DISH Network Corp (DISH) 2012 Q3 法說會逐字稿

Good morning, my name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation Q3 2012 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 Mr. Robert Olson. You may begin your call, sir.

Thank you, Heidi. My name is Robert Olson, I'm the CFO at DISH network. I'm joined today by Charlie Ergen, our Chairman, Joe Clayton, our CEO, Tom Cullen, Executive Vice President, Bernie Han, COO, Paul Orban, our Controller, and Stanton Dodge, our General Counsel. Before turning it over to Joe for his remarks, I would like to have Stanton cover our Safe Harbor disclosures.

Thank you Robert, and good morning, everyone. As you know, we invite media to participate in listen-only mode on the call, and ask that you not identify participants or their firms in your reports. 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, 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-Q.

All cautionary statements that 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 report, 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 Robert.

Thanks, Stanton. I'd like to now turn it over to Joe for his remarks on our third-quarter results.

Thanks, Robert and good afternoon to you, on the East Coast, and good morning to our West Coast participants. The third quarter brought to a close my first full year as DISH CEO, and I believe that we are on track with the commercial revitalization and the transformation of DISH, evolving from an engineering-driven organization to a more consumer-focused approach. Putting the customer first, and giving the consumer what he or she wants is a winning formula for success. Today, we are clearly focused on embracing change, embracing technology, and embracing the consumer. DISH is indeed better off today than just one short year ago.

While I am pleased with our commercial transformation of the DISH brand, and improvement in subscriber trends, there is still much more work to be done in terms of our financial performance. It is no secret that the pay TV industry continues to face a difficult economic environment, and a more price-sensitive marketplace. The pay TV business is now at a maturation point. The days of double-digit growth in our business are over. Going forward, we must deal with single-digit growth and even that rate assumes that the economy rebounds and new home formations restart. Faced with slow subscriber growth, plus faster than inflation programming cost increases, there is no question that the entire industry will have to re-think its current business model and strategy.

At DISH, we continue to develop a portfolio of assets that will serve as the foundation of our future growth, and that brings us to our wireless initiative. First, our wireless spectrum status is generally unchanged. We continue to work with the FCC on the AWS-4 rule making process. The FCC Chairman has publicly stated that we will have a decision by the end of the year, and Charlie and Tom will take your questions on wireless in a few minutes.

Now, let me briefly give you all an update on Blockbuster. During the second-quarter conference call, I told you all that we were going through a transition period with Blockbuster as well, and I enumerated the actions that we had taken to improve the business. While we did incur a small operating loss in the quarter, I believe that we are properly positioned to capitalize on a seasonally stronger fourth quarter. We've already made investments in a new merchandising strategy, and improved in-store displays. We'll also have a deeper inventory and high impact titles that will be released during the fall selling season. This has been accomplished by negotiating improved trading terms with most of our studio partners. As we move into the fourth quarter, which is traditionally the highest-performing quarter for all retailers, we expect revenues to improve above and beyond the seasonal impact, due to our new marketing and merchandising initiatives. Going forward, we will focus on individual store profitability, and the execution of our long-term strategy.

Now, let's move on to the third-quarter DISH highlights. First, we showed improvement in our subscriber performance. In the third quarter, we had gross activations of 739,000. This is a sequential improvement of 11% over the previous quarter, and 13% improvement over last year. We lost approximately 19,000 net subscribers from the end of the second quarter, giving DISH a total of 14.042 million subscribers as of September 30. Now, while disappointed in the loss of even one customer, we were 92,000 net additions better than our 2011 third-quarter results.

We're also pleased with our churn performance. It came in at 1.8%. While this is higher than last quarter, this is again an improvement over 2011, and this was accomplished despite a number of significant headwinds in our business. The AMC Channel's take-down, several difficult local retransmission negotiations with Sinclair and Gannett being the largest, and a brief Big 10 network take-down. While unsettling for our customers, we took these actions to stem the tide of spiraling programming costs, and thus minimized price increases for our customers.

Obviously, we were not alone. Other pay TV providers had similar high profile take-downs in the quarter. Now, as part of our effort to provide additional programming value to our customers, we were pleased to announce that DISH and the PAC-12 Network entered into an agreement making DISH the only satellite provider to offer PAC-12 sports programming, including football and basketball events. This new agreement also provides DISH with exclusive category sponsorship for PAC-12 athletic programs, such as stadium signage and logo rights with each of the member schools.

We were also focused on subscriber quality in the quarter. We continued to gradually increase the mix of DVR and IP-connected subscribers in our customer base. Again, this growth was primarily driven by the Hopper, our award-winning whole home HD DVR, supported with an aggressive marketing campaign. Not only have our national TV commercials, radio spots, newspaper ads and billboards been well-received by the buying public, but so have our online and e-commerce marketing efforts. In fact, we exceeded 2.3 million Facebook likes, surpassing our satellite TV competitor by over 500,000. This time last year, we were just slightly over 2,000 likes, so we are making great progress here.

Our customer service metrics continued to improve in the quarter. On top of the May news that the ACSI, the American Customer Satisfaction Index, ranked DISH first among the nation's largest satellite and cable providers in customer satisfaction, JD Power's 2012 residential television service provider satisfaction study showed that DISH had made steady gains on a regional basis. Although we stayed flat in the south, we made improvement in the east and north central regions, and we finished number one in the western region. We believe that customer service will ultimately be one of DISH's competitive advantages, as we move forward. Again, our focus is on the customer.

Now I want to highlight additional returns from our drive for operational excellence. DISH was recently recognized by CIO Magazine for our successful billing transformation project. Their annual award recognizes organizations from around the world that exemplify the highest level of operational and strategic excellence in information technology. As I mentioned during the first-quarter call, our two-year program literally transformed our operational support systems, including our customer billing system, IVR, and our work force management process, which efficiently assigns and manages thousands of DISH daily installation and service jobs nationwide. Our IT organization, according to Information Week, also landed in the Top 100 Best Information Technology Innovators in the country. And lastly, our CIO, Mike McClaskey, was recognized with the 2012 Transformational CIO Award from the Enterprise CIO Forum. So clearly, this effort was herculean, leading to increased flexibility, productivity and efficiency in our DISH operations.

Another highlight of the quarter was the national introduction of our dishNET broadband services. We launched this product with great fanfare at a 12-store regional retailer, Cowboy Maloney's, in Jackson, Mississippi. The significance of Cowboy Maloney's is that it also serves as the launch site of satellite TV back in 1994, and the introduction location for Sirius Satellite Radio in 2002. I guess big satellite things just seem to happen in Jackson. But more importantly, we will be able to provide high-speed Internet to the nearly 15 million rural Americans with no or slow broadband access. It's not only our intent to provide an Internet solution to this underserved market, but to give customers faster speeds, greater capacity, and the convenience of bundling with video, which is an obvious win for customers, but also a win for DISH, as bundled customers have a lower churn rate. Like wireless, this move to provide broadband in a capital-efficient manner is clearly on our strategic road map. Our dishNET service began October 1. And we'll give you all an update at our next analyst call.

Finally, let me address an out-of-quarter event that impacted our third-quarter results, and that's our settlement of the Voom litigation last month. As you all may know, we agreed to pay $700 million to resolve all pending litigation with Voom. Additionally, the agreement calls for Cablevision to transfer certain of its wireless licenses to DISH. And finally, we entered into an agreement to bring the AMC Channel back to DISH, as well as other AMC network channels including IFC, WE tv, the Sundance Channel and Fuse.

In summary, with the exception of the litigation expense accrual associated with the Voom settlement, our third-quarter results were generally consistent with the trends during the last few quarters. Now, to provide you all with greater details on our financial performance, here's our CFO, Robert Olson.

Thank you, Joe. I'm going to start by reviewing the impacts of the Voom settlement on our financial results. Even though the settlement was reached in late October, this was a type one subsequent event, which requires it to be reflected in our third-quarter results. There were three separate elements to this agreement which we evaluated to determine their fair market value, the settlement of the outstanding litigation, the purchase of certain spectrum licenses, and the long-term programming agreement. Based on this work, our third quarter income statement reflects $730 million of litigation expense associated with the Voom settlement.

Adjusting for taxes, using a rate of approximately 38%, the Voom settlement had a $453 million impact on net income in the quarter. Adding this amount to our reported net loss of $158 million, yields an adjusted net income of $295 million, which was down 8% versus third quarter last year. The year-over-year decline was largely due to higher programming costs and increased activations this year, which drove up total acquisition spending. Our reported EPS for the quarter was a loss of $0.35 per share. Adjusting for the Voom settlement, our fully diluted EPS was $0.65 per share.

As Joe mentioned, we continue to make progress in several areas in the third quarter. Our gross activations were up 83,000 versus third-quarter 2011, and up 74,000 compared to last quarter. Churn also improved slightly year-over-year, although it was up sequentially due to normal seasonality, and the programming issues that Joe mentioned. The result was a loss of 19,000 net subscribers in the third quarter, in what is typically a tough quarter for DISH and the industry.

Subscriber-related revenue was up 1.2% year-over-year in the third quarter, driven by slightly higher average subscribers and slightly higher ARPU. The year-over-year increase in ARPU was driven by higher hardware-related revenue. ARPU was down $0.54 sequentially, due to fewer pay-per-view events this quarter. Subscriber-related expenses increased by 6.3% in third quarter versus last year. This increase was due largely to higher programming expense. Programming costs were primarily driven by increases in our contractual rates.

Blockbuster had a $12 million operating loss in the quarter, driven by weaker revenue per store. Some of this revenue shortfall was due to seasonality as the business is normally stronger in first and fourth quarters. As Joe mentioned, we have numerous initiatives under way to improve revenue. We ended the third quarter with approximately 850 domestic stores. Our SAC for the quarter was $805 per activation, which was up $16 versus third quarter last year. This increase was largely driven by higher brand advertising expense associated with marketing the Hopper set-top box. SAC was roughly flat sequentially.

Administrative expenses were down $52 million year-over-year in the third quarter. This reduction was a result of fewer Blockbuster domestic stores this year. G&A expenses for the DISH pay TV business were roughly flat year-over-year. Interest income was up $26 million year-over-year, driven by higher balances of cash and marketable securities, and by the mix of marketable securities. Other income increased $50 million in the third quarter relative to 2011, driven by gains on the sale of marketable investment securities. We generated $424 million of free cash flow in the third quarter, and roughly $1.35 billion through the first nine months of the year. We expect free cash flow will be negative in the fourth quarter, due to the litigation settlement, which was paid on October 23.

There were a few major changes in the balance sheet relative to second quarter. The Voom settlement drove an increase in the litigation accrual on the balance sheet ending September 30. We also issued an additional $1 billion of debt on July 26. The proceeds from this debt largely ended up in cash and marketable securities. Let me now turn it back to Joe, before we start Q&A.

Thanks, Robert. I believe that today's third-quarter results clearly show that we continued to make progress. Unquestionably, there is much more work to do, but we are committed to growing high-value subscribers, increasing revenue, and investing for long-term growth. Thank you all for joining us today for our third quarter earnings call. Now we'll open it up to your questions.

(Operator Instructions)

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

I have two questions. One is strategic and then one is for Robert in terms of modeling. Robert, you said churn was up sequentially, due to normal seasonality and programming issues. So assuming that you don't have big programming issues in the fourth quarter, should we see a higher amount of year-over-year improvement in churn for the fourth quarter?

Well, Marcy, we generally don't provide forecasts. However, fourth-quarter churn will be lower just due to normal seasonality. We obviously had a little bit of carry-over effect of the AMC dispute into October, but as we've talked about in prior calls, we continue to manage the churn to balance the retention spending, with the customer satisfaction and keeping overall churn at reasonable levels.

Okay. And then second question is for Charlie. DirecTV has been pretty vocal about their desire to he merge with DISH. What are your thoughts about a potential transaction, and do you think this would be more difficult with a Democratic administration versus Republican?

I don't know, I mean, obviously it's one of the things that I think probably both companies have to consider. You've got a basically mature video business that's very competitive with the power structure being more on the programming side than distribution side, and then tremendous distribution coming almost unlimited distribution power coming from broadband and the Internet, which neither one of us have a lot of assets in. I think it's something that probably both companies will look at. I don't think it would make -- first of all, we're not having discussions about that. It's not an active thing. But I don't think either administration, if a transaction made sense, I don't think either administration would block it, if it made sense, if it was good for American public.

If it wasn't, both administrations would block it. I don't think that really makes much difference. I think it's more a factor of if you look at any transaction, at least my dealings with the government with any transaction, you look at ultimately they weigh the effect on competition and innovation in the market and they look at every deal is different and they look at that in its totality, and if the deal makes sense they approve it, and if it doesn't, they put conditions on it to make it make sense, or if it really don't make sense, then they just don't approve it. And I'd leave that up to the experts. But I think my personal opinion is it's probably a doable deal, no matter who the administration is, under certain circumstances. There's probably circumstances where it's not a doable deal.

Do you think the Sirius-XM merger happens helps your case?

Which merger?

The Sirius-XM.

I think every merger is different. Yes, that one is pretty much on point. That was a situation where two companies, and Joe can speak to that, I can't, because he was there, but two companies who were in a relatively mature business, had competition from regular radio and had tremendous competition coming from iPads and iPhones, and other forms of radio. So that one is close to on point.

Thank you.

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

Two questions, one for Charlie and one for Tom. Charlie, there's some concern among analysts that DISH Network invested a lot of capital in wireless build-out. How should investors think about potential costs of any wireless build out? And I should probably go ahead and ask for Tom, just imagining that you, when you won DBS and TerreStar, you didn't think it would be late 2012 before you had any visibility on terrestrial rights for that spectrum, so the point is, you've had a lot of time, probably more than you expected to explore wireless business models and undertake discussions with potential partners. The question is, how far along are these conversations with potential wireless partners at this point, given all the time that you've had? Thanks.

Hey, Doug, it's Tom. I'll comment on the second part. Obviously this has taken longer than we had originally forecast. We continue to work with the FCC, and we'll see how that transpires over the next several weeks.

As far as industry partnerships, I think we've been pretty public in that we've concluded clearly aren't going to go this alone in a greenfield build, and the only way to put this spectrum to use effectively in a commercially viable way is through a partnership. Yes, we have had discussions with pretty much all of the players you would think would be natural partners for us. That being said, since October 1, we've seen two pretty significant announcements that would modify the landscape of the wireless industry in the US. Both the T-Mobile and the Metro merger as well as Softbank's intent to acquire 70% of Sprint puts us in a -- I would say a delayed position in terms of meaningful conversations with those players, as they pursue their own regulatory approval process.

This is Charlie. I think just to add on to what Toms has said, obviously we're disappointed in the delay in getting our license approved. Obviously, it's gone on a lot longer than everybody anticipated, certainly than we anticipated, for a relatively non-controversial, and there's lots of precedent in terms of what we're trying to do. So obviously the landscape has changed materially in the last -- with the Japanese coming into the market and obviously Deutsche Telecom with Metro. Ultimately have to wait and see what the FCC decides, and whether we have the flexibility to enter the marketplace, and as a new entrant against four very large incumbents, the FCC, you'd like them to have gone a little faster, but the Chairman has always said it's going to be the end of the year, and I think they'll probably do it by then.

You hope you get technical flexibility so you don't take away spectrum from us or give it to somebody whose already an incumbent and has a lot of spectrum already, and you hope that they play fair and know that consistent with what they've done in past practices. If they do that, then we think there's a lot of opportunity for us in the marketplace and we obviously have a large cash balance and we're ready and willing to invest that in this business, if it makes sense and we have a high likelihood of success, and a business plan, then we're going to do that. If we don't, then we're not going to do that. And we're not going of to get in the business just to get in the business. We're going to get in the business because the FCC has allowed us as a new entrant to have the technical flexibility to get in the business and that we find people who are like-minded and where we want to go in terms of people who probably already are in the business in terms of partnerships.

I think investors shouldn't be concerned -- I don't think you should be concerned of that based on our track record, we don't normally spend money unwisely, and we don't normally take exuberant risk. So I think that we would be prudent about it. And I guess the way you should look at it, the way I look at it is I'm awfully glad we have some optionality in the wireless space because obviously we're in a mature business today and to grow our business, I think the world has changed, and video's gotten very competitive and I think you have to redefine your business every 10 or 20 years, and I think we're in a position to do that. So I like where we are and we just have to wait on the FCC and see whether they're giving us the flexibility to enter the business or not or whether they end up with rules that take spectrum away from us.

And sorry to take so long but just to follow up on the modification of the landscape, has the change that's taken place recently impacted your plans at all or what kind of returns you think you can get out of the wireless business?

The biggest impact is that Sprint kind of changed directions with the Softbank investment and takeover from Japan in the sense that they then went to the FCC and became more aggressive on the H block, which is 5 megahertz adjacent to us which is a guard band today and it's not used by anybody. There's no standard for the H block. There's no 2G, 3G, there's no chipsets for the H block. They've been very aggressive to try to limit, to an unprecedented level, limit our outer band emissions in our adjacent frequency and so that's been a little bit of a difference. They've gotten very aggressive there.

The FCC's taking a look at that. I think at the end of the day, I don't think the FCC is going to take away 5 megahertz or render 5 megahertz of ours useless and give it to the Japanese with their Clearwire investment, has over 200 megahertz of spectrum. That just wouldn't make any sense if you really want a new entrant into the business. And so that's kind of the last -- I think that the big thing to be decided, and I think that slowed things down, because that became a very aggressive approach by Sprint. You can read the ex partes on our side and their side to get -- I don't want to get into long, technical explanations about it. The ultimate kind of decision is do you take -- if you were to -- really unprecedented decision, going against 20 years of FCC precedent, to take a band that we have today and suddenly restrict it by -- adjust at 1/500 of our power level to open up 5 megahertz that only Sprint could use, wouldn't make a lot of sense. That doesn't stop a Company from trying. Certainly doesn't stop -- you never know what happens in Washington, I guess, but I think that common sense would -- we would feel comfortable that ultimately the FCC will make the right decision there.

Thanks so much.

If they do, I think we have the technical flexibility to move forward in the marketplace.

Right. All right. Thank you.

Your next question comes from the line of Amy Yong at Macquarie. Your line is now open.

Charlie, can you talk about your plans and how you plan on creating value for the spectrum you received from Cablevision. Also, can you just provide some details around the AMC programming contract and what kind of leverage, if you had, at all in the negotiations? Thanks.

Okay. First, the spectrum that we're acquiring from Cablevision is kind of the mirror image. We own about half the country in that particular spectrum. It's exactly the same spectrum we use for our DBS, so we go up to the satellite. So it's spectrum that we think can be used terrestrially, because we use it for satellite today. With the Cablevision spectrum, we will own virtually all the United States. There's a few small areas that we won't own, and so we think that it has use if we're able to enter the wireless business, we think it has a lot of strategic value with what we're trying to do in the wireless business. And it also provides some -- we also would be in a position to make sure it doesn't interfere with what we and DirecTV see through satellite.

It's not too dissimilar with what we do with DBS and TerreStar, in the sense that this spectrum is already used for satellites and could be used terrestrial. We don't place a lot of value on it today. There's a lot of hoops we'd have to jump through and a lot of testing we'd have to do, and which wore doing. There's a lot of creativity, I think, involved, to be able to use, and some advances you'd have to make in technology that we think are doable and we'd have to be allowed to get into the wireless business. If all those things happen, then we think the spectrum ultimately could have a high value for us.

As far as the settlement itself, I think that our analysis of it was that based on the judge's orders to the jury and stuff, we really had no, very little chance that the jury would side with us. It was pretty much a stacked deck against us, as it normally is, when you have a [specification] order. So I think that with that said, we looked at it and said, the settlement makes sense for us. We probably would have lost, probably not the kind of amount of money they were asking for, but would have been through an appeal process that would have gone on for three or four more years, and based on our experience in TiVo, we ended up about -- we ended up with TiVo where we probably could have ended up five years earlier, and we wasted a lot of time for lawyers and management time on something that probably could have been settled. I think based on that experience, we just decided we didn't was to go into another three or four-year appeal process where we would probably end up about where we ended up.

As far as AMC, Joe can speak to this more, we probably would have had a positive quarter from net adds had we not taken down AMC. If AMC continues to produce shows like Walking Dead, which is kind of off the charts in terms of people viewing it, then that will be a fair deal for us, and if not, if they don't -- if they stub their toe, then we probably paid too much for their programming going forward. But it is an intermediate-term type agreement and I know our programming folks have always like the AMC folks and they get along pretty well, and I think we're now in their camp to try to help them as a partner to be as successful as they possibly can. And absent the litigation, we probably never would have gotten to that point, but we are where we are. At the end of the day, our decision was that we needed to put the litigation behind us and focus on the real opportunity that we have in terms of building DISH Network, and also entering the wireless business.

Okay. Thanks.

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

Hopefully I'll keep them brief. The first one is just about your balance sheet. You had an awful lot of cash on your balance sheet at this point. And also, a fair amount of debt capacity. As you look forward and you think about partnering with another player, is it necessary to carry all that cash, or are there better uses for it, for example, perhaps a dividend? And then my second question is about Clearwire's spectrum at 2.5 gigahertz. As you look at that spectrum and the opportunities on that spectrum, what opportunities do you see there? Clearly, Sprint sees an opportunity there perhaps with a new investment. How do you view that spectrum as an opportunity going forward perhaps for you? Thanks.

You want to take the balance sheet question, Robert?

Sure. So Stefan, it's true, we do have a lot of cash on our balance sheet, and as you know, we've historically been pretty lightly-levered in terms of our borrowing capacity. We've talked to this question probably almost every call, which is, we as a Company and in conjunction with our Board, we discuss options for our cash, and obviously, one of those options is to reinvest in the business. Another option is, as you pointed out, to pay a dividend. And so we've talked on previous calls about one factor that we obviously keep an eye on is tax policy. So all those factors are being evaluated, and at the end of the day, we're simply trying to do the best thing for the shareholder.

Stefan, this is Tom. Regarding Clearwire spectrum or frankly any other spectrum, to us that's a second-order consideration. We first need to understand the starting point of where we are with the S band and what the conditions would be for us to enter this market through a partnership. We're obviously cognizant of the moves that have taken place since mid-October when Softbank moved on Sprint and then subsequently Sprint moved to take control of Clearwire. So that's now theirs to control, and we know that Softbank has aspirations apparently for that spectrum as they use it in Japan, and we understand the capabilities of the spectrum, but as I said at the beginning, we really have to understand where we are on the first investment we've made, before we can consider options to move in other directions.

Thank you.

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

Comment on sort of the applicability of these Sky Angel proceedings going on at the FCC, is that relevant to you at all in terms of how that plays out?

Okay. I think I don't know if everybody heard that but the question was without the Sky Angel proceeding at the FCC and whether it's relevant. The answer is yes, it's relevant in the sense that what Sky Angel has done is basically claiming to have IPTV over-the-top rights because they had some rights to broadcast via satellite, because they believe they're defined as an MVPD. So that proceeding would have relevance to all the MVPD players and potentially people who aren't in the business today, if the definition were to change or if Sky Angel were to prevail. So, it's worth watching, and predicting outcomes in Washington is a difficult game. As usual, they'll pick winners and losers in that, and somebody will win and somebody will lose.

Am I right in sort of if the FCC rules in favor of Sky Angel it could bring on more competition, but is it not reasonable to assume that it could dramatically lower or -- lower your SAC costs and raise your cash flow by a substantial amount, or is that misguided?

Well, I think there would be a lot of unintended consequences from that and some would be good and like you say, I think SAC, I think there probably would be potentially more competition. I think that potential already exists today, so I'm not sure -- but it just may go a little faster, and I think it may -- it would change some dynamics for certain homes, where SAC would be less, or things you could do with the programming would be different. From a big picture perspective, the industry is struggling with how do you take a market that's extremely profitable for the content owners today, and where it's pretty much fully distributed to 90% of the homes in the United States, and do you want to change that model into a different paradigm of over-the-top, IPTV, potentially with new entrants, where short-term you might be able to get some added revenue, but you ultimately would affect the revenue that you get from the current people who built that infrastructure, and are your current partners.

How do you do that? So you see programmers struggle with -- the owners of Hulu struggle with how you do that. You saw Starz struggle with how you do that with Netflix. I think each of those programmers will come perhaps -- there could be some different conclusions, but looks like the industry right now is focused on kind of a win-win situation for the current environment, which is authentication, which means as long as you pay me for your programming today, that you get more flexibility in how you can watch that programming, both inside the home and perhaps outside the home. So I think we have to -- we keep our eye on that.

We continue to look at technologies and companies that are involved in over-the-top transmissions and we're a small player in the distribution side of it, and the content owners are ultimately going to decide what's the best strategy for them, and I guess Sky Angel's just one really small piece of that in terms of that decision. I think the decisions are, that Arrow, can you put over-the-top, can you put broadcasting networks over-the-top, that's a big decision too, where they initially won the initial battle, and whether they win the war or not is another question. If that were to happen, that would be a pretty dramatic change in the way the business runs, at least for local networks, because you certainly would have retransmission consent agreements go away or come down a lot in terms of price.

Understood. Thank you.

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

I want to return to something Joe said in the intro remarks where Joe, you talked about slowing subscriber growth or little or no subscriber growth and rising programming costs being a recipe for contracting margins. How do you think about that? How do you think about what you do about that? Obviously, you suggested that your wireless strategy is part of the solution. But can you say more about how it's part of the solution and have you gravitated more toward a fixed wireless broadband network as opposed to full mobility because of that? I wonder if you could just elaborate a little bit on that commentary.

Craig, this is Charlie, I think I'll take it a little bit. I think that, look, we're not -- we don't put our head in the sand, I think when you don't raise your price and you've got programming costs that go up according to industry statistics of 6% to 10% a year, your margins are going to contract. What can you do about it? There's really two things you can do. One is you can improve your product and make sure it's a better product, and I think Joe and his team have done a pretty good job with the Hopper in terms of making a really great product that as soon as people understand it, it would be the product of choice. It is the best set-top box user interface system in the business today.

Second thing I think you can do is you can start taking things like authentication and things that you have that most people have the rights to today and make sure that we give customers a better experience both inside and outside their home, of course we do that with Sling outside the home. You continue to make a better product and you can compete. I think that our subscriber losses are less than most in this industry, and I think we're better positioned going forward to maintain where we are.

Of course, the third thing is we have the ability to raise price next year because we didn't raise price this year. So we have a pretty good path to increasing our margins, although we have to be prepared for the fact that any time you raise price, you give customers a reason to look elsewhere. So all those factors considering, I think the core business is pretty stable, in pretty good shape. The wireless side of it gives you another opportunity for a lot of reasons. It gives you another opportunity for another revenue model, whether that be fixed broadband or fixed wireless, whether that be mobile wireless.

Obviously fixed wireless probably doesn't work in a lot of parts of the country economically. But mobile broadband, mobile wireless certainly does. You have another chance to go to a customer and get another revenue stream. You also have a chance to give them a customer experience that's similar to what they get in the home at a quality of service that you can control. So it gives you a lot of reasons why somebody might want DISH Network, and they can take their TV with them everywhere and get a quality of service that they otherwise couldn't get, and one bill that takes care of their fixed and mobile needs.

In certain parts of the country you'd be more competitive than others. So we like the optionality that we have, now. It's been frustrating. I would have liked to have been sitting in a conference call at the beginning of this year telling you exactly how we'd see ourselves going forward. So it's been excruciatingly slow, in terms of getting to where we need to get to, but I think we'll have decisions before the end of the year. Give us 30 days, once we get decisions for us to say, okay now based on all that data here's where I think we're going to go. I'm hopeful our next quarter conference call, we'll be able to give some real insight in the kind of direction we're going.

The only thing you can do strategically is put yourself in a position that if certain things happen you can take advantage of that and I think we've done that, and I think that we have half a dozen options of where we want to go as a Company. And I hope that all those options will be good for our shareholders. So that's a much better situation than sitting here, if we just sat here with a video business, with satellite and that's all we had, you might have only one option going forward, and it would probably be good for shareholders but probably only have one option. So I'd rather have multiple options, because then you can pick the best one that has the highest return.

Thank you.

Your next question comes from the line of Phil Cusick with JPMorgan. Your line is now open.

Two if I may. First, a follow-up, Charlie, on the spectrum side. You mentioned in your Q the potential for a shift in that band, and in the filings in the past you talked about a delay as long as, I believe, 18 months. How do you minimize that delay? Can you work with vendors today and work with standard bodies today to start getting ready for that potential?

The shift you're talking about is that, if you could free up the H band spectrum to be usable, that would be a good thing, right? We would all like to do that, right? Because it would increase another 5 megahertz of spectrum for a country that's low on spectrum. And one way that we've looked at that with the FCC and all the technical people and with the government is to shift 5 megahertz of our low band up 5 megahertz. The ultimate conclusion that everyone has come to is that doesn't help, because the shift would be interfered by other government users, and so there would be -- that shift would not increase 5 megahertz of spectrum. So that doesn't look like it's going to work. So then you're back to, we have to stay where we are. If we did shift, it would delay us somewhere between a year or two at the 3GPP conference and delay us getting into the marketplace, which would probably be a death blow to what we're trying to do.

So then you go back to can you somehow make H block work in the current environment? We've offered through our discussions, and obviously you can read about those in our filings is, we believe that H block could be used at low power for femtocells and small cells and it could be used, and it could have value, and it could be used. Sprint has come in now with Softbank in a different discussion in terms of saying no, we want to protect it for full power, but in doing that, the result, cutting through all the technical stuff, and all the mumbo jumbo, the result of that would be to render 5 megahertz of our spectrum useless. So the net effect would be to take away 5 megahertz from us and give 5 megahertz to Sprint, who would be the only likely bidder on the H block because it's adjacent to where they are. You'd have to go against years of FCC precedent to take a band that is unused today and suddenly protect it by imposing incredible power limits on us that really haven't been done before on a usable band.

The second thing that would happen is that if the H block would have to go through 3GPP process itself, and so it's undetermined whether you'd ever be able to use the H block, and it's undetermined whether you'd ever get much of a spectrum value from it, because there'd only be one likely bidder in Sprint Softbank. And then you've got to ask the question, should Sprint with their now control of Clearwire, gives them 250 megahertz of spectrum, do you need to give them 5 megahertz more spectrum and take away 5 megahertz from the new entrant, who would essentially have 40 megahertz of spectrum? I don't think that's a practical outcome, but that certainly is worth looking at and making sure that we should look at every way that H block could be used, and I think we've offered real practical solutions to that. We certainly would bid in an auction for low power, as I would think others would bid, because it would be usable for what we really need, which is more capacity in the cities. So that's kind of where the discussions, or I think the discussions have gone on today between the staff and the FCC, and ultimately the Chairman has to decide and he has to decide -- I hate to say it again, but the government does pick winners and losers, and would they pick Sprint as a winner over the new entrant? Maybe. But I would hope not.

Okay. And then second, if I may. Robert, you had a pretty big working capital draw down this quarter. How should we think about that in terms of being temporary and reversing in the fourth quarter, or is that pretty sustainable from here?

Well, Phil, as we discussed, I would expect free cash flow to be negative in the fourth quarter because of the Voom litigation. Over the last couple years, we've had favorable working capital because our cash taxes have been less than our book taxes, and this is -- over those few years, we have benefited from bonus depreciation, clearly. Going forward, quite frankly, it's unclear what the situation will be in Washington, whether bonus depreciation will continue in some form or another, but we continue to work very hard on really all elements of working capital. I think we have some room to improve inventory over the next year. We've been a little bit high on inventory as we made the transition to the Hopper. Once that stabilizes, we've got some opportunities there. So without giving you a direct forecast quarter by quarter, in general, we manage working capital pretty tightly and we think we can do a pretty good job going forward.

Thanks, Robert.

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

Regarding AutoHop, I know you're in litigation on this, but if we assume that your right to offer the service is sustained in the court, what do you think the impact this has on broadcast economics? Do you think this fundamentally over time makes ad viewership lower and then broadcasting becomes a less profitable business, or do you think the balloon gets squeezed and we see the dollars emerge in affiliate fees instead?

This is Charlie, I'm going to take that one. I think you've seen a couple broadcasters talk about the fact that the DVR is their friend, and Hopper is just a better operating DVR, in the sense that people watch more of their shows, and they don't all skip, about half of them skip commercials, if you get more people watching, half the people -- the dirty secret is half the people skip commercials whether it's the Hopper or somebody else's. We just allow you to do it with a push of one button. Somebody else makes you push a button three or four times. So I think that it's unclear, it's unclear other than the data seems to show and the broadcasters seem to say recently the DVR is actually a positive for them, in terms of more viewership that maybe is not being measured today, and the fact that only about half the people actually skip commercials and net-net they come out ahead.

Having said all of that, I think ultimately the broadcasters are in fact our partners. We're not going to go out there and try and do something that would be at least knowingly, we wouldn't do something that would be very harmful to their total economic model, because ultimately, as you say, it would show up in other forms, and we want obviously broadcasters content is something our customers want. I think there's other things you can do, once the litigation is over, where you're actually working together to say how can we do things, where as an example, we can target ads to customers, so people don't want to skip them. And do it in a way that customers feel better about, and want to watch more commercials, and we make them better, and we can have viewer measurement as to what works and what doesn't work, and that you have more of a partnership agreement where with programmers, so that you can do things that make sense for both companies.

But we're going to have to get through the litigation first before we get there. I mean, I think, again, this is -- we don't always take principle stands but the fact of the matter is we believe the American public has the right to change a channel. We think they have the right to record a show, and we think they have a right to push a button to skip a commercial, because not all commercials are intended for -- I don't want my family, my kids are young, I didn't want them watching all those commercials. Some are very offensive. I think you have to have a right to skip a commercial. I think that's where we differ today. We think the broadcasters at least in the lawsuit have said, no, customers don't have the right to do that, and I think we have to take a stand for the consumer, because if we don't, nobody else is going to do it. I think it's one of the things, what customers like about DISH.

Great. Thank you.

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

Two questions. One on ARPU. Can you just talk about whether the sequential ARPU decline was also driven by increased credits issued to customers during the AMC dispute, and the other programming disputes. I know you mentioned pay-per-view as a driver, but I was wondering if this was also a factor. Secondly, what kind of traction have you gotten in selling the Blockbuster digital and DVD by mail service into the DBS subscriber base? Has this strategy worked at all, and if you strip out the financial impact of the stores, what does the digital and DVD by mail business look like, how big is it? Is it profitable? Talk about that, that would be great. Thanks.

Brian, this is Robert. I'll address your question on ARPU. The majority of the sequential decline in ARPU was indeed driven by pay-per-view events, as I mentioned. There was a small impact clearly due to waivers and adjustments associated with the AMC dispute, however, once again, the majority of that was just seasonality, and really the lack of major boxing events in the third quarter. With regard to the question on Blockbuster, we offer the Blockbuster At Home product to new customers, and what we've seen with that offer is, it's very similar to the take rates on premium channels, so we offer it for a few months to new customers. Some of them decide to continue, some don't. But the performance of those customers and the performance of that product is very similar to what we see on premium channels.

And just on the Blockbuster by mail piece, of our -- it's an element of a Blockbuster At Home and about a third of the customers utilize that service.

Okay, operator, that about wraps up our time. So thank you everyone for participating, and we'll talk to you next time.

Thanks, everybody.

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