DISH Network Corp (DISH) 2015 Q2 法說會逐字稿

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation Q2 2015 earnings conference call.

(Operator Instructions)

Thank you. I will now turn the call over to Jason Kiser. You may begin your conference.

Thanks, Kelly. And thanks for joining us, everybody. My name's Jason Kiser. I'm the Treasurer here at DISH Network. Joined today by Charlie Ergen, our Chairman and CEO, Tom Cullen, EVP of Corporate Development, Roger Lynch, CEO of Sling TV, Bernie Han, our COO, Steve Swain, our CFO, Paul Orban, our Controller, and Stan Dodge, our General Counsel.

Before we open it up for Q&A, we do have to do our Safe Harbor disclosure. So for that, we'll turn it over to Stan.

Thank you, Jason. Good morning, everyone, and thank you for joining us. We ask that media representatives not identify participants or their firms in your reports. We also do not allow audio taping and ask that you respect that.

All statements we make during this call that are not statements of historical fact constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by such forward-looking statements. For a list of those factors, please refer to the front of our 10-Q.

All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements that 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.

Operator, we will now open the call up for our first analyst Q&A, and then media Q&A afterwards.

(Operator instructions)

James Ratcliffe, Buckingham Research.

Hello. Thanks for taking the question. On Sling TV, do you have any color on where the customers you're getting are coming from, in terms of are they people who previously had pay TV, and any color about what sort of packages and add-ones they're taking? And secondly, I know you're including just the net adds in the gross. Any insight on the level of churn you're seeing with the product? Thanks.

Sure. This is Roger Lynch. When we launched Sling TV, our hypothesis is that we'd get subscribers from three categories. One is cord nevers, which are mostly millennials, late stage millennials. Second is cord cutters, and what we mean by that is people who've cut the cord sometime maybe in the last four years. (Inaudible) cutting the cord today. And then the final is supplementers. So people who have pay TV, but take Sling TV on top of that. Those are the three categories we expected to get subscribers from, and we are getting them across all three, probably in that order.

So the vast, vast majority of the subscribers that we take on do not currently have pay TV at the time they subscribe to Sling TV. Many of them have never had pay TV. And the ones that are cord cutters generally cut the cord a while ago. Really across the three categories, but a relatively small percent actually have pay TV at the time that they subscribe.

On churn, the business model for something like Sling TV is very different from commercial and pay TV. In traditional pay TV, you have to be very cautious about who you bring on as a subscriber, because of the subscriber acquisition costs associated with that, the set top box, the marketing, truck roll, installation.

With Sling, we don't have those costs. So we think of it as create a big funnel, bring people into the funnel with a free trial, knowing that for many of them, it may not be the right service. It may be that a traditional pay TV service is right for them. But by bringing many into the funnel, you end up with a stable base after the free trial period and after the first 90 days, which is typically when the shakeout happens.

So it's about how we expected it. And we had some experience in this from when we launched DISH World two and a half years ago. So it's the inverse of the traditional pay TV model. We make it a live funnel, bring as many in as you can, and then end up with a solid subscriber base that ends up churning at a relatively low rate over time.

As a follow-up, for those who become paying subscribers and then do disconnect, do you have any color as to what's driving that decision on their part? Are they going back to pay TV or are they just deciding they don't need any service?

I don't know the answer about whether they're going back to pay TV. But the things that we see for people who do turn off -- one of the big things, is it's a single-stream service. So they may want to watch ESPN and their wife may want to watch another channel. And on Sling TV today, it's a single-stream service. That's probably the single biggest factor that I see cited as a reason that it doesn't meet their needs.

Thank you.

Marci Ryvicker, Wells Fargo.

Thanks. I have two questions. The first, sticking with Sling, the 10-Q says you recast 169,000 Sling TV subs to March 31. So first of all, what does it mean by recast? Second, were these all international? And then third part to this one question, is the Q1 sub number of 13.844 million restated?

And then second question is a bigger picture question for Charlie. I think in terms of the DE discount, there's confusion as to what your actual options are or S&R Northstar's options. I guess the first is, if you decide to sue the FCC, do you have to pay the $3 billion first and then sue to get it back? Or if you don't pay, do you have a penalty? And then the other question is instead of suing, can you choose to withdraw your application, if you so choose? Thanks.

I think we'll try to take those in order, Marci. It's Roger Lynch again. So on the 169,000, those do not include the international Sling subs, which at that time were called DISH World. Those subs were already in the reported DISH subscriber numbers. So the 169,000 are the new Sling domestic subs that were paying subs at the end. Do you want to hit the second part about the recast?

And that is the recast, is the 169,000. That's simply adding the Sling domestic to the pay TV number, as we define pay TV to include both Slings, domestic, and DBS. And it has always included DISH World, newly named Sling International.

So the 169,000 as of June 30?

That was as of March 31.

Do you have the number for June 30?

Now we are reporting a single number that combines Sling TV, so that's Sling International, Sling Latino, and Sling Domestic, as well as DBS in total. And we're not breaking those out.

This is Charlie. I guess the follow-up question to that -- before we get to the DE question -- is the logic of why we would do that. As I came back into CEO, we're fundamentally looking at economics of how we run the business. And so we're in a mature to declining linear TV business, as we know it. We think we're at the beginning stages of OTT business that's going to grow and accelerate. Obviously, there will be new entrants into that OTT business. But the businesses fundamentally appear to be economically similar, in the sense that the value of a customer seems to be economically similar, if you are smart about it.

And I think that internally, the way I want to manage this is I want people at DISH to be smart about it. Because I found, when I got back into it a little bit, that people were going in and trying to get numbers at DISH in terms of gross ads, but sacrificing quality of subs or not anticipating that a sub we get today is going to have 5 or 10 or 15 or 20 more choices for video over the next five years that he doesn't have today, because he's going to have a lot of ways to get OTT, a lot of different ways to get video, so the video business is going to be much more competitive. So you have to be a little bit more careful about the customer you bring on at $800-plus SAC today. Whereas 10 years ago, he had three options; and today, he's got four or five or six options, and he's going to have 50 or 60 options in the future, probably.

So on the Sling side, though, if you bring a person in on the Sling side, of course, your SAC is materially less. Your ARPU is less. But the value of that customer, when you think about how you do it, should be about the same. So when we focus internally now, this is how we focus on it, in terms of putting all our customers together saying, this customer doesn't justify coming in on linear TV.

As an example, he doesn't buy as much -- it doesn't make a lot of sense for us to bring somebody in to a skinny bundle at $19.99 at DISH when you have $800 SAC. It does make sense for us to bring that guy into a skinny bundle in Sling. And before, we were bringing that guy in -- in fact, at DISH, I would go so far as to say it makes almost no sense to bring in somebody less than $50 of ARPU, even in the first year. Again, we don't run the other companies in this business. But I think people are going to come to the conclusion they've got that fundamental linear TV businesses are going to have to be a little bit more disciplined about how they do it.

We're lucky that we have the fallback of Sling. And so when you put those two together, it starts to look at - you start to see a better picture of where we are. But that's certainly how we look at it internally. Sling has a positive impact on SAC coming down. It's negative on ARPU coming down. It all flows through to EBITDA and revenue and cash flow, and those are the important numbers that you see.

On the DE question -- and Stan, you jump in here if I get this wrong -- but we believe that the FCC has told us that the order from the Chairman's office is going to deny the DE discount. Haven't gone into the reasons particularly why that is, but they've indicated that's the case. So obviously, we have two DE partners. And we'd also have to consult with them. And ultimately, I think we'll work together to figure out what makes sense for everybody, but at least I would hope that we would.

But one option is not to pay the money, in which case you immediately would be charged 15% penalty. Long term, that number could be higher, because that spectrum would be re-auctioned. And you would owe the difference between what it re-auctions for and the price paid. So you could owe more than 15%. Although in reality, when you really think about it, for various reasons, it's probably a 15% penalty. So you would owe a couple billion dollars. And in theory, you'd get your money back and life would go on.

Door number two is you could pay the money and life would go on. And it would eliminate some of the very negative handcuffs on the spectrum. For example, you could sell it, you could lease it, you could lease it all to one person and so forth, which you can't really do today under the restrictions today.

Or you could sue. And in that case, I don't know exactly whether you would pay and then sue or just sue or whatever. I don't think we know until we see the order. But I think you'd have to be prepared to pay and sue, if that was the route that you decided to go.

Okay. Thank you.

Tom Eagan, Telsey Advisory Group.

Great. Charlie, following up on your comments on the return on adding subs, at the combined AT&T DirecTV, we expect that they're going to allow the U-verse churn to increase in the hopes of migrating those subs over to DirecTV. So is there any interest at DISH to look to capture those subs? Thanks.

To capture the U-verse subs?

Yes. So as AT&T allows the U-verse subs to churn and maybe go over to DirecTV, are those subs that you'd be interested in?

We would be. But I'd say a couple things on that. One is, I'm not sure that's what AT&T ultimately will do. But certainly, to the extent that a customer is going to churn off U-verse, they'll try to have the churn and the DirecTV installation all done at the same time, so they don't open themselves up to poaching. But obviously, if we could poach, we would.

But I don't like that model that much, because AT&T has already got the investment in the customer in U-verse, and then they're going to put another SAC on top of that. In today's world, for some customers that will make sense, and some customers that will be economical, particularly if they can get a bundle for that customer. But for a lot of customers, that won't make sense. They've already got the investment of U-verse going down the street. I'm not sure that makes sense.

The only reason it would make sense if their U-verse is tight on bandwidth, and so it's slow speed or you have data problems and data caps and you can't put three HDs in a house, then it would make sense for them to save that customer and do what you just said. But I don't think we'll have a material poaching opportunity there.

Okay. Thank you.

Tuna Amobi, S&P Capital IQ.

Charlie, I wanted to get your sense on the pay TV landscape and where DISH might fit into that, especially in the context of the wireless landscape? When you think about T-Mobile and Sprint and possibly the merger is not going to happen, I'm wondering how you view the shifts that are occurring and what role DISH might play to advance your overall wireless strategy in the context of M&A? Thank you.

Well, I think we put together a lot of building blocks. So we have almost 14 million linear TV subscribers. We have relationships with programmers and contracts based on scale. We have now OTT ability, which is a precursor to being able to do things in a wireless manner. And we have lots of spectrum. But there's building blocks that we're missing. We don't have a network that's built out, as an example.

So I think you continue to look at what the landscape does, and as events happen -- and events sometimes happen that are outside of our control -- when those events happen, they move you one direction or another. But I think in terms of where the pay TV business today is, we're pretty well situated. We're situated better than most people are.

Let me just give you an example. To the extent that the FCC really goes through with the order, as we understand it, where we'd lose the DE discount, that would move us more likely in a different direction than if we were to get the discount.

And there's two reasons why. One is $3.3 billion is a lot of money. So if you actually have to pay that money, or you decide to pay that money, then you got less to work with and certainly would make M&A -- would complicate M&A in perhaps a way you couldn't do it. So that's one possibility.

The second thing is that the FCC -- they can pick winners and losers. And in every situation, they have good arguments on both sides of an argument. And I think in this case, whether they allow the discount or don't allow the discount, there would be probably good arguments on both sides. And the FCC, therefore, picks winners and losers. But it gives you an indication of what they're thinking about in terms of the industry.

Our bet was -- first of all, this is a very competent FCC, from the staff to the commissioners. They work hard. This is a really talented team and one of the best that I've seen in 30 years. And this team has talked about competition almost from day one.

Our bet was that, based on the rules of the auction, that they were set up for us to do exactly what we did, that any rational person would look at those rules and say, if we want to compete against AT&T and Verizon, we want to enter this marketplace. And based on the rules, particularly with things like blind bidding and things like that, and particularly with DE discounts with no caps and no limits, that this is exactly what they want us to do. They want us to be disruptive in the marketplace and they want us to be disruptive in an auction. Going by the rules, but obviously being disruptive.

So to the extent that the FCC would say, no, we want you disruptive in the marketplace, but not in an auction. And if we're going to side with the big guys and disallow the discount, then that's a pretty strong signal that you're probably not going to get into the marketplace in a competitive way as a new entrant. And it probably means that even in an M&A situation, you're going to have a lot of difficulties -- there's more risk than we would anticipate.

The opposite of that would have been true, had they said, you know what, yes, we know that there's some pressure, that the headline is not very good that the company would get a $3 billion discount. But we believe you followed the rules and we think that competition is important and we like the fact you're going to get in and compete, and so they can allow the discount, then you'd feel more comfortable to go in and compete.

I think that we get pushed more towards -- we still have all our options open -- but we certainly get pushed more towards a sale or lease of spectrum. And obviously, we have to work with DE partners to understand where we can and can't go. But we own a lot of spectrum outside of the DE regime, and there's no restrictions on what we can do with that spectrum. So I think we take a more conservative route. We take a little bit shorter term view of where our options are today.

Okay. That's very helpful. Thank you.

Phil Cusick, JPMorgan.

Thanks, Charlie. Just following up there, it sounds like you might be less interested in participating in the broadcast auction, given the way the FCC is pushing you.

And then second, if you can talk about an update on the 3GPP process? Where are you on getting AWS-4 into that [AD-US3] band and any sign of a unified banding scheme that the telcos might go after? Thanks.

I'll let Tom take the 3GPP question. But on the incentive auction, obviously, we, in theory, like to look at every auction we've participated in. Almost every auction, we typically don't win anything or win very much. Certainly, we need to see the rules on that auction and where the FCC -- I think the FCC is going to come down on just 30 megahertz for basically the non-big guys. I don't think that's going to go higher, unfortunately, but we'll have to wait and see the rules. Obviously, to the extent that the FCC requires us to pay the discount in the last auction, then it would be a complicating factor for us in that auction.

Phil, this is Tom. In terms of 3GPP, as you know, AWS-4 today is its own band in band 23, but that contemplates both the uplink and downlink. And we do have a downlink election option for the uplink coming up next year. In the meantime, we've been working within 3GPP on a new band, which has been designated as band 66, which is a 70 by 90 band. And that includes 20 megahertz of our AWS-4, the current downlink, and that's in a combined band with AWS-1 and 3. And that is moving through the process. And I think it's on schedule to be confirmed and finalized in December of this year.

Thanks, Tom.

Walter Piecyk, BTIG.

Just going back to Charlie, to your earlier comments about the FCC signaling support for the duopoly and maybe not wanting to get involved with a challenger or being in a competitive market, given the depth of your spectrum, does that mean your options might also now include breaking up that block of spectrum and selling it in smaller chunks, rather than just one large chunk of spectrum?

I don't know if, Tom, you want to add to this. But yes, I think a couple things that we'll look at. One is we'll look at the order of what the FCC says about the AWS-3 auction and see what they have to say and see how we feel about it. Obviously, the DEs are going to be able to do whatever they want to do about that. And then we'll look and see what the next incentive auction looks likes. So those are decision points. 3GPP is a decision point for us.

And then I think the way we look at it is we say -- and then our uplink -- we can go all downlink as an option. So we have to decide that within the next nine months or something, too. All those factors, I think the evidence will be obvious which way for us to go, based on those decisions.

It gives us five bands of spectrum. If we go all downlink, which is a very attractive option for us, we end up with a upper AWS-4 downlink that can combine with the AWS-3 spectrum we won at auction. You end up with a band that is the unpaired AWS-3 band that could be combined with the lower AWS-4 spectrum and upper H block, and then you end up with an H block, and you end up with an E block and 700 megahertz. And then we also have some 11-7 to 12-22 spectrum, which we have the vast majority of the United States spectrum, as well. So we've got a number of bands.

Then you look at corporate structure. Do I think one of the things that we'll do and that Jason is chartered with is to look at corporate structure. If you were to break those brands out, how would you do so from a corporate structure? And it looks like it may be more attractive at some point to split our video business away from our spectrum business. We thought long term those two were better together.

As a long-term shareholder, if I'd look at a 10-year span, I think those things should stay together, and I think competing in the marketplace would be the best avenue for us. But if we're not really allowed to do that or we're handcuffed by the government to do that, then you look at corporate structure and maybe you break those things out and then you have a lot of flexibility, whether your bands are in a single unit, whether they're in multiple units, or whether they're actually in a band could be in different geographies.

That sounds like the old options, because you had tied this stuff together in the past, so now if you're at this point that the FCC is signaling this one direction, that's, it sounds like in your mind, opening up a couple different options. I know on a past call, you talked about when someone asked you if you'd considered leasing it, you had said, yes, I'd lease it. But now you're saying leasing is in the mix, maybe breaking up the spectrum in different buckets is the mix, separating the Company. It sounds like your view on the options has once again expanded in the past couple of months. Is that an accurate statement?

I think the options are all still the same. And I just think that we would be -- based on where we think the FCC is going to go, we'd wake up the next day, based on when we were informed of that, we woke up the next day and said, on average, the leasing sale of option or pieces of our spectrum could be a more attractive option for us and for our shareholders, because the risk is so low to do that. And we think our spectrum is really undervalued on our balance sheet by the Street. And that's the way you'd prove it, that you might split it up, where you otherwise -- in my heart, I think the best long-term thing for our shareholders would actually be to go compete with the big guys and probably some kind of M&A and things that we could do there. I think that would be the best long-term option.

But you're not going to get there without government support. The scale is too important in this industry. And if the big guys can come in and get Congress to write letters and the FCC to make decisions, rightly or wrongly, we're not that good. We're not that big. And that's just too risky.

Your thought process changes by actions that are happening in the marketplace. There could be M&A stuff that happens in the marketplace that would affect us and there certainly can be things that the government decisions, decisions by government that force us one way or the other.

The government changes over time. Chairman Wheeler is not going to be there forever, nor are all the commissioners.

In general, I'm a pretty big fan of Chairman Wheeler. This is a very good commission. This is the commission that's thought about competition. This is a good commission. I think that's one of the most disappointing things is this is a commission that we were fairly confident was encouraging us in the auction to do exactly what we did. And for whatever reason, they sided with the big guys.

This is as good as it gets for us at the commission, probably. And I can't imagine -- you know, there may be a better commission in the next administration, but this one is really good. These are good staff and these are good people, and in general, I'm a pretty big fan.

I think Greenfield had a better question. He was hung up on.

By the way, we let you guys ask questions. We're one of the few guys that lets you guy ask questions.

I know, it's incredible.

We appreciate it, Charlie, sincerely.

But we're not moderating the call yet. We've got one more step to go. (Laughter) Charlie, you had mentioned it doesn't make sense to bring someone on to satellite at a sub $50 price point. Is a big inhibitor of that the MFNs that your larger MVPD peers have which prevent you from negotiating better programming rates or deals? And then just tied to that, in that light, does making Charter into the next Comcast, scale-wise, a problem that the government should be concerned about?

Well, on the second part of the question, the government definitely should be concerned about consolidation in the broadband business. They definitely should be concerned about it. They've shown that they're pretty competent in looking at that. Each deal is different within the government. So they'll look at this one differently than they did the Comcast one.

But they're very much the same issues that would concern us. But whether it rises to the scale of actually denying the deal, we haven't analyzed it that much yet. We're just getting into that. What was the first part of the question?

Just from the standpoint of, you had mentioned that $50 -- are MFN's the biggest problem?

No. Let me take a step back. The biggest problem in the linear business today is that viewership is going down. Advertising rates are going down. And everybody wants to go to the Street and say they're still making the same amount of money. It started happening in 2012, right?

And our answer was OTT. Let's put stuff in OTT. Let's go to the customer, let's do that. Most everybody turned us down at that point in time. By the time last year came around, a few forward thinking people said no, I think OTT works. But in the meantime, people had sold, to keep their numbers up and to please Wall Street, they'd sold some assets to Netflix or to Amazon or to Hulu. And suddenly, a customer for $7.99 can really get his fix for a lot of different kinds of kids programming, general entertainment programming, documentary. They could get a fix for all these things. And they didn't need the big bundle anymore.

So the industry is still trying to hold onto the past, which is to continue to raise rates when their viewership numbers are going down. It's been public that there's millions of people that general entertainment guys have lost over the last several years. So the Netflix phenomenon makes it very difficult to get into that lower priced tier and make any money.

The second part of it is that we have SAC. No matter what we do, if we go from a satellite television perspective, we could put a dish and install, incentive to the retailer to sell it, and a fairly sophisticated set top box with a hard drive, in most cases, that's fairly expensive. And SAC is typically over $800, for both us and DirecTV.

That understates SAC, because we both give away free TV or discounts for a year. They do it for a couple years. I've always added that in. When we sit in our financial reviews, I say, you've got to add the opportunity cost of the programming you're giving away. Now you're over $1,000 SAC, and you can't justify that for $20 or $30. It doesn't make sense.

But it does make sense for that customer to go to OTT, where his SAC might be less than $100. He might have a smart TV. He might have a Roku box. He might have just clicked on the internet and bought the service. Your SAC for some customers might be almost zero. And that's a better model.

I'm trying to steer our thought process here to that, which is you don't really care where you get a video customer. We're paying the programmer the same. When we get a Sling customer or we get a DISH customer and they both have ESPN, we write the check to ESPN, add the two together and write a check to ESPN. So that's the thought process.

Thank you very much.

Craig Moffett, MoffettNathanson.

Charlie, I want to try again on the Sling TV numbers questions, just because it creates so many changes in the rest of your reported numbers, of trying to understand growth adds, trying to understand ARPU, trying to understand SAC and that sort of thing. First, can you give us the number this quarter, so at least we can start to understand better what changes are going on in your older core business, the satellite-based core business. Ballpark, if I triangulate based on some algebra based on ARPU, it looks like you ended the quarter with something like 300,000, call it, Sling TV subscribers. If that's right, then it looks like there's a very big drop in gross adds. Are we to understand that as you described it before, as the decision to say I want to push people into Sling rather than the traditional satellite model?

I'd say a couple things. And Steve, you may want to clean up what I say, because you know better than I know it. I would say a couple things in general. One is the linear TV business, I think, is mature and I think it's now declining. I think it has been declining since about 2012. It's not declining in a free fall. It's not crazy, but kind of going along. OTT is growing. So I think you have a point when you say there's certainly more losses on the linear side than 80,000 or whatever it was. But we haven't broken it out, because that's not how we look at it.

The second thing would be that I saw your triangulation on the ARPU. And I think a better way to triangulate it is on SAC. SAC is only one variable and you can see where SAC was and where it went. And that probably gives you a better place to go. I think ARPU is a bit distorted. As you pointed out in your analysis by the Pacquiao fight, you add too many variables in the ARPU side.

And then you have to be a little bit careful in the sense that any churn that we have today in our core business is not something we did today. It's something we did a year ago. We brought on a sub that we shouldn't have brought on, or we gave bad service to a customer or whatever we did, or he became a cord cutter because he now could get HBO directly or whatever it is, it's not something we did today.

I've kind of taken a fresh look at the business and said look, we're going to be economic animals about it. We're going to be disciplined about it. We think we have most of the tools that we have to do that, between linear TV and Sling. And that's how we're going to manage the Company. Did you want to add something to that, Steve?

Just to reiterate what Charlie said on SAC triangulating, if you look at the DVS historical numbers over the past several quarters, taking that as an input, as well as the reported numbers and guessing, if you will, at Sling SAC -- and Charlie gave you a couple data points during the last question -- you can goal seek for the 767, which is our total company weighted average number, and get pretty close.

That's the way I did. I think any time you can do an analysis and have less variables, you get less -- you're closer.

That's very helpful. Can I ask a related follow-up then, which is given what's happening today in the media stocks, because of Disney's comments about ESPN, and the revaluation of the cable networks business in general, does that change your view at all about the willingness of your content partners to continue to participate? If you did lose 200,000-plus subscribers to the linear model, that's obviously not something that the rest of the content companies are going to be pleased about, probably. Disney may be in that package and may be agnostic, but others won't be. Is it harder to see how you get content going forward?

I would say a couple things. The balance of power in content has moved from, typically, it used to be, when I first started, it was pretty even between content and distribution. It recently has moved to content owners as having more leverage. It's starting to come back a little bit to the distribution side, for a variety of reasons. It's totally shifted to Netflix. Netflix is the most powerful content aggregator in the world today, and there's nobody that's even close, I don't think from, second point of view. I don't think there's anything they couldn't buy that they wanted today on original content, for example. And they've gotten -- they pay a fixed price. If they go buy something from Discovery, they pay a fixed price for it. And as their subs grow, their cost per customer goes down. When we buy something from Discovery, we pay a variable cost and we pay the same for each customer.

I think that no content owner today could afford to lose our distribution. And I think it's more of a case that I've said on the call previously, is that we have to now look at each content deal and decide whether long- term that content deal makes sense for us. And when somebody comes in and says, I want a double-digit rate increase and they've had double-digit viewership declines, we don't think that math works for us. We have viewer measurement real-time from our customers. We're not relying on Nielsen, which we think there's some inaccuracies in. And our customers may be a little different than Nielsen anyway, because we skew more rural. But we know to the penny what content is worth to our customers. We approach a negotiatation for content based on economics, not based on the fact that they used to charge us this and they want a 10% increase or a 20% increase. That's irrelevant to us. What's relevant is whether our customers watch.

Let's take an example. Kids programming used to always be right up there in the top two or three or four things people watch. But with the advent of Netflix -- we know a lot of our customers have Netflix -- they just go to Netflix and hit Kids. And it's the kids that do it. And the kids hit Kids, and they go watch whatever episode they're going to watch. And they know how to do it, and they don't have commercials. And the parents like that better, because there's no commercials and the kid can watch what he wants to watch. They can watch an episode that's two years old or 20 years old or 50 years old, and it's a cartoon. It's irrelevant. They're not sitting on the edge of their seat waiting for the new season of Game of Thrones. They're happy to watch SpongeBob from 2007, and that's just as fresh to them as SpongeBob from 2015.

So the world has changed. We've been talking about it in our conference calls for a long time, and I think other people are starting to see some of the things that we see. And all we can do as management is prepare for it and manage our way through that economically for the long term and not worry about quarter to quarter.

That's really helpful, Charlie. Thank you.

Brett Feldman, Goldman Sachs.

If a decision is made to go ahead and pay the FCC the $3.3 billion and you decide that you're going to finance that, either because you pay it yourself or you provide the financing to your designated entities, what is your view on your sources of raising that capital? And I'm particularly interested in whether you might be willing to borrow directly against the value of you spectrum, which you've not done in the past.

I think it's too early to tell. First, we've got to make the decision on what we're going to do. And then we obviously have to work with the DEs, and they have capital, as well. So we'll have to go through that and see that I think the markets are pretty available today. $3.3 billion is a lot of money. And we weren't counting on it for sure. But we've got about -- I know we have $1 billion-something on our balance sheet. We'll see when the rules come out, and then we'll make those decisions.

If I could ask another question about your spectrum. I'm curious, are you amortizing your spectrum for tax purposes? The wireless carriers all do that and they get fairly sizable tax shields as a result of it. I don't know whether you guys have that ability or not.

We are amortizing some of our spectrum for tax purposes.

But not all of it. We have to be in the business to do it. And obviously, this new spectrum would be the vast majority of our purchases. So it would dwarf what we paid for the spectrum previously. So we'll have to look at that. But there's some opportunity there. There's definitely opportunity from an amortization. I think it's amortized over 15 years. That gets interesting. That's an interesting point and potentially a positive thing for us.

Because along those lines, your tax base in the licenses you already own is pretty low. But is there anything you could do to trigger a step up in that if you had a leasing arrangement that was based on the higher assumed value? It seems like maybe tax interviews is part of your spectrum strategy that we haven't given enough consideration to.

I think -- and I don't know if you want to jump in this, Jason -- but I think tax consideration has moved way up our list, as we look at this pending FCC decision. And certainly, corporate structure would pay a big part in how you might do it. Suffice to say that we think that there may be an opportunity, from a corporate structure point of view, to do things whether you were selling or leasing spectrum, that might be very attractive from a tax perspective.

Again, we hadn't really looked at that too much, because that wasn't the path we thought we were going to be on. That is a better -- that is an increasingly advantageous option to look at. Do you want to add something, Jason, to that?

I'd just say we're taking a look at all of our options there. It's way too early to determine which path, if any path, we're going to take. But all of those things are under consideration.

Great. Thanks for taking the question.

Operator, we probably have time for one more analyst question.

(Operator Instructions)

Ben Swinburne, Morgan Stanley.

Thanks. Charlie, I guess I would say I'm a little surprised to hear you sound so downbeat about your options with the FCC and also surprised to hear you sound so complimentary, because it does feel like the goal posts have been moved on you at the end of the game, pardon the analogy. And you've got a long history of fighting a lot of battles in court with various companies and technologies going way back, I'm thinking Vista Networks, TiVo, AM, Auto hop, et cetera. Do your legal folks tell you there's no real path here to fight this? So you've really just taken the result from the FCC and then figuring out where do you go from there, or do you think there's maybe a path to pushing back to this over time?

My personal perspective is not really the question, because if we think we're right, we always battle, if we think we're right. I have a lot of respect for these guys. They don't do stuff in a vacuum. I've worked with them enough to know that it would be an honest disagreement and they would have a point of view that you don't always agree with people.

But what's disappointing about it is not that. It's the decision, the decision was black and white, in my opinion. Are you for competition? Are you for the incumbents? Nobody has the power to shift the FCC, unless they're pretty big guys. If you come down for competition, you'd say DISH followed the rules to get a discount. And obviously, they would have been I think a lot of opportunity within the M&A space to get to stronger people to compete against the top two guys, which they really have a duopoly today.

If you come down and say the discount's disallowed, it then snowballs into a bunch of different things. One is it would make virtually impossible M&A for us, based on the complications that it complicates and the uncertainty that you're going to have based on that decision. Secondly, you end up with no restrictions on the spectrum. So now you can lease all of it. If you can lease all of it, there's guys that want AWS-3 spectrum that are going to build that out and it doesn't cost them much to add our frequencies on at the same time. If you go to the tower and do it all at one time, there's a lot of economies of scale and synergy there.

What might happen is you end up in an auction where AT&T and Verizon got 70% of the auction. And because DISH was innovative and worked with DEs and did what has been done in the past, with no restriction on the amount of discount, we entered that auction, they only got 70%, instead of 85% of the auction. But as a result of losing the discount, in theory, AT&T and Verizon, in my opinion -- and maybe to some degree, T-Mobile -- but AT&T and Verizon probably end up with virtually all the spectrum out of that auction. That's horrible, from a competition point of view.

So you then, in my opinion, at that point, you probably got Sprint and T-Mo more realistically being able to go together, but from a position of weakness and you go from 4 to 3. So that's probably where the world goes. And it's all based on one decision and one auction where the government picked the winners and losers. And I made a mistake in judgment in that I believed this administration, despite the political pressure, despite the big guys being upset, that this administration would go for competition. And that's not what the decision they're going to make, as we understand it.

So that's disappointing. I think it's probably good for shareholders in the short run, and certainly a much more conservative approach for us. But it's not as exciting to me as an entrepreneur and it's certainly not as exciting to me long term. But that's the way we would be leaning today, because ultimately we're going to run this Company for our shareholders and do the right thing that we think the best economic judgment we can make, regardless of where our passion would be.

Okay. Thanks.

We will now take questions from the members of the media.

(Operator instructions)

Alex Sherman, Bloomberg.

Two questions. The first one is, Charlie, just to follow along with your last answer there, when you got the waiver from the FCC on the DVD and the Terra star spectrum, part of the rationale was that DISH would add more to the wireless market. So given that, do you feel like the FCC would be okay with you turning around and selling that spectrum to AT&T or Verizon?

There's no restrictions on us to do that. In the auctions -- one thing people don't realize, you get a discount with the DE, but you also get handcuffs. You can't lease that spectrum, more than 25% of that spectrum, to somebody. And you can't sell that spectrum without paying the discount back. So you have handcuffs. Those handcuffs go away if you pay the discount. There's no restrictions on the DBSD Terrastar. There never have been. I don't think -- you want to jump in on that, Stan? I don't think there's anything that would prevent us today from our existing spectrum to sell it or lease it, other than spectrum cap that the FCC has, in terms of existing spectrum.

Okay. Second question is --

I think the government tells you where they want you to go. They makes decisions. You don't have to be a genius to read between the lines. They told Sprint and T-Mobile they didn't want them to merge. They gave lots of signals. They are telling us that lease and sale of your spectrum is okay. Because the restrictions would be removed, you can pay the discount. I'm not going to cry about it or lose any sleep over it. It's just disappointing, because that's not in our heart where we wanted to go. But that's what they seem to be supporting.

All that being said, we're still waiting to see the final order. And until we have a chance to understand what's in the order and evaluate it with our DE partners, we don't know what next step we'll take to those licenses.

We still have all the other options, I'm just trying to be realistic with our investors, which is if you were sitting in our shoes and you said, I'll make it up, 80% think this is the way to go and there's another decision, rightly or wrongly, then you reevaluate that 80%, and you might say, I'm only 30% that way and I'm 50% a different way. I think we're taking a good hard look at that. And once we read the order and once we talk to the DEs about where they're going, we'll have a better idea.

What is the value of your current spectrum holdings, as far as you see it? Obviously, analysts have guessed a lot about this. As far as you see it, how do you value your holdings? What's the dollar value?

I don't know. The people that know are the people in the business. The auction, because of DISH's participation and because of DEs that we work with and other DEs, I think there were 15 or 17 DEs in that auction, with no restrictions. That auction was one of the first -- that may have been the only competitive auction that I've been involved in where people had to pay the market price. And the people who really know the value of the spectrum, T-Mobile, US Cellular, AT&T, and Verizon, paid about $2.90 for paired spectrum for megahertz pops. That gave you a pretty good market read of what people were willing to pay. Nobody put a gun to their head and said, you've got to pay $2.90. They voluntarily paid that.

Our spectrum -- one of the reason's is because that's high capacity spectrum. Because data usage is going up, this is the spectrum that has high capacity. The incentive auction is coverage capacity, but it's not high capacity spectrum. And probably based on the rules, where they're going to gut the DE program, that spectrum is probably going to go materially lower than this high capacity spectrum. And DISH owns mostly high capacity spectrum, which is great for data.

The second thing is we have more downlink than uplink. And the paired spectrum went for $2.90. The unpaired, uplink only, went for $0.50 a megahertz pop. So you can see that, I'll make that up, downlink is probably worth six, eight times what uplink is and we have a lot more downlink than uplink. So our spectrum is valuable.

The second piece of it that I think you have to look at is if I was looking it at the spectrum, you have to take the value of the spectrum, but you also have to take the cost of building it out, and you add those two together, and that gets you to the value of the spectrum. Anybody who's on AWS-3 spectrum is going to build it out, if they could build our spectrum out at the same time, then the incremental cost to build it out is very low. If you have to build our spectrum out by itself, then you have to add that cost and it takes away from the value of your spectrum.

All those variables are in there. I think the last auction is a pretty good proxy of where the market is for high capacity spectrum. And obviously, the Street values it much lower on our balance street, in part because we have to use it, or it has to get used. And then it gets economized and then it gets a value.

Last question for you, Charlie. Are you implying that if the FCC had ruled differently and had have given you the discount that you would be much closer to, say, owning T-Mobile today? Or were there just too many other complications in that deal, valuation, structure complications that that's what was the biggest obstacle to the talks that you guys have had.

From our perspective, the discount was the most complicating factor.

Okay.

Phil Goldstein, FierceWireless.

I'm not sure, Charlie, if you want to answer this or if you want to toss it to Tom. In May, Tom, you had talked about some of the discussions that DISH was having under NDA with lots of different wireless players. Just wondering if you could give me some color on an update on how those are going. It sounds like from what you've said, Charlie, that if the FCC does order you guys to pay back the discount, you're more inclined to do some kind of sale or leasing. I'm just wondering how you guys are thinking about that, especially in light of T-Mobile's continued comments about being willing and open to partner with non-wireless carriers. Jon Legere has talked again about cable companies, about the Googles of the world, et cetera.

And then separately, just wondering if I could get an update from Tom on the build-out time lines for AWS-4 and what those stand at, at this point?

Do you want to take part of that?

Sure. There's nothing specific to share regarding conversations in the industry. But as you noted and others have noted, we look at the spectrum being potentially valuable, or the capacity from that spectrum being potentially valuable to a broader range of industry participants than just the incumbent carriers.

As for AWS-4 build-out, the downlink election date, I think, is June 20 of next year. And the final build-out, if we were miss the interim build-out, the final build-out is 70% of pops by EA by March of 2020.

Okay. And there's a 40% somewhere in there for 2017?

There's a 40% interim build-out requirement in March of 2017.

But it's irrelevant on the 2020 timeframe. If you meet the interim build-out, then you go to 2021. Then the AWS-3 spectrum is 2025. The H block is --

AWS-3 is 12 years from the time the licenses are granted, so that hasn't even started. E block is the same as AWS-4. H block is April of 2022, if the interim build-out is missed.

The build-out requirements are interesting. What's really interesting, we have enough time that you're probably in a situation where things like 5G are going to be in this timeframe. Today, I think you build out 4G. I don't think there'd be question about it. But I think as you get closer to that timeframe, you start thinking you're not going to build out the old technology, build out the new technology, build out 5G. So we'll have to see how it all plays out.

Right. It just sounds like you guys are leaning more toward some kind of spectrum hosting arrangement or leasing than anything else, at this point.

There's nothing definitive, Phil. But as Charlie said, the combination of events that have occurred recently have forced us to take a fresh look at alternative options. So with that, Operator, I think we have time for one more question.

Paul Kirby, TR Daily.

You said earlier, Charlie, that if the FCC disallows the discounts, it would be a complicating factor for you in the incentive auction. Just to press that a little more, are you less likely to participate in the incentive auction if you don't get the bidding credits?

We're going to look at the auction. We're going to see the rules and see if there's a way to participate. Obviously, my Board is going to ask a lot more questions, like can they change the rules at the end. So I think there's $3.3 billion of complications, potentially, and I think there's a trust factor complication.

But I'm not saying that we wouldn't participate. I'm just being realistic about it when I go to the Board. We'll have to read the order and see what it says, and see what people think and see how honest the disagreement is.

We have to see the AWS-3 order. But in addition, as you know, the DE rule -- the incentive auction rules are not out yet either. I think they're due to be released tomorrow. But it's not clear that that will even include all the time lines regarding filing dates. So in both cases, we're just waiting to read and digest the orders that come out and then we'll evaluate next steps after that.

Okay. Thanks.

All right. Thanks, everybody.

So with that, thank you all for your participation. Operator, the call is over.

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