DISH Network Corp (DISH) 2009 Q3 法說會逐字稿

Good afternoon. My name is Christopher and I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation Q3 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Kiser, you may begin your conference.

Thanks, Christopher. Thanks for joining us. My name is Jason Kiser. I'm the Treasurer here at DISH Network. I'm joined by Charlie Ergen, our Chairman and CEO; Tom Cullen, Executive Vice President of DISH Networks; Bernie Han, our COO; Robert Olson, our CFO; and Stanton Dodge, our General Counsel. Before we open it up for some Q&A, we do need to do our Safe Harbor closure. For that, I'll turn it over to Stanton.

Thanks, Jason. We invite the media to participate in a listen-only mode on the call, and please do not identify participants or their [remarks] in their report. We do not allow audiotaping and ask that you respect that.

All statements we make that are not statements of historical fact constitute forward-looking statements that 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 expressly implied by such forward-looking statements. For a list of those factors, please refer to part of our 10-Q. All cautionary statements we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements. We assume no responsibility for [adjusting] any forward-looking statements. With that, I'll turn it back over to Jason.

Thanks, Stan. Christopher, we're going to go straight into Q&A, so you can open up the lines.

(Operator Instructions). Your first question comes from the line of Jeff Wlodarczak out of Hudson Square. Your line is now open.

Hey, good morning, guys. Was hoping you could shed more light on the very strong churn result. In the 10-Q, you mentioned part of the result is timing related to the shift from 18 month to 24 month subscriptions. Is your expectation therefore that you'll probably see improvement in churn, but that going forward, the magnitude of the third quarter decline was one time? Then I have one follow-up.

I think that one factor that was mentioned is one of many factors. So that one item by itself will reverse itself or go back to its old state come this spring of 2010. But there were a number of other factors that contributed to churn being improvement in the same period. We had seen some improvement as a result of the piracy mitigation, some fraud mitigation. The marketplace in terms of households moving has declined or -- fewer movers which means less churn for pay TV providers. We had talked about last -- on the last call that we're constantly trying to finetune our credit rules and thresholds with respect to customers coming in the door. And I think for a period of time, we were perhaps tighter than we had been in other periods of time and perhaps tighter than we should have been. I think those factors and other factors all contributed to churn being improved in this period. That one item about commitment periods is a one-time thing we'll see for the next six months.

Thanks. One more. On the subscriber related expense line, as far as I can tell, it is the highest level it's been in the history of the company. If you could provide any color as to how much of that is driven by MPEG 4 upgrades to existing subs and your initiatives to free up bandwidth, that would be very helpful.

Yes, it is not a lot of that. Three big items in that line are programming costs, variable costs and retention expense. Programming costs for us, we talked about spending more money on our call centers to improve customer service.

Jeff, this is Tom. Really, the biggest driver is -- as Robert said, we're investing to re-establish our leadership in customer service. We've been doing that and we're seeing some improvements in some key metrics. I think that is also associated with the churn improvement. But over time, as we're seeing the improvements, we also expect to bring out efficiencies in those lines going forward.

Great. Thank you very much.

Your next question comes from the line of John Hodulik of UBS. Your line is now open.

Just a quick one around the one-time special cash dividend. I don't know if you covered it in the document. I didn't get all the way through it at this point. But just talk a little bit about the timing and the reasons why -- is it just the fact that you've got a lot of cash on the books or obviously just raised a fair amount of attractive rates? But considering some of the other investments that the company has been looking at, we want to know the thought behind that. Thanks.

This is Charlie. As always, we look at where we can spend our cash and -- whether that be internal growth or acquisition, or stock buybacks, or dividends. And all of those factors combined, we felt -- I think we have -- the markets are open where they were closed before, which didn't make sense for us to pay a dividend. We could access markets with a major project if we found one we thought that we could sell the market. Our business is -- again, we talked about getting better every day this year and I think we're doing that. So we have some increased confidence in our ability to execute. And then one has to always keep an eye on tax policy and the macroeconomic things. And I think for a lot of our investors, this will be the last chance -- this will be the lowest tax they might pay on a dividend for a long, long, long time as the Bush tax will expire and there could be surcharges on certain levels next year.

Would you say this is a change in the way you approach things going forward? Or can we expect more cash return to buybacks or additional dividends?

It really depends on how we execute and what our other options are again. I wouldn't think the dividend would be our -- it is not our first choice. We would rather use the money internally and grow the business. We just haven't been able to -- think we still have a TiVO overhang. We haven't been able to find -- we went after Sirius XM. We haven't been able to make a major acquisition. And then again, one of the drivers of course is tax policy and the changes we'll see next year and the year after.

So, those aren't likely. Those are more one-time events in terms of tax policy. Again, if we can't find ways to use our money, I think dividends are always on the table for us. It is up to us to strategically see if we can grow the business that way. We look at everything and try to -- at the end of the day, do the best long-term thing for our shareholders.

Your next question comes from the line of Spencer Wang of Credit Suisse. Your line is now open.

Thank you. Good morning. My first question is regarding ARPU. I guess really two parts. Can you give us a sense of what ARPU growth was excluding the pay-per-view movie impact? And then if you could give us a sense of how you plan on managing ARPU versus growing your subscriber base? Then my second question is on subscriber-related expenses. Again, on a per sub basis that decelerated from 8% to 9% in the first half to about 6% in the third quarter. Should we expect that trend to continue into the fourth quarter and beyond? Thank you.

Hey, Spencer, it is Tom. On the ARPU side, we don't break out the individual components within that, but I will tell you that the biggest driver of the suppression of ARPU is programming discounting. And as you know, we had an aggressive discount February 1 through August 1, so we had one month of that in the quarter. We're now down to a more reasonable discount on a per month basis. However, fortunately, the market has responded, so the volumes are high in August and September as well. That being said, we are focused on weaning ourselves off of programming discounts going forward. That doesn't -- obviously, we'll do what we have to do to remain competitive. We don't think that's the best way in the long-term for the business to grow.

As far as subscriber-related expenses, I'll let Robert elaborate. As I said earlier, we're heavily focused on re-establishing a leadership position in customer service. We're seeing some early returns on that. But we have to get more efficient in that line item going forward.

Spencer, we don't give forward-looking guidance there. We're working very hard to make our operations more efficient. That will deliver really good customer service and a better cost structure.

Great. Thank you very much.

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

Thank you very much. So, with regard to your programming costs and retransmission, I know you did a slate of deals over the past year. How would you -- what's your outlook for programming expenses going forward? I know you just said it is a big part of your subscriber-related expense growth. Can you give us a little bit further outlook on programming and retrans?

This is Charlie. Programming costs will continue to go up. They're fixed price contracts typically, or fixed contracts for a period of time. Generally programming costs are going up at greater than rate of inflation, because we haven't had inflation obviously. And there is a lot of concentrated power in terms of programmers on some side. So, that's just a cost that will get -- that I'm sure the industry will pass on to consumers as those costs go up. And as the third largest provider of television, I think that we are well-positioned in terms of programming costs vis-a-vis our competition. And I just think we're ultimately going to have to recap that programming cost through price adjustments to your customers and you'll see that probably from the industry we've pretty much seen on an annual basis where the costs are passed on.

I think the area for us that we can control of course is our operations and our retention marketing by doing a great job there. We haven't done a great job there yet. But we are getting better every day and putting ourself in position to do better on the cost side, but we're not there yet. We still have some infrastructure problems. We still have some focus issues to tie everything together to do that, but we've got -- but I think that we are getting better every day and it is going to be certainly well into next year before we get to the level we would like to get to on an expense side.

Ok. Lastly, I want to ask about TiVO. I know you have an upcoming hearing this month. Any thoughts on that and any change in your outlook for the potential outcome?

Well, one, we already had a hearing. We had a hearing a week ago? Last Monday we actually had a hearing -- the oral arguments at the Court of Appeals, and Court of Appeals is really hearing two main issues. One, whether we're allowed to download noninfringing software to set top boxes, and the other, whether our new software is colorably] different from TiVO today. And so I think that we've done an excellent job on the briefs, the written briefs that are before the appeals court and I think we did a good job in our oral arguments. We sit back and wait.

Is the ruling expected this month, is what I was getting at?

The ruling could come at any time. Rulings have typically taken several months at the Court of Appeals. But they could come at any time. Once the oral arguments are presented, the judges could rule at any time. I guess in general, I would say that -- what I've always said which is I think ultimately, regardless of what this outcome is, we'll have a relationship with TiVO. It's a good company. They have a good product. There's things we can do together not regarding intellectual property. We have an honest disagreement on intellectual property where they've won just about every decision in the lower courts, and where the Court of Appeals has reversed it a number of times. We know how hard we work to change our intellectual property based on what TiVO has told the court and how their system operates. We know how -- we know what we did we think is legal and we trust the legal system and we look forward to a ruling. But at some point the path will be clear. Thank you very much.

your next question comes from the line of Vijay Jayant of Barclays Capital. Your line is now open.

Hi. It is James Ratcliffe for Vijay. I'm wondering if you could give us some idea of the breakdown on ARPU growth trends, because you saw ARPU growth slowed about 200 bips sequentially. How much is this change in your promotional activity versus the change in the product mix being taken by existing customers such as premiums and the like?

Again, this is Tom. As I mentioned earlier, probably the largest impact is promotional programming discounting and, as I said, we've reduced that on a per monthly basis in the second part of the quarter. Advanced product mix is healthy. We're seeing a high take rate on both HD and DVR, which is encouraging. I'm sorry, the last part of your question was -- ?

Exactly that. Promotion versus premiums.

Premiums and pay-per-view. On the last call, I think we mentioned that we see a consumer belt tightening. That's one area where people will take a second look and say do I really need the premiums. Plus we're seeing alternative sources like right now, you can get Starz Encore in a package through Netflix, which is going to put downward pressure on linear channels. There are some competitive dynamics like that at work. The composition within the line item, we don't break down.

I had to hop on a couple of minutes late. I'm sorry if I missed this. But did you discuss how much of the churn delta year on year was due to the change of the contract length from 18 to 24 months?

We did not disclose it. It is a contributor, but again, there are many factors at work on the line item. We're seeing improvement in service, which is helpful. But we can -- obviously we can calculate with precision exactly how much of the term was attributable to that, and I'll tell you it was a factor, but there were many other factors at work.

Your next question comes from Craig Moffett of Sanford Bernstein. Your line is now open.

I'm going to sound like a broken record trying to drill into the issue of ARPU and margins. Given how steep the decline was in your premarketing cash flow margins, that presumably means that the programming costs are growing significantly faster obviously than ARPU. Can you just disaggregate these two issues a little bit more into how much of the programming discounts are going to roll off as the subscribers mature? Or should we see this as more long lasting packages that are offered at lower markups than they've been in the past?

This is Charlie. I mean again, I just have to reiterate what Tom said. The primary factor in the erosion of margin is in fact the discounting. It is significant in the sense that we've given as much as $25 off for six months. I think we're at $15 now for 12 months. Some of our competition is materially higher than we are. I think that's going to affect ARPUs for people while you discount it. We account for it in the most conservative manner we can. It hits it immediately. Programming cost per se, there are some timing issues there as you do new contracts. We've had a lot of contracts that came up in 2009. As you do new contracts and you make adjustments to programming packages and retrans and so forth, you sometimes have impacts -- a one-time nature on programming margins that flatten out over time.

But I think that ARPU is a place where we still have upside vis-a-vis our competitors. I think we're at least $15 less than our competitor in the satellite end of the business for virtually the same product. They have out-of-market NFL, which is a couple of bucks, but apples to apples, we're probably at least double digits below in ARPU. We have some room both on pricing and less discounting and pricing.

The long-term trends are a little bit hard to predict. Some long-term trends in terms of ARPU -- I can probably argue that one both ways. I think there's opportunity for us to increase ARPU in a significant way, and then there's also pressures against ARPU, whether it be the Internet as Tom talked about with Starz Encore giving their programming away on the Internet much less expensively than they do on a linear channel, which takes away from our linear channel revenue on Starz Encore. Otherwise there'd be the economy where people are downsizing. There are headwinds against that. But there are opportunities as well.

Would you say those are primarily upfront discounts that roll off or are they a change in the longer term markups on programming?

It's mostly upfront discounts that roll off, assuming you don't continue to discount at the levels that you're discounting today.

This is Bernie. Our undiscounted programming packages, the prices were last changed on February 1 of this year and they haven't changed since then. So it has been mostly discounting against the standard prices that we increased in February.

I would say it this way, the margins we're getting today, I think we have room for improvement. I think we have done a better job improving our marketing presence and gaining momentum in the market place. We have not done as good a job on the operational side, in part because the operational side just takes a little bit longer. We had more things to fix there. We had to make an investment in people and call centers and service to make sure we're taking care of our customers. Perhaps we hadn't invested as much as we should have in the past. We've done that now, and now I think -- in 2008, we stopped getting worse. 2009, we're getting better every day. In 2010, I think we have a chance by this time next year to be best in class in a lot of areas, and certainly our margins aren't best in class yet. So we have a lot of work to do there. We put the building blocks to do that. Or we are putting them in place to do it.

Okay, thank you.

Your next question comes from the line of Doug Mitchelson of Deutsche Bank. Your line is now open.

Good morning, gentlemen. A series of questions here. Clarifications. Charlie, you just said the discounts are accounted for in the most conservative way. Does that mean you book the customers at no revenues until the discounts burn off?

No, the $15 off is just not taken to revenue, as you would expect.

Right. Any comment you can make on the AT&T churn -- from what we hear from AT&T in terms of your sub losses, that the churn is relatively awful relative to your [share]. Any story behind that?

Obviously AT&T is prevented by contract from going after our customers. But I believe that we provide better customer service to our customers than -- realize AT&T builds those customers. From a customer service perspective today, I think we're best in class -- parts of our customer service are best in class today. Certainly in the speed with which we answer our phone. We're open up 24 hours, seven days a week. A lot of AT&T is closed on weekends and late nights. I think we're giving better customer service, and I think that on the positive side has helped us on our churn. I think that when we don't control the customer and the relationship with the customer directly, then -- for example, we're not able to tell a customer about his AT&T bill because we don't have access to that information. Certainly, we can't tell them about their phone bill. Then that churn is -- I think their churn, I think it's safe to say that AT&T churn -- correct me if I'm wrong -- AT&T churn is higher if not materially higher than our standard churn.

It's higher, but you also have peel it back. You could see a customer that was bundled disconnecting to single service. So it looks like a churn customer out of the bundle. But they may elect to keep their DISH service and be billed directly from us.

Okay. So, from your standpoint, it is not a churn, but from their standpoint it is. So it doesn't really count.

In some cases, there's a percentage that fall into that category.

I mean -- this is Charlie again. Don't lose sight of the fact that we made a strategic decision that long-term, we want to be with partners who have the same focus that we do, which is to get a customer and keep them long-term attached to our service. And one of the -- AT&T was a good partner and a good relationship. The fact of the matter is that AT&T, every time we have to put a dish in, they still have one eye on the customer to put their U-verse system in. That makes for a little bit tougher relationship, because we don't want invest stock in a customer that we know somebody else is going to try to be getting. Our regional phone providers that we deal with is a better relationship for us long-term, because their emphasis is on getting the customer long-term. Just as the satellite dish -- just as ours is, they don't at this point for the most part have a competing service. While that's been painful, my hat is off to some of the management here in terms of refocusing, our company back to long-term providers who have the same interest at heart that we do long-term, which is to get a customer and keep them for the rest of their life.

I'll end on a follow-up to that point. There are a lot of investors out there who think Verizon and AT&T may be more interested in formal strategic alliances with the DBS players. Any renewed interest by either Verizon or AT&T strategically in DISH?

We wouldn't comment on that.

Would you expect that to happen once the DirecTV deal with Liberty closes and the company is available to do M&A transactions -- do you think there is the possibility there would be renewed interest by [RBOX]?

I think DirecTV is an unbelievable company. They have been extremely well managed. They're one of two companies that provide a very ubiquitous service to the entire United States for television, and one of the great things they can do is do that consistently. So, every customer can get the same experience through DirecTV. I think that's difficult to do through IP TV and broadband. Everyone gets a little different experience or speeds change, and your picture quality changes. Anybody who wants a national service, DirecTV would be attractive to them. Now, what DirecTV's management decides to do, who knows. That will be interesting to sit back and watch. We focus on what we can do at DISH Network, which is to try to become better every day and try to become world-class in what we're trying to do in terms of a video experience, and that's where our focus is.

We're very comfortable with where we are today. I think -- just to expand a little bit bigger, the biggest emphasis for us that we worry in terms of our ability to compete would be whether or not we continue to have access to programming on a fair basis and whether we continue to have access to the broadband pipe in a neutral way where somebody doesn't discriminate to our customers in any way in terms of the bits and where they can go on the Internet and get a service. That's part of the equation as the years go by, that many people today and many people in the future are going to get some of their video products from broadband. Net neutrality and all that goes with that in program access will be key things for us to be able to remain competitive.

There is a lot to be said good about a company who doesn't own programming content and doesn't own a distribution path for broadband -- more of a Switzerland approach, and can give customers great choice and great customer service. Otherwise, customers are all going to get -- the only choice you have is to get a package of 200 channels. They'll all be pretty much the same channels with pretty much the same price. That's not much of a choice. I think we've done a good job over the last almost 30 years of giving customers choices that they wouldn't otherwise have. I hope that's going to continue to be important in the marketplace. So that's big picture stuff in temples of how Washington looks like and how some of our competitors who may cause mischief might do that.

It looks like you'll be able to afford a second house in DC. Thanks for the comments, Charlie.

Your next question comes from the line of Ben Swinburne from Morgan Stanley. Your line is now open.

Hey, good morning. This is Ben Swinburne. A couple of questions. Charlie, in the past, you've been cautious about giving away programming. You've talked about that a lot today. I think DIRECTV in 2003 was progressive, bringing in new stuff. There was a lot of churn on the back end. Can you give us a sense of your confidence level and the current gross adds that you're not going to see that backoff on spurn when these contracts roll off?

It's a good question. I've been on record. I continue to be on record. I hate giving away programming. I hate the discounting that we do today, in part because it does cause you problems in the back end. When that 18 months or 24 months is up, your customers are going to see a significant price increase and they probably have seen a price increase maybe in the meantime before their contract term is up. I don't think that's a great customer experience. One of the things we're starting -- so, I think a lot of -- we spend a lot of time strategically on how we might wean ourself away from that.

It is difficult when -- I can't make this up. I read where DirecTV was giving away $700 worth of programming this month, but we get the NFL season ticket, and that was $300, and then you got $26 off a month for 12 months, and an extra $5 if you signed up with a credit card. Pretty incredible number. We have to be cognizant where our competition is in terms of what they give away. We spend a lot of time trying to figure that out. On average, you delay some of your churn during that 24 months, then you get a spike in the 24th month. It is just inevitable. We haven't been in the discounting business as long as other people. It is something we have to worry about a year from now, or two years from now as it affects churn. We just keep an eye on it and develop ways to go to customers and explain to them that we're a great everyday low price and you don't have to necessarily -- if you buy a discounted program, your package -- your costs are going to go up. Tom, maybe you want to speak to this because you're closer to it than I am in terms of what we're seeing from the customers.

Following up to that, Ben, we do think we're going through a more sensible period in terms of consumers shopping and flipping. I will tell you from sitting on a lot of calls and being out in the channels, it seems like the customer is more focused on the overall value equation and particularly focused on what happens when the promotional period ends. Even if we have a 12 by [$15] offer in the marketplace, they're very focused on what happens after the 12th month. As Charlie said, as long as we maintain our relative cost structure and we will be the everyday low price leader, we think that serves us well in the long run.

If I can ask a follow-up, Charlie on Comcast NBC and how you think that might affect the DISH Network and what you think the regulatory review process or regulatory might be on that company if it actually happens? One quick housekeeping, is the dividend a dividend or return of capital from a tax perspective?

It's a dividend.

Comcast NBC, obviously we see the same stuff in the press that everybody else sees. Obviously we would have concerns with anybody who owns programming and delivery distribution particularly, when they own distribution in both broadband and to cable. So program access and broadband neutrality would be important issues there. And any combination of that size would have significant regulatory oversight. Maybe the first really big deal for this administration in terms of that. It would be interesting to see. And maybe I'll just get an apartment in Washington. Save some money. Maybe one of those hotels. Don't they have those monthly hotel deals where you can stay $1,000 for a month?

I don't know. All right, thank you.

Anyway, I think that that's -- realize we purchased programming content from Comcast for a long time. We're not treated fairly when it comes to the sports teams in Philadelphia. So, that's -- that has always smelled a little bit. And the FCC has never seen fit to solve that. So, there always have been some issues there.

your next question comes from the line of Gerard Hallaren from TownHall Investments. Your line is now open.

Good morning, guys. I have three questions for you. One relates to the Court of Appeals, one relates to retransmission and one relates to the security card swap out. What order would you like to go in?

Up to you.

Let's take the Court of Appeals one first. It is my understanding -- and I would love it if you would disabuse me of this if I'm wrong -- that the Court of Appeals addresses questions of law and not patents, is that correct? So there's not a technical issue in front of the Court of Appeals.

I don't know that I would term it that way. Stanton, you want to take a shot at that?

I'm happy to give you a real legal lawyer of it depends.

Can you clarify that a little bit?

There are two issues in front of the court. They go through that. They can rule any way they want to on that.

If you get down to questions of law versus questions of fact, I guess it depends through standards of review, [the judge saying] findings not supporting the records, the Court of Appeals can overturn them on that. It depends.

Okay.

I think what you're really asking is what does the Court of Appeals going to look at to make a decision, which obviously has impact for both DISH and TiVO.

Said much more clearly than I did. Yes. Please.

I think the issues are pretty clear before them. I mean one issue is can you design around a patent? It is a fundamental issue. This would be chilling. If they were to make a decision that you cannot design around a patent -- in other words, we couldn't download a new noninfringing software to our set top boxes, that would be a chilling, chilling decision on innovation in the United States.

Sure would.

And they've got -- they could rule either way on that. The other one is really whether we're colorably different, and the only thing I can tell you is logic, which is TiVO presented new infringement theories at trial, and if we didn't -- if we weren't colorably different, they could have kept the same theory they had at trial. They had to go to different theories on how their intellectual property worked. Therefore, we logically, we were colorably different. There is a pretty -- it is a pretty set standard for colorable differences, and the Court of Appeals will look at that and see how the judge interpreted that and decide whether there was the fact, a law or a fact finding that will reverse him. Again, it is -- I would say it this way. I would rather have -- I would rather have our case than TiVO's. I don't know what else to say.

No. That's a great answer. I appreciate -- you went further than I had expected to. So thank you. Retransmission of local programming takes somewhat of a bite out of your capacity, correct?

It takes a bite out of our profits. The must carry is what takes a bite out of our capacity. Retrans is just a payment to broadcasters for their channel. That's in addition -- since they got their spectrum for free, it is an additional tax on consumers. Obviously we pass that on to consumers. And most people pay a retrans fee today, including cable. Must carry is a severe limitation on our capacity where both satellite providers have had to spend literally billions of dollars for satellites to carry channels that have very little local content or that nobody watches or very few people watch or -- but broadcasters were politically strong enough to get passed.

The question that I would ask, and I thank you for your definitional explanations, is given the quality of the new broadcast digital TV, which seems pretty good to my thinking, would you -- could you get around either of these issues for some portion your customers or some meaningful portion of your customers by setting them up to receive digital television through your -- through their set top box or straight to their TV through your system?

Okay. I think I understand your question. You could not pay -- your customer would not have to pay retransmission fee if he would install an [offer] antenna or use an indoor antenna to receive the digital broadcast, which, as you explained, is pretty good. That would eliminate any retransmission fee from being paid to the broadcaster. The must-carry, it does not help with must carry in our capacity because the law is if we carry one channel in the market, we have to carry all. And at this point, the vast majority our customers still choose to get their local channels from satellite from us, because they are consistently high quality and they can record easier and we have -- the guide information is more accurate.

So, unless all of our customers in particular city were to put up offer antennas, we would still have to use the capacity. And of course, the second thing is that the DMA of a market geographically is typically much larger than the broadcaster's ability to send their signal. So their digital spectrum, the digital signal may go 50 miles in Denver, but the DMA of Denver may be 300 miles wide. So, those customers' only choice is satellite. So, the law is not particularly consumer friendly. the way it is set today. It is arguably heavily tilted toward the broadcasters. I always find it ironic that we as satellite guys were required by law to spend billions of dollars to deliver a local signal and the local broadcaster was not required to spend -- I mean literally, he was required to spend about $1 million to deliver the broadcast signal. We had to spend billions to deliver his -- and then we had to pay him for his signal. Then we had to carry everybody's signal. So, it was always a little bit -- it has never been a consumer friendly law, and I imagine over time that as technology changes and so forth that ultimately the country will get it right.

Well, the DTV stuff does seem much better than I had anticipated and I think a lot of other people had anticipated.

The risk to us is some people would disconnect from pay television to go to a local broadcast. We haven't seen that. In fact, we've seen just the opposite. Part of our subscriber growth this quarter probably came from the DTV transition where customers actually were far enough away they could get an analog signal, but couldn't get the digital signal, and then they went to a pay TV package. Actually to some small degree benefited us in the quarter. But I agree with you. Once you get the digital signal, it is pretty good.

It is. So, it wouldn't be worth your putting a bundle out to companies who could get it to -- and they could avoid the retrans fee and pay a one-time fee for getting the DTV into their house?

We don't see that as a business today.

Okay. My last question comes right to the growth rate issue and where customers come from. You swapped out security cards in the quarter. Fair number of them. And I'm sure you caught a good number of cheaters out there or pirates out there. Do you have an idea or can you give us some guidance or color as to how many of those pirates you nabbed and how many of them are now DISH customers and how many of them are facing lawsuits?

Just to clarify, the card swap was completed in the second quarter. So, most of the impact on subscriber growth we think was was from the second quarter. There may be a bleed into the beginning of the third quarter. We don't think it was significant. We haven't reported any sub numbers associated with the resecuritization of the network.

But your point is well taken. It obviously was a positive impact on churn. We can't quantify it because most subscribers don't call us up and say they were a pirate. They call up and say they love DISH Network, and they've been without it for a period of time. They would love to reconnect. A lot of pirates buy the basic package and so a lot of -- we had some upgrades from a guy that maybe had the basic package and maybe upgraded to a higher package because before he was stealing it. It certainly -- I think it is important at this point that the satellite industry is secure from a card basis. There are other forms of fraud and piracy that are out there. I think we have to look at -- continue to make the investment in swapping out cards even before the system is broken. So, there's always going to a cost for us to do that.

Okay. Thank you very much.

Your next question comes from the line of Bryan Kraft of Cross Research. Your line is now open.

Hi, thanks. Two questions. One on credit management. Just wanted to hear if you had made any changes to your credit management policies over the last couple of quarters? And then secondly, just on the wireless spectrum. Can you provide an update on your activities and plans regarding the spectrum? I think you had mentioned you were doing a trial later this year, and wanted to see if I could get an update. Thanks.

With respect to the credit management policies, we won't get into specifics but we alluded to this on the last call and I alluded to it earlier today, which is we're constantly looking at trying to get our credit thresholds just right, so the new customers we bring in, our customers that are going to be good quality customers that will stay with us long enough to pay back the initial investment that we make in each customer. And we have, from time to time, tinkered with various things such as credit scores and certain forms of payment. And as I alluded to earlier, there are probably periods of time -- not in this quarter.

The question was -- did we change anything in the quarter. In this quarter, no. But there have been changes that were made earlier this year that we may be seeing some benefits from. As I alluded to, we were probably across -- we were probably tighter in our measures for some period of time leading up to this summer. And then I think this summer, we did make some changes that caused us to accept more customers up-front. And we're constantly looking at that to make sure that we are indeed only taking customers that will pay over the long run, provide a return over the long run.

Given the changes you made earlier in the year, have you -- what has the trend been in involuntary turn? Has it stayed stable despite loosening up the policies a little bit?

Well, you've seen our overall churn rate has declined and involuntary churn has contributed to that.

This is Charlie. The biggest change we made was to accept debit cards. We had made a change not to accept debit cards because we didn't have the ability to distinguish between a prepaid debit card and a debit card. So a debit cardholder was always a pretty good customer but a prepaid debit card customer was a horrible customer. And so we -- the change we made this year was when we were able to distinguish between a prepaid debit card customer and a debit card customer. That had a positive impact without the corresponding negative impact in churn from -- eliminating a prepaid debit card customer was a positive impact to churn. That's not the only thing we've done. That's a primary example.

Having said that, the churn that we have today has no relation to our policies today. It has relation to our policies a year or two or three years ago. And the policies that we have today will affect our churn next time, this time next year. There is always a delay in churn, and I think that there's no question that the programming discounting -- when that programming discount goes away, your churn is going to go up. And that's probably the single biggest thing that everybody in our industry has to worry about. We just want to be -- I think where our focus is to be the least of programming discount. Not to get in it at all, but when we're involved in it, to be at the low end of the scale of discounting. I would be very scared to be higher than we are today.

Thanks. That's very helpful. If you can cover the wireless?

Wireless spectrum. We think it is a good asset. Again, some -- we're testing now, a number of uses of the wireless spectrum, including mobile video. Some will depend on perhaps -- the FCC's now instituted comments on spectrum and broadband and so forth. A lot of where we might go with that spectrum will be dependent on where we think the FCC is going to go with policy. We're looking for -- I think we're looking for a little direction perhaps out of Washington as to -- we think we're going to come up with two or three good uses of that spectrum and see where Washington indicates they're going to go with long-term spectrum policy and then go. I think for investor point of view, I don't think you should expect a large capital commitment in the near term until we see a better idea of where we think Washington will be with it.

Okay, great. Thanks a lot.

Your next question comes from the line of Marci Ryvicker of Wells Fargo. Your line is now open.

Thanks. Two quick questions. First, Charlie, earlier this year, you said ARPU hit bottom in the third quarter. Is this still the case? And then secondly, you guys had some pretty nice sub units this quarter. Where are they coming from, if you can distinguish between DirecTV, cable, and the telcos?

I'll let Tom take the second part of that. I don't know that -- I don't know that I've said ARPU is going to hit bottom. I think that -- I do think that the year lapping -- the overlapping discounts which is in effect this quarter, it goes one more quarter, doesn't it? I think you get one more quarter. We get the fourth quarter of overlapping discounts. We have two different discount programs going at one time.

I think that will still continue to put pressure on ARPU in the fourth quarter. I think that reverses a little bit into next year and hopefully our marketing team will come up with things that discount less as well. So, I can't say that's the bottom. In fact, even if you weren't discounting, you can't say it is going to bottom, because there are competitive pressures regardless. I would say it this way. We have room for upside on ARPU. I mean we're double digits below our competition. We have room on the upside.

Marci, on the second question, a number of factors at work here. One, obviously our share within DBS grew in terms of activations. We've also made a concerted effort since I would say around April or May to get feet on the street and to reinvigorate our relationships with our channel partners, whether those be telcos or our retailers and distributors. So, we've been out very aggressively in local markets working with retailers. I think that helps us share within both DBS and also locally in local markets. I guess a larger -- I'm not sure it is a trend, but an observation is that we're seeing some -- somewhat of an unbundling trend as people are disconnecting phone service and the number of households that have broadband. The propensity to switch only on the video side is occurring. So, in that regard, we're seeing some from both telcos and cable.

Great. Thank you.

I think we have time for one more question.

Your final question comes from the line of Jake Newman of CreditSights. Your line is now open.

Thank you. One quick clarification on what's going on with SAC. Maybe you can talk about the decline in SAC. In the 10-Q, there's a mention of a change in the sales mix which might make one think that you were actually putting out fewer advance boxes. But then the paragraph also says there was upward pressure on SAC as a result of that. Can you talk about what is going on in the change in sales mix and the decline in SAC?

There are a lot of things going on there. We've talked about some of them in the past. Every quarter, we work lower the cost of our capital, CPE, and so that trend continues into the third quarter. We've got subtle changes in mix that have occurred over the quarter. But generally those have tended to cancel each other out. So, you end up with pretty consistent SAC year over year.

Okay.

Thank you.

Thank you for joining us. I guess we'll be back sometime early next year. February of next year. Thanks for joining us.

This concludes today's conference call. You may now disconnect.