, by hopefully solidifying our position that our DVR technology is our own and doesn't violate somebody else's intellectual property, those are all the things going forward and those are the things that give us confidence going forward as a Company that we'll be competitive in the marketplace. And it's really more competitive than we've been in the last year.

Right.

Okay, thank you.

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

Yes, thank you very much. Charlie, I wanted to get a sense of any potential continuing obligations related to the AT&T existing subscribers, whether it's customer support, stuff like that, and any timing for those would be helpful in terms of the possible financial obligations involved there?

Obviously -- let's assume that the contract expires at the end of this year and we have no relationship with AT&T going after that. Then we obviously have customers that came through AT&T or perhaps even customers that they bill today so we have is an ongoing obligation to those customers, as does AT&T, and AT&T still provides first level customer service to those customers. We would provide more advanced service levels to those customers, as we would any customers. We don't think that is in any way is an increase in customer service costs or anything. It's something we would do anyway because those customers are, obviously, on our books as a customer, So we actually probably have a little bit less customer service cost for those customers because AT&T has obligations that survive the contract that they have to support. So I think we're well protected from a contractual point of view in terms of keeping those customers and that AT&T, both of us, will continue to pro provide high level service to those customers.

Okay, and in terms of AMC14, can you update us on any insurance-related claims or is there any portion of that insured?

That's really a, it's first of all, it's a SATS issue, not a DISH issue, but we did receive -- SATS did receive the insurance payments that were receivable last quarter end.

And so if you sit on the SATS call, we'll probably go over that, but that didn't affect DISH in any way, other than we didn't get the capacity we thought we would get back in March. It's really August before we got that capacity.

Great. Lastly, Charlie any thoughts bigger picture on cable to WiMAX, do you think that changes the equation long term and what does that mean for the competitive landscape in terms of how you compete with cable?

Well, I don't know that I totally understand they're going to -- what they're going to do in the WiMAX field and how they're going to go into it, but obviously at this point I think a couple trends. One is the cable is getting -- on an analog subscriber front they certainly have issues, but when it gets to -- and video they're kind of treading water, but when it comes to broadband, it seems like there starts to be a pretty clear trend that they 're winning the broadband wars over the phone companies DSL. Their adds -- they're getting their trends to market share versus DSL are compelling. Obviously, the phone companies have an advantage when it comes to wireless in a big way so it's going to be interesting to see how that battle evolves between our cable guys able to get into the wireless business before the phone guys can get into the broadband business, video business, right?

And to some degree, we're a bit on the sidelines there watching that and I think we have -- I think our focus as a Company is just to be the best we can be at video, and all forms of video, and make sure that we can make that video accessible no matter where you are and that's really what we have to focus on. And we have to hope that customers access to broadband on a level playing field, and that's how we see it evolving. And the competitive dynamic of what cable does with WiMAX will be interesting because the big phone guys will have to react to that. And we'll have to be prepared for all of the different things that might happen there, and that's what we'll have to do strategically and we think we're pretty well positioned there today.

Okay, thank you.

Next we have Kit Spring of Stifel Nicolaus.

I think we just got a press release from Cablevision saying that the network DVR has been overturned, that they'll be allowed to use it. How does that potentially impact you in the future. And then maybe could you just talk a little bit more broadly about what your video-on-demand strategy is and whether net neutrality will hold and allow you to do video-on-demand over broadband? Thanks.

I'd have to look at -- I'm not as well versed on the Cablevision DVR, but I think that's a positive for the industry in DVRs in the sense they're coming off servers with DVRs it gives them rights to do things and that's probably a net positive for total DVR. And obviously we think we have a a lot of intellectual property in our own technology there, so we think that's probably a positive of us. It may affect the SATS -- the other companies SATS more than DISH, but first of all I guess I'd start with saying we think that there's a real business out there for the customer who says, what I really want is a set top box that gives me TV, and that TV comes -- and I can watch any TV I want and that TV could be something like money night football but it also could be a movie and that movie could come in through video-on-demand or it could come through HBO or it could come from the internet, through broadband connection and we think we're well positioned to do that.

All of our VIP series receivers -- we have three of them today -- all those are broadband ready and all of those could be hooked up to a broadband connection today and can deliver you video-on-demand -- and we just started that and we just started that August 1st but we just started -- and we haven't rolled it out to all of our DVRs but we're just rolling out video-on-demand where it truly is video-on-demand. So you may have ten or 15 channels that have movies that start when you press the button. They're already downloaded to your hard drive so they're resident on your hard drive and when you want to watch that particular movie you just push the button and start and you can rewind it and stop it and pause and everything else and skip forward and so fourth and so on. Just like video-on-demand in a cable company today. We also think that the broadband connection then gives you those movies that maybe aren't the top ten or 15 or 20 movies that people are watching/ They may be movies from the past but you can go out and get TV shows and movies in that way and you can do it in a seamless way to download and store to your hard drive and we think we're well positioned there from a technology point of view.

The one -- the two really remaining things for us are the operating system and how we make that easier to use, which we continue to make improvements on, although it's relatively easy to use today. And the second thing is how do you architect the storage of all of that broadband and how open do you make your system. So are you going to allow people to go to amazon.com like TiVo does, or are you going to have more of a -- are you only going to allow them to go to your servers get your movies and so forth. And those are strategic decisions that we haven't made yet in terms of how we design that. But again, we probably will -- we've done enough testing now,, we have a pretty good feel of where we want to go for combination of what I would call the true in-home system where you have basically a satellite system and broadband hooked into one system that's fairly seamless to the customer as to where he's getting his video. That certainly is going to be the future and the companies that do that the best are going to be successful.

Net neutrality relates to that in a sense that with the FCC Now ruling that Comcast can't clog their pipes from other users and kind of a net neutrality favorable ruling go net neutrality, it means that if that were to holdup through the courts and through Congress and everything else that our customers would be pretty secure knowing that we could deliver them a good standard of service through any broadband connection, whether that be of cable or phone or a wireless WiMAX system or so fourth -- or even a satellite system. So as long as you can deliver a consistent level of service, then the total video platform that we're developing should be very, very competitive, And so again, those are long-term things that we work on that don't show up in quarterly results. They'll show up in quarterly results two or three years from now, but they don't show up in this quarter.

Thanks.

Our next question comes from the line of Doug Mitchelson of Deutsche Bank.

Thanks. A few questions, I guess I'll just ask them one by one. Charlie, you've addressed us with a lot of the execution issued that you highlighted on the call, but since you did lose subs in the quarter and it's the first time in the Company's, at least public history that we've seen that, just any general comments on how you feel the Company is executing? Given the challenges, is that a good number for this quarter?

No, it's not a good number and obviously we're disappointed at it, I would say. But on the other hand, I guess because I'm here day to day, I would say our second quarter was better than our first quarter, right, even though the sub number was worse, right? And that's just because we made progress in trying to execute the kind of things that we need to do long term to make sure we're a very viable Company and can take advantage of a lot of the things that we see going on in the marketplace today, including a fairly weak economy. So how do we take advantage of that? There's lots of things we have to do and we executed better on those things in the second quarter than we did in the first quarter. And we really kind of got wobbly in terms of execution probably a year ago, so we really haven't done as good a job executing for the last year and the second quarter is the first quarter we made any progress.

And that's kind of the first step -- and again it's all my fault. I really wasn't on top of this business from an operational point of view as well as I should have been. But as I got into it and I traveled around and I saw our operations the first thing was we really had to make sure we had the right people in the right place and that was done pretty much in the end of the first quarter and now -- then we had to dev -- and during the first quarter we developed the plans that we thought we needed to do to put things in a more firm footing. Second quarter we were actually able to go out and start doing that and third quarter we'll do a better job and the fourth quarter we'll do a better job and the first quarter next year we'll do a better job. And at the end of that period of time the lesson learned is we'll stay on top of our operations, certainly at my level, well enough to make sure that our operations ultimately are better than they have ever been. In other words we get to a different standard for our own Company and it'll take us some time to get there, but we're certainly not going to take a back seat to anybody when it comes to operational excellence. And as long as we have the right people in place that want to achieve that, that's certainly something we totally control. We control whether we give outstanding service and whether we operationally are efficient. We definitely control that.

And then -- and those are things -- we've done that in the past and we're capable of doing that in the future and we're making progress and there is nobody in our industry today that is operationally excellent. There is nobody in the video business and if you look at the independent surveys of customer service and everything else we're still one or two in most surveys, but none of us are good enough and we all have to do a better job and whoever gets there first -- it's kind of like the airline business, right. where nobody's really that operational efficient today, with a possible exception of Southwest airlines, right, and we better be the Southwest Airlines of this business and there's really no reason why we can't be.

So, along those lines you noted in the 10-Q that you believe you can still grow subscribers and you have qualifications against that and I think one thing that we're all struggling with is what 2009 would look like if you didn't have AT&T distribution. Do you -- is there anything you could talk about in terms of 2009? Do you still think you could grow subscribers in the future if you lost AT&T distribution?

I think we can still grow subscribers no matter what and again, with or without AT&T, and it's just -- it's really the part that I don't know, and I can't predict in 2009, is if we lose AT&T what dynamic then happens and what has AT&T done in the alternative and what forms of distribution do we pick up if we lose AT&T and what kind of things can we do from a competitive point of view that we otherwise might not be able to do with AT&T? And those are lots of unknown questions, so what you do from strategic point of view is you make sure that you plan both ways. Right? At some degree AT&T decisions are our decisions too. It's not a one-sided thing, and so we'll be prepared either way and that's, all I can say is we have confidence that we can grow this business and we want to grow this business in a smart way.

We think that that's still growing video subscribers but there's other things we can do in the business that grow our business, but we're not going to go out there and -- I guess there was a time when a mortgage company said, man, things are slowing down, the economy's slowing down, we're having a harder time getting people signed up for mortgages so let's lower our credit standards. whatever happened we don't -- somebody should have had enough gut to say, we better run a good, long-term business and the financial discipline to do that. and since a lot of the money here is my money we intend to look at it from a long-term point of view and make sure we have the discipline in place and not do many crazy things. and a lot of the things that got us in trouble has been the stuff where we probably didn't do the long-term things, didn't make the kind of long term decisions that we should have made. And I've always said don't like giving away programming and I'm not saying you wouldn't do that from time to time as a promotion, but giving away programming is probably not the smartest thing we've ever done. It comes back to haunt you when the free programming runs out, and those are things that we probably could have done a better job on. Now we might have had slower sub growth two years ago, but we probably wouldn't have as high a churn today.

Just one last data point question. So, the 1080p of HD channel that you're offering is pretty interesting. How many channels out there do you think your customers would like to see in 1080p? It's more valuable for some channels than others, I imagine, and what kind of channel capacity do you think you have for offering 1080p maybe by year-end when you've got another couple --?

Well, I think -- again I don't know exactly but we have ten or 15 channels probably in 1080p that we'll put up. Realize that we're starting with pay-per-view movies, our video-on-demand, so the way that works is we don't actually need to -- we don't need a lot of capacity for that because we actually download that in the middle of the night , that capacity to your hard drive, so it doesn't take up a full linear channel while we do that and then the video-on-demand movies there. So "I Am Legend," or whatever, the first movie we started with that just got downloaded to everybody in the middle of the night. It took us a couple hours to download it and then it was done. No more capacity was needed for that movie in 1080p.

So there's not any question -- and I think you'd probably hear the same thing from DirecTV -- that the satellite industry is going to be able to deliver the best quality of HD, and the satellite industry is going to be able to deliver the most channels. I think DirecTV said they're going to go to 130, we said we're going to go to 150. Our track record is we just don't talk about it the until we're ready to do it, and we are certainly over 100 channels today. So I just think it's a huge advantage. To the extent that HD is a factor in the marketplace, satellite has a huge advantage and we are now more competitive within the satellite industry than -- much more competitive than we were a month ago and we'll be more competitive by the time we turn Echo 11 on by the end of this month and we'll be even more competitive when we launch the next satellite by the end of the year, so we've got good things going on in HD. We won't take a back seat to anybody there. And again, our DVRs we think we won't take a back seat to anybody there and certainly the TiVo litigation is important at that or whatever -- however we finally end up with that relationship will be important.

All right thanks for all the time, Charlie.

Next with we have a question from Lee Cooperman of Omega Advisors.

Thank you very much. It's really a question regarding the priorities for the use of your cash flow and your borrowing capacity. I get a little rusty because of my age but I think at the end of '02 we announced our first repurchase program. I want back and looked and I think we had 8.2 million subs at the end of '02 and our ARPU was about $49, and the end of '04, which may have been the second repurchase program, the subs were 10.9 million and the ARPU was $55 and currently we're 13.8 and the ARPU is running $69. We're currently running, by my calculations, something about like [$2.50 or $1 billion, $1.2 billion[ of free cash flow and in this period going through the stock is largely unchanged if you adjust for the distribution. Now I'm just curious -- if I can get into your head a little bit -- how do you see you using your free cash flow that you're generating in this business going forward?

Well, normally I can't answer that question very well because I answer it the same way, which is it changes every day as we look at where our stock price is and what the business opportunities is on there, but we know at least in the short term what we're going to do in the sense that we have a note to pay AT&T around first of September, that's $500 million, we're going to pay that off, and then we have $1 billion that comes due, I think, in October from one of our past high-yield financings and we'll pay that. So that -- and we have about $1.9 billion in cash on the balance sheet, something along those lines, so that's where the vast majority of our cash will go short term.

Then we look at -- we get beyond that and probably a question for the next quarterly conference call, which is what do you do beyond that? We look at whether we -- if there's acquisitions and other places we can use our money, we look at whether we should be paying a dividend, we look at whether we should buy bond stock and our board and we make a decision as to where we think the focus will be. Usually when it comes to something like buying stock back there's certainly a price that we think it's attractive to buyback if given other alternatives. On the other hand, in the marketplace today we see an awful lot of opportunities. We're not bidding against private equity companies for outrageous amounts of money for companies that were clearly over valued in the last couple of years. Suddenly valuations have come back to earth, so to speak, and we think there's attractive opportunities out there. So we'll take a look at all of those things and decide what's the most prudent long-term thing for us to do. Obviously we took $700 million and bought 700 megahertz at an auction. That's a fairly long-term investment. We're not going to get any return on that next year, but that's a critical piece of Real Estate that's not -- wasn't going to be around if we didn't get it. So we're just trying to use it in a prudent way but in the short term we're going to pay off debt.

Thank you.

Next we have Tom Eagan of Collins Stewart.

Great. Thank you very much. Charlie, you mentioned that the new encryption -- you're going to start to rollout the new encryption software, you just announced last week that you got to 100 HD channels, so is it fair to say that in July, maybe you didn't see improvements over some of the customer metrics that you may have seen in Q2 or is that not fair to say? And then I have a follow up, thanks.

Well I guess I'd go back to my earlier point, which is of the four things that are affecting our business today, one of them we don't control -- and I wouldn't say the economy is getting any better. I think that the economy's likely to continue to slowdown. Maybe got a little better because of rebates, but that's a short-term phenomenon. I think that the economy is going to struggle for awhile, so take that one aside. And the second quarter, we made some operational improvements, but we certainly weren't anymore competitive from an HD perspective and we certain weren't anymore secure. Starting August 1st we were a bit more competitive in the HD front. We launched, I think, 17 new channels and so hopefully that'll show -- hopefully that's a positive and I don't know how long it takes to show up. And certainly, we started sending out the new encryption system. But the new encryption system you have to send it out to everybody before you turn it on, right, so what happens is it did come in incremental stages, because you do target certain segments, right?

So your premium -- for example, you may have a premium channel that you send out all of the cards on and then you flip the switch so nobody can get the premium channel anymore, so you do start seeing some incremental benefit from that. And the way I would say it -- the way I would term it is that the third quarter we're making -- we'll continue operational efficiencies, we got more competitive in HD, probably see no benefit from piracy, and probably see no benefit from the economy. In the fourth quarter we'll see more operational efficiencies, I hope. I hope we'll see more improvements on the competitive front from an HD perspective. Hopeful we've got more clarity on the TiVo situation, hopefully the judge has made a ruling in September there in our favor. And then probably first of next year is when you start to see the gains from a piracy point of view, right, and a benefit from the satellite launch that we're launching at the end of the year. So that's your timeframes, then you continue to make improvements in everything else along the way.

Okay. And just secondly, with the February of '09 migration you've got to think that cable and satellite providers will be able to garner some of the 13 to 15 million over-the-air households. We expect DirecTV to work with their RBOC partners to offer some kind of really-cheap dual play of phone and video and cable guys will do the same thing, maybe $30 to $40 for a dual play. What is the strategy you guys have, with or without AT&T as a partner, to try to grab as many of those OTA households as you can?

Well, if I had a strategy I probably wouldn't tell you. [LAUGHTER]. I think we're well positioned for the digital transition and again, we're the only one of the players you mentioned that has a digital transition set top box, which we're selling, which has gotten pretty good reviews and I think it's the highest rated digital set top box out there by many reviewers. So I think we're well positioned there, but we'll see how -- I don't want to overstate it because the customers you're going to get in digital transition are going to be at the lower end of the food chain. But you're correct, I think there probably is some opportunity there.

Great. Thank you.

I think we have time for one more question maybe.

That question will come from the line of Gerard Heller of JRPT.

Yes, Gerard Halloran from JRPT here. I've got a couple of questions for you about business, some more fairly forward-looking. What are you do -- how's the Atlanta DVBH trial going? Can you comment on that?

Well, a lot of that's being done over on the SATS side, but from a DISH perspective we think it's very interesting, and we think it's a very interesting technology. One of the great things about that technology is that you can reuse frequencies and you can reuse multi-path in a way that some other technologies don't allow you to do. And so this is a fairly technical question but when you use OSDM-type modulation schemes the fact that you can reuse your multi-path to your advantage is a relatively revolutionary breakthrough in technology. And so any time you can find a standard that could utilize that -- and there's several in the world today-- it's interesting and so therefore we're testing all that to see what we think may make sense, if anything makes sense.

When do you think you might try testing the marketing of that?

Well, I don't think we're far enough along that we could say.

Sure.

That may be a good question for next conference call.

Okay. Now we shift a little bit to --

I do think the technology -- I think there's still things that you have to overcome,not the least of which is just production of cheap enough chip sets.

Yes, although Qualcomm might want to help you with a slight variance of DVBH.

Well, I think Qualcomm obviously understands that to some degree they've got some interesting parts of their technology, they got some disadvantages in their technology, but many of the things they're doing today you also need to make a profit at it and timing's everything and there's probably not an ability to make a profit today, quite frankly. So we don't mind losing money if we got pretty good certainty of recouping that money, but to me the timing's a little ear -- to me I would say in general timing's a little early.

Do you sell many of those pocket Dishes because that seem s to be one of the things that would be an issue? Right now that seems pretty expensive.

Well, we do sell some at -- most of them are sold at retail, not through our distribution, but it's not a material part of our business today. I think it can belong long term, but again it's unclear to me what devise of devices people watch video on, and clearly, it's a TV set number one and today is probably computer number two, but it's going to be a handheld phone or handheld portable device that are certainly going to be parts of the equation.

Where would you go to buy one of your set tops now besides your website?

For an additional transition?

Yes.

You'd go to Sears or you'd go -- from a national perspective you'd go to Sears, and otherwise you'd go to -- you have to look and see, there's quite a few other retailers that are regional or local in nature that sell it or go to a satellite retailer themselves or you'd go to our website.

And talking about AT&T for just a moment, if I was them and I was renewing a contract the size of yours I'd probably notify you too. What do you think they're going to try to go after from a pricing perspective or a service perspective? What do you think is important to them?

Well, I have lots of conversations with AT&T and they just remain private, and you'd have to ask AT&T what they're looking for. But I think all I can tell you is that -- I can only tell you the relationship has been good at all levels within our Company, so we've liked working with them but we're not -- we have to be prepared with or without them. That's all I can say. I think they have strategic objectives that they clearly would like to -- I think they have strategic objectives. How much satellite and how important satellite is they have to tell you in those strategic objectives.

Realistically, do you think they'd go with Verizon's supplier?

You'd have to ask them.

Okay.

I think -- I'd put it this way. It would be difficult to have a national video service that you were trying to bundle with both your wireless and wireline business if you had the same thing as the other guys have. So there's three or four wireless players out there and there's only two satellite guys, so I think there's going to be -- I guess the way I would term it there's probably going to be opportunity for both companies out there, both Direct and DISH somehow.

Okay.

But I don't know how all that shakes out, and to the extent that even plays into where we want to go. I guess that was our last call, will be on November. I guess, and we will talk to you guys then. Operator, we're done on this end.

Thank you, sir, and thank you, ladies and gentlemen for attending today's conference. You may now disconnect.