DISH Network Corp (DISH) 2010 Q4 法說會逐字稿

Good morning or afternoon. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation fourth-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. Mr. Kiser, you may begin your conference.

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

Thank you, Jason, and good morning, everyone, and thank you for joining us. As you know, we invite media to participate in listen-only mode on the call and ask that you not identify participants or firms in your reports. We also do not allow audio taping and ask that you respect that. All statements we make during this call that are not statements of historical fact constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results, and from any future results expressed or implied by such forward-looking statements. For a list of those factors, please refer to the front of our 10-K.

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 subscribed 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 will turn it back over to Jason.

Thanks, Stanton. And, Simon, we'll go straight into Q&A so you can open up the queue.

Certainly. (Operator Instructions).Your first question is from Jeff Wlodarczak with Pivotal Research Group. Your line is open.

Good morning, guys. I will limit myself to two questions. During the fourth quarter did you all materially accelerate your conversion of your existing sub-based MPEG4 boxes and how much of an effect did it have on your potential new subscriber installation capacity and if you could also help quantify the effects of the Fox and MSG shutdowns on your subscribers during that, that would be helpful. Thanks.

Hi, Jeff, this is Tom. Yes, we did accelerate MPEG4 distribution during the quarter. We consider to see an uptick in both HD subscriber base and DVRs. It did not impact our capacity in terms of subs or installation capacity, however, and regarding the programming interruptions, clearly those aren't easy on any of us, but given we were -- I was willing to take the short-term impact because what we were being proposed in terms of both programming rates and digital rights were not something that we thought the consumer market nor our own economic models could support over the long run, so fortunately we were able to reach a couple of agreements with major programming providers that give us more long-term certainty on both economics and digital rights.

Thanks. If I can ask one follow-up. Maybe just talk about more color about the gross add growth, if that wasn't the driver, the lower gross, if you could maybe spend time talking about what the driver of the gross was this quarter, lower than at least we expected?

There is probably three things. One, the programming interruptions clearly are a factor, not only on churn but also gross adds and new activations, and there is a residual effect to that as well, not only during the period when the interruption is occurring, but there is a lag effect associated with it. Secondly, I would say we continue to continue to operate in a challenging competitive and economic environment. We're not seeing -- while we believe maybe the housing issues have bottomed out, we're certainly not seeing a recovery there, and thirdly, frankly, I would say we still have executional issues internally in both sales, marketing, as well as retention.

Okay. Thank you.

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

Thanks. Just a few hopefully quick ones. Can you explain to us the rationale behind the price increase being larger in 2011 and then holding steady in those pricing in 2012?

Yes. This is Bernie. I think we put a lot of thought into this. One of the things that I think was announced fairly recently, is that we're going to be undergoing a billing conversion here at DISH over the next year-and-a-half or so, and it is a pretty difficult process as it is, when everything goes smoothly and everything goes right, and one of the things we're trying to accomplish in this next window of the next year-and-a-half or so is to try to impact our customers less, where we don't have to impact them. There is going to be other impacts as a result of doing the conversion, that are going to be inevitable, so that was a big part of what went into our thinking. If we were going to not do an increase next year on some of our core packages, doing a bigger increase this year made sense, particularly when you look at where our prices are compared to our competitors. We thought that we had a little bit more room to put in a bigger increase this year, and then at the same time be able to not disrupt our customers as much over the next year, while we're going through our conversion.

And then when you think about you talked about the challenging operating environment. You've got certainly a lot of customers out there that are more economically challenged than normal, and now you have a bigger than normal price increase. I imagine you're anticipating a higher than normal churn related to price increase this year?

Yes. We have done a lot of preparation for this price increase. The price increase is happening right now as we speak. The first customer is getting the increase -- their bills are due, I think, today, and versus a lower increase, I think you would expect a slightly higher churn. The message of being locked in for two years actually does mitigate that quite a bit, when customers call and ask about the larger than usual increase. I think being able to tell them that we're frozen for two years has worked very well, and we have done a lot of preparation, a lot of training for this, so I think we're in good shape to handle whatever happens over the next month or so.

Two more accounting questions here. I know you don't give guidance. If you can help us on the tax rate, looks like it is 37.5% core, but there was some unusual items that brought it down in 2010. Is there anything in 2011 we should think about relative to your normalized 37.5% tax rate?

Doug, this is Robert. I think you should think about around the 38% as the steady state rate. There were a lot of small one-time impacts to that. I think we talked about some of them related to valuation allowances, state credits, things like that, but steady state, more in the 38% to 39% rate.

EchoStar 16 showed a $72 million a year for obligations for the life of the lease which seems awfully high relative to what you guys usually are paying for a satellite. Is that one where more value is being transferred to sats or is it a bigger satellite or can you help me understand the dollar amounts there?

No. There is just a more capable satellite more than anything else, so there is no value transfer there.

This is Charlie. It costs a lot more to build a satellite today and launch a satellite today than it did the first generations we built, so it is -- we have negotiated an internal rate of return that we have done not only with EchoStar but with other companies that follows the same pattern in terms of a rate that we're comfortable with, but it is -- satellite is probably three times bigger than what we would have launched six or seven years ago, and we're not paying three times the rate, so there is some efficiency in this satellite.

Got it. I will leave the phone for questions for everybody else. Thanks.

Your next question is from the line of James Ratcliffe with Barclays Capital. Your line is open.

Good morning, folks. Thanks for taking the question. Two if I could. First of all, in the wireless space, now with the 700 MHz spectrum and DBSD and potentially TerreStar on the EchoStar side, Charlie, can you talk about how you view these assets as being stitched together or do you view the EchoStar, TerreStar and DISH DBSD deals as independent standalones that one doesn't depend on the other, and secondly, if you could just talk about operationally, you have clearly been working on improving the installation process, marketing process, the retention process. Where on those three are we in the fifth inning, ninth inning? How far through the operational improvement are we? Thanks.

Okay. First on spectrum, I think we look at spectrum independently, but we have always been interested in spectrum, and as you probably know we have been in every option that the FCC has done the last 15, ten years or whatever starting with the DBS slot at 110. We typically lose. We typically can't outbid some of the big guys, and doing that, we have always looked at spectrum. Independently, it has value. As an example, 700MHz, AT&T just paid well over I think almost $2 billion for similar spectrum. Now we don't have quite as much spectrum as Qualcomm had, but it is we think it has value. Just as an asset.

We typically would rather buy it strategically as we get more value to it, so we look at that and DBSD is a satellite-related company, and it has satellite operating in outer space today, and the business plan just takes longer to get going, and that's why they end up in bankruptcy, so for us it is an opportunity and we just have supported a plan framework that will be in front of the judge next week, and we'll wait to hear whether our plan is approved or somebody else's plan is approved, and then we look at it and say, again, if you can -- Spectrum individually is important and obviously to the extent that spectrum can go together, which we think DBS from a video perspective goes with other spectrum for other reasons, that can be added and synergistic to that, but we looked at it individually first and say is there anything there for us first and we looked at DBSD individually at this point, as we did 700MHz.

And on the operating process and operating improvement, how far along are we on that?

This is Bernie. I would say fifth inning might a rough estimate. I would say we have -- we feel like there is as much room for improvement ahead of us as we have achieved so far to date. I think with the billing conversion that I talked about, we made a lot of things I think simpler from a customer standpoint over the last year, year and a half. One of the challenges now as we're going through the billing conversion is we want to push the simplification back through the back end systems so our billing system is kind of the core and heart of how we run the Company but we have a lot of edge systems that function and interact with the billing system and try to get those simplified so that our systems are more reliable and our tools work better for our agents and I think it is still a lot of benefit yet to be realized and then recognize that our business isn't standing still.

We are continuing to change as we try to sell adapters and trying to add offering like IP-VOD, so part of operational improvement has been catching up on a number of years where we didn't focus on it as much as we probably should have, but a big part of operations is as we start implementing new things that are quite a bit different being ahead of it an trying to make sure we don't introduce problems that we have had in the past.

Thank you.

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

Hi. Good morning, Charlie. Two questions if I could. First you mentioned on the last call, you hinted that after you account for programming subsidies, that there may not be a great return on attracting certain kinds of subs, and I wonder if you can elaborate on that a little bit, and talk about your view now, and if that has changed at all?

And just one housekeeping question as it relates to the TiVO litigation, and that is, how many set-top boxes do you have that are still of the model numbers that were originally found to be infringing?

Okay. I will take the first one. Again, the way I analyze SAC, this is me personally, I am probably the only person that does it this way, I look at and what I give our guys ability to do is based on this, is to look at what the total cash SAC is, and then what the programming discounts are or any other discounts we give to get the customer, so when we give away $200 of programming, I look at our SAC as being $1000, and you look at the ARPU and you look at all of your churn and you look at all of your numbers and say is this an economical model?

When we first started in DBS, you didn't even really have to do the analysis because the customer was paying for his equipment so you didn't have any SAC to begin with, so it was all profit. Now as you move closer to that economic analysis, you are not sure if some customers are actually economic for you. You think ahead a little bit here, but if you're going to give somebody two years of programming discounts and a two-year agreement, at the end of two years they're just going to ask for more money. They're either going to leave because they have three or four other choices to go to, not the least of which might be the internet, or they're going to ask for more discounts.

You can't run a model now where you say I get a customer with a $1000 SAC and don't worry about it, because two years from now he'll be paying me $90 ARPU for the next ten years, because that's not realistic in the marketplace. You look at that and say where do I want to spend my money and what I spend my time on is I want to spend money on something I get a return on, and so when you look at that, there is less of a customer pie probably for everybody in the industry, but certainly for us to go after. It has to be a better credit score, be a little bit better customer that might be strategically a little bit positioned for your particular company to look at, and so that's why we probably are less aggressive than other people in the industry, particularly on discounting programming for any length of time, because we're not sure that type of customer is going to be the best long-term investment for us. I am not saying you can't make money on that customer. You probably can. Whether it would be the best long-term investment for us, no.

Others have a higher ARPU or lower churn that an economic analysis will be different for them, but it is not a given that you should go after every type of customer who would actually want your service today. I think the dynamics are, look, the dynamics are changing in our industry, in that we have new competitors from the phone companies and we have new competitors from the internet, and virtually anybody can enter the internet business to be a competitor, not the least of which are some of the programming partners themselves and a lot of piracy, so we have done a pretty good job of controlling piracy on our end but the internet piracy is off the charts free for people. Programmers put stuff on the internet but they haven't protected it or don't realize the extent of what piracy can be on the internet.

We take all of those things into consideration and say we're fortunate we have a large critical mass of customers, a stable business for us, a stable customer base, throws off a lot of cash flow and hopefully we're able to maneuver our company through what I see on the opposite side of that, which is lots of opportunity both in satellite and our current core business, and lots of other opportunities that out there. Do you want to follow up on that question?

Reading between the lines, then, is it your intent that you're more selective and does that explain some of the change in gross additions?

I say it two ways. One is, I don't run the details how we do it. I am not giving -- when somebody comes in, if this was a company where we were a bank and somebody was coming in and offering me subprime loans and said we have to do subprime loans because the other guy is doing subprime loans, I will say we won't do subprime loans, and we'll pick the pieces up two or three years from now, so our guys have an economic number they can work with, and they're only allowed to go after economic customers.

If they go after economic customers and I believe we can do a lot better than we're doing, I think there is a lot more economic customers we can get than we're getting, but they're not -- they can't go out and match every programming offer and give away the store just to get a customer to please Wall Street. That doesn't make sense for us, and realize we have a different set of economics than other people in the industry, so for us -- for other people they're probably making their own rational decisions. For us, we look at it just as DISH Network, so I am disappointed that we're not getting customers. Are there a million gross adds a month, a quarter out there for us that are economic, yes, there are, but we're not getting a million, so we're not operating as efficiently as we should to go out and get those customers that would be economic for us.

That discipline is tough for a management team who is maybe two years ago didn't have a lot of discipline in going after customers. So when you put that discipline in place it takes a long time to react to that and figure out new ways to get customers that would make sense for us and only because I look from a long-term perspective. I worry about what we're going to look like five years from now and not what we're going to look like five quarters from now. When I look at it five years from now, we have to make some -- there is a lot of things going on. We went through this.

This is a long-winded answer, but we went through this twice in our careers, once when scrambling happened in 1988 or whenever it was when we had to react to a totally different marketplace because programming wasn't free, and then we had to react to DBS in the big DISH business totally fundamentally changed to a little DISH business, and now our business is changing not only the video is changing to more competition and different forms of video distribution, so we have to be ready to adapt to that and sometimes, I would rather be on the early end of trying to adapt to that than the back end. Long-winded answer.

TiVO, we haven't disclosed how many boxes that are affected by -- could be affected by TiVO, but obviously, I would say we have material risk obviously in the TiVO litigation. We're fortunate that we got a [involved] hearing for the full court of appeals. If you were a card player, statistical player, the majority of involved hearings overturn lower courts either in whole or part, but each case is different and there is no guarantee it could go one way or the other, but given what TiVO has told the District Court, what they then told a slightly different story to the appeals court and a slightly different narrowing of the story of the patent to the Patent Office during re-examination, we're confident that we don't violate their patent.

Thank you.

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

Good morning. Thanks for taking my questions. I will ask two, if that's okay. You mentioned in the annual report that you filed this morning that the economy competition and programming disputes have been the key drivers of churn. It would seem that lower retention spending might also be a driver of churn. I say that because your sub-related expense growth remains very, very low and implies that retention spending remains quite modest and that perhaps you're deliberately letting lower-end subs go. Can you discuss your retention spending strategy as you look forward and how you're approaching that, and is it fair for us to expect elevated churn as you let some subs go, and on a related note, can you discuss your recent price increase which seems to be the stiffest at the lower end of your packages, and how we should think about that and why you might have approached it that way?

This is Bernie. First of all with respect to retention spend, I think over the last few years, we have been trying to meter how much we're spending on retention spend to see if we're at the right point. I think a couple years ago, we thought we might have been a little bit higher than we ought to be. Last year, we turned the dial back a little bit in the beginning of the year and we probably in hindsight went a little bit too far and I think Tom alluded to the fact that in the fourth quarter our retention spend increased a little bit and part of that is seasonal. The fourth quarter is usually a big time of year for people upgrading to HD and whatnot, but I think based on our learnings from the last few years, somewhere in between what we've done the last few years is probably where we think is the right spot.

With respect to the price increase, part of the reason for that being a bigger percentage obviously on the lower price packages. We did a straight $5 price increase across our core packages, AT120, AT200, AT250, and, yes, there is a bigger percentage increase on the lower price packages. We felt like that we had a little bit more room there from a percentage standpoint and to make things simple we just went with $5 across the board.

And, Stefan, this is Tom. I would also comment that as Charlie alluded, we are not discounting promotionally to the degree others than the industry are, but when you get through the promotional period, and you look at list pricing, we are still -- we still have a fairly large gap between us and the other players, and so we felt we had that room to make the move now, and give customers the certainty for the next two years.

AT120 also forgot to say, a year ago we didn't touch AT120 pricing at all, and we have previously moved up AT200 and AT250 pricing a year ago, so when you look at over a couple year period, actually we weren't targeting the lower end at all.

I guess I understand that strategy, but does the sticker shock affect -- concern you as I understand that you aren't anticipating or subs shouldn't anticipate price increases for the next two years beyond that, but can sticker shock be a factor here, as you think about churn in 2Q especially?

This is Charlie. We think it is a risk -- there is a risk in the strategy of what we're doing, but there are strategic reasons why we're doing it the way we're doing it. I tell you a couple things. One is, the first quarter seasonally is a lower churn quarter typically, and I don't know that you see the effect, all the effects in the first quarter if you are going to see an effect because in the middle of winter people don't necessarily want to change their system even if the price went up. We'll have to wait and see for a couple quarters to maybe even three quarters to really factor in.

Obviously next year, we should have an advantage, and we have also done some things for our customers we really want to retain. We have done things proactively. I haven't personally gotten a lot of noise on it from customers, and that's the only peripheral evidence I can give you, but we're still pretty early since the bills just start -- the customers have known about it so all of our customers know and received their bills but they did not start coming in until today, so obviously on the lower end, the price increase can't be a super positive, but we have known it wasn't going to be a positive, and we have done a lot of things proactively I think are going to help and we'll see and again we're very competitive. We're still 20%. Our customers are paying 20% less than they pay competitors, so there is still room for us.

Thanks very much.

We just don't know. But, anecdotally, I talk to customers all the time, and I am not getting a lot of flack.

Okay. That's helpful. Thank you.

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

Thanks. Charlie, I just want to go back to your comments on the spectrum and make sure that I am understanding your comments correctly. Is it fair to say that you look at spectrum as a valuable investment, or would your plans if you get it all, include any sort of wireless network buildout? And then secondly, at what point do you get more aggressive by going after subs? Sounds like competition is not likely to change, the economy is still slow to recover, so is it fair to say you probably will not be pursuing subs for a while?

I will take the second part first. I don't think it is fair to say we wouldn't be pursuing subs. I think there are things we have advantages in pursuing subs that we haven't taken full advantage of. I would say that we haven't done the hard -- if I was criticizing myself, we haven't done the hard work of going out and saying, okay, maybe we're not trying to get everybody, and we're not trying to get all 110 million homes, where do we have advantages and where would we like to focus, and it has been a bit of a struggle to get as focused on those areas, but we should be very aggressive in those areas because those are very profitable customers for us when you run the economic analysis, and I think it is, so often times management sits back and kind of throws stuff up, and hopes that that's going to get lots of subs, but you're getting a weighted average of subs instead of going off the subs you should go after, with more of a rifle approach instead of a shotgun approach, and I think we have to get better at being a rifle approach, because there are many, many, many subs.

There are a million gross adds a quarter, that are profitable for us, yes, there are. We just have to change and be willing to do the hard work to go get them. To the extent that our management teams can do that, then we would be aggressive in those areas. I would be less aggressive -- we have been less aggressive in just a general market, and throw something up and hope somebody calls up and changes to us.

On the spectrum, I guess I look at again, we think spectrum has value. Not all spectrum has the same value. We think spectrum has value, and then if you can do something with it, if you can do something strategically and have more value or less value if you invest the wrong way, or if you can accumulate spectrum, that fits like it fits together, then you can create some more value and we primarily played in the KU and KA DBS spectrum but we have some 700MHz spectrum and now we made an offer for some S-band spectrum.

There is not a grand strategy at this point other than then we have been an investor in the Company for a long time and lost money on our investment and we're trying to get the Company moving in the right direction, and they have a management team. They have a satellite. They just need some capital to -- it is going to take capital. They need some capital to improve the business. It is in an area that we know pretty well, so we think it makes a lot of sense for us to do it and may make sense for others to do that. There is no guarantee our plan will be accepted by the judge.

Thank you.

Your next question comes from the line of Jason Bazinet with Citi. Your line is open.

Thanks. I just have two questions. One, I noticed first the easy one. The allowance for it doubtful accounts number hit about $30 million, I think, in the fourth quarter which had is up about 2.5 fold even though your gross accounts receivable hasn't moved a lot. I was wondering why what is sort of behind the larger provision there, if you are anticipating higher churn.

And then my second question is, and this is maybe bigger picture, but I am looking at the lack of -- A couple things, lack of equity shrink at DISH, the decision to spin out sats, some of these websites the Street is looking at like Dishworld, IPTV.com and your wireless investments and I swirl all of that together and it almost suggests that you maybe don't see a lot of durability to the cash flow to the base DISH business because you see a lot more pay TV providers selling traditional pay TV packages over the internet five years from now, and you're going to try and be an early adopter and shape that and be bigger in it, but do you think that's a reasonable hypothesis in terms of why we're seeing all of these moves or lack of moves on the part of DISH?

Take the first part, Robert?

Yes, Jason, this is Robert. There is nothing dramatic about the change in allowance for doubtful accounts. We analyze that every month. Based on the data that we saw, we thought it was appropriate to take up that allowance, and if some of that is related to the higher churn that we saw in the back half of the year gave us more data on that account, but I don't see going forward any dramatic changes in that account.

This is Charlie. On the second part of the question, I wouldn't frame it the way you said it. I think there is a lot of durability in our cash flow, and I think we positioned ourselves really well for that, and we have taken some -- we're doing the right things to make sure that, including how we move forward to make sure that we have a very solid steady cash flow.

Having said that, for us in terms of DISH subscribers, that's a mature business for everybody. The whole industry is net new subscribers is probably -- I don't know what it was this quarter. Last quarter it was actually negative. It is probably mature. I doubt you're going to see a lot of losses. I doubt you'll see a lot of gains industry-wide, so it is a pretty mature industry from a video perspective. Your programming costs are going up.

You only raise your prices up so much, and that environment I think you can layer on investments that utilize your core cash flow and you can layer on some things that increase it, and I know people in the industry have talked about advertising and there is still as the technology for localized advertising gives us --it catches the DBS industry up with what the cable industry has been able to do from an advertising perspective, there's certainly over the top video, there's certainly broadband, there's certainly other things that -- there's other ways to get cash flow out of existing customer relationships you have, and existing pieces you have and you have to be careful about -- All I can tell you is the way people come here and come in and present stuff to me and let's do this and I run the economic analysis and we would lose $300 on every subscriber we got and if we do that we would get plenty of subscribers, but we'd lose $300 long-term on every subscriber, and I am not interested in doing that.

All right? They're going to have to come in and show me a plan where they make $300 on a subscriber, right, and that's just -- I am a long-term shareholder. I am trying to make rational long-term strategic decisions that increase the value of our Company, and we have a great core base. We have great programming partners. There is lots of things going on that we think we're really good at. There is lots of pieces of business that we have advantages in, and we just need to make sure we move where we have advantages and we don't waste money where we don't have an advantage and we continue to work with our programming partners and other partners that we have in this industry to move our business forward.

We know a lot about the -- we're pretty competent now -- I probably spent the last three years trying to understand where I think things are going to go, and I feel pretty comfortable now. On these calls a few years ago I didn't know -- I don't think anybody knows where this thing is going. I think I know where this thing is going now.

Where do you think it is going?

We have to make -- only knowledge I can give you if you were in the phone business and wireless came along, and you stepped and kept on putting in twisted pair of lines, that was still a good business for another ten years, fifteen years, but at some point, that wasn't a very good business.

Got it.

So I would rather be on the leading edge of that than the back end of it.

Very helpful. Thank you.

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

Hi. Thanks. A couple questions. I guess, one, Bernie, you talked about the billing system conversion being disruptive to customers and just wanted to understand a little better as to how it would be disruptive and why and then also just to follow up, looking at what you have done, Charlie, the Hughes acquisition on the SAT side, the Liberty Bell acquisition within DISH, the spectrum acquisitions, how do these all fit together in terms of connectivity? Seems like you're focused on connectivity on the one side and then it also sounds like you're focused on planning to offer an internet-only video product on the application side. Is that right and if that's the case, have you been securing the rights to do that as you have been signing new programming contracts? Thanks.

This is Bernie. I will take the first piece. The way it is disruptive when you go through a billing conversion, one of the things, a billing conversion is a pretty hard thing to do. I think the analogy used is it is the equivalent of a heart transplant that you're doing. To make that easier, one of the things we try to do is conform our customer base, make the customer base a little bit more consistent, and we have actually been doing this over the last year already, so some of this impact has already been felt.

Yes, over many, many years you have customers who have come in under various different rules, various different programming packages, different packaging rules, et cetera, and if you wanted to move all of those permutations over to the new billing system, it would be extremely difficult and extremely risky. What we have been doing over the last year is changing some of our customer base who are on legacy packages, legacy rules, and legacy fees and conforming them. So when you do those changes, it does impact customer's bills, it impacts what they see, et cetera, so those are the things we can't avoid if we want to make the conversion successful, and as unrisky as possible. Some of the things we can control like the price increases, as a result we decided to approach it the way we discussed.

This is Charlie. I don't anticipate, given what we have done operationally to prepare, I don't anticipate any major customer disruption from a billing conversion but we certainly are being very conservative about how we do it, and we certainly wanted to minimize -- all the changes we can control we have done and now it is just the blocking and tackling of the billing conversion and we're pretty confident that's not going to be a disruption. Based on what we have done, if there is a pain in billing conversion we have probably taken 90% of it already.

Bryan, this is Tom Cullen. Let me take the second part of your question. You touched on a number of things. One, yes, we are driving connectivity pretty aggressively, specifically broadband connectivity in most cases, and as we do introduce new products that enhance linear television, we are also introducing, and just recently launched VOD services that are accessible over the IP pipe, so you're packaging linear channels for movies with the rights to on demand access to thousands of titles, for no additional charge, so connectivity is important on many fronts, including advertising and set-top box help and customer notifications, but from a feature functionality standpoint it is also important.

As far as Liberty Bell goes, it is a very small CLEC that operates today only in a couple states. We see it as an opportunity to test our ability to bundle wholesale broadband and voice as per the CLEC contract with DISH Video Services. I think we all know that standalone CLECs have always been challenged from a customer acquisition standpoint on the residential side, but if you can dovetail that offering with our existing media spend and marketing efforts for the video product, we think there is an opportunity there, so very small operation today and wasn't a large acquisition as you know, but it is something that we're going to be moving forward with in certain test markets in the next several months.

As for internet-only services, I think you're probably referring, as one of the previous questions surfaced, the DISH World product which is this is in our international business we often have internet-delivered programming rights, and that was a business that we looked at opportunistically because frankly many of the target customers in those foreign language groups are often in MDUs, and so it was an easier way of providing service certainly without the install or address those customers where sometimes you couldn't complete successfully a satellite install.

Regarding programming contract renewals, yes, we are pushing for expanded digital rights and in most ever -- not every programmer has made that decision, but we're comfortable that we will have parity at least with the other players in the industry as we move forward.

Do you envision, though, I understand the international is a little different, but do you think at some point you're going to have a video product that essentially resembles your current satellite TV product but is delivered solely over the internet?

I think that in large part is due to the position that the largest programmers take in regard to streaming rights.

And what position are they taking as you ask for it in somewhat of a different form? You're still talking about a bundle of channels, I think that's akin to a pay-tv product.

As Charlie has mentioned, the world is changing around us and clearly our agreements with programmers are confidential, but I think you and I can see plenty of evidence every day of programmers pursuing new forms of delivery, and we want to be assured of equal footing as those developments occur.

Thanks.

This is Charlie. My gut feel is that some programmers will grant some over-the-top internet rights and probably undermine their core business, right, and I think Starz probably is a good example where they sold some over-the-top rights for fairly inexpensively and we know that's hurt our premium business for them far more than they're getting paid for it. I think people will experiment with that and some people will make some mistakes and some people will do a great job of doing it, right, but I can give you anecdotal evidence. I know people who subscribe to ESPN 360 and unhook their cable or satellite. ESPN makes a little bit of money on 360 but loses money on Disney and other things that is part of the core stuff.

Does that make sense? That makes some sense until your contract -- until you see an industry where paid TV actually goes down, ranked number of subscribers, so I think it is just kind of wait and see attitude and everybody is going to play around with it, I think there will be people that make mistakes and some people will experiment correctly and eventually as an industry, we'll figure it out. The hope is that you don't take too much money out of the ecosystem while you're figuring it out, and you don't do something long-term that you never put the genie back in the bottle like the music industry did.

We have to be prepared that kind of soup to nuts, that people make a lot of mistakes and what would that do to our business and how would we do really well in that environment? I like that kind of environment. I like change. I like those things.I think as a Company we're prepared for change.

Thank you.

Your next question comes from the line of Vijay Jayant with Citadel Securities. Your line is open. Your next question comes from the line of Tuna Amobi with Standard & Poor's. Your line is open.

Thank you very much. Can you hear me?

Yes.

Good. The first question that I had, I wanted to circle back on this programming subsidies topic. So just maybe another level of granularity in terms of the dynamics between premium and non-premium channels in terms of how that affects the economics for you guys. Some of the premium networks as you know have alluded to an increase in the number of promotional subscribers, so I wanted to get a sense what percent of your promotional -- what percent of your promotion is actually related to premium versus non-premium and how those economics affect you between those two kinds of channels, that would be helpful.

I am not sure I understand, and you can jump in here, Tom. We don't do a lot with promotional programming on premiums. I think the industry in general may give one offer another for three months free and there is a lot of logic to that, because it is usually a negative option which means the customer continues with the programming after the free programming.

So most of your --

And you get a customer you otherwise wouldn't have gotten. That's a little different than giving away two years of discounts on your core package. This is just me. I am probably the only guy that thinks this. I don't like to give away my core business. I give away anything peripheral but I don't like to give away my core business. When you give away your basic package programming, that to me is not the most logical thing and we're not doing well in the marketplace vis-a-vis competitors so maybe I am stupid.

The premium stuff is not as core, right, so I think you get customers you otherwise might not get, so when you run the economic model on premiums, a little bit different than a basic package, and so I don't think there is anything too dramatic going on the premium business that's not rational, other than premium providers providing their content over the net, through other forms, where customers now continue to maintain cable or satellite as a subscription but cancel their premium subscription to go get it from a Netflix or Redbox instead of paying $15 for premium from somebody else. And they get enough premium product that they're pretty happy. A lot of money went out of the ecosystem when that happens and I think we have seen a general downturn in an industry in terms of premium subscriptions via cable and satellite. I think that's primarily caused by alternative sources of that premium content at less price, and more a la carte.

Just so I understand it, Charlie, when HBO, for example, kind of says that when they do a lot of promotions and as you alluded to, subscribers are migrating to some of these over-the-top services, what -- I know you explained that's not part of your core product, but I am just trying to understand how much of a hit do you take when an existing subscriber, for example, gets those kinds of promotions from say HBO or is that something that's not relevant based on what you're saying right now?

That's not relevant because he doesn't switch from DISH to somebody else to get, if he is an HBO subscriber from DISH, HBO is supportive. Everything they do is actually helps us, and HBO hasn't put their product on the internet per se, unless you're already a subscriber, so in my opinion, HBO is going at it in a much more rational way than maybe some others, so HBO would probably be the one end of the thing that looks like they're doing it to protect their base. Where they get hurt is if a customer because the economy, the customer just can't afford $15 a month for HBO, say, they may go to Netflix for $8 or may go to Red Box or they may not watch movies, right? And the HBO can only control that by how they make it easier for customers which they're starting to do now with HBO to go, make it convenient for customers to get their product everywhere, and also great programming. Obviously they have original series and things and that's a big driver of their business as well, but I know I didn't answer the question exactly.

A couple additional comments. This is Tom. One, what premiums are offered during different promotional cycles is often tied to where you are in your contractual cycle, with the individual premium providers first of all, and secondly, when you look at our promotion right now, that we have in market, we are promoting Starz, and then we're also using the new platinum product that I referred to earlier, where platinum is a package of linear movie channels as well as, we have contracted for the rights -- the broadband delivered rights to the libraries of both Epics and Starz, and so we're positioning a movie service to drive connectivity as well. Obviously historically premiums were viewed as movies but now there is a higher element of original programming, so it is not quite a parallel to movies, but for this particular promotion, we have got Showtime alone as well as our platinum product.

That's helpful. If I can ask two separate follow-up quick questions. First of all, if you can give us a sense how much advertising is included in your numbers, I would presume that's growing at a relatively healthy pace while perhaps still relatively small, and along the lines, any what long-term perspective on local and addressable advertising? When do you think that can begin to gain some traction?

And separately, several years ago, Charlie, I remember you guys made a decision to forego in orbit insurance for satellites and while that seemed like a pretty gutsy move at the time, it is looking awfully clever today. Do you feel that that's still the right decision, and how do you -- what are the steps do you take into mitigate any potential losses there? That would be helpful. Thank you.

Tuna, this is Tom. I will take the first couple. Regarding advertising, the spend in the fourth quarter was a bit unusual because of the programming interruptions that we discussed earlier. Those interruptions, I think were not only unusually deep but the duration of them were longer than you would normally see, so the advertising effectiveness in the quarter drove somewhat of an artificial inflation of both churn and SAC, and there were negative headwinds around that.

Second question regarding advertising, yes, we are on a path to have addressable and local advertising and the product is, I reviewed it just the other day. It is looking pretty good. I think we're getting close to being able to beta test that, and I would forecast that we would probably be in market certainly later this year, I couldn't be more precise in terms of late third quarter or early fourth.

Tuna, this is Robert. We call out advertising expense in our financial statements, and it was roughly $100 million in the fourth quarter.

Advertising revenues.

The revenues we don't call out but it has been growing double-digits throughout 2010.

Okay.

There is some upside. We have to be -- this is Charlie. We have to be careful about when you go to localized advertising in a satellite environment you're coming off a hard drive typically to do it so we don't want to mess with the customer experience. We can do it technically today, but it has to be seamless to the customer, so it is not -- for us it's not quite ready but that I think we should release it because I think it affects the customer in a negative way.

Insurance -- again it's just math. We have taken insurance from time to time, and for us it is just math and obviously to the extent that you can have critical mass which we kind of do now with 14 or 15 satellites, then normally an insurance company is making a profit, or they wouldn't be in the business and normally in orbit insurance, which you have known defects on your satellites typically, and they always exempt them from the insurance and you can't really insure what you want to insure, sometimes.

So it just hasn't made sense in general for us to do it, and the best way to have in-orbit insurance and the third thing is, insurance doesn't insure your customer base, so it just insures the value of the satellite, so the only real way -- the real way to take insurance is have additional capacity in outer space and have back up satellites as ready to go as you can in case you have an issue, and I think you have another couple satellites coming up, one this year and one next year, so we continue from time to time we'll have to build replacement satellites to give us that insurance.

Thank you very much.

Simon, we need to wrap this up. One more in the queue that's a quick one, we can with take it.

Certainly. Vijay Jayant with Citadel Securities is back in the queue. Go ahead. Your line is open.

Sorry about the snafu. This is [Kanal] for Vijay.I have a couple of quick questions. You spoke about DBSD requiring additional capital. How much additional capital do they need? Second is with regard to the re-trans deals, that may be coming up this year, any big ones that we should be aware of?

I will let Tom take the second part. This is Charlie. In DBSD to grow that business, we would need more capital, but it would be A, premature for me to talk about what I think that is and really be up to that management team to talk about it, and if we were ever in an ownership position, certainly when we talk about it, [the debt] is not an asset that in my opinion can be utilized without investing more capital in it.

This is Tom. Regarding retrans, in general obviously we don't disclose when individual agreements are expiring. From a general programming standpoint, 2011 will be lighter in terms of renewals and expirations than either 2010 or 2009. That being said, with retrans, there are always deals in cycle. Retransmission consent deals are constantly under renewal, so, yes, we do have some coming up this year and we'll deal with those in due course.

Thank you so much.

Thank you. This concludes it.

Simon, we're done.

Certainly. Did you have any closing remarks before we close?

No. We'll be back in May, I guess. And we appreciate your participation and interest. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.