DISH Network Corp (DISH) 2010 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you, I would now like to turn the call over to the Treasurer, Jason Kiser. You may begin your conference.

Thanks, Operator. Thanks for joining us. This is Jason Kiser, Treasurer here at DISH Network. I'm joined today by Charlie Ergen, Chairman and CEO; Tom Cullen, Executive Vice President; Bernie Han, COO; Robert Olson, our CFO; Paul Ruben, our Controller; and Stanton Dodge, our general counsel. Before we open up the (inaudible), we do need to do our Safe Harbor disclosures, so for that, we will turn it to over to Stan.

Good morning, everyone. Thanks, Jason. We invite media to participate in listen-only mode on the call and ask that you not identify participants or their firms in your report. We also do not allow audiotaping and ask that you respect that. All statements we make during this call that are not statements of historical fact constitute forward-looking statements. These involve known and unknown risks, uncertainties and other factors that could cause our actual results to be marginally different from historical results and from any future results expressed or implied by such forward-looking statements. For a list of those factors, please refer to the front 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 updating any forward-looking statements. With that out of the way, I'll turn it back over to Jason.

Thanks. Operator, we're just going to go straight into Q&A, so if you would like to open up the lines, we're ready to go. Operator, are you there?

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of James Ratcliffe, Barclays Capital. Your line is open.

Morning, guys, thanks for taking the question. First of all, pretty strong RPU growth on the quarter. I'm wondering, can you talk a little bit more color about how much of that was driven by more advanced services subs versus the flow-through from price increases, and it sounds like a little less willingness to concede to customers if they were threatening to turn?

And secondly, Charlie, if you could give us an overview on what you're thinking about capital allocation at this point? Because several other companies in the space have made a lot of efforts lately to clarify the capital allocation strategy and increase the return of capital to shareholders. Last year you did a big one-time dividend and I think similar this year, your leverage is well below the rest of the space and you're at the point you could probably take it private and be well under three times levered. I'm just wondering what's driving the choice to have that kind of a leverage profile and is it looking for security, or is there some other use for the cash that you're preparing for? Thanks.

I'll take the part of the question directed to me and maybe Robert, you want --maybe you can talk about RPU after I finish. Well, capital allocation, a), it's one thing we do think about a fair amount, so even though we haven't really articulated a lot of what we're thinking in terms of actual action, I think we've articulated on these calls our thought process. And a couple factors that we would say.

One is, we look at the overall economy and where we think that's going to go and factor that into our plans and obviously the economic outlook has not been -- is still not real optimistic at this point. Second, we need to know what tax policy is going to be. Tax policy, if the tax rates are going to go up, a dividend gets more attractive, if tax rates are going to go up, leverage could make some sense. If tax rates aren't going to go up, then it's probably a better economic climate from a strategic investment point of view.

We have our own -- so also in an economic environment that doesn't look that optimistic to us, there's also -- at the same time, I would say, there appears to be an awful lot of opportunity out there as well. And then our overall business is changing a little bit from just putting in video products to whatever the next thing -- the trends are, and certainly you may have questions ultimately on things like over-the-top video and things like that. So we look at all those factors, and what's the price of our stock, right? So do we think the price is fairly valued, over-valued, undervalued? So we look at all those factors and we try to make some decisions. We also have a Tivo case, which has a material impact on our business one way or the other, which isn't resolved yet.

So all those factors are things that make us, I guess, fairly conservative in terms of what we're doing. We don't think -- we think -- we don't think we're missing a particular decision or particular investment, and when we do think that, last year we were concerned that the tax rates might go up even before they were supposed to, and so we did do a one-time return to shareholders. So those are the factors we look at, and if you can tell me what the tax policy is going to be, if you can tell me what interest rates are going to do, if you can tell me what the resolution of the Tivo case is going to be, if you could tell me what the -- then I think we can make rational decisions. But the only thing that might run away from us would be tax -- at this point, the thing that we're probably keeping our biggest eye on is tax policy, because that could drive us one way or the other. And that could be resolved as early as three weeks from now or it could be three months from now, but we're probably going to get some indication from the government as to what that's going to be. And, Robert, do you want to take the -- ?

Yes, sure, Charlie. James, this is Robert. Regarding your question on RPU, the bulk of the increase in RPU is driven by the price increases. We took a price increase in February related to receiver pricing, we took a price increase in June for certain programming packages. I believe I've outlined in our previous call that, because of the timing of our billing cycle, if w take a price increase in June, you see most of the benefit of that price increase in July and going forward. So you didn't really see much of the benefit of that June price increase in the second quarter.

With regard to customers taking a more advanced set-top box and programming features, that does contribute to RPU. Probably the bigger impact it has on our business, though, in the long-term is we get a higher quality customer, a higher credit score customer, and over the long-term, that should help us in churn. It doesn't have a lot of impact in the short-term.

Great, thank you.

Your next question comes from the line of Stefan Anninger, Credit Suisse. Your line is open.

Hi. Thanks for taking my question. Your churn has been somewhat elevated now for two quarters, but over the last two years you have been making a lot of efforts to reduce your churn. You've improved customer service, installed Nagravision 3, moved subs onto auto pay, improved communications with dealers, et cetera. Can you discuss your optimism that these factors can push churn down again after two quarters of slightly elevated churn?

Tom, do you want to take that one?

Yes, sure. As Robert mentioned, obviously we would expect third quarter to be a bit of an aberration because of the mounting or accretive effect of the multiple price changes, as well as we -- as I mentioned on the last call, we significantly tightened many of our retention policies at the same time in early June.

We want to be more targeted in how we apply retention practices, and I think in summer or early fall of 2009, the industry fell into a mode of applying pretty generous credits and adjustments to customers across the board when they threatened to switch, and we're looking at it in a much more economically rational way, saying it's costing us a fair amount in SAC, as you've seen, to acquire a new customer, and we have to be have to be very selective in understanding the long-term profitability of individual customers as we apply retention going forward. That being said, I think most of those issues are behind us and it's hard to predict what the future is going to hold, but we do think the 198 number for this quarter is a bit of an aberration.

That's great, thank you.

I might -- this is Charlie. I might just add that I think you get a little bit carried -- as a normal business, I might agree with that, but I think that the -- and we may get a question about this later, but I'll just jump in, that the Fox -- the takedown of the Fox channels is certainly not going to have a positive impact in the short-run when it comes to churn because you have customers who can get those channels from other sources, and because of the length -- I think it was over a month, I think it was at least --

It was just about 30 days.

You might want to talk about that, Tom, just in terms of what the takedown, why we would go to takedown and so forth.

Yes, you're right. My comments about churn were more reflective of a steady state. Clearly the Fox dispute in the short-term is going to have an impact. Subscribers, when they lose -- during a programming interruption, you are going to lose subscribers. And the effect of that continues even after the programming comes back up, because you have to re-engage on both the activation and churn front. So we're not in a position to quantify what the impact of that will be on Q4. On the other hand, we're pleased to have reached a multi-year long-term deal with Fox. These negotiations are more complicated obviously now than they used to be as industry dynamics and consumer consumption trends change, you get into other areas such as authentication and other elements, which, again, we're not going to discuss the details of the agreement, but we're pleased to move forward with Fox as a partner, and the October results will clearly be impacted because of the programming interruption that impacted not only the RSMs, but also a couple of the other cable networks.

And I guess I would just add to that, while you take short-term, some short-term pain, I think the fact that we have a long-term solid relationship with Fox and a lot better understanding on our side of where they want to go, and I think they have a better understanding of where we want to go, that partnership now is very solid and long-term, and the long-term results of that hopefully will outweigh the short-term impact that we'll have in probably the fourth quarter.

Got it, thank you.

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

Thanks. Charlie, I was just hoping if you can talk about your long-term strategy given the economy and the competition. Are you looking to move up market in terms of subs, and at what point does it make more sense to buy yourself versus buying a sub? It feels like maybe the $800 mark is your limit. And then also, do you feel disadvantaged without a broadband offering, given the viability of over-the-top today?

Okay, good questions. First of all, strategically, I'm actually spending a bit more time on strategy. I haven't unfortunately gotten to spend a lot of time on strategy the last -- up until the last few months. And so I don't think that I can give you a coherent strategic plan, other than we have for a long period of time been trying to put building blocks in place for the things that we think are going to happen. And for the most part, things are happening pretty much the way that we thought they would happen, other than maybe the economy's suffered a lot more in the last two years than we would have hoped. Other than that, things are happening strategically about the way thought. So we're putting a lot of building blocks in place, and they are not always visible to the people outside the Company. And usually when you put building blocks in place from a strategic point of view, you put a solid foundation in there and then when certain things happen, you're able to take advantage of those.

One of those things is over-the-top video where we don't really have a broadband offering, per se, and obviously net neutrality is an important piece of that, so we know that our customers won't be discriminated against, and it's unclear what's going to happen there, but certainly, if you look strategically, it's not a business that we can't get into. We have, again, a lot of programming partners. You need that for that kind of -- we have a lot of technology, we have a lot of call centers installation, we have most of the building blocks that you need to do that if that's a business that could be profitable.

From a SAC perspective, it's not -- the way I look at it is a little bit different than people looking at it. It's not just the almost $800 in SAC, but it's also the free programming you give away that you have to add into your SAC. So we're almost -- we're really closer to $1000 worth of SAC when it comes to -- and we have to continue to evaluate whether we're getting a customer for $1000, and that's before you upgrade the customer or give them credits and so forth. So we have to look at that customer and say, are we going to make money or can we spend $1000 somewhere else? And that is a -- in the old days, that was never a problem because you were spending $400, $500 to get somebody who was worth $1500. Today, that gap has narrowed and it maybe means there's other things we could do.

Thank you.

Your next question comes from the line of Brian Kraft from Evercore Partners. Your line is open.

Hi, thanks a lot. Just had a couple questions. I guess, one, on the last call, you made mention of your prepaid offer and how that was having a factor on some of the subscriber trends. I was just wondering if you could elaborate on what you're doing in the prepaid space and how it's flowing through the results in the current quarter -- or the third quarter, I should say.

And then also, just, Charlie, in response to the first question about capital allocation, you mentioned being in a position to invest in the next thing, and you mentioned over-the-top. Is that specifically what you mean by the next thing, or is there do you think a multitude of potential options for being the next thing that you might be deploying capital into? Thank you.

I'll take the second question part, but in the meantime, Tom, you can talk about prepaid.

Got it.

I wouldn't say that over-the-top would be the next thing that we would potentially invest in. I think over-the-top is interesting and it's a -- if you look at NetFlix, which has a higher market cap than we do, you can -- obviously they never launched a satellite. They did have that -- put the CapEx, that's an interesting business, and if properly -- if done properly, they have certainly proven that there's a marketplace with a high valuation on it. Whether we could do things there or not is something we have to continue to look at and see whether it could make some sense.

Obviously most of the receivers that we've been doing for the last three or four years are capable of receiving video and data through the Internet. And I think the first step you've seen us -- we're not afraid of technology, so one of the things you've seen us do is get involved with Google TV and that, again, is the epitome of over-the-top video, because you really on the one hand could search the Web for a lot of TV, and some of it -- a lot of it which is free, which takes away from obviously the pay TV provider out there potentially. But on the other hand, it's a technology that might be very appealing to those people who are hybrid customers, who want both what they can get on the Internet for free and what they can get on a linear basis. So, Tom, might also want to jump in there as well.

But I feel -- I don't want to leave you the impression -- I see a lot of opportunity -- I think over-the-top is something worth looking at and every pay TV provider has to look at it, but I think there's a lot more opportunity beyond that as well, some that would take a little bit of money, some that would take a lot of money. And we just have to -- you don't want to -- in the marketplace, yes, you could probably borrow money today in the marketplace, but if you spend your money today and the markets turn against you and you couldn't borrow money, then you miss other opportunities. I'm, by nature, a very conservative person. So I try not to have to make decisions unless something's running away from me. The capital allocation is not running away from us. If we were to buyback our stock, that's something we can do tomorrow, that's something we could do next year. That's not something we have to do tomorrow.

And on the other hand, some of the business opportunities that we look at might be gone six months from now or might be -- or not be available, so we have to be ready for those kinds of things. That's just the way we look at it. And again, I think when we see what the government's tax policy is, when we get some resolution to the Tivo case, I think we're in a better position to make long-term decisions. Tom, did you want to talk maybe about Google TV all the other question?

Yes, Brian, first of all, back to the prepaid offering, as I mentioned on the last call, we continue to tweak it. As we gain more experience in the category, we've made some changes. Most of those -- most significantly it was towards the end of the quarter where we tightened the credit qualification with stricter measures, and we're seeing the benefit of that now, but most of that is going to be fourth quarter. We -- again, we don't break out prepaid churn separately at this point, but I can tell you that we're making changes to the product. And now it's much more in line with what we had in the planning model.

As far as -- just to dove-tail on what Charlie said on over-the-top, clearly the world's changing and we're going to adjust accordingly. And I view it as, if you say notwithstanding the forecasted growth of out-of-home consumption, we're really in a battle for share of the living room hours, if you will. And first it was all broadcast and then that evolved to multi-channel, then game consoles came along and now you're seeing streaming services and Internet applications and other forms of long-tail consumption.

And some cord cutting is inevitable, but if you read many of the reports, you would view these as binary. That is the assumption is if I consume some content over-the-top, I've therefore cut the cord. We don't really see it that way. We see it as multiple forms of delivery co-existing in the household for the most part, and that's why we are pursuing things like a greater focus on connectivity of our boxes with ethernet, where we're delivering more movie services, why we're doing things with Google TV and so forth. So nobody can predict the future perfectly, but we see it as -- not as binary as most people are projecting it to be.

I'll actually ask two follow-up questions, one for Tom. What percentage of your receivers today are connected to the Internet?

We haven't disclosed that, but it's -- to be honest, we've had ethernet connectivity capability on the boxes for many years. The focus on connectivity has only really been instituted in the last nine months or so. But, as you know, we're in 20,000-plus homes a day, either for activation, service calls or upgrades. And so on every chance we get now, we're attempting to connect the box and provide the customer with additional service capability.

And this is Charlie. I mean, I think that, that -- firstly, broadband connectivity, you have to have the product and we don't really have as good a product from a broadband perspective. We've been playing around with some beta stuff today and we do have a wide variety of movies that our customers can get if they are connected, but you also have to have an operating system where it's easy to get to those movies, and we still have a lot of work to do there. But our customers would say that's worth the hassle to actually hook up my Dish box to broadband connectivity.

Second thing is -- but strategically, what I focus on is that we have the ability to -- that we're training our people so they have the ability to go in and hook up people and service people for broadband connectivity, that our hardware is such that it's fairly easy to do that and it's got the right kind of software and hardware in it to do it, and that your operating system that a customer needs is being developed around our box and with remote control that needs you to do it. And if you do those things, then it's -- then you can get connectivity rates up.

The second thing that's happened is sometimes the connectivity is happening in spite of us. If someone buys a TV or a video game product, he's already hooking up to broadband that way as well. So we have to figure out how to make sure we're tying into those people who are already hooked up broadband connectivity-wise, but not through their set-top box. So we're fairly well strategically positioned there, we're not quite there operationally.

Got it. And then the other -- thank you. And the other follow-up I had for Charlie was when you talked about keeping powder dry, basically, for investment opportunities, are you talking about things that are sort of a cohesive strategy that compliments the core business, or do you mean opportunistic -type investments like you explored with SIRIUS last year, for example, last year?

Well, I mean I would say most of the things we looked at, and even SIRIUS would have fallen in this category, would be things that we have core competencies in that we can then take one and one and put one and one together and make three. So most of what we look at is somehow consumer-related, somehow revenue -- ongoing revenue-related, typically technology-related, such as satellite, such as having something to do with the satellites. That's why SIRIUS was interesting, because it was a satellite platform, had a recurring income model. Something that would need some of the fundamentals that we have, such as customer service and call centers, such as in-home installation, such as encryption, things that we have fundamental skills in and then we just build on those skills. That would be the primary place we look.

Having said that, the world changes and if -- an extreme example would be you have national healthcare where the government's going to be a bigger part of that, that may open up opportunities in a completely different industry that may only peripherally need satellite or in-home installation or something like that, you would look at healthcare and say it's going to be a bigger part of the economy, it's going to be something subsidized by the government, maybe that's a place that we ought to be looking. So that would be an extreme example that we probably don't spend as much time on, but we look at that kind of stuff.

Interesting. Thank you.

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

Yes, hi, Charlie. To follow up on from what you've just been talking about a little bit, can you enlighten us a little bit on what you're thinking about Terre Star and where that might fit into your plans, and I would add to that I guess your 700 MHz spectrum?

That's a good question. I'll start with Terra Star. Terra Star, that's an investment that EchoStar has made, so since this is a DISH conference call, it's probably -- I'll probably give you the answer you're going to get in the next call, just probably go ahead and give you the answer, which is we're an investor in that company and, unfortunately, I guess I would say, that the company is currently in bankruptcy and it just wouldn't be appropriate for us to comment on Terra Star because they are going through a bankruptcy process, and we're not the management team there and I think they probably hold conference calls and I think probably asking them questions about their business is more appropriate at this point.

As far as the 700 MHz Spectrum, that is a DISH investment, and, again, I would say it's just a building block that -- there was an auction and if we wanted to play in that building block, we had to make a decision several years ago. We didn't want -- the timing was not good because we didn't think the technology was ready to take advantage of that particular spectrum yet. It may still not be, but it's a building block potentially strategically for things we might want to do in the future. It is, as it turns out, a pretty good inflation hedge and they are not making any more of that spectrum and if we're not able to strategically do something with that spectrum, then there's probably other people who are able to do that.

I think the smart thing -- I think one of the better things that we did was, that we resisted the temptation to go out and try to build it out and spend more money on the build-out for it without really knowing where we wanted to go. And so we haven't -- we've got a high cost of acquiring that spectrum, we haven't added to our cost basis by trying a business plan that we're just not ready to try yet. So we've been very conservative there. And again, my experience has been that you end up with building blocks and you -- what happens is where sometimes something happens that owning that building block ends up being a strategic-- ends up putting you in a place that you otherwise wouldn't have been and doing something in a positive way. Sometimes what you think will happen doesn't happen, and you just need to exit -- at that point you just need to exit gracefully and admit you made a mistake.

We've won some, we've lost some. Mistakes, I tend to remember a little bit more than success. But we got into the broadband via satellite business very early on, with (inaudible) and when we lost a lot of money, not that that was -- not that that ultimately wasn't going to be a good business, we were just too early and the satellites weren't efficient enough and the hardware was too expensive. So we had to write that off, and we exited that gracefully. We took our lumps and went home. And it's the right thing to do. That has turned out to be a good business now for other people, but our timing just wasn't right.

So I don't know whether our timing's right or not on 700 MHz. At some point that will be a valuable spectrum to somebody. And if we can figure out a way to use it, it's good. If we can't, then somebody else -- somebody else will own it.

So technologically, because it's not paired spectrum, do you feel like you can use it for two-way or do you still think of it as it may have to be a one-way application for that spectrum?

Today, I think it has to be a one-way application. That's really -- again, but as a building block, if you can tell me what the government's going to do with wide spaces, what the terrestrial broadcasters are going to do, what the FCC might do, -- and this is an FCC that's looking very -- that's a good thing for the country. They are looking very hard at how you can efficiently use spectrum for the benefit of consumers and the benefit of competition. And when you do that, people come out with pretty innovative ideas of how spectrum can be used in a different way than the FCC originally thought of, and they have been pretty open to experimentation.

And if -- as long as the government's going to take an entrepreneurial approach to the way spectrum's going to be used, maybe we can catch up to some of these countries who -- there's big blocks around the world where people are able to do a lot better things with spectrum than we do in the United States. We're so chopped up around here that it's not the way that you would want to do spectrum allocation, but it's happened over a period of 30 years and so it's just -- someday you're going to see those things -- you're going to see efficient -- you're going to see companies on the FCC and everything else come together and use the spectrum more efficiently in a better way and that's going to be reallocations, change of rules and those kind of things. And if they do that, then maybe the 700 MHz can be used a different way than is allocated today. But today, it's clearly a one-way spectrum which limits its use.

Thank you.

Your next question comes from the line of John Hodulik from UBS. Your line's open.

Thanks. Yes, on the call today, Charlie, we've talked about a lot of different things. On the strategic side, it sounds like you're spending some more time there. I mean, has your view of the video business, whether it's because of the economy or over-the-top or increased competition, has it changed fundamentally? And as you look out -- I realize there could be some issues in 4Q, but as you look out to 2011, is there a scenario where you think that you could return to growth in a scenario that makes economic sense, or is that -- I'm just trying to get a sense of whether that's something we should expect or not?

Yes, I think it's a great question. I would say that potentially my view has changed a bit about video and video distribution in terms of its overall chance for -- as we do it today, as most of the MPPD players do it today, I think it's under some -- it's added risk than I would have said a year ago or two years ago. And there's several reasons why.

One is, as you've heard me say, I hate the fact that we're giving away -- that we're discounting -- all of us in this industry are discounting our programming, so we're giving away our product and trying to make it up on things that aren't really our product. And I hate that because you just -- strategically, you don't -- you can give away anything, but you don't ever want to give away your product, your core product. You can give away the razor, but don't give away the razor blade, don't give away the shaving cream. So we give away the razor and the razor blades today as an industry. And that's why I say that our SAC as an industry is really much higher than the analysts look at because the free programming has to be considered an opportunity cost that you're giving away.

Second thing that's happened is we have four competitors in every market now. So we have the addition of a phone company in the marketplace that wasn't there several years ago. So -- and they can't really be economic on their investment without getting a certain market share percentage, which is very difficult for them to do. So that's a bit of a problem. And then we have another competitor that's in the marketplace that we talked about -- alluded to, which is over-the-top and Internet. You can go to Hulu and watch the TV shows that we're charging you for. You can go to NetFlix and get all the movies on Stars/Encore that we as an industry charge you more for the linear version and you can get all the movies basically on-demand for a less expensive costs than that, so that's a pretty big competitor. While you might not lose somebody as a subscriber, you lose RPU from the customer as a result of that.

And the programmers, it's unclear to me what the programmers are going to -- the people in the programming business are going to do. Are they going to put their product out there for free for customer who is aren't paying for it? They are going to go down a slippery slope where they find their revenue models at risk as well, because the Internet allows you to do so many tricky things to get things for free, that you got to be awfully careful for it. My kids think I'm crazy for being in the pay TV business because they don't pay for TV. They don't pay for movies. So -- but they watch an awful lot of TV and movies. So, you know, that's going to be an interesting dynamic. So I think those dynamics are putting pressure on the margins and the industry as we know it, per se.

Having said that, there's opportunities that still -- high-definition television is something that satellite providers have an advantage on because we're much more efficient distribution model for high-definition television than cable companies are, and we're much more efficient than the -- for the most part, than the Internet is bandwidth consumption is very high. So that's a real positive kind of thing.

The second thing is that the over-the-top model is not necessarily -- can become complimentary to many customers who want the experience of linear TV, but also want to have the added feature of video on-demand and other things of other product. And it also requires you to -- it also gives you the ability to take TV with you where -- anywhere on any device, and we're well positioned there as a Company, particularly since we've licensed Sling and most people have not licensed Sling, and so we've got a technology that allows us to do that kind of stuff.

So there's some opportunity there, but if you -- would it make sense to -- I can already give you an example. If you started today and your choice was to launch 10 satellites, like us and DIRECTV have done, which are going to cost you $3 billion to launch th satellites, or are you better off starting NetFlix? The answer might be, given where the marketplace is, you're better off starting NetFlix and saving your $3 billion for servers and programming contracts.

So I think the world is changing and my focus and what our challenge to our Management team is, we have to adapt to that. And I guess the final thing is that we're not -- that DIRECTV has done a fabulous job of the brand of the -- the premium brand in this marketplace over, even over phone companies, cable companies and certainly us. Mike has come on, Chase left that in very good shape and Mike's continued the great Management that they have there. So those guys are doing a fabulous job and growing in a marketplace where everybody else is not growing, and they are the premium brand and their customers are suffering a lot less in the recession than probably, as a generalization, probably as our customers. We have a very tough competitor who is doing a fabulous job and that -- so we have to figure out how we can do things differently and how we can compete. And I think that really boils down to strategy and I have a lot of confidence in our ability as a Company to strategically adapt to what's going on long-term.

We're fortunate we don't have to worry about some of the short-term implications of that as much as some companies do, and we can make those strategic choices, build those building blocks and turn that into -- and strategically adapt our Company to where we think the environment goes. And you've got a big -- you have an economic challenge in the United States and we have a technology challenge as the way people consume video changes -- and data. So that's a long-winded answer of that, yes, I think the model's changed a bit.

Okay, great, thanks.

Your next question comes from the line of Jason Bazinet from Citigroup. Your line's open.

I have a question for Mr. Ergen. Most of the investors I speak with on the street believe that the mobile video offer -- or opportunity is a fairly limited one, either because of Qualcomm's MediaFlo product or international analogs. And my question is, do you share that dose of skepticism that the buy-side has -- the investor community has about mobile video?

I guess I would -- the short answer is yes. I'm a bit skeptical, but I think, like anything else, it's timing, and probably MediaFlo was too early in the marketplace. Second, the model I think is perhaps not one where people will pay a lot of money to watch video on their on their phones, particularly if they are paying for it already. So I think there's a lot of strategic discussions that would have to take place from programmers as to find a model that might work. And MediaFlo, I think one of the big challenges they had was that their programming costs were so high that they just -- that the product just priced out of the marketplace for consumers because the phone is not the ideal place to watch TV.

Having said that, though, I think that the next 10 years are going to see more and more people watching TV, if available on their phones, around the world, I think the answer to that is yes. Whether you can make any money on it, I'm skeptical of -- unless you get a lot of industry participants working together to prove the model. And that's really a timing question and right now, I would be pessimistic about that.

Thank you.

Your next question comes from the line of Paul Sweeney from Bloomberg Research. Your line's open.

Thanks very much. Good afternoon. Earlier this week, Time Warner Cable talked about potentially introducing a lower-cost video package, and to the extent this occurs and is embraced by other MSOs, just wondering what your thoughts would be on the impact on you guys giving your low-cost provider status. And then second, just on your sub-related expenses down again as you make improvements in in-home service operations and so on and so forth. So just wondering if you could give us a sense of where you are in that process and perhaps how much farther you can go on that expense line? Thank you.

Bernie, are you there?

Yes, I am.

Bernie, you might want to take the operation-expense-side question, and, Tom, did you want to take the programming question?

Yes, on the programming question, obviously we don't have visibility into what DIRECT -- what Time Warner is intending to launch, and I don't think they disclosed timing, but we would, a) expect to be able to work with programmers to achieve something similar, and, b) we do have some lighter packages that we have not aggressively promoted in the past, which is an option for us. But I guess until we understand more as to where the competitive landscape is moving, I can't really comment much beyond that.

And with respect to the subscriber-related -- expense-related to operations, yes, the efforts to try to improve our operations, to try to simplify our business, they are ongoing. While we realize it's a very long-term effort, we've made a lot of good progress, I think, in the last year. I think we've got a lot of good, low-hanging fruit picked. I think there's still a lot of opportunity moving forward, but getting some of those benefits may be a little bit harder.

And also, our business is changing. So part of running a good, efficient operation is about obviously cleaning up what we've have today and making that more efficient, but part of it is trying to react to the changing marketplace and things that we're going to be doing differently and try to do those efficiently from the get-go rather than on a reactive basis. So there's still a lot of work being done. We're not anywhere close in our minds to feeling like we're done fixing our operations, but at the same time, we have made some good progress over the last few quarters.

Okay, thank you.

Your next question comes from the line of Todd Mitchell, Kaufman Brothers. Your line's open.

Hi. Thank you for taking my question. I was wondering if you could talk a little bit about some of the vagrancies or differences you're seeing in some of your end markets. More specifically, are you seeing any different -- from a 10,000-mile level on differences happening in some of the Spanish language markets versus the overall market, and how you're responding to that?

Probably yours.

Yes, we actually, Todd, have had a pretty good recent run in the Latino market. So we've doubled down in some of our marketing efforts there and have built a new team around Latino leadership. So that's one that we're pretty optimistic about going forward. As far as end markets, were you referring to local geographies?

Local geographies or sort of sub-segments of the market. I would also kind of add, can you tell me what -- you were fairly aggressive during the analog to digital transition, was that -- did that turn out to be a good investment in effort and capital?

Well yes, I think we did benefit from the transition. And as you know, and I think we covered on the last call, we since have launched locals in all 210 local markets. And so we used that as an opportunity to more surgically market in those individual geographies. And we do that selectively, even in larger markets where we see competitive opportunities, our marketing weight is clearly not spread evenly throughout the country, even though we are a national brand and we have national promotions and packages, we will emphasize local markets heavier in some -- with some tactics.

And so you've been able to increase your share -- do you feel like you've been able to increase your share of the Spanish language markets because of your efforts? Because it seems like a lot of people have gone after that market.

Yes, I guess I don't have a perfect score card as to how to measure overall share in our piece of it, but we are seeing an uptick and our message is being well-received and we're seeing call volumes and response rates to our marketing improve. So -- but I don't have a means of comparing specifically versus other cable competitors or Telco competitors.

Okay, thank you very much.

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

Thank you very much. So within the context of capital allocation, Charlie, I know you'd talked about some potential constraints that might limit your visibility there. But within the international front, which is maybe a farfetched question for you, but given that your peers are actually having a lot of success in Latin America, et cetera, do you feel that if you had another shot, that you might have looked more vigorously at other international opportunity way back? And is that something today that you might actually be willing to maybe look for some potentially complimentary opportunities for capital allocation, given the saturation clearly in the domestic market here? I would presume it's also a lot easier for you to perhaps expand internationally than perhaps a cable company, so what's your thinking there in terms of strategically?

Well, from a big picture -- I'll say a couple things. From a big picture, certainly as I travel around the world, there are emerging economies that are absolutely doing fabulous. You're looking -- probably looking at pretty much guaranteed almost double-digit growth in China, India, Brazil is still -- and all of Latin America continues to grow disproportionately to say Europe and the United States. And even emerging markets, small emerging markets like Vietnam and Indonesia and places are really on a pretty good long-term -- they didn't have a subprime debt problem, they didn't spend beyond their means for 20 years. So they are going to benefit from that.

Having said that, most of our international focus is actually, again, been on the EchoStar side, where we have an international division and they've look for those opportunities. And DISH Mexico is really an international company -- goes through to EchoStar and really DISH is a total focus is on the domestic United States. It's not to say that, that DISH wouldn't enter some international business, it's just that the focus really is to make sure we're the best domestic Company on the video side of the space that we can be, and international side, EchoStar spends a lot of time traveling around the world looking for opportunity.

Okay. So no planned -- (inaudible -- multiple speakers).

It's difficult to get on the video side of the business internationally because usually the government restrictions. And the are places where you could get in, like in the UK, Sky is already there and a dominant factor, it wouldn't make sense for us to try to enter that market. So -- and you have to have a good partner and so forth. So it's a difficult business. But strategically, could make sense because of the world economies and where they are likely to go over the next five or 10 years. But probably on the EchoStar side, So if you're international investor, you're probably not a DISH guy.

Okay, all right. Switching gears to the regulatory environment, I know you spoke about the spectrum reallocation issue. But I wanted to get a sense, you know, of how you viewed the regulatory climate, particularly coming off the midterm election, where there were a lot of other issues seem to be in flux, whether it's Title II, program access, terrestrial loophole, online video, net neutrality, what not. So the question is, do you feel better today than you might have felt a few months ago, and where would you like to see the most traction on the regulatory front, in terms from your vantage point, where would you -- what issue would you consider that you're most passionate about and how confident are you that the regulators can get it right, so to speak?

I would say, having spent a fair amount of time in Washington, that I like -- I think we have a very confident FCC, and it's an FCC that's not only very bright, but it's an FCC that is very curious and has taken time to really analyze -- they have a great team and they analyze things. Normally at the FCC you know what the right thing is after you analyze things, and obviously spectrum allocation and things such as net neutrality are important issues.

Having -- but I feel a little worse today than I would have a month ago because I think that once you figure out what you should do, you have the politics of you can't make those decisions in a vacuum. There are politics how it affects jobs, how it affects re-elections, those kind of things that are real world practical things you have to take into consideration. So it's not going to be as easy for the FCC from a political point of view, in my opinion,n to make the right policy choices with a divided government. And there's quite a difference of opinion philosophically between the Republicans and the Democrats in general. So I think it's going to be difficult, more difficult, but it's a very competent -- very, very competent staff and members, hard working members on both sides of the aisle at the FCC.

And I think from -- what would be our important issues, I think net neutrality is probably our biggest issue because if you don't have some kind of power to avoid discrimination on the bits that go through a pipe, you're only going to have the guy that owns the pipe in all these businesses, whether it be home security, video. There wouldn't be a NetFlix if Comcast could make their movies go through really fast and they could slow down the NetFlix movies, NetFlix wouldn't be in business. And so -- and you're not going to get innovation unless -- it's similar to -- with Apple, you have applications that only Apple can write the applications, you're going to have less innovation than if you're Android where everybody can write applications. Now you've even seen Apple open up their applications a little bit because they realize that the innovation is all happening on the Android side. We want -- I think we as a country have to have innovation on broadband. We can't leave all innovation up to Comcast or AT&T. You're going to have to have the power of entrepreneurship opening those applications up, and the NetFlix of the world are great companies that have been innovators. So that would be my number one issue.

My number two issue would be take all this bandwidth that's out there that's chopped up and try to get some -- do two things, one is try to get some rational -- more rationality in that bandwidth application; second, try to bring in some new entrants into the marketplace so you get some real competition and, again, you get more innovation and competition will drive incumbents. But we don't have -- really from a bandwidth perspective today -- well profit's going to be you get AT&T and Verizon and you don't have much in between. So I think that's going to be a critical factor. Otherwise, you're just going to continue to -- when you see what happens around the world, it just gets very depressing to see that as a country, we don't innovate as much. There's obstacles to our innovation, where we used to lead the world. So those would be the factors. But again, that's tougher today probably than a week ago.

That's very, very helpful. And lastly, just on the FSS, which seemed like you guys kind of stepped up efforts about a year or so ago. We haven't heard much about that. Has that cooled off a bit? How much of an incremental revenue have you been generating from that? Is this something you're looking at through a ramp-up or you don't feel the environment is conducive to that at the moment? What's your thinking?

By FSS, you're talking about satellite?

FSS satellite, yes.

That's on the EchoStar side, so they can probably more properly address that. Having said that, I think that, again, we're not really large -- we don't really have scale there and we still -- we tried, we made an offer (inaudible) that wasn't successful. So we really don't have scale there yet, so we really have to look at either, can we get to a place where we have scale or does that business -- or is that business more -- in somebody else's hands, better properly -- probably belongs to somebody who does have scale, but again, that's not, a decision we have to make any time soon. It's just that's what we continue to look at.

Thank you.

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

And your next question comes from the line of Doug Mitchelson from Deutsche Bank. Your line's open.

Thanks so much. I'll try -- I've got a few, I'll try to make them quick. Thanks, Charlie, for being on the call, now that you're a big TV star and all, it's nice of you to join us. How are those ads working, pretty good so far?

I'm not the guy to ask. I don't like doing TV, so let's put it that way.

So one comment in the 10-Q was recent developments in the financial markets have made it more difficult for issuers of high-yield indebtedness, such as, us to access capital markets at acceptable terms. I thought the high-yield market was actually pretty terrific right now, is that a carry-over line, or is that something unique to DISH?

Yes, Robert, or Jason, do you want to take that one?

Yes, I think that that's reflecting maybe over the broader period of time that we've seen over the last several -- couple of years. So, yes, if you looked at just the last couple months, it has gotten -- the environment's better.

There's another comment in there, low-end price increase -- or sorry, as of September 30, inventory balance was $523 million, the increase due to less gross subscriber additions than anticipated in 2010. But then you've got another disclosure that says the set-top boxes and equipment you're purchasing from EchoStar in 3Q was up quite a bit year-over-year. I'm trying to figure out why is the inventory balance up $300 million year-to-date? And gross additions are below, I would think you would be buying less equipment from EchoStar on the margin, not more.

Yes, Doug, this is Robert again. I think we've talked about this before, is that our orders with EchoStar really stretch out nine months. So we had an expectation that the HD Free for Life would do two things. It would drive a lot of activations, far more than we've experience, and also, that we'd have a very high level of upgrades for our existing SD customers. We've had some of that, but not as much as we had forecast. So we've -- as a result, we've used less MPEG4 than we had forecast six, nine months ago.

I think I mentioned in the last call that we're going to work that inventory down. We think, clearly, $500 million inventory is well above where we think this business will run. But it's going to take a couple quarters to get that back down to the level that we think it should be at. And like I said, it's all tied to the -- our forecast on the HD Free for Life.

Okay, and then I'm looking at the website and I think this is accurate, but does the new Fox deal allow you to keep the RSNs off the base AT 100 programming tier? I know that gives you a little promotional price advantage versus some peers.

Yes, they are currently at 200 and they are staying there.

And then, Charlie, it seems to me -- I'm curious if this thesis is correct. You spent a lot of the last year-and-a-half, two years improving operating execution and indicating that that was a big reason behind some of the subscriber declines. It seems that the operation execution is now fixed and that the sub declines we've had the last few quarters is more about marketing, getting the marketing right, and then just some unusual items like churn from the prepaid subs and a little bit less RBOC promotion than you used to have, and that sort of thing. Does that make sense to you?

I wouldn't say it quite that way. I think the operations still have a long way to go. We're probably in the second year of a four-year project, but it's certainly stabilized. A couple years ago, it was actually getting worse and now we're getting better every day.

As far as the marketing, I think we have a long way to go with marketing. That's really a question for Tom. But if I had to -- then again, I'll take my share of the blame. If I look constructively, I just don't think from a marketing perspective we've found our identity yet. And I sometimes feel like there's -- sometimes you got to admit you got a problem before you can fix it, and I think we're having a hard time admitting we have a problem, and that's just my self-reflection on it. I think from a marketing perspective, it's really the world has changed and how we go about marketing and where the opportunities for us from our marketing perspective might not be the same as some of our competitors. And I'm not a big believer in just trying to emulate what somebody else does, and I think there's lots of opportunity there to do a better job, and that's something we're certainly going to work on going forward.

And finally, I think the only other thing that I would -- this is our last question probably, I think the other thing that -- I think Tivo's certainly been a big driver overhang for us in terms of management time and everything else. There has been a couple little developments there, but as an investor people should look at, one is we do have our (inaudible) hearing in front of the full Court of Appeals next week, I think it's Tuesday. That's an important -- that's much, much more important than just whether -- it's not really as much about Tivo and DISH, that's very important whether you -- whether the law is going to encourage innovation or is the law going to err, move more towards protecting patent holders and stifling innovation.

And couple things -- just as an example, Stan, you may want to jump here in a little more detail, but we were just issued I think yesterday or the day before, we just got our patent, our design around -- for the Tivo, our design around, we just were issued a patent by the United States Patent Office who clearly looked at the 389 patent of Tivo and decided that we had a very novel approach and it actually worked in some cases better than the Tivo approach. That -- if you can be found in contempt of court, as Tivo alleges, we never would have got that patent and now we're -- so now we have a more novel way of doing DVRs and we could license other companies and create competition. You wouldn't be able to do that if contempt of court could be -- if people -- obviously, we had to change -- we had to materially change the -- to get a patent, you would have to be materially different.

The second thing that's happened is that Tivo's patent had been invalidated by the patent office. And to get that patent reinstated, they had to make statements that narrowed their patent. And, in fact, in narrowing that patent, and the way that they now say their patent works, which is different than what they told the judge in Texas and different than what they told the Court of Appeals, but the way their patent now works is materially different than what we were found to have infringed. You've got -- it's a very important case. It's really one that I don't think anybody's really taking the time to totally understand, and it's - will be our biggest contribution to innovation, one way or the other. However that turns out. I don't know. Stan, do you have any comments on that?

I guess the only thing I would add is when Tivo narrowed their claims in front of the PPO, we just looked at it and said it would be pretty darn unfair to continue to enforce an injunction against us when we haven't even been found to infringe those narrower claims.

But the patent laws are very strange. A lot of catch-22 situations in it, and it's very complex, and it's going to be -- I'm glad that we're getting the rare chance to have a full hearing in front of the appeals court so that, at least going forward, both patent holders and innovators will know what the rules are. And we think we know what the rules are and we think we followed those rules, but at least everybody's going to know going forward and the court's going to have to decide whether -- which is more important, innovation or non-innovation. That's a big question and something that is super important for all high-tech companies going forward.

Thanks very much, guys.

I think with that, we're done.

All right. Thanks, everybody. Appreciate it.

We'll be back in about five months, I guess. And this now concludes today's conference call. You may now disconnect.