DISH Network Corp (DISH) 2012 Q4 法說會逐字稿

Good afternoon, my name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation Q4 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'll now introduce and turn the call over to Mr. Jason Kiser, VP, Treasurer. You may begin your conference.

Thanks, Tracy. Thanks for joining us. My name is Jason Kiser. I'm the Treasurer here at DISH Network. I'm joined today by Charlie Ergen, our Chairman; Joe Clayton, our CEO; Bernie Han, our COO; Robert Olson, our CFO; Paul Orban, our Controller; and Stanton Dodge, our General Counsel. Both Joe and Robert have some prepared remarks that they'd like to go through before we open it up for Q&A. And then following the analyst portion of the call, we're also going to invite the press to ask some questions as well.

Before we do all that, we do need to do our Safe Harbor disclosures. For that, we'll turn it over to Stanton.

Thanks, Jason. We ask that media representatives 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 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 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 reports, and should not place undue reliance on any forward-looking statements, which we assume no responsibility for updating.

With that out of the way, I'll turn it over to Joe.

Thanks, Stanton. Good afternoon to those of you on the East Coast, and good morning to our West Coast participants. We, at DISH, continue to invest in a portfolio of assets that will serve as the foundation for our long-term growth. First and foremost, on everyone's mind today is our wireless spectrum investment. We were pleased to have some clarity on our S-band spectrum, as a result of the FCC's recent rulemaking process. Plus, Charlie is here to take your questions on wireless a little later.

Next, let me give you all an update on Blockbuster. First, we're shutting down 300 unprofitable domestic stores in the next few months. This will leave us with approximately 500 stores, and we'll continue to evaluate these over the coming months. Going forward, we'll focus on maximizing value from this brand, and monetizing the non-strategic assets.

So, at DISH today, it is clear that we embrace change, we embrace technology, and most importantly, we embrace the consumer. We're using innovation to make consumers' viewing experience easier and simpler. That is why, like many content providers and broadcasters, we're willing to take risks and to make changes to our existing technology and business model. And to win in a sea of sameness, which is the nature of today's pay-TV market, we must distinctively differentiate our products and services, and this is what DISH has been doing over the last year. All with an eye on what the consumer is willing to pay.

In order to provide the best value to consumers, and to generate a return on our investment, we do not shy away from making difficult decisions, including taking down channels from time to time, which has been necessary to combat the spiraling costs of programming. This was especially true in a year where DISH did not increase programming prices to our customers. So, in 2012, we achieved our goals of growing high-value subscribers, increasing revenue, and investing for long-term growth. As reported, we changed our pay-TV subscriber trajectory.

DISH turned in significant year-over-year improvement in both activations and churn. In 2011, we lost 166,000 pay-TV subscribers. Last year, we added 89,000 new customers, for a year-over-year improvement of 255,000. Now, a large portion of this growth was driven by our award-winning whole-home HD-DVR, the Hopper. In addition to Hopper, our other 2012 product achievement was dishNET. In October, we launched a new broadband satellite service, which makes available faster speeds, greater capacity, and lower cost to more than 15 million under-served American homes.

Now, after the launch of dishNET, we generated significant broadband growth, by adding 44,000 net subscribers in the fourth quarter. We ended the year with 183,000 dishNET customers, both satellite and wireline. These customers are nearly 100% attached to our DISH pay-TV service. Understanding the importance of owning the bundle, we expect these dishNET customers to provide incremental value over the coming year, with higher revenue and lower churn.

Okay. So, what's new for 2013? At DISH, we know that customers want their video content to be affordable, easy to use, and available anywhere. Americans are not making a gradual shift to mobile entertainment, it's a full-blown sprint. And as a result of actually hearing consumers, we've developed a host of new features to meet this ever-growing demand for mobility.

Our first step was to incorporate the patented Sling technology inside the next-generation Hopper. You all may remember that DISH has had this technology since 2007, but our new DISH Anywhere capability is now much easier to use and more cost effective. With the newly introduced Hopper with Sling, it will be built right into the set-top box. This gives the consumer the ability to access live and recorded content via mobile phones, tablets, or PCs. We call this capability DISH Anywhere.

Hopper with Sling was introduced last month with great fanfare at the Consumer Electronics Show in Las Vegas. In fact, it was voted best of show, but not without some controversy and intrigue. I guess that's just the price that you pay for standing up for the rights of consumers. At DISH, we are fanatics when it comes to giving customers their video content, what they want, when they want it, and where they want it.

And speaking of the consumer, we've also added the ability to watch shows on your mobile device, even without an Internet connection. We call this feature Hopper Transfers. For instance, our customers can move their favorite recorded programming to their iPad, and watch offline on a plane, in a train, or in an automobile. Now, that's the real Anywhere experience, and only from the Hopper with Sling.

The Hopper has several other consumer-friendly apps including What's Hot, identifying the nation's most popular shows and the most-watched programs in your own zip code. The Game Finder app, offering quick access to your favorite sporting events and teams. And DISH Explorer, the app that turns your iPad into both a remote control and information resource, as a second screen. This is an exploding trend for 85% of the tablet owners, and it's changing the way customers discover and watch content.

So, DISH is redefining the in-home and out-of-home entertainment experience. As you saw in our 2012 SAC results, DISH has invested heavily in its brand, with the loveable Boston Guys. Just last week, we kicked off a massive national communications campaign, featuring our new-generation Hopper with Sling product. We'll be running our ads on cable TV, radio, print, social media, and billboards.

This investment, coupled with our award-winning technology, deliver a solid one-two merchandising punch. In fact, DISH's top-of-mind visibility is up to 70%, an all-time high for us. Yes, we're leveraging this heightened awareness to grow high-value subscribers, and to increase revenue in 2013.

Now, to give you all some details on our financial performance, here's our CFO, Robert Olson.

Thank you. As Joe noted, broadband activations increased significantly in the fourth quarter, with the launch of our dishNET brand. Along with disclosing broadband subscriber results beginning with this 10-K filing, we also redefined our SAC and ARPU metrics. Previously, our SAC metric had included certain costs associated with broadband activations, but we only included pay-TV activations in the denominator of this metric. Historically, these broadband activation costs were immaterial. However, with the increase in broadband activations in the fourth quarter, this prior metric would have been distorted.

Our new metric, pay-TV SAC, simply takes pay-TV activation costs for the period, divided by pay-TV activations. Similarly, our new metric, pay-TV ARPU, now only includes pay-TV revenue and subscribers. The change from the prior metrics was relatively small for periods before the fourth quarter, due to the lower broadband activation rate and subscriber base. We have provided prior-period data for each quarter in 2012, and the full-year 2011 in our 10-K filing.

I'll spend a few minutes now going through our fourth-quarter and full-year 2012 results. Subscriber-related revenue grew by 0.8% in 2012, compared to 2011, and increased by 1.9% year over year in the fourth quarter, due to a combination of increased pay-TV ARPU and higher average subscribers. Pay-TV ARPU was up 1% year over year in the fourth quarter, and increased by $0.60 relative to the same metric in the third quarter. As discussed in previous calls, pay-per-view revenue typically improves sequentially in the fourth quarter. Also, receiver revenue improved slightly quarter over quarter, as the mix of Hopper receivers in our base is gradually increasing.

For those of you who haven't had the time to thoroughly review our 10-K, compared to prior filings, the new pay-TV ARPU metric was approximately $0.48 lower in 2011, and $0.52 lower through the first nine months of 2012, when compared versus our prior ARPU metric. This difference simply reflects pulling broadband revenue out of the numerator of this calculation.

Subscriber-related expenses increased by 6% in 2012 versus 2011. This increase was largely driven by higher programming expenses. The programming expense increase was due to contractual rate increases, and was consistent with trends we have seen during the last few years.

Cost of sales increased by 27% in 2012 compared to 2011, driven by the full-year effect of the Blockbuster business. In the fourth quarter, cost of sales declined by 5% year over year, due to Blockbuster store closures throughout the year. As Joe mentioned, we announced the closing of roughly 300 Blockbuster domestic stores in January. We analyzed profitability at the store level, and these stores were not able to reach acceptable levels of performance. We also announced in January that the Blockbuster operations in the United Kingdom entered into administration. As noted in our 8-K filing earlier this month, we recorded a $21 million charge to cost of sales, and a $25 million charge in Other income in the fourth quarter, related to this decision.

Pay-TV SAC for 2012 was $784 per activation, an increase of 1.8% versus 2011. The increase was largely due to higher advertising expenses associated with our Hopper introduction. Pay-TV SAC in the fourth quarter was $791, a slight sequential decline relative to second and third quarter. With the roll-out of the Hopper with Sling receiver this month, we shifted some advertising spending from the fourth quarter into the first quarter, so we would expect some upward pressure on pay-TV SAC in the first quarter.

Just to help everyone with the math, the new pay-TV SAC metric was $1 per activation lower in 2011, and $6 per activation lower through the first nine months of 2012, when compared versus our prior SAC metric. This difference simply reflects pulling certain broadband activation costs out of the numerator for this calculation.

Administrative expenses were impacted by the Blockbuster acquisition. For the full-year 2012, G&A expenses were up 9.6% year over year. Just looking at the fourth quarter, G&A expenses declined 12.5% year over year, driven largely by domestic store closures throughout the year. Net income attributable to DISH Network was down 58% for the full year, primarily driven by the Voom litigation settlement, the reversal of certain accrued expenses associated with the TiVo litigation in 2011, and increases in programming expenses, with no offsetting price increase to our customers. This same income measure was down 33% year over year in the fourth quarter, driven by the Blockbuster UK charge and programming expense increases.

In the fourth quarter, we paid out approximately $700 million associated with the Voom litigation settlement and related agreements. As a result, our free cash flow in the quarter was negative $298 million. For the full-year 2012, we generated over $1 billion of free cash flow, and over $1.7 billion excluding the Voom settlement.

There were three major changes in the balance sheet versus last quarter. First, the Voom payment of $700 million was made on October 21, which eliminated the associated accrued expense on the balance sheet. Second, we issued $1.5 billion in debt on December 27. Finally, we paid a $1 per share dividend on December 28.

Let me now turn it back to Joe before we start Q&A.

Thanks, Robert. Given our significant 2012 improvements in customer service, in branding, in operations, and in award-winning product offerings, DISH is better positioned today than it was just one short year ago. Unquestionably, there is much more work to do, but we are committed to growing high-value subscribers, to increasing revenue, and investing for long-term growth, and we look forward to communicating those results in 2013.

So, again, thanks for joining us today for our fourth-quarter earnings call. Now, we'll open it up to your questions.

(Operator Instructions)

Phil Cusick with JPMorgan.

I guess for Charlie, can you give us an idea, first on wireless, how long l do you think you can work on this before it gets down to the point where you walk away? And you've tried a number of avenues so far, it looks like you're doing some interesting things, but how long do you have before the timing of the build-out and the market opportunity fades? And then second, on the H block, can you give us any thoughts on when you think that auction might happen? Thank you.

Okay. On the second part, H block, we don't have any insight. The FCC, I think, has indicated they'd like to get the H block auction done this year. I think that's what they've said publicly. Usually things take a little longer, but this FCC has hit a lot of milestones that they've publicly said they've hit a lot of those, so they're the best people to ask for that. But I think the H block auction will happen for auctions -- will be the next auction to happen. I think it will happen before the 700 megahertz, so it's probably the next one to happen.

In terms of -- we have seven years to build out. We don't think the value of our spectrum goes down. So I think the focus for the next year will be to figure out what the best path for us, with our preference being to partner with somebody that's in the business today. And we have plenty of time to do that and make the right decisions and so forth. The trick is not to lose a lot of money while you're trying to make the long-term strategic call.

Plenty of time.

So obviously -- I'd say this. I think the way the industry's framed right now, you've got several -- while we were in the FCC review process, obviously a lot of the dance partners picked partners. And so those are all coming up with shareholder votes in the next three to four months. So by the time you get to, say, June, you've probably had three or four shareholder votes out there. That will give us a better indication of what the landscape is.

Good. Thank you.

Marci Ryvicker with Wells Fargo.

A numbers question for Robert, and then I have a strategic question for Charlie. So first on the numbers side, Robert, do you have the total SAC number for the fourth quarter? I note the 791 is for pay-TV. Do you either have consolidated number or a broadband-only number?

And then with the strategic question, Charlie, last time you were in front of us, you mentioned that within 30 days of receiving the NPRM that you would reveal your wireless plans and I think we keep hearing from all these public outlets that your biggest plan is to partner with somebody. Is there more that you can reveal to us? I feel like people are waiting for some announcement, maybe on this call, or are you just happy enough telling us that you first and foremost want to partner with somebody?

Included within our total subscriber acquisition cost is $27 million of operating expense related to broadband in the fourth quarter, and about $10 million of capital related to broadband in the fourth quarter. This historically was a much lower number. In fact, if you go back to fourth quarter last year, the operating expense for broadband acquisition cost was under $1 million.

Okay.

That includes wireline and --

Fourth quarter number includes both satellite and wireline acquisitions. And then Marci your second --

I think the second question is for me. Yes, so strategically where we stand now, first, the FCC has -- we don't formally have our license, which we hope to get next month and we think by the end -- we're back to what's called a 3GBP process because our power levels were changed on the lower S-band by the FCC. So we have to go back to the 3GBP process and get that change done, which is actually going fairly smoothly, and we think that we get that done by the end of March.

So by the end of March, we probably have our license and we know the 3GBP stand so we can move forward and at that point in time, we'll start building -- we're already building chipsets and we'll start building radios so we can start testing our system. We hope to be able to test something by late this year.

We're also building out our 700 megahertz license. We're in the process of testing that as well. We'll add more sites to do that. We won't spend a huge amount of money in doing that. We'll at least make sure all our technology works, so when we're prepared to move forward very aggressively we've got the system in place to do that.

Strategically, certainly our first preference is to partner now. What have we done? We put that -- we put our first preference on the table. We've made an actionable offer to the Clearwire Board, special committee, which provides a superior offer to the shareholders of $3.30 a share versus the Sprint offer of $2.97. It would have us acquiring 40 megahertz of spectrum nationwide.

Couple things will happen. One is, that's probably a pretty good deal for Clearwire shareholders. It's clearly a better deal than what Sprint has offered. It's probably a good deal for Clearwire, because they get much-needed capital, minimum over $2.5 billion in capital. Maybe a little bit more. It's not a bad deal for Sprint, because they end up with a lot of capital to help their build-out, particularly in Clearwire. And that would mean that Sprint would be the most likely -- if that transaction went through, Sprint's your most likely partner.

The reverse of that is that offer is not accepted, or there's a bidding war for Clearwire. And were we to lose that bidding war, or if we were not to prevail for our offer for Clearwire, then Sprint's probably not a likely partner. We have to wait and see how that plays out. So that's strategically the first place that I think we have shown a direction we'd like to go. And that was even before we got our spectrum. So I think that's -- so we have to wait and see how that plays out. And then, if for some reason Clearwire's not an option for us, because that's just the way the circumstances go, then we think we have alternatives.

Thank you.

Doug Mitchelson with Deutsche Bank.

For Charlie and Joe, your Disney renewal's up later this year. I think you've got two separate lawsuits with Disney right now, maybe there's more. That's probably a pretty normal number anyways. Are you concerned that Disney will refuse to license ABC to you if you will not disable the Hopper, and any other issues with the renewal that we should think about? Then I'll ask my second question afterwards.

You take it and I'll follow up.

Okay. Yes, we do have a renewal with Disney. We are a big customer of Disney's. I would not expect them to take it down with the Auto Hop as the reason. That being said, anything can happen, but normally greed prevails, and there will be a discussion, and there will be a win-win for both companies and that's a general statement. What do you think?

Obviously we're a very large customer of Disney. Our checks are pretty big. Obviously to the extent that we had negotiations every year with major programmers, some that we're in litigation with, while we have contracts going on, we've always been able to work through those issues. Because ultimately content going down is a lose-lose for both us and the content provider, particularly in Disney's case, because the model would be materially changed if customers weren't -- as you know, sports programming is the most expensive cost and it's virtually every package that pay-TV providers offer.

So the model could change which would not be -- may not be a bad problem for us long-term, but probably would be a shorter term problem. That certainly would be a long-term problem for Disney. I would expect that both companies will find a workable solution, certainly how we would approach it.

The Auto Hop feature is broad question, which is again -- I think we're a bit misunderstood on that in the sense that we see the advertising model changing. We see with the advent of the Internet and the way you can target commercials, we think we can't, as an industry, put our head in the sand to that. With DVRs, all models of DVRs, all pay-TV providers skip commercials, customers skip commercials, we can't ignore that fact.

What we're really saying is to the broadcasters, is there's a way for you to not put your head in the sand. There's a way for you to certainly, I believe, make more money than you make today from DVRs from advertising and the way to do that is to target the commercials and to work with us, not against us, and we'll help show you how to do that

I personally believe that's the -- that as those discussions go on that we can show the broadcasters that we're not foe, we're friend, and that the advertising model can work for both the consumer, for the content owner and for the distributor. That's really where I'm focused. Doesn't mean that everybody will accept that. Doesn't mean that some people are adverse to change. The advertising model's going to change with or without the Hopper.

Right. Thanks for that. And quick follow-ups on comments you already made for Charlie, you and Tom if he wants to chip in. You said you had plenty of time to make decisions on wireless. Could you give us a sense on what kind of time frame you're thinking of? You could wait six years before you have to build out the 70 megahertz to 70% of the country. Is the time frame measured in you have years to sort this out, versus months? You mentioned the possibility of a Clearwire bidding war. You're on one end of that. Are you ready to get into a bidding war in Clearwire?

Those are loaded questions. We have two build-out schedules. One is on the S-band I think we have seven years from whenever our license gets approved. And it isn't formally approved yet.

Interim build-out requirements as well.

There's interim requirements. You don't have to meet the interim requirements, there's a final requirement, I think it's seven years. For the 700 megahertz, we have an interim requirement, potential requirement of June. If you don't hit that interim requirement, you have additional time to build out, which I think is another three --

Four.

Another four years. And so that's where we'll head on the 700 megahertz. The technology's changing and so it doesn't make sense to -- we don't want to get in a situation where -- I think as a Monday morning quarterback, and I think Clearwire would probably agree with this, they probably made a mistake to go WiMAX. They saw that LTE was around the corner, but they wanted to be first and so they went with WiMAX. And in hindsight probably should have just waited for LTE and built their network out in LTE.

Even though you would have said what are you doing, what are you doing, what are you doing, and put a lot of pressure on them, that might not have been the best long-term decision. We want to make sure we're making the right long-term decisions, and so there are technology breakthroughs that happen every year in this industry, and timing's important, and you want to hit with the right technology breakthrough based on the timing of your license. In our case, now that our license is assured, now's the timing of how other people are building out and who we might work with.

Big picture is we have a mature business in video today, as do our competitors. Cable guys have a path on broadband to accelerate the revenue and margins on broadband, as people use more and more broadband, and more and more data, and we've taken a strategic choice to put ourself in a position to expand our business on the wireless side. So, I like where we are strategically. There's lots of unknowns out there, obviously.

We're not going to give you our strategy. We're not going to give you all the inside play book, because if you play poker, you don't do very well when you show everybody else your cards. It's really hard to win that way. Most people don't show their cards until all the money's down. There's a winner and there's a loser.

Thanks so much, guys.

Ben Swinburne with Morgan Stanley.

Joe, you mentioned mobile video and consumers racing to mobile video, and if you look at the TV everywhere trends in the industry, it's definitely a big reason for Comcast and Time Warner Cable seeing 10% to 12%, 13% programming cost growth, because they're acquiring out-of-home rights through their contract renewals, including the likes of Disney. Is DISH prepared to spend that kind of money to build out its out-of-home rights portfolio, or do you think Sling allows you with an elegant way around that problem?

Charlie, just to come back to Clearwire again, where I get confused is when I look at the Sprint Clearwire shareholder agreement there seems be things that make the offer you made very difficult if not impossible for the Board or at least Sprint to support. It seems like you would need Sprint's support to get this deal done. Isn't Sprint going to be down-spectrum if your offer goes through versus what Sprint's proposing, and if that's the case, why would Sprint agree to it? Maybe you could flesh that out for us, as you mentioned before, you thought it was a pretty good deal for them.

I'll take the last part of your question first. Clearwire has basically 160 megahertz of spectrum nationwide. We're offering to buy -- our offer is to buy 40 megahertz, so about 25% of that spectrum. Sprint would still have plenty of spectrum. I would contend the FCC's not likely that a foreign company owning a vast swath of spectrum, 160 megahertz, which is the only technically TDD spectrum that we have in the United States, and given that data is more important, that would be a very strategic asset.

Based on spectrum caps, that would put a Japanese Company in a situation of owning more spectrum in the United States than AT&T or Verizon, and so I would contend that when the FCC looks at that they'll look as to whether a foreign company should be able to own that amount of spectrum plus all the spectrum that Sprint owns today. So I think there's going to be issues with that spectrum anyway.

The second thing is, I believe that we have an actionable item in front of the Clearwire Board today. The only reason it wouldn't be actionable is if Sprint really controls Clearwire. Now, if Sprint controls Clearwire, or Clearwire -- I have yet to see any -- and shareholders got misled by both Clearwire and Sprint, and the FCC's been misled, because there would be a change of control that took place that nobody knew about.

So I don't think that Sprint -- at least Sprint has contended in their public filings they don't control Clearwire. If they don't control Clearwire, obviously we have an actionable. It means that if Sprint -- if our offer's illusionary, and Clearwire sold to Sprint long ago, nobody knew about it. They didn't tell anybody. That's a whole different set of issues. That would get messy.

So I think it's an interesting -- I think when people rationally look at it, $3.30 is better than $2.97 and shareholders normally in most cases get the higher value. Right. So we'll see what happens, but we're serious. We're playing to win. We like the Sprint -- we think the Clearwire offer we have is a fair offer, and we think strategic to us. We also think it's probably good for Sprint and Clearwire. But they may have different opinions. We don't control that.

Thank you.

Ben, in regard to the first question, in terms of the rights, I think you used the right word. I think we do have an elegant solution in providing content on a mobile basis and why should the consumer have to pay twice what he's already paid for that he's using in the home? So it's a matter just using technology once again to provide the same experience that he has in the home via a tablet, a PC or a mobile phone. So we think we have a significant competitive advantage here over our competition.

Thanks a lot.

Bryan Kraft with Evercore Partners.

If you look at the gross adds in the fourth quarter, I think they were flat year-over-year after being up pretty significantly in the second and third quarter. So just was wondering what was behind that change. And then also, can you talk about how you're seeing the price increases being received by the customer base, and what you might be expecting in terms of a churn reaction in the first quarter? Thank you.

I'll take the last one first, Bryan. In terms of the price increase, I'd have to say so far, so good. But we're really not going to get a real good barometer on this until the March-April time period when we're through one cycle of the payments, of their billing cycle. But so far, I'd say it's going according to plan.

I'll take your first question on gross adds. It was a little bit lighter in fourth quarter. We knew the Hopper with Sling would be launched this quarter, and so I mentioned in my opening remarks that we went a little bit lighter on advertising spending in the fourth quarter, with the thought that we would promote heavily our Hopper with Sling this quarter.

Right or wrong, we pulled back on advertising with the election and into the Christmas selling season, because we weren't sure we could get above the clutter. And of course, the costs were prohibitive. So I guess we saved a little dry powder for the first quarter.

Okay. Thanks. Could I also ask quickly, did the AMC dispute end up having any discernible impact on your churn or gross adds in the early part of the quarter?

I think it had a small impact because remember that dispute wasn't settled until mid-October. So I think it had a small impact on fourth quarter.

Okay. Thanks a lot.

Amy Yong with Macquarie.

Looks like you made a nice return in marketable securities. Can you comment if this is Clearwire, and if it is, how will we think about this investment versus your bid for Clearwire? Also, Charlie, you've made in the past a distinction between urban and non-urban areas. Do you feel like your spectrum is better utilized in either market, or do you think it's better utilized for a nationwide network? Thanks.

With regard to your first question, we don't provide the details of our marketable securities, and we've given some color in our 10-K on the fair value of those securities. But we don't provide the details. And I'll turn the second question over to Charlie.

Well, the way I look at it we're $700 million down on Voom and we made a couple hundred million on marketable securities, so we're still stupid. But we're not -- we're less stupid today than we were three months ago. In terms of spectrum, in general, the frequency that we have in even the Clearwire is obviously much better for an urban, densely populated area because it doesn't propagate very far. So it's a less attractive from a rural point of view. That's just a general statement.

That doesn't mean you couldn't be creative, but in general, spectrum in a small town is not as valuable as spectrum in a city, because in a small town, even if everybody was on their phone at one time, you don't need a lot of spectrum. And so small towns you typically would want a lower frequency so your build-out costs are less and you can propagate farther.

The reverse of that, in cities, the low band spectrum, you can't reuse it as much, and so it has less capacity in total, and our frequency has great value in cities, because you can re-use it very efficiently and it's got pretty good -- it's got middle of the road propagation characteristics so it's a pretty good sweet spot for spectrum. In general there's a lot of variables in spectrum. And it's a long-winded -- it's much more than a 30-second answer as to why you would do one thing or another.

Okay. Thank you.

Jason Blair with Telsey Advisory.

A follow-up on Amy's question. Conventional wisdom, it will take $20 billion to $30 billion or more to build out a wireless broadband network, which in itself is a meaningful barrier to entry, plus you have the issues of getting to scale in chipsets. Is there an alternative where you could build out for a lower cost, like could you build out a limited network to offer only stationary broadband that you would cross-sell to your subscriber base and not offer a mobile broadband network from day one? Or are there non-traditional partners that might make sense?

I probably disagree with your first statement. I think people have spent $20 billion or $30 billion or more to build out networks. I don't believe that it would necessarily --

I think that's the conventional wisdom.

Yes, well, I would say it differently. If you were to build out a 2G, 3G, edge network, it would cost you that kind of numbers or more, but obviously the world has moved to LTE, and if you were to build an LTE-only network you can -- towers exist already. People share towers. So your costs are less. There's back haul that you can share a lot of towers so the costs are less, potentially less there. Small cells can be done at a fraction of the cost of macro cells. Your build-out costs can be materially less than that.

To your second part of it, there are some reasons why you might use some of your spectrum for fixed broadband, as an example. That's materially less build-out cost. As we test, I think you'll see us test a lot of different uses of our spectrum, see where it comes down. We have some ideas where we think it's going to fall. The best, the most profitable use is going to be for mobile data, voice and video. But there's probably some areas where it makes sense in a fixed basis as well. That's the general answer. We'll prove that out to ourselves by testing it.

And then can you just give us a sense of the pre-SAC margin contribution of the dishNET broadband service and what might be a reasonable penetration rate of your sub base?

We look at the broadband long-term economics being pretty similar to the pay-TV economics on a per-subscriber basis. In general, broadband SAC is slightly lower than pay-TV. Also, broadband ARPU is slightly lower than pay-TV. When we look at the overall economic return of a broadband subscriber, we expect it to be in the same range as pay-TV. With regard to the potential market, it's still pretty early to say how big that potential market is. However, we had great results in the fourth quarter with the launch of dishNET. First quarter, we're seeing the same thing. So we're pretty excited about this product.

Thank you.

You know how much the demand is when you see if Viasat or Hughes invests in another satellite.

Great. Thank you.

Vijay Jayant with ISI.

Following up on the broadband story. So you're wholesaling from I think Viasat and Echostar for the service. Your economics and your P&L are retail economics or is that -- can you walk us through what goes into your numbers and you can helps us, what actually goes to the actual owner of satellite and the network. Just want to know what the total wireless related set-up costs were in 2012? Thank you.

I'll take the first broadband question then I think I'm going to have to get you to he repeat your second question. We are essentially the owner of the customer. We bill the customer. We provide customer service and we do pay a wholesale fee to either Viasat or to Hughes, which is owned by Echostar, or to CenturyLink, the wireline option that we described in our 10-K filing.

It is our customer. We incur the SAC. We incur the revenue. The way I think about it is, versus the pay-TV business, where you're paying programmers a certain amount of money each month, we're just paying the satellite provider a certain amount of money each month. Fortunately, we pay the satellite provider less than we pay the programmers. And so Vijay, could you repeat your second question?

Just want to know what was the total cost on your wireless initiative, the set-up cost in 2012?

Very small in terms of hard cost associated with our wireless spectrum. We break out the wireless spectrum as a separate segment. However, most of the costs for that segment are depreciation and amortization.

Great. Thank you.

It's fair to say the biggest costs are Terrestar and G1 satellites, right?

The depreciation of those. We have some very modest costs to run the satellites, just to operate the satellites.

Tuna Amobi with MSP Capital.

Some quick questions for Robert. On the free cash flow line, can you give us an idea of some potential factors that could affect your outlook this year? Any kind of working capital issues, cash taxes, et cetera, sort of thing and on P&L, for Hopper DVR? I was wondering if you're planning a major outlay for upgrade of existing subscribers, or are your efforts mostly focused on new subscribers? Any color there would be helpful.

And then for Charlie, your recent comments seem to suggest that cord cutting is actually going to accelerate or is here to stay. I think you suggested potentially that a la carte may provide some kind of solution for that. I'm wondering if you see that getting traction over the next year or is this something that you intend to actively propagate or are you just expressing some general thoughts? Any color there would be helpful. Thanks.

I'll start with your question on free cash flow. Generally, we think for 2013 that free cash flow will be at or slightly better than net income for the year. You might have noticed that Washington extended the bonus depreciation for one more year, so there's 50% bonus depreciation. That clearly helps us on the cash tax side.

The other element that will help us in 2013 on the cash tax side, is that we reached a settlement, the Voom settlement in October. We reached that after we had paid our quarterly tax payment on September 15. As a result, our normally scheduled April 15 tax payment will be far lower this year. So those will all help free cash flow, and as I said, probably free cash flow would be at or slightly better than net income for the year.

With regard to upgrades, we provide upgrades to customers, existing customers, as they request. The cost of those upgrades range from being free to some costs depending on how long the customer has been a DISH customer. We've seen pretty good demand. Retention expense in the fourth quarter was up slightly year over year and we think there will be pretty good demand throughout 2013 for the Hopper product. Offsetting those costs, however, we see far less normal HD upgrades, because a greater and greater percentage of our base has MPEG-4 receivers relative to what it was a few years ago.

Okay.

Your third question was on cord cutting to Charlie.

I've been more outspoken about the issue than probably anybody in the pay-TV industry. I think cord cutting is here to stay and will accelerate over time as monthly fees -- as people pay $1,000, $1,200, $1,500 a year for TV, and they have other alternatives. And one of the problems is that the video's available on the Internet. It may be a day later. It may have less commercials or no commercials. And it comes in more of an a la carte form, where you can pick and choose.

The younger generation a lot of times just sits down to watch something to entertain them, and it's not always network TV or cable channels anymore. It can be anything from Amazon to Netflix to YouTube to whatever else they search for. That's why I think we have a -- our core business is a mature business, and that's why we four years ago decided to transform and to take advantage of some of those trends that we saw that are happening. And history will judge it five years from now whether that was a good decision or bad decision, but that's the path we're on, because we think that's the right path.

That's very helpful. Quick clarification on earlier remarks you made about the Clearwire deal. I think you said if DISH does not prevail then that wouldn't be -- then Sprint would not be an option. I'm wondering if part of your strategy might contemplate some kind of middle ground where perhaps you and Sprint can work out some middle compromise solution or do you see this pretty much as an either/or situation?

I could be naive, but based on the situation that I believe Sprint was in and I believe Clearwire was in, I think we solved a lot of problems for both of those companies. One is, we have a superior offer in terms of the shareholders. And second was we offloaded a lot of their build-out costs by acquiring spectrum that may have to be jettisoned by the FCC anyway. And the third thing is Sprint and DISH match up pretty well in terms of where our spectrum is.

Obviously, the H block was a big fight that Sprint ultimately prevailed on, but that's a spectrum that joins both of our spectrums, or a band that joins both of our spectrums, so we match up pretty well. And then Sprint has publicly talked about their Network Vision which is to build out a network that could be shared by other people, which obviously would reduce our build-out costs. That seemed pretty logical to me.

Sprint then took the opinion that our offer was illusionary and didn't think that Clearwire could actually execute on it. And so that's where they've been publicly today. If that's the path that they ultimately go down, we would say two things. One is we do have an offer that's executable by Clearwire, unless Clearwire sold the Company without telling anybody. Then I might change my mind. But I don't think they did that.

So the next move is for Sprint to make the move. Sprint will have to decide. And the Clearwire Board will have to decide. And that will send us one direction or another. But you can't -- that's the way it goes in life, right? You get to the fork in the road and you're going to wait for the sign to change and it could tell you which way to go. DISH is in the fork in the road. We have multiple paths to go, depending on decisions other people make.

The final part of that is, the Federal Government and the FCC make decisions and they pick winners and losers. That's even harder to predict, and obviously they pick Sprint -- in the H block proceeding, they picked Sprint as a winner and DISH as a loser in that particular specific instance. As these mergers and partnerships and all these things go through, the FCC will weigh in, and ultimately the FCC's going to signal to us that yes, we want DISH in the business or no, we don't care if you're in the business or not. If they signal to us that they don't care if we're in the business or not, then obviously selling the spectrum becomes more of a reality. If the FCC signals to us that they want us in the business, then nobody will try harder to get in this business than we will.

Okay.

So you can see -- so what do you do as management? You put yourself in a position that no matter what the FCC decides or no matter what Clearwire decides or what Sprint Softbank decide or whatever, that you then believe you have other alternatives that are good for your shareholders to take place.

You have preferences of the direction you'd like to see it go, that you think are best for your shareholders, but you don't always get what you want in life. It doesn't always work out the same way, and then you have to have the tenacity and flexibility and the confidence in your team that when something changes you can change with it. And my experience has been that there's been deals that you I wish we could have gotten and they didn't happen and three years later I'm sitting here saying I'm glad that deal didn't happen. Thank God that deal didn't happen.

And sometimes there's been deals that -- we wish we would have got Sirius Radio. That deal didn't happen. I wish that. Three years later, I wish that deal would have happened. So sometimes you lose. But one thing I'm sure of, you can't win unless you get in the arena a.

Thank you very much for all the color.

We're a Company that the gets into the arena, rightly or wrongly. Sometimes we lose.

Thanks a lot, Charlie.

Matthew Harrigan with Wunderlich Securities.

When you look at a couple people who deployed LTE advanced networks, outside Moscow, what lessons are you inferring from that in terms of waiting on the technology and the small cell or femtocell side and just the consumer proposition, and even if you did decide that the FCC was very friendly, but you really did have to go it alone, the plausibility of taking a graduated approach and doing it without a partner? Secondly, could you provide a little bit more color on how Echostar might layer into your strategies in terms of having sufficient scale and all that?

I'm not going to say I'm the world's expert on wireless, and people who are deploying LTE networks are more knowledgeable than I am. The Mobile World Congress is next week in Barcelona where you get to see, talk to everybody in the world who's done that so we'll learn a lot next week. There's different developments in LTE. There's different revisions that are coming so every year LTE gets better and better, whether it be heterogeneous networks or whether it be carrier aggregation or so forth and so on. There are a lot of things that are happening, whether it be voice-over-LTE or VoLTE, so those things are all happening.

We spend our time traveling around the world looking for those things, talking to people, learning the lessons learned. When I don't know something, we don't know something, the best thing is go talk to people who do know. And that's what we're doing. As opposed to let's experiment and just blow a bunch of money. It's who's built the best LTE network in the world? Who's built the worst LTE network in the world? Let's go see them. What did you do right? What did you do wrong.

That's the approach we did in DBS. We never launched a satellite. We never built a set-top box. We never billed a customer. We had to go learn those things and we learned from people who had done it. The Hubbards had done it in DBS and DirecTV had done it in DBS. We learned from them. That's how we'll do it here. We are very ignorant on the industry, but we're going to be right up there with the best in the world by the time we're done.

Are you joined at the hip with Echostar in all this?

No, Echostar is a separate corporation and there are things that, from a technology point of view, where one of the things we're going to do is make a link to the satellite, so no matter where you are in the United States you can always make a text, potentially a phone call, by using our satellite technology. That technology, Echostar invented that technology, in terms of how you reach the satellite and they were the primary vendor for Terrestar and DBSD.

All things being equal, we certainly would continue to use them for technology things where they're the leading expert. It's possible from a back haul perspective. If you get in a rural area and there's no fiber and no microwave, then you could use a satellite for back haul, which they have a broadband back haul satellite. There are ways we might use Echostar, but it would be an arm's length transaction where we believe they're the best vendor for us, and they certainly have some talent in this area.

You're going to be busy. Thank you.

Tracy, I think we've used up our time on the analyst portion of the call and if you want to open up the lines to the press so we can start that.

We'll thank the financial community for joining the call today and now we still have some time for questions from the members of the media.