DIRECTV's CEO Hosts 2013 Investor Day Conference (Transcript)

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DIRECTV (DTV) 2013 Investor Day Conference December 12, 2013 8:30 AM ET

Executives

Martin Sheehan - Senior Director of Investor Relations

Michael D. White - Chairman, Chief Executive Officer and President

Bruce B. Churchill - Executive Vice President, Chief Executive Officer of DIRECTV Latin America LLC, President of DIRECTV Latin America LLC and President of New Ventures

Jacopo Bracco - Director and President of Directv Panamericana

Luiz E. Baptista da Rocha

Evan R. Grayer - Vice President of Broadband

Fazal Merchant - Senior Vice President of Treasury & Corporate Development

Romulo C. Pontual - Chief Technology Officer and Executive Vice President

Michael W. Palkovic - Executive Vice President of Operations

Paul Guyardo - Chief Revenue & Marketing Officer and Executive Vice President

Patrick T. Doyle - Chief Financial Officer and Executive Vice President

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Craig Moffett - MoffettNathanson LLC

Richard Greenfield - BTIG, LLC, Research Division

Tuna N. Amobi - S&P Capital IQ Equity Research

Martin Sheehan

Good morning, and welcome, everyone, to the 2013 DIRECTV Investor Day. For those of you who don't know me, or only spoken with me on the phone, I'm Martin Sheehan, Vice President of Investor Relations.

We have an exciting day planned for you, including some great product demonstrations out in the lobby, which I highly recommend you spend some time perusing, either at the break or when we adjourn for lunch. In particular, I'd like to point out, we have an ultra HD experience demo out in the last room on the right, just past the registration desk. In addition, we're highlighting our new sports portal, second screen apps, as well as many of the features, content and services that set DIRECTV Latin America apart from the competition.

As for today's agenda, Mike will come up in a minute to give you -- to kick off the day and make some opening remarks. And then we'll spend about 90 minutes going through the Latin America business, followed by a short Q&A. Then we'll take a 10-minute break, followed by 90 minutes of presentations on the U.S. business. We will close the session with a more extended Q&A. And of course, we want to make sure that you get all your questions answered, so Mike and his executive team invite everyone to join us for a buffet lunch in the breakout rooms back again down towards the registration desk, following the formal Q&A session.

I would also like to note that hard copies of the presentation will be available after the formal remarks are complete at about 1:00. You may also pick up a flash drive at the registration desk that will have a PDF of the slides saved on the drive. And of course, at that time, we will post the slides on our website, directv.com.

Finally, I would be remiss if I didn't point out that Jon Rubin is making his final appearance today, representing DIRECTV. I've had the pleasure of working for Jon for over 15 years, and I want to personally thank him for all he's done in helping me in my career, as well as his efforts in making DIRECTV and the IR function best-in-class. So if you haven't had a chance to wish Jon well, please make sure you track him down before you leave today.

With that, I will try to perform one of the duties which he's done so well over the last 18 years and read our legal disclaimers. In the materials, we have provided a cautionary statement regarding the use of forward-looking statements in these presentations and the associated risk factors, and urge you carefully to read that statement. In addition, in accordance with the SEC's Regulation G that requires companies reporting non-GAAP financial measures to reconcile these measures to the most directly comparable GAAP measure, we provide reconciliation schedules for non-GAAP measures, which are included in the back of the hard copies of the presentation and will be posted on our website at directv.com/investor.

With that, I'm pleased to introduce Mike White, Chairman, President and CEO of DIRECTV. Mike?

Michael D. White

Thanks, Martin. Good morning, everyone, and welcome to our 2013 Investor Day, otherwise known as Martin Sheehan's coming-out party.

Look, we've got a lot of DIRECTV staff here. I'm not going to introduce them all. A number of the presenters -- we'll introduce the presenters as we go. Most of them, you're familiar with, but there are a number of others that are out in the audience. I'm going to just ask all of the other DIRECTV executives after I kind of introduce a couple to stand up. But our General Counsel, Larry Hunter, is here; our Chief Content Officer, Dan York, is here, in charge of programming. Anybody got any questions about programming? I do. A guy you may not have met before, Rasesh Patel, Senior Vice President of our Customer Experience Group; Tony Goncalves, Senior Vice President of our Digital Entertainment group. And if I just ask all the other DIRECTV resources that are here, they'll be out manning the booths so that if you have questions or whatever, by all means, seek them out. So all the rest of the DIRECTV folks, just raise your hands, that are out in the audience. We've got a pile here.

Okay. With that, let me get started. It was December 2, 2010, and a number of you didn't have much to do to prepare for Christmas that year, so you came up to -- uptown to our big Investor Day meeting. And as I think back on it, I mean, this was one of the slides, we talked about building a diversified growth story. At the time our stock was $40 a share. We had about -- we closed that year with 28 million subscribers, and we had about $24 billion in revenue. We told you, for the U.S., that we were going to build on our leading brand and technological innovation to take U.S. video to the digital world, and we talked about pillars of strength like strengthening the core -- pillars of success, being: strengthening the core through segmentation, delivering a best anytime, anywhere experience, creating new revenue streams and enhancing productivity. And in terms of Latin America, we talked about doubling down on Latin America to capture the tremendous growth opportunity we saw, to profitably increase market share with the segment and strategy, extending our leadership in higher end markets through HD and DVR leadership with the best programming, and penetrating deeper into the middle market, with prepaid services and lower priced postpaid offerings.

Well, here we are 3 years later, and we've added nearly 10 million more households across the Americas that are DIRECTV customers. We are the world's largest pay-TV provider, and I know you're all pretty familiar with our different portfolio parts. 3/4 of our portfolio is in the highly profitable U.S. business that continues to generate strong cash growth. About 1/4 of our business is in Latin America, and growing fast, with big business that's highly profitable in Brazil. A PanAmericana business that's got some dramatic growth opportunities you'll hear about from Jacopo later today. And our all-important investment in Sky Mexico, as well, which is also highly profitable. And we have a small sports network team, but I would argue, they may be small, but they are by far, the best Regional Sports Network in the industry and a hugely strategic asset for us.

Now when I think back on the last 3 years, we've accomplished a lot. But I would say, if I were to pick out a few things that I'm most proud of, and I kind of picked 4 buckets here, product innovation because innovating on our product and the entertainment experience is the lifeblood of DIRECTV; advancing the customer experience; developing our talent and expanding our corporate social responsibility and delivering our financial and operating goals.

In terms of product innovation. We launched the best-in-class set-top box called Genie. We've rolled out an industry-leading, high-def user interface across multiple screens. And there's a tremendous story that Tony Goncalves, coupled in partnership with our engineering group led by Romulo Pontual that are building around digital entertainment. There's a lot of stuff in the back in the demos that you'll see in that area. But that team, in partnership with both Mike Benson in IT and Romulo, has helped lead us build the foundation for a robust TV Everywhere platform that we're very excited about. And after beating cable for 13 consecutive years on the customer experience with -- the ACSI customer service scores, as is typical of DIRECTV, we felt it was time to raise the bar on ourselves and not necessarily just look through our own industry, but look beyond our industry, to become best-in-class in terms of the customer experience, believing that improving our customer experience will both improve customer loyalty, as well as drive productivity.

We created a group under Senior Vice President Rasesh Patel, who's here with us this morning, that has helped focus us working in partnership with both Paul Guyardo on our policies and practices on the sales side, as well as with Mike Palkovic on the operations side. And it's really doing a terrific job making a real difference in how we service our customers.

In 2013 alone, we'll have eliminated 5 million phone calls out of some of the policies and practices that we've been following. We've reduced our service calls by 25%, and our equipment failures by 40%. And Latin America continues to win award after award around our customer experience and is investing in new software that will give us an even more sophisticated way to manage our customers going forward. Third, I'm incredibly proud of our team and our focus on corporate responsibility. We've been recognized just last week as one of Bloomberg's Civic 50 list of America's most community-minded companies. Our DIRECTV employees have contributed more than 32,000 hours across the Americas, in both Latin America and the U.S., in their community over the past year. We've got a robust sustainability agenda, receiving the 2013 Department of Energy, ENERGY STAR Partner of the Year Award, in reducing our carbon footprint by more than 10% since 2011. And we know that's not only good for the planet, it's also saving us real money. And you'll find out, to the right, a booth where we've got copies of our new Corporate Social Responsibility report, which we just issued about a week ago.

And lastly, but not least, certainly, we continue to deliver year in and year out on our commitments. We delivered on our consolidated revenue goal that we set 3 years ago of $30 billion. In fact, when we closed the year out, we'll exceed that goal. We far exceeded the 30 million subscriber goal that I set 3 years ago. And we will have delivered on our $5 earnings per share goal that I outlined 3 years ago. We continue to have the highest capital return policy in the industry. And as I looked at it, 45% of our float has been retired since I became CEO.

Now all of that has created a lot of shareholder value and we're really, really proud of the improvement that we've seen in our stock price and the recognition in delivering those numbers. And we continue today to be confident in our future based on the same competitive advantages that we talked about 3 years ago. Our advanced technology, from our best sound and picture to our industry-best user interface to the best HD DVR in Genie. Our incredible brand, that Paul Guyardo will talk to you about a little later on this morning, that continues to win award after award for our world-class advertising. Our customer experience that continues to beat cable year in and year out. Our low-cost delivery and service platform all across the Americas. Distinctive content from NFL SUNDAY TICKET to our World Cup offerings that we'll have in 2014 in Latin America, and perhaps, most importantly, an experience-savvy management team that has a track record of strong execution.

But certainly, I know, no one can rely on historical advantages in today's fast-changing world. Each of us in business has to constantly adapt, reinvent, revitalize, and everyday, look to improve our business. And I might say for DIRECTV as like -- I like to say, the original over-the-top disruptor in our industry, we don't ever take anything for granted, and are constantly looking for ways to get better day in and day out.

Now with that said, I'm well aware of the unique challenges that we face in our 2 key geographies. And the U.S. is a mature, hypercompetitive marketplace. We've got an accelerating pace of technological change from 4G networks to a proliferation of mobile devices, over-the-top services, even new video ecosystems like YouTube to our content cost challenge. And in Latin America, it's also a competitive marketplace, but I would say one thing that has changed is it clearly is a much more volatile and challenging macro political -- macroeconomic and political environment, requiring greater agility and streetsmarts in how we manage through that. All of that being delivered, at the same time, we've still got to complete the modernization of our Latin America infrastructure, launching 3 new satellites, excluding Mexico, over the next couple of years and completing 2 broadcast centers, as well as a broadband build-out. And ensuring that while we do that, we generate an attractive return on investment and cash flow in 2016.

So with that said, let me just tell you quickly the themes you're going to hear today. First, in terms of Latin America, Bruce Churchill and his team will be up right after me, to talk to you about how we're going to grow our Latin America business. First and foremost, continuing to extend our leadership position in the high-end markets. You're going to hear about the launch of our new satellites over the next couple of years that will, over time, give us a tenfold increase in high-definition channel capacity, and you know how important that was to accelerating our growth in the U.S. business. You'll hear them talk about lower-cost boxes, like a lower-cost HD box or something called Lego [ph] that we've got. And you'll see that outside, by the way, demonstrated in the back, where we can kind of take a low-cost HD box and literally just drop-ship to the customer, something that you could just hook onto it and create a DVR out of it. Self-service, in effect, which saves truck rolls. Incredibly efficient opportunity for us going forward. Clearly, we need to continue to profitably increase our penetration in the mass market segment.

And you'll hear how we're going to continue, especially in Brazil, to better optimize our programming and packaging strategies, leverage prepaid, which has been so successful in PanAmericana, and continue to build a profitable middle -- mass market business.

You'll also hear from our new CFO of Latin America, Fazal Merchant, who'll talk to you a little about how we're going about protecting, in some cases, or improving margins in other cases, depending on the country, through smart pricing and rigorous cost management and tough-minded control of our capital spending.

Evan Grayer will talk to us a little bit with an update on how we're going about driving fixed wireless broadband growth with a success-based initiative that also we're demoing in the back. In fact, we expect to reach, or pass, somewhere between 5 million and 8 million households by the end of 2014 across Brazil, Argentina, Colombia and Peru.

And finally, you'll hear Fazal talk about how we're working to ensure that Brazil is largely self-funded in 2014. And when I say self-funded, what I mean is if I pull Venezuela out, we've been investing in Latin America. We expect, in 2014, to get pretty close to self-funding, excluding Venezuela. And we certainly expect to generate significant accessible free cash by 2016.

Now with all that said, I think I could argue that a lot of what's on that slide is similar to what you've heard before at our recent Latin America Investor Day. Certainly, it's true that we're committed to continuing to modernize our infrastructure, which, by the way, when we get done with 3 or 4 satellites across both Mexico and South America, we'll have fewer satellites to service an entire half continent than the United States does with its satellites. So it's an incredibly efficient approach that we're taking. But it does take money and it does play out in our capital spending over the next 3 years.

Second, we have to win in the middle market. It's not a choice. Those statistics, if we just stick with the A and B consumer in Brazil, you're going to service 20% of the population. The C-class customer is more than 1/2 of the population and we can't win and build a scale business without being successful with that population. But finally, we're well aware that the macros are changing, are more challenging between devaluation, elections and other disruptions across Latin America. So we are taking steps to fine-tune our spending, be smart about our pricing and be quick to adapt our capital spending as things change.

After that, you'll hear from the U.S. team. Romulo Pontual, our Chief Technology Officer, is going to tell you about our product innovation plans and how we intend to continue to advance our best-in-class entertainment experience. He has a terrific demo, as Martin said, of the ultra HD, which will be enabled by the launch of 2 new satellites over the next 2 years. You'll see in the back, a whole pile of demos around the whole digital DIRECTV Everywhere platform and what we're doing with satellite cloud hybrid technology. You'll see how we're going to continue to enhance our HD user interface. I think we're demoing voice in the back.

Second, after Romulo gets done, Mike Palkovic, our EVP of Operations, will talk to us about how we're going about going from best in the industry to best in the world to make customer service a true competitive differentiator for DIRECTV, how we've spent a tremendous amount of effort over the last year between Rasesh Patel and his team working in partnership with Mike on empowering our frontline employees to completely retrain our technicians and our call agents on how we're going to do business going forward. You're going to see how we're working to streamline and simplify policies, practices and processes. And the 5 million call reduction in 2013 is just a down payment on the opportunities that we see to further reduce calls in 2014 and beyond. And we're investing in our directv.com capability to enable chat, which we did this year, but also, to enable greater self-care over the next couple of years.

After that, our EVP of Sales and Marketing, our Chief Revenue Officer, Paul Guyardo, will talk to us about how we continue, year in and year out, to attract and retain profitable subscribers through what I would argue is world-class direct marketing capabilities, the best-in-class branding and sophisticated retention tools. In addition, Paul is going to talk to you a little bit about some of the nonresidential kind of more new ancillary revenue streams that we're focusing on. Home security, through our LifeShield acquisition, which is also being demoed in the back and kind of one of the founders, Mike Hagan, is here in the back, demoing the LifeShield opportunity, which you'll see more of as we expand that in 2014. And dynamic ad insertion and ad sales is a tremendous opportunity that we've got a great start on in 2013, and you'll hear more from Paul about that. Growing our commercial business, which also has had a terrific year, as well as looking at opportunities in subscription VOD, over-the-top and electronic sell-through. Finally, Pat Doyle will wrap up with an explanation of our productivity initiatives that we've undertaken across our enterprise over the past year.

Now again, a lot of that hasn't changed. Most of it's pretty consistent with what we've talked about before. But make no mistake about it, I would argue, we are far more in-depth in our strategies. We know a lot more about streaming, we know a lot more about our TV Everywhere platform, we know a lot more about the cloud, we know a lot more about ultra HD. In terms of the customer experience, we've had about 18 months of experience, realizing that it is not only a huge advantage in terms of customer loyalty, but it also drives real productivity. And we've had now 3 years, by my count, of managing elevated content cost, managing our net adds and our churn with elevated pricing. All of that has taught us a lot in how to work in these times. And we've got a lot of new things going on in terms of our enterprise-wide focus on productivity, including a whole initiative around leveraging global procurement across the Americas and the U.S. So don't all rush out to your Bloomberg terminals. This is why Martin didn't want to give you the slides ahead. But if I think about the next 3 years, the story is -- continues to be that DIRECTV is an attractive, diversified growth story for our investors. We've got solid strategies. We're embracing new technologies, looking for the best of the best, ensuring that we get the low-cost, high-quality, high-reliability advantages of a scale satellite platform, coupled with the mobility and the interactivity and the breadth of content that the cloud can offer and ensuring that we make that together a seamless experience that leverages the best of both. And we're adapting to changes, whether they're in the U.S. or Latin America, through agility and continued innovation.

Now I have confidence in our business and its prospects. Our U.S. algorithm really isn't that different than what we've talked about before. Clearly, Latin America's gotten a little more complex. So in my mind, what I look to, and Bruce and the team come in and talk to me about their performance quarter in and quarter out, is first and foremost, our GMs manage their business in local currency. So I want to know how they're performing on the top line in local currency, and we certainly expect to see continued growth in 2014. Second, I want to make sure that we're thinking hard about how we either sustain in some cases, because we've got several countries that already have 30% up to margins, or in other cases, where we've been investing for growth, that we have a track -- kind of a path forward that over the next several years, gets us close to 30% margins. And finally, that we're managing our capital spending in a disciplined way, recognizing the changes that are going on in the external environment.

So with all of that said, how do I think about DIRECTV enterprise 3 years from now? Well, I'm not here to provide guidance, so don't -- and I don't intend to update you on a quarterly basis in terms of guidance. But these are the goals that we have set for ourselves as a management team and, by the way, on the basis of which our long-term incentive compensation will be based. I want to caveat a couple of things. First of all, I'm taking Venezuela out because Venezuela's created a lot of confusion. We're going to continue to report it the same way. I'm not creating a new segment, okay? Let me be clear. But in terms of true economics of the business, Venezuela's a little less than $1 billion of revenue, about $0.5 billion in OPBDA, and about $300 million in reported cash flow, none of which we can put our fingers on at the moment. So let's take that all out of our numbers, park it to the side.

Second, we've tried to take a very conservative look at currency using consensus forecast from several banks. And we've made some assumptions on share buyback. Now our normal review with our Board of Directors is the February meeting, so we'll update you with specifics on share buyback at that time, but certainly, I can tell you, we intend to continue our strategy of buying back shares. And we've modeled out what we think is a reasonable amount of share buyback, all of which leads to delivering a leveraged financial algorithm. So we start with mid-single digit or a little better than that in revenue and OPBDA, with tight control of capital spending, because we really do believe, in total, 2013 is probably our high watermark for capital spending, that we're going to get leverage off of that so you leverage up your cash flow to, let's say, higher single digits. And then you get 10-plus points of leverage from continuing to buy back shares. All of that leads to an $8 a share earnings or better, and an $8 a share free cash flow per share, which is the number I'd tend to focus on more in 2016, all of that excluding Venezuela.

Now if we deliver on that, by my team's calculation, we'll be in the top 10% of the S&P 500, with first quartile growth, as always. I'm confident in the plans that you're going to hear today that we can deliver that. We're excited about the future at DIRECTV.

And with that, I'm going to introduce Bruce Churchill, our EVP and President of Latin America. Somebody who's got more than 20 years of experience in the media business, and is a real internationalist. Bruce?

Bruce B. Churchill

Thanks, Mike. Good morning, everybody. Thanks for coming. Actually, for many of you, we had a DIRECTV Latin America Investor Day, I think, in this very room, I think, about 18 months ago. So some of what I'm going to cover today may be a bit repetitive for those of you that were here and -- but obviously updated, but for others, could be new information.

Here we go. So I'm going to give a bit of a market overview and update. I'll try not to be too repetitive, as I said. Jacopo Bracco will follow me with an update on PanAmericana; Luiz Eduardo Baptista, otherwise known as Bap, the CEO of SKY Brazil, will give us an update on Brazil; Evan Grayer will present a few new information on where we are on our broadband. And then, as Mike mentioned, Fazal Merchant, who's recently appointed the CFO of DIRECTV Latin America, but whom many of you may know in his previous capacity as the Treasurer and Head of Corporate Development for DIRECTV, will give us an update on where we are financially. Mike and I will then do a quick Q&A. And as Mike said, a lot of those hands that went up earlier were hands of other DIRECTV Latin America executives. So look around the room if you have any particular questions.

So what have we been doing since we last met 18 months ago? Well, we've grown ourselves by about 50%. These figures include Mexico, but we operate as, I think you know, really 3 platforms. The first, which you'll hear about today, is our PanAmericana platform. This is the platform that covers Spanish-speaking South America, as well as the Caribbean. We do operate pretty much in every country except for Bolivia and Paraguay. And as I mentioned, it covers all of the Spanish-speaking countries. It's our largest platform, the big territories are some of the obvious ones, Venezuela and Argentina, the 2 biggest countries. But we've had a lot of growth in a lot of the other countries, and you're going to hear about that from Jacopo later today. And as I flip through these slides, the thing I think you ought to focus in on are really the 3 factors that help drive our growth in Latin America. One is the number of households. So the number of households in Latin America, it continues to grow, up 2% per year. Then you have the penetration rate. And if you look at, for example, this chart here in PanAmericana, the penetration rate is increasing across Latin America as well. In the case of PanAmericana, 3 years ago, we're 35%, today, it's almost 45%. Then on top of that, obviously, we have our share, and we have been growing our share in every case, in every country over the last several years. And so we have, in fact, grown faster than the market. And by the way, we own 100% of the PanAmericana platform.

In Brazil, we operate under the Sky brand, SKY Brazil. It's really the premier pay-TV brand in Brazil. It has about 5.5 million subscribers, the second largest operator in the country. Again, Brazil is a very dynamic country. The number of households is growing and I'm going to talk a little bit about -- or Bap will talk a little bit about later, of not only our households growing, but there's been a big shift over the last several years of the nature of those households, where more and more of them have become middle class households because of the growth in the economy. And that has a big impact on the penetration rates and the growth of the penetration rates. We are partnered in that business with Globo. Globo is the large -- largest and by far and away, most successful television company in Brazil and has been a key contributor to our success there over the years.

Finally, Sky Mexico. Most of what I'll talk about later today and the figures that you'll see from Fazal will exclude Mexico because we don't consolidate the Sky Mexico platform. We own 41% of it. It's majority owned by our partner, Televisa. Televisa is an equally successful television company based in Mexico, and Sky in Mexico is the #1 pay-TV provider in the market. And again, the phenomenon that you've seen in Mexico, for those of you that probably follow Televisa, is the growth in the number of households, the growth in pay-TV penetration and the growth in our share.

Now since we were here 1.5 years ago, as Mike alluded to, there had been a few changes out there in the macro world, makes my life interesting, makes the team's life interesting. Certainly, one factor is moderating growth across the region. In many ways, driven by the moderating growth in China. Many of these economies are resource-based economies and have been driven -- their growth has been driven by the growth of exports of their resources to China. So there has been a slowdown in some of the key markets. Having said that, if you look at where the projections are for most of these countries and a lot of them still have pretty respectable growth rates going forward. So while it slowed down, it is certainly not -- growth has not stopped. On top of that, if you look at the chart on the bottom, the currencies, year-over-year, presents some challenges as well. Pretty much every major currency has weakened vis-à-vis the U.S. dollar from 12 months ago. And so from a financial reporting point of view, that obviously makes year-over-year comparisons somewhat difficult, somewhat more challenging. Having said all that, we're still #1.

And there's a lot of data in the market about how many people, how many subs, various companies have. And you have to be very careful when you look at that data because some companies count it in different ways. The way I count it is paying subscribers. I'm the kind of guy who likes to get paid. And if you use that measure and you really dig into the numbers, and we do it with quite a lot of detail on an ongoing basis, you will see that we are by far and away, the #1 pay-TV provider in the region. Having said that, I still think there's significant room for growth. Again, if you look at those 3 factors that help drive the size of our market in terms of household growth, pay-TV penetration growth and our share growth, what you'll see is in each of those categories, there's an opportunity for us to continue to grow our business. I think the other thing I would point out is that the size of the market, even excluding Mexico, so just the markets that we consolidate financially, it's roughly the size of the U.S. So it's a very big and substantial market. In just over the last 3 years that are shown here, the number of households increased by 10 million. So these, again, are pretty big numbers and really have a significant impact on our ability to grow.

On the content front, a lot of talk about, obviously, content, programming costs, et cetera in the U.S. Certainly, the dynamics are in some ways similar. Programmers always want to be paid more, that's a universal truth that I can tell you, having worked around the world. But I would say, at the same time, that the dynamics and the challenges are not nearly as severe outside -- in Latin America as they are here in the U.S. Important to remember that in countries in Latin America, it's really the local players who dominate and particularly in Brazil, it's Globo; and in Mexico, it's Televisa. It's nice -- they are, fortunately, our partners. Nice to have friends in high places. There has been some consolidation in the international arena. The names are up there, the 5 big players are ones that you would all probably recognize. I would say that sports is an area that has gone through somewhat of a transition, frankly, as much driven by us as anything else. We've become a fairly significant regional player in sports, particularly in soccer, both local soccer and international soccer. I'll talk -- you'll hear a lot about that later today, but Fox, which is now I guess 21st Century Fox, recently bought out as partner, they've been a little more aggressive. And interestingly, América Móvil recently, for the first time, made a big sports rights acquisition when they bought the rights to the 2016 Olympics. So it's a dynamic market and much as you see in the U.S. and in other markets, sports is very much a driver in the content arena.

In the area of content, there's also -- in media, in general, there's a lot of regulation that goes on. It's something that we navigate all the time. There have been times -- I know where sometimes, news about new regulations in one country or another surfaces in the U.S. for whatever reason. People tend to get a little -- quite worked up about it. I think the advice I would give you is to really look deeply into what news it is that you've seen, really try and understand if something really meaningful has happened or not. But these are the kinds of things that we do all the time and we navigate them all the time. And at the moment, there's nothing on the horizon that gives me any reason or source of concern.

And finally, a topic that's much discussed here in the U.S. is kind of the OTT. What about the disruptors? What are the threats from that? My general view about it is at the moment, it is not a major threat, but you'll always see us watching. You can never be complacent. Broadband penetration is increasing, but as you'll hear from Evan a little later today, it's still relatively low. There's also, again, there's another area where I would urge you to really look hard at the data. A lot of times, you'll see figures about broadband penetration. You need to sort out the residential versus business. You need to sort out how much of that is being accessed on mobile devices, which probably means it's not really that robust. And as a practical matter, a lot of the data well, say somebody has 2 MB or 1 MB, but in reality, they're actually receiving a lot less. So the infrastructure in Latin America is much more challenged than it is here. And I think it will be for the foreseeable future.

Netflix did launch with a big bang, and I've not heard a lot about it since. Very difficult to get hard data on that, they don't talk about Latin America specifically when they talk about their international. My experience after 20-plus years in media is if people don't talk about something a lot, it usually means it's not going that well. But that's my own conclusion.

And finally, you are seeing some of the international players starting to offer some of these online OTT, TV Everywhere-type products, but it's usually in an authenticated model. We have relationships with all of them, but at the moment, it's really quite limited.

So that pretty much gives me the -- finishes my quick summary and update. And let me just give you a little more on our kind of strategic priorities. Now for those of you that were here 18 months ago, it's probably going to look like a fairly similar slide, I don't think it's the same exact slide, but in many ways, the basic strategies remain the same. We very much focus on continuing to build our leadership position in pay-TV through better technology, better segmentation, better service and better content. On top of that, we'll be talking about our broadband rollout. As Mike mentioned, since that time, while the basic strategies remain the same, we have -- we've learned a lot in the last 18 months. We certainly, I think, been more successful in terms of what we're doing in the prepaid arena. We've really, I think, got that nut cracked in PanAmericana, and Jacopo will talk about that. We certainly learned a lot in the arena of broadband, and Evan will be talking about that.

Now having said that, I would also, to Mike's point, the world has changed. It's become a little more volatile. I mentioned the currencies are a little more challenging. So we do have to be careful about our tactics. And I think that we will continue to refine what we do and not only think about how much money we spend, but where we spend it as we try and manage our way and navigate our way through these somewhat challenging times.

So let me give you the update. On the progress front, I'm sorry, I think I skipped one there. Did I? Can you just go back one slide? Thanks. Mike mentioned on the technology front, we have in the last -- since we last met, obviously, come a lot farther along in terms of where we are in terms of developing our satellites. We'll be launching a new satellite at the end of sort of third or fourth quarter of next year for PanAmericana, that will really leapfrog our ability to launch HD, as well as SD. This kind of investment will really future-proof our business for the foreseeable future. In SKY Brazil, we have ordered a satellite that will be coming a little later, more in the range of 2016. We do have capacity and capabilities to add to our HD capacity in the meantime, before the satellite is delivered. But I do think HD is going to be a new battleground in pay-TV going forward.

With respect HD, we very much do follow the U.S. roadmaps, so all the things that you're going to see in the back of the room or maybe you saw this morning, we ultimately do introduce in Latin America, we tend to follow by 1 to 2 years. But for us, it's really a key competitive advantage. And the reason is, it's the best -- the best products, we get them first. So we can introduce them when we need to and we get them at the lowest cost. And that, I think, has been one of our key differentiators in terms of our ability to compete in Latin America. And it's not something that any of our competitors can easily duplicate.

Segmentation. Talked a lot about that. I think we've gotten a lot smarter about it. And I think we've got a lot better about executing on it. Now why is segmentation important? I gave you some pay-TV penetration numbers, by country, a few minutes ago. But when you look at each country, you then have to go in a little deeper and say, "Okay, how's the penetration by social class?" And social classes tend to be divided along A, B, C, D in Latin America, with A being, obviously, the high-end and the C, D, E is more the low-end. And if you look at it, not a huge surprise to see that pay-TV penetration is higher in the A, B segments than it is in the C, D segments. But if you look then -- the charts on the left there show the red for Brazil and the blue for PanAmericana, what percent of the households are in each of those? What's the pay-TV penetration in each of those segments? But if you look at the gray bars, they tell you the size of those segments, what percent of the population do they make up. And obviously, the Cs and Ds are a bigger part of the population, the As and Bs tend to be smaller. So the pay-TV penetration is not only low in general, but it's actually lowest in the largest segments. So assuming we can figure out ways, which I think we have, to serve the lower segments profitably and efficiently, the opportunity remains very large. On top of that, we're not giving up on the As and Bs, and I think we still, with all of our technologies I mentioned, are the market leader there. And so I think we have a nice balance within our portfolio of customers. And what you'll see over time, you'll see, for example there on the right-hand side of the chart, are gross ads by segment for this year. I think more and more, that SD or that traditional standard of that segment will shrink as a percent of the total and you're going to end up with more people in the advanced products, which we include -- where we include HD and mass market. And those will be the 2 big segments that we face.

Now how is it that we're able to offer these broad range of products? Well, we typically play with, I would say, 3 different variables. This one is kind of obviously the programming and packaging and that affects the ARPU. How much you're charging every month. In addition, we charge varying hook-up fee. That's mentioned as the HUV that you see here. This is our packaging lineup in Colombia. And finally, we have the method of payment. So on the left-hand side, or the really, the C and D class, we have relatively lower ARPUs, more modest hook-up fees and the ability to go on a prepaid basis, so they don't have to commit to us. And all the way up to the right-hand side where, obviously, you're putting in more of an investment, but there's still a bit of a hook-up fee and obviously, a higher ARPU that goes with more equipment, more technology.

And we try and balance all 3 to create the best value proposition for the consumer. Now at the same time, it's important to balance those things not just for the consumer but frankly, for DIRECTV and DIRECTV shareholders. And so we do very much monitor the returns or the IRR on each of the segments. And so it's balancing the lower net SAC with that lower monthly ARPU to get the kind of return that we need in order to keep the business profitable. So as you can see here, let's say, taking the PanAmericana, 2 examples up there, the postpaid has an IRR of about 40%; prepaid, closer to 45%. So actually, the prepaid has a slightly better IRR based on our experience now. In Sky Brazil, we've been historically a postpaid business, and we'll be moving more into prepaid, which Bap will talk about, but again, very respectable IRR, certainly well above our cost of capital. And by the way, also, the PanAmericana figures here exclude Venezuela, just because, again, as Mike talked about, sometimes putting in Venezuela creates a bit of noise.

We get asked a lot about, "Why do prepaid?" Because we're really the only pay television in company Latin America that does it in a big way. We obviously think it's very suited to the market, as do the telcos, who do a lot of mobile. But here's some information I recently ran across, which is a part of an article on social inclusion in Latin America. And what it shows is information about the percent, in this case, it's men. The figures are actually lower for women. But what percent of the population effectively has a bank account, has some relationship with a bank. And in the United States, that figure's above 90%. In Brazil, it's actually not -- it's a pretty respectable number, and Brazil has always had a pretty good banking system largely -- dating back to the days of very high inflation. And so it's 60%. But you start getting in some other countries and you quickly drop down to well below 1/2 the population, in some cases, as low as 20%, 25%. So you need to figure out ways to serve these customers if you want to be in the mass market business. And so the prepaid model is one that we think is -- that works very well for that group.

Service. Mike's talked about our investments in service. We continue to make pretty big investments and do that in order to support our growing platform. I would say this is an area where we have definitely refined our tactics in the last 18 months, as we tried to adapt to the new reality of where do we want to be spending money, where do we want to be putting in our overhead. You're going to see more of it in Argentina and Venezuela, because if the cash is strapped there, you might as well use it to support your business locally, even if that part of that activity can support you on a regional basis. And as Mike mentioned, we're really in the middle of an investment cycle. We've got satellites, we have this kind of activity going on. Having said all that, I still think we have a fairly asset-light approach to the market. We don't have tons of satellites. We're very efficient about how we get our scale across the region, with regional call centers in Colombia, for example. And while we are in the middle of a pretty big investment cycle for the scale of our business, I don't think it at all out of line.

Content. We're television people, I believe in content. I believe in content as a differentiator. My experience is telcos don't believe that but we do. And so we've made significant investments and this is an area, I'd say, in the last 18 months that we've made a lot of progress in this arena in terms of the investments that we've made in creating some both occasionally exclusive content, but in many cases, differentiated content. And these are particularly in the area of international football or soccer with Spanish League, English Premier League and some extension of our rights of the World Cup.

So in conclusion, really, this is -- everything that we do is all about leveraging our regional scale to compete effectively in the local markets. And every one of these components here, they're all interrelated, but it's all about driving our scale to enable us to serve the whole market in a cost-efficient way that provides great service to our customers, great differentiation and continues to build on our leadership. And even our ability to invest in broadband is very much linked to the fact that we have these basic customers that we can sell to. So each of the components is interrelated, it's all about leveraging our scale, and I think scale is something that is extremely important to our success, and again, something that I think is difficult for our competitors to replicate.

So with that, I will turn it over to Jacopo Bracco, who will give us an update on PanAmericana. Jacopo?

Jacopo Bracco

Thank you, Bruce. Good morning, everyone. So I'd like to start with a quick update from the presentation I had from the Investors Day about 18 months ago. So as some of you may recall, 18 months ago, we talked about 3 main objectives. The first one was expanding in Colombia; number two was growing in the mass market through the growth of our prepaid product; and then finally, delivering in synergies and efficiencies through our scale, globally, regionally and eventually, locally. And so today, I'm happy to tell you we've had progress on all 3. We've more than doubled our business in Colombia. Our sales, on an annual basis, have increased 45%, primarily through the growth of prepaid. And also, we've made great progress on customer experience, and we'll see the benefits of that a little later. But in addition to delivering on these objectives, we've also strengthened PanAmericana. We've innovated. We've launched new products, and we've launched new features, and we've also strengthened our lineup of differentiating content. So as a result of that, our leadership position in pay television's even stronger.

But as the market grows, and you've seen that in Bruce's chart earlier, the competition is intensifying. And I'm not going to get into a lot of detail because, again, there's 9 territories, there's a lot of different things, but there are some common themes, and Bruce gave you an overview. But I'll touch on 2 points. The number one is competitors have actually aggressively increased their HD lineup. And curiously, the company that has the most HD channels today is the cable company, the largest cable company in Ecuador, TVCable. They currently advertise 55 HD channels, which compares to our 20 channels of HD in Ecuador. Now because of this number, in terms of their goal in aggressively try to steal customers away from DIRECTV, providing incentives, aggressive incentives but really, without much success once we bring to bear the weight of our differentiating content.

And the second theme that I want to share with you is that competition amongst -- between the telcos and the cable companies is intensifying, and that results in very aggressive triple play offers. So recently, Claro in Colombia has launched a promotion for 5 months triple play, free, and that was in response to Telefonica's promotion of 12 months at 50% on the triple play, which is really a triple play, $35, $40. So I think this is the general theme on competition on the one hand. The competitors are investing heavily to really bridge the gap, the disadvantage they have vis-à-vis DIRECTV on the pay-TV front. And on the other hand, there's an intensifying competitive situation between -- in the telecommunication in general, so resulting in the triple play. But in spite of that, we're competing very well on the basis of our superior content, I mentioned that, and also the technology and service.

So let's take a look at this next chart. So since the last Investor Day, the market has grown about 4 million customers. But we have taken more than 50% of that. We've grown 2.1 million subscribers. So that clearly shows you that we're outperforming the competition in our market. And if you take the examples in the previous page, yes, it may be true that in some cases, we had led less HD, but we really have exclusive channels, which is DIRECTV Sports and on DIRECTV, you have a demo outside. That really help us drive our differentiating message, and these are very highly rated channels, they are true differentiators, and that's where we put the exclusive content that we have, the Spanish League and the English Premier League and other things. And with respect to price, well, there's no doubt that we're priced at a premium. We've always been. It's always been the case for DIRECTV in Latin America, and we continue capturing with that large part of the market that truly cares for their entertainment experience. And the entertainment experience is very important, of course, over the high-end, but in the low-end, it's the only entertainment that they have. The television is central to the family life. It's the babysitter, as well as the security. Bringing the kids, keeping them at home and not on the street, where you may have some real security challenges.

So not only we're doing well today, but I'll argue, our future is pretty exciting. And Bruce talked about our satellites. So at the end of 2014, we'll launch this new satellite. And it's not just a replacement. It's 3x bigger, it's a very large satellite. It's better designed, it's designed to take into account our 15 years experience in pay television in the industry. And we're really bringing what I would say is a powerhouse of the satellite. And what it will do is primarily take us to the HD era. Over time, we can increase our HD channels. We've mentioned about tenfold, probably more, once you factor in advances in compression technologies that will come over the next 10 years. But with the satellite, we can keep our lead in HD for a very long time.

But the satellite is only part of the story. Bruce has mentioned about the Lego [ph] box and other technologies. We will be introducing technologies that will allow us, over time, to bring HD -- but right now, it's a high-end market product, to the middle market, and then eventually over the life of the satellite. The satellite will be there for 15 years, to the mass market. And I have no doubt that we'll see an acceleration in HD. Look, we have sub-1,000 television HD TVs in Latin America as we've had in the U.S. Prices for those follow the global market. You cannot find HD TVs today. So if you go in the mass market, I think we've seen the statistics where you we have 35% to 50% of the homes in the D-class already with HD TVs.

And finally, on the right-hand side of this chart, I'd like to tell you that one thing that we're increasingly doing is dedicate our innovation efforts to all the segments of the market. So this year, for the high-end, we've launched several things. We've launched MRV, Multi-Room Viewing, we've launched the iPad app and we've launched also a feature we call, Call Me, for our best customers so that they can, from the screen of their television, ask for our call center operators to call them and resolve the service issues they may be having. For prepaid customers, we're launching an interactive application so that they can see on screen how many days are left in their programming. So that they remember to recharge and stay active and not lose their television for a day or 2 in case they forgot to charge their account. Again, we have a few demos outside, and we're very excited about our opportunities.

And as Bruce mentioned, again, segmentation continues to be a priority. It is a priority not just for growth, but also to deliver profitable growth. And as this chart here shows our sales, so the new customers coming to the base. And as I mentioned before, we're seeing a real acceleration on prepaid. We've expected to close the year having sold 1.3 million prepaid -- new prepaid customers compared to only about 400,000, 3 years ago. So we're growing fast. And postpaid, on the other hand, has remained fairly constant. The little dip you see in 2013 is just because in the second semester of this year, we've had real challenges importing equipment into Venezuela due to the cash restrictions, so we're using local funds to bring the local -- to bring boxes, which were are actually

[Audio Gap]

probably more opportunities, but we're particularly focused on the profitability of the prepaid segment, which actually leads me to the next page.

And this is a busy chart. The main point that I'm trying to make here is that we currently have a very strong prepaid business, I would argue. We have 7 years of experience running, so we've developed the kind of processes and systems that require us and help us maximize that business. It is actually a product with a surprisingly high customer satisfaction. So we've made changes. We've tried different things. We've developed different options. And we have a very pretty strong product. And one of the keys to our success in prepaid is managing this constant coming and going into the base. So look at the numbers in the middle of the chart, right. So we report to Wall Street. We report in our financials about 2 million customers. That's our current numbers, right? But those are the customers that are active on the day -- on the last day of the quarter, right? So if a customer just disconnected for a couple of days from Day 29 and reconnect Day 2, you will not be accounted. So the reality is even though we report that, we manage a much bigger active base. And as a matter of fact, we have about 1 million more customers that are those that had been active at least 1 day or at least a period in the last 90 days. And those are customers that we're constantly communicating to. We're telling them, "Make sure to recharge. Make sure you don't miss the game this Sunday." And that constant communication's a big difference from what we do with our postpaid customers, which tend to be -- tend to want less of an interaction.

And the last point that I want to make in this chart is here at the bottom left. You can calculate those numbers using the numbers that Bruce showed you earlier. But what it says is that even though you include the fact that we've grown 38%, our subscriber base -- so we had to pay, we had to invest on the acquisition of those new customers. The prepaid business has generated this year in 2013, for PanAmericana, over $100 million in cash profits.

So in conclusion, I would say, we know the business. We have a proven model. It's growing really fast. And it's already profitable.

So let me move now to our content differential. I'm not going to get to all of the details. 2014 is the World Cup year. It is the year of the World Cup, in fact. I'm not sure there are many soccer fans here. The draws weren't really very favorable for Team U.S.A. Some of you may not be very happy about that. I'm Italian. We didn't do so well either. But luckily, for me, our broadcast is looking fantastic. We're going to have -- we're good to be the only place where you can see the 64 games live and in HD. We're going to have 5 channels of HD fully dedicated to the event, 24-hour coverage, 800-plus hours of exclusive production just for DIRECTV subscribers, interactive multi-cameras, statistics. It's going to be a real event. We've had a lot of success in the past with the World Cup. So with the Olympics, the DIRECTV can really differentiate during those times. And as a matter of fact, we are already telling the market, do not forget DIRECTV is going to do it again this year. We've launched a new World Cup campaign already in November. We're warming up the market. And our campaign has already been seen by over 5 million people in Latin America. So I think we're going to have a great year with that. I'll show you the campaign at the end of my presentation. And so between the satellite that is coming at the end of the year and the World Cup, it's a very exciting year for us at PanAmericana.

But it's not just about all of this big and exciting things. As Mike mentioned before and Bruce again, it's also about basic blocking and tackling, which takes me to my slide about service. Just like in the U.S., we're very focused on the customer experience. We're very focused on making sure we're not causing problems to our subscribers. Or on the contrary, we're resolving them before they actually appear. And you can see how that has driven a reduction of 20% in the number of calls we're getting from our subscribers. And I would say, most importantly, you can see the significant reduction in churn that we're seeing over the next -- over the last 3 years. And that reduction in churn has really come across the board, some markets more than others. But it's really a big effort and a big success, I would argue.

And finally, I think the chart on the right is our Net Promoter Score as compared to an average of our competitors. And you can see the gap. And that gap is very significant, 40 points lead. It's pretty unprecedented. I think a lot of that explains why we're able to continue beating the competition in the way that we have in the last 3 years.

So my last point today is about our growth opportunity as we move forward. And we talked about Colombia. We said, "Well, Colombia will be the third leg in the three-legged stool." And that was what we said 18 months ago. But as we look at it 18 months later, I would like to tell you that while, yes, we've done great in Colombia, but it's not just about Colombia. In fact, we've grown in 5 markets. We've grown more than 30% this year. Colombia, yes, but also Chile, Ecuador, and Peru. And in Uruguay, we've actually grown 50% this year alone. So if you take then the longer time period, you see that in these markets outside Argentina and Venezuela, we're growing faster. We have a compounded growth rate of 32% compared to the very strong 22% in Argentina and 16% in Venezuela. But that's where we're growing faster. That's where we're investing our growth. And today, these other markets represent already 1/3 of PanAmericana. And I believe in 3 years, because of the faster growth in those markets, you'll be close to 50% of PanAmericana even more if you take a very bearish view on Venezuela.

So and if -- again, going forward, we have more opportunities for growth in those markets. In fact, excluding Argentina and Venezuela, as you see in the circle, pay-TV penetration is lower, much lower than the average of PanAmericana. It's only 32% versus 44% for the average of PanAmericana. But not only that, the market size is 34 million homes, which is about 60% of the total homes we have right now in PanAmericana. And you also should consider the kind of attractive GDP growth profile in markets such as Chile, Peru, Colombia and Ecuador. We also have and are increasing our local advantage. We've become #1 company in Ecuador. We'll soon be #1 in Uruguay. We have the highest ARPUs of PanAmericana outside Argentina and Venezuela. We have in Chile, Puerto Rico and the Caribbean region. And finally, in Colombia, we are combining the strength of our pay television business with our -- with a big push with our broad wireless broadband that Evan is going to talk to you soon. So I'm not going to get into the details of that.

So we definitely have a very attractive opportunity ahead, but it's not like now we're ignoring Argentina and Venezuela. That'd be crazy. We're #1 in Venezuela. We have a 44% -- 43%, sorry, market share. We're #2 in Argentina. We're very close to #1, Cablevision. We're growing those businesses using local funds. I mean, you're still seeing attractive growth in subscriber in both markets, quite surprisingly in Argentina, which is we have a very high penetration close to 70%. They're a key part of PanAmericana. And they're integral to our success. And because of that, we're using those markets. We're using -- increasing those markets to develop shared services to support all of the other markets in their growth. And we're going to continue to do that. And it's also a way to use the funds that we generate in those markets.

So in conclusion, I hope I've been able to argue enough about the growth opportunity. I've just mentioned the fact that we're adapting our business to this changing business environment, the macro environment. In our Investor Day in 2012, we had said we had a 5-year vision to surpass 8 million more subscribers by the end of 2016. And I'm very confident we're going to make or exceed that goal. So the future is bright for PanAmericana. I'm very confident. I'm very pleased. I conclude here. I'll be here for questions as well. But before I pass on the microphone to my colleague, Bap, to talk about SKY Brazil, I'd like to ask the team to run the World Cup campaign. Thank you very much.

[Presentation]

Luiz E. Baptista da Rocha

So good morning, everyone. Thanks for coming. So the history in Brazil is no different, as Bruce mentioned and Jacopo mentioned, about PanAmericana. So the last time we're here, we were all expecting strong economic growth in Brazil, competition focused on all end, emerging middle markets. Then Sky was the only provider of all products for all segments. There was still penetration and decent opportunity in AMB's. DTH, especially Sky, was in advantage because of the uneven situation of the country that we have in Brazil. And we expect it to double on the business in 5 years by 2016.

So what has changed since then? The growth has moderated somehow. There's a little bit of uncertainty regarding politics. And there's also inflationary impression and depreciation versus the dollar. So regarding the market, in 2012, probably 50% of the sales were highly concentrated on C and D class, the so-called mass market. It has moved to 70% to 80%. So all the sales pitch are highly concentrated in this low-end world. But there are still AMB opportunities. And yes, DTH is still in advantage. And we also have Gisele. We still have Gisele with us. So which is good, that's a good differentiator. So if you'd consider our vision right now, it will be basically the same as we had 18 months ago. So in 2013, we had mid-teen revenue growth around 30% EBITDA. And having said that, we believe that we still have a privileged position. Yes, there are growth opportunities in Brazil, but we have to adjust to the market reality and leverage the very successful expense that we had in PanAmericana with prepaid.

So regarding competition, as I have told you, very intense at lower price points. Most of the competitors, but Sky are selling what plays offers. So then you have América Móvil, which is a combination of Net Serviços on cable and Claro on DTH. We have Oi, the former fixed telephony company in Brazil. They have a dominance in 25 Brazilian states, which is currently owned by Portugal Telecom. They are selling both DTH and DSL. We have Telefónica in just 1 Brazilian state, which is São Paulo, but it's the state. So it's 1/3 of the resident GDP is in São Paulo. And Telefónica is holding a very strong position within this area. And they are defending themselves and expanding if and then there's a corporate possibility outside São Paulo. And last but not least, there is GVT, which is expanding fiber to the node to build out, moving into São Paulo and fighting for the same customers as Telefónica and others.

So what about the market share? We have 30% in 2012. So regardless all these inflationary pressures and the very fierce competition in lowering prices, everybody yelling BRL 39, BRL 49. We're able to cap our market share in a profitable way. We dominate actually all of the 26 Brazilian states. We dominate -- we have a leadership in 14. And we are #2 in 12 states. So basically, the red stuff on this graph shows our dominance in Brazil. So we do expect to expand it in the next 12 months for 16 states. And the interesting fact is that the vast majority growth opportunity is concentrated in the red areas, which will have a physical dominance. So in 2012, we had a physical presence in approximately 1,200 cities in Brazil. Now we have doubled on that number for almost 2,700 cities. Brazil is a very big country, 5,600 cities. So having the physical presence is absolutely key. So we have a pretty much privileged position regarding physical presence and market share.

It's also interesting to see that Oi, GVT and Vivo, some of them are getting a little bit share. Others are losing the cable overview of this somehow, piercing the competition within this area. So the overview of this making these competitors getting sub one from each other. So regarding content, pretty much similar to what Jacopo mentioned to you regarding PanAmericana. So we have differentiated ourselves in a very positive way. We are, in fact, dominant regarding sports in Brazil. So although we have 30% market share, and the soccer has been declared something that shouldn't be exclusive in Brazil for real reasons. But we have 2/3 of the market of the pay-per-view soccer in Brazil. So 2/3 belongs to Sky. And we're improving that position. So we have a pretty much dominant position. And we are differentiating ourselves either on service or with content.

So regarding services. So we don't work for these awards, but we're very pleased and proud of what we have accomplished in the last 10, 11 years. We won 11 years in a row, the best service category in our industry in Brazil. And in the last 3 years, we won twice, the best service in country. So we are very pleased for accomplishing this recognition. So lots of things has been said about the so-called demographic bonus in Brazil opportunity. So if you consider what had happened in the last 10 years in Brazil, if you would consider the green and the blue bar as being where the opportunity is, you're going to see that in the last 10 years, 63 million new potential customers, consumers, had entered that market. And for the next 10 years, there's still an expectation of 40 million-plus new subscribers. So there's household growth. The population is also growing. The social mobility is bringing more people to consume. And of course, that opportunity, as was mentioned by Bruce and Jacopo, is in the mass market in a dominant way.

So we are continuing to grow, but we need to do certain adjustments. So 18 months ago, we didn't have a clear vision on how these mass market customers would behave. So we really ramped it up in the last years. Regarding sales, we've doubled on from 1 million to 2.1 million from 2010 to 2012. And then we kept the 2.1 million sales right now, but we realized that these mass market customers, they probably didn't have money to pay more than 7 to 8 installments a year. We are, by far, the toughest company regarding churn. So we do consider churn at 50 days. Most of our competitors considers churn at 90 days. So based on that behavior scoring, we acknowledge the fact that we should change the way we are relating ourselves to these customers around financial standpoint. So in May this year, we decided to keep the filters of credit. So we became tougher. And in 2012, we lost or we denied approximately 40,000 prospects willing to adhere to Sky on a monthly basis, which will be roughly 0.5 million potential subs that we had said no. So this year, that number ramped up to more than 100,000. So if we would have allowed them to come in, probably we'll be doing 2.8 million, 2.9 million gross adds, but we will feel the heat on the churn. So we realized that we need to leverage the successful PanAmericana experience with prepaid. And that was time for us to introduce that concept in Brazil. If you have a chance to take a look at the net sac for Brazil was BRL 450. In PanAmericana, regarding prepaid, was BRL 130-something. So we're filling out smarter ways to implement the successful strategy in Brazil.

So regarding high def. So that's basically saying, we're going to tenfold our capacity in the next 3 years. So in reality, we really don't believe that it's going to be more than 10 or 20 relevant high-def channels should be launched within this period of time. So if you're comfortable with that position because it's not only about the quantity of channels, but also the experience of watching TV. So -- and we're by far much better than everybody else. So we have the leadership in high def. So probably going to end up the year with approximately 1.8 million high-def subs and moving up. So as you already know, we have the best HD DVR in the market. And because of that gap that we have between the mass market and the high-end DVR subscribers, we introduced a low-cost high-def DVR, which is actually 40% less expensive than the high-end box, which would allow us what rate the very best customers that we have, introducing them to this high-def world that is really becoming a reality in Brazil.

So what's happening in the market there? So the blue bars here represent standard def offers. The green bars represent high-def offers. So we always had all segments served with different products. So I would ask your attention for Oi and GVT, they decided they were the latecomers. They decided to come only with high-def offers and redid at the current, it was shrunk. Currency exchange rate in Brazil was 1.6. Nowadays, it's 2.3. And they don't have all scale to deploy new stuff. So probably their paybacks are kind of suffering. So -- but if 75% of the sales are concentrated in the mass market, which is Cs and Ds, right, so we need to segment our actions. So the postpaid traditional lease model, we leverage on the existing leadership and are going to enhance it based on our principles that were there 4 years. On the prepaid sales model, we're going to reduce our financial risk and commitment with these subs. And we're going to leverage what happened in PanAmericana. The key aspect here is that the churn that we experienced in 2013 is mostly related to cash payment mass market subs. So they want the service. So you cut them off. You try to retrieve the box, then they pay 1 monthly fee. And then on a unit basis, we are experiencing that they are not contributing as a regular postpaid sub. So they're going to find out smarter ways, and I'm going to share with you a few ideas on the upcoming pages. These are the ones that are mostly under non-automatic debit means of payment. So they have the option to pay or not to pay because they have a slip. And it has been challenging to make them behave in a regular way.

So having said that, so we have launched 2 years ago a product in Brazil that will be before the prepaid. So we didn't launch a prepaid. Then we acted like, "Okay, let's try to act on a market that Brazil, because of the size of the country, most of the broadcasters didn't have the ability to serve the signals throughout the country."

So the C-band is a reality in Brazil. We have actually 17 HPD [ph], 18 million pay-TV subscribers in Brazil. Okay, there are approximately 20 million of C-band users in Brazil. So we decided to take a chunk of that market, believing that, "Okay, the vast majority of these C-band users are mass-market customers and they will some time adhere to pay-TV. So let's position ourselves on that segment."

So without making a lot of noise, we have reached easily 1.5 million users, which we never reported as subs. If you'd make a math and consider that and until figures points like 18 million subs in Brazil. But if you're going to take a look at pay-TV survey numbers we've got in the programmers, you're going to miss 2.5 million pay-TV content subscribers. Where are they? They are here. Most of our competitors are declaring these subs, which we are not. They don't have pay-TV content. They have free-to-air content. But if they're considering it under an RGU concept, they are added to their numbers.

Then we decided to enhance our strategy, launching the Livre Turbo. The Livre Turbo was one step up to the Livre. So they would be able to buy pay-TV content on this mass-market options, packages starting at $21 to $34. And they would be committing to a 12-month period. And in Brazil, if you're going to do it via credit card, there's no financial risks. You're going to get the money regardless they're going to pay it on a monthly basis or not. So this is a first move to target the mass-market with access to credit.

And then we have the last piece, which is mostly related to the PanAmericana success with prepaid strategy, which will be the Livre Recargas. In English, it would be recharging process, in which we're going to try to leverage the very successful mobile industry history Brazil. 80% of the mobile industry in Brazil is based on prepaid. So the customer must own a box. They can recharge in more than 12,000 locations in Brazil, mostly lottery houses. Lottery houses are, by far, much better than banks because, you know why, if these workers are working on commercial business days, they don't have an opportunity go to a bank. But in a lottery house, you can show up anytime, Saturday, Sundays, 10:00 p.m., 7:00 a.m., they are always open. So this is one of the changes that we have just did. And hopefully we're going to bring a successful story regarding that segment next time we'll be here.

So we're going to streamline the postpaid existing offer. We are deemphasizing the cash offers for our postpaid customers, especially the mass-market ones that are not under automatic debit means of payment. We're going to reinforce the prepaid efforts in Brazil, as I have just mentioned to you. We're going to expand the recharge network for supermarkets. That's going to be the next wave, probably Q1 next year. And we believe that the churn will be under control by doing this because we're going to treat them in a different way. So today, we have the pizza with the basic postpaid offers. On the very right side, we're streamlining the basic standard def offers because we are going to prepay out the high-def new staff for these very good customers. And there's going to be a chunk of our business that will be treated as a prepaid exactly as in PanAmericana.

So having said all that, we still have a premier pay-TV brand. So we are very well positioned to extend our leadership in distribution, capacity high-def, technology, whatever. So yes, we have a very strong financial performance in 2013. And we have very good reasons to believe that it's going to be this way in the upcoming years. So there's still opportunities in the market, but we must adjust ourselves to the reality that we shouldn't be funding certain type of customers that wants to be on the platform but not in a postpaid relationship.

We are even better positioned nowadays because, as Bruce mentioned, we had enhanced on segmentation. We understand much better this type of customers right now. Now we have data, we have beliefs. Nowadays, we have historical data, which is supporting our latest decisions. We have improved a lot in efficiency, which allowed us to improve our EBITDA margins. And we really expect to expand even further the terrific experience of having Sky in Brazil for our customers.

So having said all that, we believe that we are on track to profitably deliver subscriber base of 8 million subs, as I have started. I'm going to finish, I'm going to thank you. I'm going to say that I'm very confident about Brazil in the upcoming years regarding everything that you've been hearing about Brazil. It is a strong country, very strong inner market, which supported us in the last years. And we have reasons to believe that it's going to be this way in the upcoming years. So thank you very much. And I'm going to refer you to Evan, that is going to explain to you guys about broadband. Thank you very much.

Evan R. Grayer

Thank you, Bap. It's great to see so many of you here this morning, even up in the balcony. And it's a pleasure to be here to talk to you about the opportunity that we have with wireless broadband.

First, spectrum. Spectrum is the lifeblood of any wireless business. Over the past few years, we have looked for opportunities to acquire spectrum on advantageous terms. What do I mean by advantageous terms? I mean, we've looked for spectrum at a price that is consistent with our business model. We've looked for enough spectrum, a sufficient spectrum, that would enable us to launch a residential broadband business. And we've looked for spectrum that would not have disadvantageous regulatory rules, such as technology restrictions or owners' buildout requirements. We've also looked for spectrum that would enable us to take advantage of TD-LTE technology, which is optimized to support a broadband business.

With this spectrum -- with spectrum that supports TD-LTE technology, we could take advantage of the ecosystems that are being developed by China Mobile, which is the largest mobile provider in the world with over 700 million subscribers; by SoftBank, both in Japan and now with the Sprint acquisition in the United States; and by Bharti in India. So we've been acquiring this 2.5 spectrum, the 2.3 spectrum in Peru and the 3.6 spectrum in Argentina, all of which supports the TD-LTE technology.

So we feel we've aggregated a meaningful spectrum position throughout the region. We now have coverage in all of Colombia, all of Peru. And in Brazil, we cover more than 30% of the GDP in 19 of the 26 state capitals. And in Argentina, we have coverage of the 7 most important markets, including, of course, Buenos Aires.

So what have we learned so far as we have begun to roll out broadband networks? The big thing is there is substantial room for growth in residential broadband in Latin America. Penetration levels for service that is more than 2 megabits per second on the download range from 17% in Peru -- sorry, in Colombia to 28% in Argentina. For those of you who have been to some of the big capitals in Latin America, such as São Paulo or Buenos Aires, and seen ads for service of 10 or more megabits per second, that's only in very specific neighborhoods of some of the larger cities. It is not widely available at that kind of speed.

And these statistics are consistent with what we've seen on the ground as we've done our rollouts. We looked at neighborhoods where we have lots of DIRECTV or Sky subscribers or where we're acquiring lots of DIRECTV or Sky subscribers, and these subscribers don't have good broadband alternatives. They may have one broadband offer, often from a not very good DSL provider. And this is true in many of the what we call the mass-market or the emerging middle-class areas, such as the gated communities that are being developed throughout the region but typically don't have any broadband infrastructure.

Now earlier, Jacopo mentioned the Net Promoter Score. The gap that we see in the pay-TV business between our Net Promoter Score and those of the competition is actually bigger when we look at the broadband service. We have a better NPS and they have lower NPS when we talk about broadband. So this gives a company like DIRECTV, with a reputation for quality service, quite an opportunity.

And the demand has panned out. In our first market that we rolled out, we now have over 20% of the Internet market penetration and we penetrated 30% of our base. And very importantly, on the right side of this chart, you'll see that broadband tends to attract quality subscribers. They have lower churn. And you heard Bap talk about method of payment, how important that is. They tend to pay by credit card more often. They tend to take more advanced products. So we think that by adding broadband to the mix, we're going to improve the customer quality for the company in general.

Now for some pretty pictures. We have 2 types of deployments that we are pursuing. The first on the left is the LTE, which is making use of the spectrum I talked about earlier. This picture here, it actually comes from Colombia, this is typical of the types of areas that we're serving with the LTE. It tends -- these areas tend to be underserved. And how to we go about picking these areas? Well, we do with through a combination of market analysis, engineering analysis and also we rely heavily on our salespeople. And the capillarity of our sales network and our dealer network helps us identify this low-hanging fruit of areas where we have lots of subscribers or acquiring lots of subscribers but there's not very good broadband. And this kind of data doesn't exist from third parties in the marketplace in Latin America. It's something you have to have in-house.

Now once we roll these areas out, we give specific sales targets to the people who helped us choose where to put these base stations, the towers, you see it pictured there on the left. Because people have specific towers -- I mean, sorry, specific goals on a tower-by-tower basis, they have a lot of incentive to choose carefully. From a financial perspective, we're managing the rollout in the network in this way. We're looking at it on base station by base station basis. And the results of how we do on the early base stations are going to determine how and by how much we deploy going forward. So that's what we mean when we say this is a success-based or a pay-as-you-go rollout.

Now the LTE supports speeds of around 10 megabits per second. But interestingly, we haven't rolled out that speed yet. We typically have been offering 2, 3, 4, 6 megabits per second. But it turns out that more than half of our customers are actually taking the slower tier, the slower speed when we offer more than one. This suggests that there's a price sensitivity, which also implies that wireless is better-suited for serving this mass-market type customer. When I say mass market, you've heard so much about some of the earlier presentations, then say a very expensive fixed network buildout.

On the right side, you see what we're doing in some of the larger cities, where we have lots of apartment buildings. Any of you who have been to Latin America know that some Latin American cities dwarf Manhattan when it comes to the proliferation of large apartment buildings. In Colombia, for example, on a percentage basis, twice the number of Colombians live in -- or twice the percentage of Colombians live in apartment buildings as compared to the United States. So deploying to apartment buildings provides quite an opportunity. With the broadband to the building project, we can deliver speeds that are competitive with fiber. So it's different than what we're doing in the underserved areas with LTE. This assignment provides 50, even 100 megabits per second. And in this installation, this is a real installer, we can use our standard installer network to deploy this very simple-to-install technology.

So what have we been doing over the past year? We've been very focused on Brazil, building out to 2.5 million households in Brazil. Now we haven't been focusing on the São Paulos and the Rios of Brazil. We're focusing on what a lot of people call secondary cities. But these secondary cities are very large. For example, Fortaleza and Salvador have 1 million households. And all these cities are very large by American standards. And doing this, we've acquired a lot of experience. We've gotten to know the process of siting towers, of building relationships with the likes of American Tower and other tower companies and managing the sometimes difficult permitting process. And we have developed relationships with our equipment vendors, such as Huawei and Cisco and others.

So by February or so, we should have this coverage of the 2.5 million households that Mike mentioned earlier. And by -- actually, no, he mentioned the other one, the other statistic. By the end of the year, we plan to have coverage of 5 million to 8 million households by the end of 2014, not only in Brazil but also in Colombia, Argentina and Peru. Now it's hard to predict the exact number, which is why we give a range, because their dependency is on, what I mentioned before, the permitting and other governmental processes, which are hard to predict.

Now for the numbers, which I know you're not interested in at all. These numbers don't assume any benefits to the core pay-TV business. This is just the broadband business, looking at it standalone. Since the last Investor Day, these numbers have increased somewhat, mainly because of the acquisition of spectrum in Colombia and Peru. We're planning to build out networks there. Last time, we talked about only Brazil and Argentina. But the fundamentals of the business have not changed. We're looking at an ARPU of around $25, the margins of between 45% and 50% and returns in the mid-20s.

We believe that by adding 1 million subs by 2016 and 2 million subs by 2019, we will increase revenue for the overall company, enhance profitability and increase our overall competitiveness in a world that includes Latin America becomes more and more desirous and dependent upon broadband connectivity.

And the other thing to mention from these numbers is that by 2016, revenue will almost equal cumulative capital investment. And by 2019, revenue will have surpassed cumulative network investment, which is somewhat consistent with what we showed in the last Investor Day.

So with that, I'm going to turn you over to even more numbers from our CFO, Fazal Merchant. Thank you very much.

Fazal Merchant

Thanks, Evan. Good morning, everyone. Yes, I was just thinking we have such great commercials. I'm just so glad I don't have to follow one. In fact, it'd be great if we had a finance commercial and get Oliver Stone to do it. "Where are the equity analysts? Show me the GAAP reconciliations. You're fantastic." My imagination has gone wild already. So between Mike, Bruce, Jacopo, Bap and Evan, we shared a lot of information with you about our Latin American business. And hopefully, we've conveyed the excitement we feel, not only about the accomplishments to-date but really the opportunity that lays ahead.

So before I get into the financials, let me attempt to recap just a few of the reasons we feel really good about our future. So I'll actually start with the brand, which is probably one of our strongest assets and something many pay-TV subscribers aspire to, and now even more accessible to them as we bring a much broader offering of products to address the mass market. There's the leading technology and an already advantaged delivery platform with further investment to deliver an even better consumer experience. There's the outstanding and award-winning customer service we've talked about in an industry that frankly isn't widely known for it. And we're continuing to make investments in systems and processes and infrastructure to ensure we get even better. There's the scale and the synergies to harvest advantages in cost, in technology, in the ability to increase our time-to-market or enhance our time-to-market, I should say. There's the differentiated and exclusive content. And last but certainly not least, an experienced management team with a solid track record of navigating the very real macro and micro challenges that come with doing business in Latin America.

Now you couple that with being in a market with very solid pay-TV fundamentals for growth; low penetration, which is still, as you see on the dotted circle, mid-30s; to the growing mass-market opportunity we talked about in the middle; and a balanced portfolio, including advanced products. That leaves us feeling pretty good about our future.

And let's also not forget about our unconsolidated 41% Sky Mexico partnership with Televisa. It's a real important part of the DTVLA story. And it's also in another market with low penetration and an attractive growth outlook. In fact, the business has seen sub growth quite well with its prepaid VeTV offering and is on track to end the year with about 6 million subs, over $1 billion in revenue and OPBDA margins in the mid-40s.

So now let me shift gears into brief financial summary. But actually, let me start with some key principles. We want to continue investing in accretive growth with a subscriber model that's profitable across segments, across price points and across countries. We also want to continue our measured investments in broadband and we want to continue opportunistically using the illiquid currencies. At the same time, we want to continue exercising financial discipline and focus on returns so that we can enhance our ROIC, or our return on invested capital, our cash flows and preserve our margins. And that means a lot of things, including balancing the pricing efforts at the local level with the competitive realities in the local marketplace and ensuring our subscriber model remains -- maintains, I'm sorry, its strong IRRs. Now that also means being largely self-funding by 2014, or in 2014 as Mike said. And by that I simply mean that to the extent that we can't continue to access or utilize the illiquid currencies, that the business can still fund itself and its growth. And of course, we want to stay on track to generating strong accessible cash when 2016. And finally, we want to leverage our scale, so we can drive cost management, but do so with a keen eye on risk management as well.

So I mentioned ROIC earlier because I think it's worth noting that despite being in the investment cycle that we're in to support the wonderful growth that we've the benefit of seeing and continue to see, the business generates an attractive ROIC, and certainly in excess of our cost of capital. That said, similar to the ROIC profile of the U.S. business a decade earlier, we believe we can grow the ROIC meaningfully as the business exits the investment cycle in the outyears and we see an even greater return on the investments that we've already made and continue to make in our long-term growth.

Now you'll notice on this slide and some of the earlier slides and the ones ahead, as Mike said, that we've excluded or memo-ed Venezuela. So just to reiterate, to be clear, we run the business like a portfolio. So we're not introducing a new reporting segment, and rather we're just trying to be helpful in providing some clarity into the portfolio.

So now looking back over the past 3 years, you can see the kind of growth we've expressed in revenue and OPBDA with 20% plus CAGRs going from 2010 to 2013. And notably, CFBIT or cash flow before interest and taxes hasn't grown in tandem. But it's important to recognize that about 75% of our CapEx spend is subscriber-related. And so the cash flow gets reinvested to support the strong growth that we've seen and that you see reflected on the right side of the slide as our sub base has grown to what we expect will be about 11.5 million subscribers by year end.

It's also important to note that while these results have been in the face of some pretty challenging macro conditions and currencies, in particular, we run the business at the local level. So when you look at the results on this slide, at constant currency, it helps us appreciate the strength in the organic growth of the business. And you can see revenue and OPBDA CAGRs in this case are even higher, in the low to mid-30s.

Now moving to the right side of the slide. We've shared some longer term perspectives, again in local currency terms. Now while 2014 is expected to have some unique challenges of its own, which I'll touch on in the next slide, we expect Brazil to grow to about 8 million subscribers, which will be key to delivering the low double-digit revenue growth, but also key will be managing the churn and our pricing actions to help offset the impacts of mix.

We expect OPBDA margins in Brazil to remain stable and CapEx to remain relatively flat with strong improvement in CFBIT. In PanAmericana, again excluding Venezuela, simply to help highlight the growth in the portfolio's other markets that Jacopo talked about, we expect to grow at about 6 to 7 million subscribers, which will help fuel 20-plus percent revenue growth and strong margin expansion from the increased scale and the operating efficiencies that come with that increased scale.

CapEx will remain relatively flat, and we expect to see significant improvement in cash flow. Now clearly, there were a number of assumptions that formed the basis of the 2016 vision that we shared with you at the last Investor Day. But most notably, a lot of things have changed since then. And most notably, both the actual and the assumed currency headwinds that we faced and expect to face or may face are probably some of the biggest changes.

So let's start with a bit of a reminder on the top left of what we shared at the last Investor Day in terms of our vision. That was about 16 million-plus subscribers, revenue of $10 billion-plus, OPBDA margins around $3 billion-plus and CapEx in the $1.6 billion range. Now moving to the right column, we believe that were it not for the FX impacts, we'd be on track to meet or exceed that vision. So unfortunately, that's not the world we live in. So we've rolled through some FX assumptions that are challenging indeed. And I don't fancy myself an expert in projecting rates, certainly not long-term rates. So we based our assumptions on those of Citi and Goldman forecasts as of October. And those forecasts reflect a meaningful depreciation versus the dollar to the tune of 20% for the real, 75% for the bolivar and 100-plus percent for the Argentine peso.

Now with that, partially offset by some of the business initiatives and strategies that we've talked about, our revised vision, moves over to the top right side of the slide, has us on track for the subscribers and the CapEx that we have spoken about before with revenue still very healthy in the $8 billion to $9 billion range and OPBDA margins in the 30% range, again in line with consensus. So we feel good about that. Now the vision is an ambitious one. And on our way to this vision, 2014, as I said, is going to post some unique challenges of its own. First, there's the currency depreciation we assumed for the calendar year, particularly as the rhetoric and the debate around Fed tapering starts to pick back up heading into next year. And second, there's the roughly $70 million favorable impact we saw in our 2013 OPBDA results from the ECAD settlement that we noted earlier in the year. And all that does is just make the year-over-year comparisons from 2014 to '13 a bit more challenging.

There's also some other items that we already spoke about earlier that have put pressure on 2014. But they're important in driving the long-term growth of the business. And those include things like costs associated with World Cup, the launch of the Brazil prepaid business, our broadband expansion and our continued investment in infrastructure and capacity expansion. But also in 2014, we're expecting a healthy year-over-year improvement in cash flow that we believe we can continue and even accelerate through 2016.

So finally and in closing, I'd just like to reiterate some of the many efforts and initiatives across the business that we've talked about from extending our technology roadmap, to meeting the needs of the growing mass market, to improving our leading customer service, to differentiated content, to investment in broadband, all of which leverage the competitive advantages I mentioned earlier and help ensure our position as the leading pay-TV provider in Latin America and position us for long-term success.

So with that, I'll conclude. I think we will open it up, Martin, for Q&A.

Question-and-Answer Session

Michael D. White

Who wants to go first? While we're getting set up, we're going to get started to make sure you guys get time. Yes, Ben? There you go. Okay, that's on.

Benjamin Swinburne - Morgan Stanley, Research Division

For either of you, I'd love to hear your thoughts on doing more with content across the region as you look out through 2016. In the U.S., program access rules make it a lot harder to have exclusive content here as a distributor. But every market in Latin America is different. Can you tell us, as you think about the next 3 years, could you see yourself investing significantly more in exclusive content? Do you think it's a differentiator? Would you want to own content assets? Can help us think for those things?

Bruce B. Churchill

I don't think our spend is going to increase dramatically. We have -- most of our deals are multiyear deals, so a lot of those proprieties that you saw up there, we have deals that run through well past 2016. In the case of FIFA, we go through 2022 now. So I don't think that's going to change. One I probably didn't get to a lot of detail on is we have begun to take some stakes in channels. Frankly, that's driven more by -- it's almost like the price of entry, if you will now. And if there are people in the market that want to get launched in Latin America, obviously launching on a satellite platform has the advantage because you have instantaneous region-wide distribution, tends to force the cable guy to have to take your channel. That's something that we're going to extract some value for. So we would have some minority stakes in some of these channels. Some of you may have seen our announcement about Sundance Channel recently. So that kind of thing. I think that the exclusive versus differentiated is a balance that we always strike. I mean, in the case of, for example, the English Premier League, we actually did buy the rights ourselves directly. We did it in partnership for PanAmericana with Sky Mexico. Sky Mexico is choosing to carry it all exclusively on the Sky Mexico platform. In our case, we're sharing it with one of the sports channels. And it's just -- and obviously, we can offload a big part of the cost. But it's a great model because the linear sports channel can show one game, but there's obviously multiple games occurring in a given day or even sometimes simultaneously. We can open up extra channels to carry the other games. And so it actually allows us to -- usually, even if you may split the games 50-50, we usually can get more than 50% of our money back just because they really need the product. So I think it's something that we just kind of manage on an ongoing basis as property-by-property. But I think we're big believers in differentiation as opposed to just pure exclusivity. I mean, Jacopo mentioned and talked a lot about FIFA. The reality is FIFA is going to be on all the free-to-air channels. This happened last time, too. But they're not all carrying in HD, they're not carrying all the games. They're not going to have a lot of the interactive features and mosaics and functionality around it. And what we discovered last time was that our viewers, our customers tended to watch the World Cup on our broadcast, on our channels. So you can differentiate and for a surprisingly little money on the right side, you can take nonexclusive rights but really create something that's very different and very valuable.

Unknown Attendee

I think in the presentation you talked about some of the bundled service offerings that exist. I'm just picking up on Evan's presentation about the ARPU uplift you have on wireless broadband. I was wondering if you we're thinking about maybe taking advantage some of the opportunities to buy some wireless assets there that could be a forced sale in Brazil with TIM part. Obviously, NII, which is in a distressed situation, wouldn't it make sense to help Evan accelerate his rollout and at the same time, have a better bundled offering by maybe looking at some of those acquisitions and taking advantage of this time in distress?

Bruce B. Churchill

Well, look, first of all, with respect to our wireless product, while it will be available on a stand-alone basis, as a rule we're going to sell it on a bundled basis. So we'll be targeting our existing subscriber base, as well as new subs to be buying a bundle of video and broadband in the markets that we've entered. Look, I think we would look opportunistically at any asset that came along that we think would build our business. Assuming it were be available at the right price, some of those assets you're talking about would be pretty big pills to swallow. So I don't know that we're really the contender for them. But I think we would be opportunistic about any of it. Or there's always a possibility maybe spectrum falls on some of those deals and you could pick up spectrum. But I don't think we have a hard and fast rule about, yes, we're definitely going to go do this and do that. We have a good spectrum base now we need to get rolled out and really execute on our plan and see where it takes us. I don't know if you want to add on the M&A thing.

Michael D. White

I think the other 2 points I'd make is, one, in terms of having Evan go faster, I think, look, Evan will go as fast we can execute it well. But as he was trying to explain, it's kind of almost a tower-by-tower, neighborhood-by-neighborhood build, okay? So you get your tower, and then you've got to go sell 70 homes in the neighborhood. So we've got to be all coordinated. And that's what we're doing. And so we'll go as fast as we can. As a practical matter, though it's not like you build the entire thing and turn on a switch, and then go on the air to sell. I mean, it's really, as Bruce said, mostly bundled sales to existing customers. So we'll go as fast as that as we're comfortable from an execution standpoint. I think in terms of wireless, look, América Móvil is pretty dominant in Latin America, pure handheld wireless kind of business. I don't see that strategically as something for us right at the moment. But we've got a big investment agenda as it is as you've seen.

Benjamin Swinburne - Morgan Stanley, Research Division

Who's got the microphone? Jon [ph]?

Unknown Attendee

Televisa says that DOCSIS 3.0 is pretty ubiquitous in Mexico. I know VTR is using it. How are the speeds that slow as far as the competition goes? Is that just kind of in the noncable areas? And then in Mexico, I think some of the reforms of Peña Nieto don't affect Sky very much. But is there anything that gives you stress, I guess, Maduro or someone like that? I guess, you almost couldn't call it legislation. Was there any pending legislation in any of the other markets that could affect your business as you refer to the regulatory framework?

Bruce B. Churchill

On the first question about why -- basically you're saying, given that they're using relatively current technology, why are the speeds so slow. I think our point is that there are neighborhoods in our places, where you can get fast speeds. But they tend to be pretty limited and obviously, in the best neighborhoods. So our decision is that we're probably not going to go up against -- trying to go up against those guys in those neighborhoods. But there's plenty of other neighborhoods, even in not in the core, best A neighborhoods but even around them in the same cities or the outskirts of those cities or in some cities altogether, like in Brazil, where they're not -- no one is investing in the new technology, where we think the fixed wireless product is very competitive. And as we said, we also think it matches up pretty well with the opportunity in the mass-market C class because the reality is a fiber product that is not going to be competitive for very a low ARPU, so just you can't get the returns. So I think it's consistent with the theme of segmentation that you've seen in video that we need to do also in broadband, and we're just going to pick our spots. With respect to, I guess, really your question, does reform -- or is there anything on the regulation front that gives me concern? Look, we always -- we obviously keep a very close eye on it. I think we make a pretty big effort to have good relations with all of the -- in all of the countries with all of the regulators that we operate in, very difficult to predict what the outcome is going to be. Biggest issue is just making sure we're not surprised and that we, therefore, can have the right -- the ability to respond in the event that something happens or, in some cases, even help shape it. And that's something we know we do more and more successfully. But the reality is it's 10 different countries. There's all kinds of political stuff going on in every single one of them. And we have to deal with it.

Michael D. White

I saw a couple here. Right here, Jon [ph].

Unknown Attendee

You mentioned in the presentation that you manage the Latin American business on a local currency basis. And I was just wondering philosophically since your CapEx is dollar-denominated, when you think about and measure the IRRs, are you assuming that the expense in the equipment is essentially getting more expensive in local currency terms as the currencies depreciate? Or do you sort of adjust that, if you will, and sort of say, "On a constant currency basis, we're going to look at the CapEx, but we're going to look at the..."

Bruce B. Churchill

No. We look at the IRRs in local currency. So you adjust the investment portion, which would be the equipment in local currency, then say, "Okay, what are the returns we can get on that?"

Michael D. White

So I think when I said managing local currency, I'm talking about the revenue, the expenses and the OPBDA of the guts of the P&L. Look, what I expect the local general manager to do -- I mean, if you live in Brazil, you sell in reais. I expect Bap to deliver his objectives in reais, not in dollars for revenue. And I expect him to manage his margins. Now as it relates to capital, a fair point, separate question, absolutely. But my point is that's why we're taking a total look at it and making sure, as Fazal showed you, that we've got clear plans to deliver the ROIC and the cash flow in a relatively, I would say, closing window here. We're talking we've got a couple more years of investment in '14 and '15 in particular with satellites and broadcast centers. But by '16, that comes down dramatically. And that's all I'm saying is that we continue to make sure as we look at the size of the investment that the returns are going to be there. And frankly, they're not going to be there in 2025. Well, they will be. But I mean, we're talking about a fairly short window here, where we're going to see those tangible returns. And from my standpoint as CEO, I'm seeing a big down payment on it in 2014. I mean, there's a significant improvement in Bruce's plans for next year in terms of cash and returns. And I think you'll see that secularly improve year-over-year-over-year so that we'll be able to make sure as we go that we're hitting the returns. With that said, as I said, I don't think we have an option but to modernize our infrastructure if we're going to be competitive and have a business for the long haul. And we're going to do that. So we're on the hook for probably another $1 billion over the next 3 years of between satellites and broadcast centers and stuff like that, order of magnitude combined over the 3 years, we're going to do that. But we want to make sure is that we're getting a good return on that capital as we get there. So yes?

Craig Moffett - MoffettNathanson LLC

Yes. Mike and Bruce, I guess, both of you at the 2012 Analyst Day said that while you were primarily then an A and B provider in LatAm, you hadn't really seen any macroeconomic sensitivity in the business yet. How has that evolved over the last couple of years? I know you've only been in the market that you've been in. But is your understanding of how cyclical the business might be or how exposed to macroeconomic conditions, it might be changed as you've started to penetrate the C segments more?

Michael D. White

Every country has its own unique aspects. So first of all, I mean, probably our best prepaid market is our worst macro market, it's Venezuela. And in fact, even in spite of all your -- what you read in the newspaper in local terms, I mean, our prepaid business there is healthy. We haven't seen churn. And in fact, one of the other metrics Jacopo didn't show is he measures improvement year-over-year. Remember he said that if we measure the end of the month, what percent of our subs were on out of the 2.9 million, 2.1 million, whatever were on. But we not only measure it, we measure it on the date, we measure it within 30 days, we measure it within 60 days. We've seen significant improvements on those, all of those metrics over the last year. Now I think the one thing, Craig, that we're probably learning a little bit about, as Bap was saying, is, look, you've had a huge explosion of the middle class in Brazil, okay? And without a doubt, some of them probably have gotten a little ahead of their skis on debt. I guess, we haven't seen that picture before or learned the lesson. In their case, it's not buying houses. In their cases, it's buying refrigerators and buying cars and things like that. So I think we have seen a little bit of a pullback in Brazil and are getting a little bit of learning about the churn and how that evolves. But as I try to say, look, you can't walk away from that market. That is the market. But we want be street smart and savvy. I think as Bap was trying to explain, in the case of Brazil, we may need to tweak a few things and already have to make sure that we're going to get a profitable business out of it. But I don't know, Bruce, you could add to it. But that market has been good.

Bruce B. Churchill

Maybe also pick up on the point that Bap made, which is we've not seen a slowdown of demand for our product. It's kind of managing the people that are on the platform and making sure they pay us. I don't I said this, I like being paid, and that's how I count my subs, right? And to Mike's point, I think there is no doubt that part of the growth in the consumer economy in Brazil in the last couple of year was fueled by credit. And some of those consumers probably took on more credit than they could bear. And therefore, they're trying to manage which bills they pay. And that's why the only pay us or only want to pay us 7 or 8 or 9 times a year, not 12, which is why we're making the adjustments to our business. But as far as kind of a long-term cyclical trend, I don't think there's any decline in the demand for the product. It's just a question of how do we then refine our tactics so that we can provide it to as many people as possible and still make money.

Michael D. White

The trick is getting paid.

Craig Moffett - MoffettNathanson LLC

What I'm asking for is do you see a big change in the way the [indiscernible] deposits were negative? Would you expect that to have now a larger impact on your business [indiscernible]

Michael D. White

The question is would I expect to see a bigger change if there's a big change in GDP? Look, let's leave an implosion in Venezuela's side. But as I said, if the entire thing falls apart, I can't comment on that. But it's been a tough year in Venezuela. That business has performed very, very well in Venezuela. I think in the case of Brazil, the interesting thing, as Bruce said, absolutely that the demand for gross adds is there. That hasn't really changed. Even Brazil has had a lower GDP over the last 12 months, for sure, even actually the last 2 years. And our demand for our services has just been huge. The watchout, as Bap said, is that with the postpaid business, you're going to get paid for 12 months, okay? And as he was trying to explain, some of them we've gone in and analyzed and probably afford 7 of the 12. So therefore, what do you do? And that's this idea of can we get a better prepaid model that works in Brazil, leveraging some of the learnings in PanAmericana. Also remember the prepaid model has $130 in SAC. You don't have to keep -- I mean, I think that the payout that Jacopo shows is 11 months payback. So I'm less worried about the vicissitudes of GDP growth per se, except that there is no doubt that with some of the middle-market subs, when they got ahead of their skis in Brazil, in particular, that we have seen an impact in their ability to pay in the churn. And so it's more of the churn number we've got to keep on eye on, I would say.

Bruce B. Churchill

I think you probably have to look at the components of GDP because in fact, I think, it's still virtually full employment in Brazil today, even though the economy has come down. So from a consumer point of view, that segment of the economy is doing okay, other parts of it, not so okay.

Michael D. White

So why don't we do one more, and then we'll go to break. And Bruce and the team will be around. And obviously, we're going to have a longer Q&A later, so if you have other questions on Latin America...

Unknown Attendee

If you could talk about the synergies between the U.S. and the LatAm business. And then secondly, with Latin America becoming free cash flow breakeven, has your business positioning changed on maybe on the spinout of that business?

Michael D. White

Who would take the first one?

Bruce B. Churchill

I'd take the first. Yes, the biggest and the most obvious one is the technology. And I know probably a lot of people in this room think I'd beat that like a dead horse, but it's a huge part of our cost. So it's a huge strategic advantage. And obviously, being on the technology platform that the U.S. has developed, which Latin America was not when I started actually -- interestingly, when DIRECTV Latin America launched, it had its own technology platform, go figure. And it's been a huge advantage for us, both in terms of not just the features and functionality when we get it but the cost. We buy globally. It's all the same suppliers. That's probably the biggest impact. There's, I think, many of the obvious things are like sharing your best practices and learning from one market to the other, which frankly goes both ways, a little harder to quantify. And the other area that you probably -- we always think about and it can be a little bit too difficult to juggle is the notion of programming, which is obviously our biggest operating cost, right? And the question is for programmers that cut across the entire Americas footprint, are there opportunities to leverage either better programming costs or access to programming? And we do that on a case-by-case basis. One of the challenges there is that the markets are so much different. Where we might pay a programmer, pick a number, $100 million a year, that same figure in the U.S. could be $500 million, $600 million, $700, million, $800 million. It's a big number. So it's not necessarily always to our advantage to jam them together. But we do it opportunistically.

Michael D. White

It really doesn't change my thinking one bit. I mean, if you're going to spin a business out, you're going to have a 20% IPO discount, how does that makes sense? Second of all, if I look at the business, maybe in 3 or 4 or 5 years when it's generating prodigious amounts of cash, you could actually ask that question, you really can't today. And third, I still think we're the best parent that can enable it to achieve its vision of dramatically growing a business from a capability standpoint. I mean, we're actually looking at more areas where we can now procure boxes together to get more leverage and savings for both the U.S. and Latin America. We put a whole procurement team going at that earlier this year. And we're already finding opportunities. And the technology is fundamental to the competitive advantage of the business.

Bruce B. Churchill

It's 18% of the CapEx.

Michael D. White

I mean, it's 18% of the CapEx. I mean, Romulo's team manages both. From a technology standpoint, we've got a broadcast center in California, as well as the ones out in Latin America. So I don't think it's best for the business. I think the best thing for the business for us to achieve the maximum amount of value creation, of course, is to continue to be part of DIRECTV. So why don't we take a 15-minute break, and we'll take more questions plus the team is here. If you have questions, come on up.

[Break]

Martin Sheehan

Okay, everybody, we're going to get started. If I can just get this flipped. Please take your seats. So kicking off this afternoon will be our Executive Vice President and Chief Technology Officer, Romulo Pontual. Romulo?

Romulo C. Pontual

Good morning, everybody, and thank you for listening for this session of the presentation. I have -- I don't have a joke for you today. What I have is a very passionate presentation. I'm very passionate about the technology we have. I'm also a very passionate customer of DIRECTV. And I also, as an investor, love what we have ahead of us.

What is -- the challenge that we have is how do we keep the momentum we have and keep developing the technology we have. But what we would have to do is very simple: We have to keep leveraging satellite distribution, we have to keep leveraging the cloud, and more importantly, the cloud, combined with the satellites, is a very, very strong competitive product. We have to keep developing the most compelling service to our customers, and we are sure we can continue to do so. And we have to support the business, enabling technology that will allow us to enforce new revenue streams and reduce costs.

And let's check where we are. We have had a very nice journey. We have executed in everything you see here today, and the journey for the future has started. We are now ready to dramatically increase the content variety, both television-based and web-based. We have an outstanding Genie product in the home. We're now gearing up to make all distribution wireless, but not only wireless on televisions, wireless on demand to mobile devices in and out of the home.

We have an efficient delivery of SD/ HD. We still have unmatched HD quality. We're gearing up, and we are ready for whenever the consumers need to go all the way to Ultra HD. Our agenda for HD, when needed and when the time is right, will be much bigger than a simple increasing quality to the experience.

And in closing, and as importantly, is the user experience. We have the standard in the industry or leading the industry in the user experience. And please, by all means, go and see all of them, see how it works. But we are now becoming even more dynamic and even more personalized, again, leveraging the cloud experience we have ahead of us.

Let me do a deep dive in the satellite because I keep saying cloud, hybrid, satellite. And I don't probably communicate better as the engineer than the team. We have a very robust fleet today. We serve 37 million households. I mean, the passion of being able to be the major influence in the company and to be with my colleagues delivering this entertainment is fantastic.

In U.S., we have 20 million customers, have a strong fleet, well positioned in a right orbital location and delivering high-quality TV that's unmatched, and we don't have any fear that is going to be matched.

At the cloud, we probably were the first company that actually used IP distribution for high-quality video. And we did that several years ago because we wanted to find an efficient way to bring more than 2,000 channels back to our pooling facilities. We switched back, we revert back that know-how and started developing how can we wire our customers, complementing what we have -- broadcasting our satellite through the cloud. Today, we have a very robust distribution system that relies on the cloud.

And just to put together these things, as you all now, the Internet would not exist without a caching technology. And what we talked about here is a distribution technology that is approximately the size of 2 full Internets in the U.S. In order for us to wall and to go the next step, we have a three-pronged solution: We have a storage in the home, and our current product has about a terabyte of storage; we have a satellite distribution that's best to none; and we have a cloud integration. Broadband connection, satellite and storage is a sustainable competitive advantage that will -- for years to come.

Let's take a look what's next in this -- still in this area of technology. We have 2 satellites under construction. We only need one of them to be able to have a meaningful increase through both HD capacity and/or Ultra HD. And we have the flexibility to pick any one of the course, depending on how the market works. As for the cloud, we are moving to the cloud what makes sense to do. For example, can we use the cloud to that [indiscernible] interface? Yes, we can. And that's what we're going to do, because despite the fact that we dynamically increase it continuously, that allows us to be much faster. I don't know how many of you has seen already, but you should see our UI dynamically changing today in the background. This is not far-fetched future. It is -- we are about to release and convert our entire VOD experience into cloud-based UI. We are also using the cloud to help us in further enhancing our communication [ph] that's already good today.

Before I proceed to the technology talk, let's debate a little bit. Let me review with you what our customers are telling us. Despite the noise we hear in the newspaper, the customers are telling us, I want to watch TV in a big screen. They continue to watch in a big screen, the 94% of the consumption is in the big screen. They also connect in many devices to the Internet, and there's a lot going on here. But from that segment, they are focused on mobility. Then what DIRECTV realized is, yes, we are the best in the TV, we have to be the best in the mobile experience. It's a much less viewing today, it's growing and we have very, very strong solutions serving them today, and we fully embrace that technology.

That's what we took. We thought, okay, let's double-down on the big screen, let's go with the mobile. And again, we have a recurring team here, we have put this infrastructure together. Technically speaking, we need to get the content there. And there are several nuances to get content. But again, our focus is to get content into mobile. Our customers naturally believe they should get ubiquity toward having a TV. And they also leverage in the fact they have a second screen to try to further enhance engagement in our biggest screen.

None of this would work without weaving together these interface and features. And we have a large team dedicated to find what's the best way to provide all this in a seamless way, in a nice way for the customer.

Let's deep dive into big screen. We have launched the most -- the best TV that we ever did, eliminated several pain points amongst many. The fact that the consumer have tuner conflicts, this is no longer happening. We have upgraded our user interface in a way that we upgrade nationally in one shot, and we get it to what is today considered the benchmark for the industry. We have a unique search. Our search beats every other search in the market to find video. We have a brand-new recommendation engine that, in fact, [indiscernible] and records some suggestions. We have quadrupled the number of connected homes since we last spoke here in 2010. And with the new set-top box we introduced, the Genie box, we added a built-in WiFi. We anticipate that take-up rate of broadband connection is going to be much higher because we eliminated some of the frictions to get there.

On the mobile side, last time I spoke, frankly, it was almost a pet product. We had a few features, 3-device supported, and we were very pleased about it. We fully embraced the system. We have had a major download of apps. We have 95% coverage, and the viewership and the streaming capability is all there. Streaming, actually, is the most important thing that we have. But social discovery, social sharing is also becoming popular. The flip-to-TV technology, it allowed us to watch a piece of the content in the devices which the TV is popular, and then we are building on it. We have a very robust streaming infrastructure. In fact, we are ready for either way. If the customer wants to stream, they can.

Let me pause for a second here because I mentioned a couple of times how important content is. And this is more like a reflection on how the industry is doing. Industry is landing in the right structure for content, but it's similar to the win-lose [ph] system. First and foremost is live television. Our customers watch live TV. Just our streaming, for example, we have 11x more streaming live than on-demand, and this is the focus of DIRECTV from day 1. Second is, it is in a world -- high-tech world we were in, makes no sense to get in front of the TV 15 minutes late or 1 hour late and not be able to watch the show you like so much. And the catch-up TV is almost like live, we have delivered that, we launched that system. That's the focus -- focusing rights and obtain rights. DIRECTV is also opportunistically going to the right catch-up plus. Think about last season. You are watching now NCIS, you love it, what about catching up last season? This is similar to our Hulu Plus infrastructure.

And then, the deep library. Although these blocks, they look all the same, the left represents a $100 billion business, the right is about $5 billion business. There's a big discretion [ph] here in value, and we are focusing from right -- from left to right. Typical over-the-tops guys, they're from right to left. Of course, we're going to collide somewhere, but that's how we converge. And there, we are prepared to have the most compelling offering. Again, one thing that we drive is business wins and the quality of the content we have. That's not a numbers game, it's a quality game.

What did we do with our streaming? We have the technology foundation ready, we have access to multiple points, we can increase their map through the streaming today and we are comfortable with that. We are now adding features that allow us to enable a more -- to enhance this ecosystem, more revenue for content providers, more arrangements for Black House [ph]. For example, any session we have already by creating a currency for viewership measurement is extremely important for that industry.

As a wrap up, I'm giving you some data points. In the last year, in 1 year, we doubled the number of in-home live streaming channels. We multiply by 5 the out-of-home, although, from a very small base, and we continue to grow.

This is a good example of how the multi-screen can be used. We relaunched NFL. And as some of you know, we have been providing streaming NFL for the last 4 years. This year, we decided to do a new launch. We changed our quality of video streaming. It's probably the best in the industry today, it's fantastic for sports. We added highlights. If a fan supports, it makes absolutely no sense not to subscribe to DIRECTV. In fact, if some of you don't have NFL and you like football, I feel sorry for you. That's the place to be. Without it, you've not experienced the experience. And if you like fantasy, it's even more. For the first time in the industry, we create instant highlights, that thing that in 10 seconds after the show happens, it's available to the highlights of the game. You can have -- track your player, you can do a fantasy and it's really a match, that's not -- there's so much you can say.

Now we're trying something else. We're trying to give to consumers now what we call the moments. Back in our head-in, we have an actual producer who's watching our shows live and producing moments for social interaction. And just starting trying to explain -- let me see if I can embarrass myself here. Let me see if it works in real time. You can -- as long as you don't use too much of your WiFi, it may work. Can you please display the screen? That's in my hand, that's the iPad. Imagine yourself watching a basketball game in your big TV. While watching, our producers are producing the stuff that's in the bottom here, which are the moments. Now once the moments are created, you can see the moments in the smaller screen. And if you are a socially oriented customer, you can take a look at what they are talking about, and you can participate and you can chat. Or if you like stats, you can press the stats and say, "Okay, what's going on with my players?" This sort of feature set, which by the way, there's more detail that you can get in the back there, will give us the ability to increase engagement in the big screen, which again, is the big area that customers have asked us to focus on. Can you bring up the presentation back, please? Again, repeating myself, these 2 applications are fantastic. Please watch them back in our show room.

Let's keep it going here. What's the future? Again, future is content, more content anytime, anywhere. And we are -- the company's focused on this, to do this in a nice way. Our goal is to reach ubiquity one day. We are about to launch Startover, and as I said, the catch-up is that you just got 15 minutes on your server, you can just start it from the beginning. And we will be leveraging our technology. We have a huge asset that is transparent to everybody is undercovered. It's under the hoods where people can access today, but that is where we're going to start leveraging. For example, leveraging our technology to enable new revenue services, so subscription of VOD, electronic sell-through. We even try to test some pure-play over the top. All these, we can support the technology we already built.

As I said earlier, none of this will work if we cannot deliver to the consumer an experience that's intuitive, rewarding and exciting. Then we have this large team that does nothing but work in the interface. And we do have a cross-function over the company. Every employee, in fact, have a chance to help us innovate and create ideas here. We have a benchmark UI in pay-TV today. And we have deployed -- and if I'd look in through this year to every one of our apps, and we did that in a way that caused no friction and that the consumers just keep engaging for us. The next step is easier than the first step, which is the big change we made. As a way of example, I will show you some solutions of the interface we have.

What's the match? How can DIRECTV, overnight, update every single customer, and don't get into trouble? Because our competitors do. Our competitors make press release after they download to 110,000 customers. We do 20 million customers. What we do is we do update their UI quickly, but you make sure that a consumer can move to the new feature set in their own pace. We preserve the traditional UI. They can continue to use their guide. But as time goes by and they want to explore another way to navigate, they can go to a more modern UI, which is a show-based UI. And lastly, we are providing a third option, which is highly personal that requires using your phone as your remote control. Again, the users don't have to do it. We do it in a way that they can grow with us towards a new solution.

As one example of the modern UI, any person that watch pay-TV and like sports has to confess that there is nothing more challenging than to find where your game are playing. The rights are so messed up. I'm passionate about tennis. How many times I get in the weekend where is, if anything, these tennis matches are going on. This is no longer a problem. Just go to this portal where you find every match that's going on today, in fact, even more. If I like tennis, all I have to say is to say I like tennis and that -- it should be prioritized in the portal. This is unique DIRECTV. Nobody saw this out. It is fantastic. This is a big pain point that the industry has never resolved, we resolved it. And it is already in consumer hands. You can see in the demo as well.

Contextual search. How many times we hear these in press releases in other -- from our competitors? We have been doing this for years. Our search today finds anything you're looking for with fewer key presses than any other search engine in the business. We have -- we'll be further enhancing it because we want to be able to give you another dimension. I want you to be able to give how you feel about it. The only way to do it is to resort in a better input material, and we launched the voice search. You can go there and say, I'm tired and have 30 minutes to kill. These sort of things that we're looking for. Can you entertain me? That's the sort of solution we're looking for. This is certainly a way to address consumer needs.

Another area that's interesting is, our technology is kind of an open platform. And just a way of example for you today, we brought a couple of examples of using Google Glass and the Samsung watch, which is a fantastic way to make it -- to please everybody whoever wants to use the Glass scan. Myself, what I really like is to flip. I love to flip. I get my little streamer and find something to watch with the strength of the big TV. What is missing? What was missing was the ability to be watching the big TV and my wife calls me in the kitchen to bring back to my iPad, and that will be launching soon and is demonstrated here today. It's flipped at the back.

I couldn't make a presentation to you without talking about revenue and efficiency. So as you know, we heard already from Mike and from my colleagues, we have 3 solutions in revenue. One is, how can we increase the revenue without impacting consumer wallet? That's the last one. We are focused on advertisement. How can we compete for the share of wallet? We'll purchase LifeShield, I'm very excited about it. The technology they have at LifeShield is very close to ours. We can get synergies there. And then we have the best solutions for every hotel in the country and lodging. It's -- we have solutions that are cost-effective for the mom and pop hotel, all the way to a Las Vegas hotel.

On the cost-efficiency side, there are 3 components of this business aside from the content that drives us cost: It's acquisition, upgrades and services. We're working in all 3 areas. Just a way of an example, 2010, when I presented to you box structure, today, the set-top box cost to serve a 3-TV home is 60% of what was in 2010, despite the fact that we have the best product in the market today. We are thinking, we are piloting wireless distribution to customers who want it and it's also more efficient for us to install. We have learned and we've gotten to the Lego architecture, trying to solve a specific problem in Latin America. We're now bringing it to America, and it will also reduce our cost base. We have launched the fantastic. I mean, I have not seen anything matched yet, which is the self-service in our web platform.

Just before closing, I just want to emphasize, Bruce already said how important is to bring the technology to Latin America. With 17 million subscribers, we learn a lot from them and for the different businesses, and we are taking this information day-to-day to enhance the innovation and ideas we have in solving problems that makes sense as a well. The 2-way street is much more valuable than we can quantify or finance.

Lastly, just in summary, if I would want you to remember something from this presentation is, we have the most robust solution delivered to be in this country. We have the most efficient return on invested capital, and we can leverage the cloud and the satellite to go from here to the next leap of Ultra HD or whatever is needed. This is not its beachfront, nobody can match this. It's takes time to build it. We have a solution that's very efficient.

Two, we fully embrace the mobile experience, and I believe we are really there. We have 95% of device coverage, and we're not happy because there's 5% to deal with. We are attacking this thing upfront and delivering the best experience. Third, we have found many opportunities. This advertisement, home security and commercial that I showed to you already is more than $1.5 billion of revenue and is growing. And we are going to deep dive and support my colleagues on this. Cost reduction is our passion. We have a committed, as I said, cost reduction. And lastly, and more importantly, we deliver world-class, frankly, I really, really -- for those of you who do not know what DIRECTV is, you're missing something. Thank you.

I'm sorry, I was told 10x to not forget to introduce him. We're now going to have a presentation with Mike Palkovic. Without Mike, none of the things I described to you could happen. Mike is responsible for the field operations. Mike is responsible for the call center that takes care of our customers. Please, Mike? I'm sorry.

Michael W. Palkovic

Good morning, everybody. I'm going to spend a little time talking about kind of our existing customer service kind of operations. You know a little bit about this. We talked to you guys, I think, 3 years ago about what we were trying to get done. And then we're going to talk about the broader customer experience as we've kind of taken this on as an enterprise priority. Mike introduced Rasesh Patel who leads that organization and basically works with my organization, Paul Guyardo's and virtually every organization in the company to kind of make this beyond just the customer operations priority but the company priority.

So I'm going to talk a little bit about how we think about this. You can think about these 3 pillars as we've got to deliver the existing service delivery model we have today. It's a significant operation. I'll share with you a little bit, just as a reminder of the size and the complexity of this operation. We have to do everything we do with an eye towards productivity and efficiency. That's very important. You'll hear us -- or hear me and others talk about stacked wins, where if you can do something that's good for the front-line employee and the customer and benefit the shareholder, you pretty much got a strategy that answers all the most important priorities.

And then finally, how do we take it -- take what we're doing today, raise the bar and drive increased customer loyalty and really, really make that part of our business competitive advantage in a way to help grow the platform in the future. And you all know the benefit of churn and the sensitivity to the business model, and we've got to see how we're connecting the dots for you on the things we're doing and how that translates to the bottom line and to growing the platform.

So real quickly, 2 big large front-line, customer-facing organizations, the call centers and the technicians. A lot of agents and techs, a lot of transactions, which means a lot of opportunities to either do it right or not do it very well. And obviously, our focus is to do it right the first time, and you'll hear that in some of our strategies, and you can see some of the results to date.

I'll move on and talk a little bit about how we shape our strategies. I mean, we made a conscious decision on the field technician side to bring some of that business in-house. And we did that not because owning and then outsourcing is the magical answer, but we wanted to understand how to do it the best possible way for the customer experience and then take those learnings and manage our outside strategic partners with that. We do the same exact thing on the call center side. So that was a conscious decision we made back in 2008. We really focused both of these operations on doing it right the first time. It's far better for us to solve a customer's problem on the phone and get a truck roll completed accurately and completely. And the way we do that is we give the front-line employees the proper tools to do their job better, proper training, et cetera. So that's a big change in how we're running the business starting in probably 2008 and forward.

And then, finally, focusing on the employee. You're going to see some data here in a minute about how important it is for us to have the employees, all the way down at the front line. Now think about the fact that if we have a corporate strategy or initiative that the management team comes up with then they say it's a priority, I've got to take it to my management team, and it's about 5 or 6 levels of management to get to a call center agent or a technician. Every single one of those levels of management have to buy in to this strategy. The minute any of those don't, you're wasting your time. It won't get executed, or worse, it will get executed poorly. So focusing on the front-line is critical to what we're trying to accomplish.

So just a little bit of progress today before we get into where we're going to take the business going forward. In the call center side, this contact rate, just to explain it quickly, 0.63% -- or 63% of our customers will call us monthly back in 2009. By focusing on first call resolution, we've driven that number down to 0.52. Now that's not everybody calling us once, that's the number of customers that call us multiple times because we're not resolving the problem. Those are the ones we have to really fix. But the point here is that when you drive that number down and you've increased your customer base by roughly 2 million customers over that period of time, that's 30 million calls we're not taking this year that we would be taking if we hadn't focused on this.

Service cost, it's the same exact concept. Close to 2% of our customer base we were rolling on a service call, that's now down below 1.4%. That's 1.2 million less service calls in 2013 by focusing on getting it right the first time. And then if you focus on employees, you can look at the agent and tech churn, that's the combination of the call centers and the field techs. Back in 2009, we were averaging about 100% or greater technician attrition or tech churn and agent churn amongst our strategic partners. Those numbers now on our owned and operated footprint with techs is now down to around 16% a year. We've taken that number down. We've taken the average tenure for a tech, was less than a year, between 6 and 9 months, is now over 3.5 years. And the quality that, that technician will do, when they engage and they stay with us that long, is significantly greater. Same is true on the call center side. Their numbers are a little higher, but they've gone from 100% in that range down to the mid-40s, just by focusing on giving them tools and training that allow them to do their job better. We're going to talk a little bit more about why that's an important part of our strategy.

So the other 2 big parts of the operation are not customer-facing, but I like to think of these groups as supply chain and logistic groups that purchase all the equipment. They do it in a way that saves us a tremendous amount of money. But they get the right equipment to the right location, so they're on the trucks. When the tech has to take care of the customer, he has the equipment he needs. On the service and repair side, we refurbished about 8 million boxes a year since we put in a lease model. Those boxes now go through such a rigorous quality control, as rigorous as the new boxes that our OEM manufacturers make, and it saves us, on average, around $300 million a year over the last 5 years. And I'll show you some numbers in a second. More importantly, that number on the bottom right, a 40% reduction in equipment failures by focusing on the quality of the equipment.

So I just have done talking about the quality of the labor, people on the phones and in the homes. We also focus, with Romulo's group, a lot on the quality of equipment, both new and refurbished. It's very, very important for us to do that. One minor note, we'll talk a little bit about our upgrade program in a second. But this warranty plan that we launched, this kind of an idea 10 years ago, we're now approaching $900 million in revenue. And I think that's roughly, what, at 40% up, down that, or something like that, really strong margins. And that's the program that we launched, our transparent upgrade program that I'll talk about in a minute.

So technology investments. We very specifically target what we invest in and why. I've highlighted 2 here. One is an active decision engine. That basically allows us to push to an agent on their desktop the right offers that they should be making to that customer that's on the phone. Now, in the past, they'd have to go look at the laundry list of offers. And instead of using their listening skills to really figure out what that the root cause is that they're trying to solve, they're busy navigating through a lot of kind of kludgy databases. And we took that information and said, based on the customers calling you, this is what we want you to talk to them about and we can also then take the success of that program. And first of all, you'll spend a lot less time on the phone, so there's your productivity savings. So better customer experience, because you'll get to their issue faster, because you're going to spend more time listening and less time looking so the experience is better. And you'll obviously get a lot of information on how effective these offers are, so we can constantly change the engine in the back-office to be more effective.

Field service, dynamic dispatch, this is very simple. Instead of giving somebody 3 jobs for the day and then they start running late and they run into trouble in the first one and they end up canceling the second and they do the third, they do not get the second job scheduled for them until they finish the first job. And what that allows you to do is it increases your on-time availability significantly. I think we're up to like 95% of the time. We're showing up when we say we're going to show up. And it saves you a lot of money and fuel efficiency, because you're not driving past techs to get to the other side of town, you're going to get the next job scheduled to you, that's the closest to you that's ready to go. The customer knows the tech's showing up, they just don't know which one.

So with the investment in this workforce, the tech sched, if your remember the theme I had, the techs get more work done, so they're getting paid more money. The customer's getting better on-time availability, so the customers wins and I'm saving money. So again, another one of those stacked wins. When we find these types of investments, that's where we want to put our money.

So I'd be remiss if I didn't try and at least quantify what we've done over the last 4 or 5 years. That reduction in contact rate has saved us over $400 million in running the call center operation. That run rate today, that 30 million calls, is a little less than 150 million a year today, because we focus on first-call resolution. The reduction in service calls saves us roughly $300 million over the last 4 years, that's about $90 million a year on a run rate. So easy math, say, 1.2 million at about $75 a service call that we're not spending because we focused on getting the work done better every time we show up and put processes in place to do that.

You can see some of the other cost savings. The refurb business at the bottom, that the supply chain guys and the service and repair guys manage. That's $1.5 billion of money. We didn't have to spend on new equipment because we redeployed set-top boxes that, just as a reminder, the only thing they're good for, the only thing you can use them for is our service. So it was good decision to put a lease program, and I think we've put it back in 2006 and then focus on the quality aspect of our equipment. We have a very rigorous -- we call it a new product introduction process, where we test boxes before they're deployed and have 1 or 2 out of, say, a sample size of like 300 boxes failed, we ship it back to the manufacturer and make them fix it instead of waiting for customers to find their problems. So a lot of good savings here.

Good transition to, now, what are we going to do in the future. We've got kind of a 4-pronged strategy that, as a company we're embracing, recess is taking a lead on this. But essentially, I'm going to talk about 2 or 3 of these in more detail. But essentially, it's creating a new metric beyond customer satisfaction. You've seen all the customer satisfaction scores. You know that we've been leading the industry, whether it's ACSI or the J.D. Power's data that you've seen. The only thing I would say there is, when you're in 100 point scale and you're in the low 70s and your competition is somewhere in the low 60s, 3 points on that scale is statistically significant, which means it's not like it's first place, second place, it's like first place, fourth place. So we have a significant lead in our industry, that's not what we're after here. We're trying to get ourselves to a place where we're going to be considered best-in-class in any industry, not just the video industry.

So the second column is talking about streamlining policies, and I'll talk about that in a little bit more detail. And then again, this concept of empowering and enabling our frontline is critical, and I'll talk a little bit about what we're doing there. And then finally, we created, just like many DIRECTV learning lab in our San Diego market, that allowed us to test a lot of new ideas very quickly and then figure out the ones that are scalable, that can be executed broadly across the network. Remember, we're talking 30-some-thousand frontline employees everyday to make this -- to do what we do everyday. So it's not as simple as you have an idea and you're telling me go do it. There's a little bit of work in between there.

So focusing on net promoter. It's a simple concept, it's easy math, it's a 10 point scale. 9s and 10s are great, they're promoters. 7s and 8s are neutral. 6 and below are detractors. And you take your 9s and 10s, you subtract the 6 and belows, that's your Net Promoter Score. We want people to be advocates and promoters. So we've created this very, very rich set of customer analytics that take customer feedback through surveys, operational data across a lot of touch points and create this customer data mark that helps drive our decisions on where we're going to focus our priorities and initiatives and investments, whether it's in IT systems or other types of technologies. So it's a very thoughtful process. But it starts with getting people from detractors to neutral and neutral to promoters, and eventually, as many as possible to give us 9s and 10s.

I want to talk also. You'll see a little bit, in a minute, how we've taken that down to the actual frontline employee level.

Something as simple as a bill. We send out 20 billion bills a month. It's technically correct. We don't have any revenue assurance issues at all. But it's kludgy, it's not clean. And when you join DIRECTV, the first 90 days -- I ought to just share a little bit insight. A couple of years ago, since the last time that we've talked, we've done a lot of analysis on where could we really make a difference.

Well, interestingly enough, the first 90 days with DIRECTV is critical, it's huge. If you get it right, whether it's the bill, the technician, answering issues on the phone, whatever it is, the sales process, disclosing stuff better, being more transparent, however you want to define it, if that's a good experience versus a bad experience, your voluntary churn after your 2-year commitment is up, is roughly half. That's the magnitude of benefit we're after here. We're talking about driving these initiatives in for the benefit of growing the platform. Now it takes time to get these things implemented and to prove those theories out, but the data analytics behind some of these decisions is very compelling.

So we're going to change the bill. We've got this targeted, first time in our industry, the transparent upgrade program. We have people that are on that extended protection plan, which is about half our customer base. They know every 2 years they're entitled to a free upgrade. No questions asked. That's what you get for being loyal to DIRECTV. First time ever that people actually knew they were entitled to an upgrade, very happy with that.

Now we also took a $2 price increase in the program, so we took a little bit of a hit in churn and NPS because of we're probably, maybe, a little bit too aggressive on pricing. Having said that, that program was selling in at 50%. With this transparent upgrade program, and a $2 price increase, we actually increased the take rate to 58%. That's how important it is for customers to know that we're being transparent. Just a simple part of the difference in how much a customer trusts us as a provider when you give them a simple transparent bill, where there's no question what they're paying and what's coming and what's happened and you give them a transparent upgrade program. And you give them the opportunity if they don't want to talk to an agent, even more robust self-care options. The impact, you can see on the bottom part of that screen.

So the employees. These things you see on the upper left, that's what the sales centers under Paul Guyardo have created, which is their acronym for how they're going to treat customers better. It's to begin with the customer's needs, find out what they want, okay, that's the B. Earn their trust, okay. The S is sales, simply. There's that simplified theme. And then the T is turn customers into fans. You can see the cares, that's on the call center side. In codecs, we have a video for, that's what the text came up with.

The important thing to talk here, then underlying that is across all 3 of those big operations, is a kind of a lean-based continuous improvement system. You can see things like a week in the life of a supervisor or a team lead in the call center. There's huddles, there's coaching, there's accountability, there's process verification. It runs through all of our operations now, and all of those stuff has been implemented. I'm going to roll a quick video and have the folks that actually created code talk to you directly. Because sometimes, and I can tell you all day long what we're doing. I think sometimes it's important to hear directly from our frontlines. So can you roll that video, please?

[Presentation]

Michael W. Palkovic

All right. So look, I've talked a little bit about large organizations, a lot of transactions. We've got over 40 call centers. We've got 250 locations that techs are operating at everyday. What you just saw, and if you didn't pick up on the last part, a little chant, that was actually a huddle part of the SIMs process. And the chant was, "Go get there 10." Because every technician that net the day after they complete their work gets scored on an NPS score and is reported back to the huddle, and they celebrate and recognize anybody who got all 10s the day before. So to the extent that the hard part is getting this down through that organization out to the frontline. That's happened in 250 locations. Sometime around 6:30 in the morning, they're getting after that stuff before they get out, and they're getting all pumped up like that every single day.

So in a very short period of time, you can see some of the movement. I mean, that entire network of techs has moved 9 points in 18 months. That's just unheard of. So -- and we've just got the scratched the surface. So what I want to leave you with is talked a little bit about our track record, everything we've already accomplished. So we're not guessing at whether can we do it. We know we can. It's just are we going to embrace it and make it a company-wide priority or not? And I think the answer is yes. And I think you've seen evidence directly from the frontline that they're not -- this isn't some corporate strategy, this is their strategy which will make it a very successful. And again, the goal is not to measure ourselves against the rest of our competitors. We're beyond that. We're targeting the best of anybody in any industry, any place. That's the goal that we're after.

So you heard from Romulo, we've got the best technology, far and away. My job with the help of recess is to make the service part a competitive differentiator. And you're going to hear now, in a second, from Paul Guyardo, our Chief Revenue and Marketing Officer, on why we think we have the best brand and the best marketing in the industry. Thank you.

Paul Guyardo

So I don't speak to the investor community that frequently. But from what I understand, the big question on your mind is how can we possibly maintain pricing power, maintain subscriber growth, revenue growth in this environment that is increasingly more challenging and more competitive. And I guess the short answer to the question is we plan on doing it by continuing to pursue the strategies that have gotten us to where we are today. Of course, it all starts with a differentiated experience. And you heard Romulo and Mike Palkovic talk about how we've always have to differentiate. But it's also about wrapping the experience in a world-class brand, something that's really going to resonate with consumers, particularly consumers that we're interested in, and differentiate us and also justify that slight price premium. And more importantly than anything, we've got to continue our heightened focus on going after high-value customers. Customers who can both afford, and more importantly, appreciate a differentiated experience. We don't want consumers that view television as a commodity.

Now, how having said all that, it's very, very fair of you to ask, is this strategy sustainable, given not only aggressive competitors, but escalating programming costs, emerging disruptors and increasingly expectations on the part of customers? And the fact of the matter is, is we think it is. Because none of this is new. Escalating programming costs are already baked into our business model. And when you look at the disruptors, despite the introduction of Netflix, despite the introduction of Hulu, despite the emergence of TelcoTV and the heightened activity of cable that was responding to TelcoTV, we have far exceeded the competition in terms of net subscriber growth versus all other pay-TV providers combined. And you guys know in this room very well, that if you take out TelcoTV from that red line, you've got cable that's lost millions of subscribers.

And take a look at our churn over the past 6 years, it's been relatively flat. And more recently, it's down at a time when our consumers have more choices than ever before. This is all hardcore evidence that our strategy is solid. But as we all know in this room, past performance is no guarantee of future results.

Let me take you through some of the things that we are doing to continually improve the execution of our strategy to make sure that we can continue to drive profitable growth for many years to come.

Let's start with our national advertising. This is an area where we have excelled consistently for the past 8 years. And I'm very proud to say somehow, someway the team continues to outdo itself. This year, we were distinguished with 3 Gold Lions at Cannes International Festival for Creativity. Now for those of you who are not familiar with Cannes, it is essentially the Oscars for the advertising industry. It is the highest and best award that you can get. There were 5,000 entries, not from the U.S. but from around the world this year at Cannes. They handed out 14 Gold Lions. Of the 14, 3 were awarded to DIRECTV.

And in the last 3 years, DIRECTV commercials have won 16 Lions. Our 2013 print ad in Sports Illustrated was ranked the #1 most recalled ad in the publication. And I think you can see why. And "Football on Your Phone," the viral video, was the most-watched video in the world on the day that it was launched. These are just a few of the many creative elements that has taken our brand awareness to an all-time high.

All right. So our national advertising is complemented by some very, very hard-hitting direct marketing. And while it's not as sexy as our national advertising, it is extremely, extremely effective because it targets high-value customers. Specifically, our direct mail is exclusively targeted to customers who have already been prequalified for our very, very best offer based on their credit score. So we have essentially screened out all less-attractive prospects.

Newspapers. Despite the declining circulation in newspapers, we continue to rely on it. You can target geographically by neighborhood. But more importantly, as many of you know, newspaper readers are more affluent, they are better educated, and that is consistent with our targeting strategy. And digital media, we have really, really ramped it up in our digital media and marketing. Why? Because directv.com delivers the highest quality gross add at the lowest cost per acquisition. With the investments that we're making at a new sales flow, in a universal acquisition cart, we are constantly rebuilding and redesigning the site to maximize its productivity. And right now, we're working on something called strategic micro-sites which is going to improve our presence on Google, Yahoo! and other search engines. We expect this channel to deliver significant growth of good quality gross adds.

Now as targeted, as we try to be with our marketing, the fact of the matter is, is that we credit score every single customer. And as you guys know, this is nothing new. We have credit scored since 2005. But what you may not know is that we are constantly, constantly optimizing our credit model to improve the quality of our gross adds. Effective credit scoring is about matching the right consumer to the right credit file, and that is much, much easier said than done. Our credit team is constantly recalibrating our credit model with Equifax and other credit bureaus. They are adding in additional databases like a utility exchange, as well as integrating numerous fraud prevention and identity verification tools.

Today, we have 40 different scores that are tied to tactics and channels. And we literally see the flow of gross adds coming in from each one of these tactics and channels, and we can dial up or dial down the quality and the quantity exactly how we want to, based on these credit scores.

And what you also may not know is that we are also constantly improving our segmented offers. For example, among customers who pass credit, we now have 3 different upfront fees based on a customer's credit profile. This enables us to more effectively manage our SAC investment. It puts skin in the game for customers who don't meet our highest level of credit. And it screens out the less attractive subs who we're probably not going to get a very good return on that investment. So as you can see, whether we're talking about the direct marketing, whether we're talking about the screening process, whether we're talking about the segmented offers, we're all continuously focused on managing our investments to maximize subscriber value.

With this more diligent focus on quality over quantity, as you know very well, we have reduced the number of gross adds. And that's come primarily from the lower-value gross adds. And as a result, we saved about $300 million approximately in SAC. What we've done is we've taken that $300 million, and we've reinvested it in our existing customers, giving them what we call experiential upgrades. An experiential upgrade means taking the customer from SD to HD or from HD to HD DVR. It creates a great customer experience, it improves customer loyalty but an experience upgrade also drives 3x the ROI versus the investment we used to make acquiring lower-value gross adds. That comes from the additional revenue and margin we get from advanced service fees, as well as the lower churn from the better experience.

And the combination of all of this stuff that I've shared with you -- look at this. Let's start with new customers. The top line shows you, as you know very well, that our gross adds have come down about 7% from where they were 3 years ago. But look at the lifetime value per growth add. It's up 25%. And so therefore, the net effect is that the total new customer value, the value of the total new customers that we're bringing in today, is 15% better than where it was in 2010. I'd also like to share with you some of the KPIs of our overall subscriber base. You're now looking at our entire 20 million subs. Take a look at advanced products, the top line. It's up to 80%. We are 24 points better than Comcast. Whole-Home DVR is up 8x. Connected Home is up 5x. And what's very, very telling is almost 3 in 5 of our customers are on a contractual commitment with us. We give them an experiential upgrade, they sign up for another commitment, when they could very well leave us for the competition. And as a result, existing customer value, which is looking at the existing base, is up 12% from where it was in 2010.

And because of this diligent focus on quality that really began way back in 2005 when we initiated our early forms of credit scoring, you can see now that 80% of our base has ARPUs of $70 or greater. And look at the far right. You've got 1 in 4 with ARPUs of $130 or greater. This demonstrates to us that we can continue to price up. The other thing I want to point out on this slide, which is also very important, is notice the red line. The more a customer pays us, the lower the churn. And that's why we continue to think that we can price up because the overwhelming majority of our base are customers that value a premium experience, and are willing to pay for it. Now having said that, we are not ignoring the more price-sensitive customer base that we have at that segment. What you'll do -- and the way we are addressing that is we're constantly looking at more affordable packages like the entertainment package that we recently introduced, which is very, very affordable for consumers and provides a margin that is acceptable to us. And we're very strategic and very targeted in our price increases. Unlike the competition, which just does a $3 across-the-board on any package or a $5 across-the-board on any package, we actually segment our customer base and we have varying price increases for each segment based on what we know that segment will accept in terms of a price increase. And that's how we particularly manage churn with the more price-conscious shopper.

So with all of these continual enhancements that I'd taken you through regarding our core business, we believe, as Mike said at the beginning of the morning, that we can deliver mid-single digit revenue growth. Having said that, quite frankly, we aspire to doing better than that. And we know that, that can only come from driving incremental revenue streams from ancillary businesses.

Now we are looking at all kinds of ancillary businesses. In the interest of time, I'm going to take you through 3: ad sales, commercial and home security. Let's start with ad sales. As you all know, the ARPU that we generate from ad sales is historically much lower than what cable delivers. And that's because we can't compete on the local level. Well, our new addressable product, we think, is really going to close the gap. Now if you're not familiar with addressable, and when I say the addressable product, think of it as taking the power of a 30-second TV spot and combining it with the precision targeting, as illustrated here, of direct mail. So for an advertiser, you get all of the reach without the waste. And I'm going to give you an example in 1 minute.

4 of the 5 top advertisers in the U.S. are now DIRECTV addressable clients because we have this new addressable product. They weren't our clients a year ago. And let me explain to you why they like it so much. Imagine if you are a manufacturer of a high-end luxury vehicle and you want to go out there and you want to target men, 25 to 54, with household incomes of $150,000 or greater. If you go buy a traditional ad buy, you've got to buy men, 25 to 54. And we all know that only a fraction of that segment actually have household incomes of $150,000 and greater. But when you come to DIRECTV ad sales and only DIRECTV ad sales, we can pinpoint the ad exactly in the households who meet the entire criteria. And that's what I mean when I say you get none of the waste or, as illustrated in this chart, you get 100% by efficiency versus something much less if you do it the traditional way.

I think it's also important for me to point out that we just started this January of this year and already, we have done 120 campaigns. And the only reason I tell you that is to let you know that our infrastructure and our data capabilities for operating addressable are real and scalable. We've also, because clients love addressable so much, we've even reorganized within our ad sales group. Now we have this whole biz dev team that's actually focused on going directly to clients, making pitches and presentations to clients who then influence their agencies, their media buying agencies and we do this now, of course, in addition to very good relationship we have with TV agency buyers. We have also, in ad sales, made an incredible investment in data expansion. By the end of Q1 2014, we are going to have return path data for all of our HD DVR broadband-connected homes, audience measurement data. That is far more powerful than anything a Nielsen or a like kind of service like that can provide to advertisers. And what we do is we take our own in-house data and we augment it with data from SHOP.COM, I-Behavior, Axiom, Experian, just to name a few. And what that enables us to do is to get with advertisers and before a campaign even runs, we can start working on predictive modeling and data matches with them. Then during the campaign, we can really optimize the placement of each of the spots in the homes that we're going for. And then what's -- most importantly is after the campaign is over, we can work on post analytics to help them understand an ROI on their advertising investment. This is huge. I mean, you know for the industry, usually, you just write this big check, you get all these impressions and you really don't know what you're getting for it. Now with DIRECTV ad sales, advertisers can understand the ROI they're getting. And I think the biggest proof point that this is successful is, of all of the clients that have come to us this year and used our addressable product, over 90% have come back for second, third, sometimes even a fourth time, which should tell you repeat performance is a good sign of success.

So as a function of all of this, conservatively, we think we can get ad sales which is approximately about $550 million to up about 30% to 40% in the next 3 years. And as you know, it's not only revenue but this is a very, very high-margin business. Secondly, I'd like to move on now to commercial. When I stood up in front many of you 3 years ago, the commercial business was $640 million. And we committed, at that time, that we would get it to $1 billion. It currently sits at $1 billion today. That said, we think it's poised for a much greater top line and bottom line growth. As some of you may know, we really segmented out commercial into what we call 3 verticals. There's bars and restaurants, lodgings and institutions and business private. We really focused on the first 2 and it's obvious, obviously, because of the higher ARPU, the higher LTV and the lower churn. These businesses, they really, really depend on video. I mean, it's obvious in bars and restaurants, but even in the hotel. If the TV is not working at a hotel room, they will not rent out the room. I mean, to a hotel, television is like electricity. In terms of private businesses, we're focused on the more video-relevant portion of that. That would be like fitness clubs, dialysis centers, businesses like that.

Let me share with you some of the initiatives that we've been pursuing since we spoke last to either grow market share or improve revenue and margin.

First is, in the last year, we have now formed a direct relationship with Hilton Worldwide, in addition to the relationship we have with their franchisees. And that has given us a greater in-room penetration at Hilton than any of our competitors.

We also have a new strategic partnership with SONIFI. SONIFI is formerly known as LodgeNet. They are our largest commercial dealer. We have really worked with them to help them bring down the cost of their hardware by leveraging our buying power. We've also established a facility that enables hotels doing business with SONIFI to get an HD upgrade at 0 upfront cost. So both of these initiatives can make SONIFI much more competitive than it was just a year ago.

In March of 2014 this year, we're going to introduce a new low-cost solution of -- call it the high definition heaven [ph]. And it's the ability to mass distribute to hundreds of rooms, HD to hundreds of rooms. This is going to make us much, much more competitive in the big hotel space. Think Las Vegas, Atlantic City, hotels like that, where we'll now be able to be much more competitive when we roll out come 2000. And just last month, we developed -- no, I shouldn't say we developed -- Romulo and his team developed a fantastic new technology called DRE loop-through. What is DRE? DRE stands for DIRECTV Residential Experience. What that is, is you can walk into a hotel room and you can get the exact same experience that you can get in your home. But here's the more exciting part about it. It's loop-through-compatible. And loop-through is just basically jargon for the wiring that exists in the walls of hotels. 60% of hotels have loop-through wiring. Prior to last month, we couldn't do business with those hotels because we didn't have the technology that was compatible with loop-through wiring. Now thanks to Romulo and his team, we do. And in terms of what we're doing to improve revenue and margin, similar to what we do on the residential side, we're working with programming acquisitions to look at every single commercial programming agreement. We're developing, and have developed, all-new pricing and packaging that makes us much more competitive in the space. This leads us to conservatively believe, and Pat's going to wrap this all up for you in a bow and show you what all these pieces add up to, taking the business from $1 billion of where it sits today to, conservatively, $1.2 billion by 2016.

Lastly, I'd like to say a few words about home security. As you know, about 6 months ago, we acquired LifeShield. We think LifeShield provides a tremendous, tremendous opportunity to be disruptive in the home security space. Let's look at the industry first.

We think it's very, very attractive for 3 reasons. One, it's poised for massive growth. Why? Because it's being infused with interactivity. Apps, video, things like that. We all know that consumers, they love to be connected to the 2 most important things in their life, and that's family and that's home. Two, it's attractive to us because it's a very, very fragmented category. There's like 10,000 players in the space. A lot of them are mom-and-pop, and we think they're going to have a very hard time keeping up with this technology revolution. And thirdly, when you add in things like video monitoring and home automation, it takes a high-margin business and makes the margins look even more attractive. In terms of why we think we can be disruptive in the space, it's really about combining the power of LifeShield with the power of DIRECTV. Let's start with LifeShield.

They've got patented technology that you should learn more about before you leave, and a proprietary IT platform, which is going to allow new feature function innovation in-market at a much, much faster pace than we believe any competitors can do. In terms of our strengths, they're obvious, right? We have an existing relationship with 20 million homes where we can easily cross-sell. It's very easy and efficient for us to upsell it on our 3.8 million, 3.9 million gross adds. And we're the only player out there, or one of the few players out there, with a national footprint of installers and we gain huge advantages in reduced SAC when you got 1 truck roll to install both the video experience and the home security experience. So we think it's a great win for consumers because they're going to save on their video bill and they're going to save on their home security. And we think it's a great win for us because it's going to drive incremental revenue and lower churn.

In terms of initial projections on that, we think LifeShield will be adding about $300 million of incremental revenue by year end '18, by bringing on about, conservatively, 600,000 DIRECTV-LifeShield combined customers. So in terms of our path forward, it's obviously to continue to innovate and execute on our core business with excellence. It's about developing pricing and packaging for our price-conscious segment. It's about generating significant incremental revenue from, particularly, the 3 businesses that I just reviewed with you. But we're also exploring other revenue streams as well, SVOD and EST. And we are also exploring an alternative business model for nontraditional DIRECTV customers, that would be lower SAC solution and may not pass credit, and that's really an OTT product that we're currently exploring as well.

Now no presentation from a marketing guy would be complete without showing you a few commercials, right? So I'm going to give you a preview of some new spots that are about to run in January of this year. I think you're all familiar with our Cable Effects campaign. It was very, very successful, so we're bringing it back with 3 new spots, and I'd like to share them with you know. Roll tape, please.

[Presentation]

Paul Guyardo

Thank you very much. I've worked at this company for 8 years. I'm very proud and honored to work here. We've tried very hard to exceed your expectation, and that's certainly going to be our goal going forward. So thank you very much. At this time, I'd like to introduce a man who really needs no introduction for this group, and that's Pat Doyle, our CFO. Thank you.

Patrick T. Doyle

Good afternoon. So to close up the day, what I'm going to do, as you've heard a lot of themes and a lot of messages today, and I'm going to try to pull those all together and tell you why we think not only as those themes and those messages and our execution of those put us in a great position to this point. But it also makes us very bullish and very optimistic about our ability to continue to deliver those kind of results going forward. So these are kind of the key themes and messages that I'm going to go into in more detail through the rest of my presentation.

Probably one of the most important things and most important themes that we, as a team, pride ourselves on is execution, is delivering results. And whether it's dealing with a bundle or you get a telco competitor to come in or you're dealing with rising programming cost for a multi-year period, we continue to deliver. As a management team, we find ways to address all of those issues and continue to deliver the kind of results you see here over the last 4 years. And I would say, not only have we led the industry here, but I think if you go back and look and you compare our performance against analyst expectations, you'll find that a lot of these years, we continue to exceed what the external expectations are for our business.

You've heard a lot today about the quality of the subscriber we're bringing in and clearly, it's really important, right? Because here, you bring in the high quality subscribers, they're more likely to be able to absorb annual price increases. They're more likely to take advanced products. They're more likely to be connected to broadband. And so we have really driven in this area, and Paul talked about it quite a bit, of really focusing and that, I think -- we feel like, gives us the power to continue to grow our revenue at mid-single digits. The thing I would tell you, too, is as far as growing revenue going forward, we're not looking for a dramatic change in the pricing power in our industry. If the competition begins to push through higher price increases, that's great. That's not what we're counting on. We're gearing up our business and sizing our business to be able to get these kind of returns to kind of what we've seen as historical price increases, in the 3% to 4% range.

On the quality subs, when we've looked at, and try to make sure that we're really bringing in the type of customers that we need to drive this business, there are certain characteristics that we always look at, and it does give us the confidence that we're doing the right thing and if you see, we over-indexed on characteristics like income, households, on college education, on homeownership, see those are great indicators of the ability for us to continue to price through our product. On top of that, once they get on the platform, we see their behavior. And these people will take -- they'll take the high-end packages. They'll sign up for the sports packages. Obviously, they'll take advanced products. They'll spend more on pay-per-view and pay-per-view events. So even once they come on the platform, we see a behavior that tells us that we're bringing on the right people.

On the lower left-hand corner, you heard a lot today about us focusing on making sure we're bringing in the best customers. And the graph there, the higher-risk customers, think of those as the customers that have to pay an upfront fee to come onto the platform. And they're good customers, they give us a return, but they're still a difficult group in that they'll churn more. We make a return on them but it's not as good as some of the higher-end subs. So we've made some changes over the last few years. And so we've seen this group of kind of your higher-risk customers, drop from a percentage of 7% of our gross adds to now down around 3%.

When you look at the SAC at DIRECTV U.S., it's trended up over the last few years modestly. But whenever we go in and we look at the core of our cost of SAC, the things that encourage us is it's going for the right reasons, all right? It's more advanced products, including our Genie product coming into the home. It's more people that are connecting to broadband, which provides them with a better experience and better ARPU. And on Paul Guyardo's side, as he mentioned, we're focusing more and more on the tactics that bring in higher-value subs. And by definition, those are usually the tougher ones to find. The spend is a little bit higher, but the returns are even greater, if you could bring those high-quality subs in through your channels. And Paul gave the chart on the bottom left-hand, but it's a great example of a conscious decision we made to really focus on high-value but not lose the value in total. And so to be able to kind of reduce the number of gross adds we're bringing in, but knowing that we've got even better value in total. We're maintaining or growing the value of our gross adds every year.

On upgrading our customers. So in February, we told you it was our plan, our intention, to spend about $200 million more in 2013 on upgrading our very best customers. Because of the demand we saw for our products, particularly our new Genie product, that step-up from '12 to '13 turned out to be more like $300 million in total. But when we look at it, again, it was the right thing. It's the right people that are upgrading. And down in the lower left-hand corner, these are some of the numbers Paul referred to. If you look at kind of, what we call, a cutoff customer, this would be somebody that doesn't pay us an upfront fee but their credit score is slightly above that. So those customers provide us a good return. It's an adequate return, but compare that to an average upgrade that we had in 2013, where the LTV, relative value we got out of that was 3x what we got from that new customer. And if you get an experience upgrade, like Paul said, where they're moving up from either SD to HD or they're moving up from HD to an HD DVR, the economics are even more compelling. It's a 6x return. So you can see why we were so adamant that this was the right thing to do and this was the right spend. Going forward, again, I think as you look forward, I think -- we think kind of the upgrade retention spend we had in '13 was kind of the high watermark. I don't think we'll go higher than that going forward. So it was kind of a onetime increase. We think it's the right thing to do, but it's not -- we don't see it growing from this point forward.

So churn rates, obviously, are critical in a subscription business. And you saw a lot of discussion about things that we're doing to try to drive down churn or maintain churn. The stats that you saw before on the number of customers on commitment or the number of customers that have an HD DVR or the number of customers that are on auto-bill pay, and those trends are very meaningful as in trying to predict churn going forward. And I would say that if I had to pick 1 of them individually, I don't know that individually, you'd see a meaningful impact from those characteristics. But when you add those together in that trend, it really is important for us because these are key indicators of the stickiness of a customer. And then what you don't see here is the discussion you heard from Mike Palkovic. We are spending so much time and so much effort on trying to raise the bar on customer experience. And underlying, we see great trends on individual projects that we're doing. That's clear that it's resonating with the customer. We're -- early on, we need to kind of accumulate some of these benefits, but we think that's kind of the X factor. If we can really rise up above the industry and be that company that provides a unique customer experience. Obviously, we think that is meaningful in getting customers to stay on your platform.

Programming cost, obviously, is the biggest issue facing our industry. And there's no silver bullet. If I was going to say what's our strategy here, I think it's going to be a lot like you've heard us say before. We're going to use our scale, and we do, in the negotiations that we have. We're going to continue to look at marginal channels and we're going to be prepared to drop those. And we're going to try to get more rights as we go through there. But we're not assuming as we go through -- in the numbers that Mike was showing, of $8 of EPS and free cash flow, we're not assuming a dramatic change in the growth of programming. We are gearing our business and we are intensely focused on continuing to perform well even in a rising programming cost environment. If we start to see a tapering of that growth, it's good. It's upside for it. We're not counting on that. But the important thing here is we're continuing, through our price increases, in growing our revenue because we do want to make sure we can grow margin dollars. And that's the chart you see on the top left-hand corner. We want to continue to contribute margin dollars to the bottom line. That is important to us.

So all other costs. If you look at 2013, I think it's a great example of kind of the financial algorithm that we're focused on going forward, and that, is you've seen a kind of mid-single digit revenue growth, controlled programming cost, manage it to the best we can, but then be intensely focused on all of the other cost categories. And they've got to grow at a slower rate. These are 3 of the kind of overhead categories, if you will, subscriber services, broadcast operations and G&A. And you can see the trend we've had of reducing those as a percentage of revenue over the last few years, and 2013 is no exception.

One other item that I will mention here, and it kind of goes also back to SAC and ROM, but it gives you an indication of how focused we are on it. Mike mentioned some of the things that we're doing on productivity and procurement. We put a cross-functional team together. It includes Latin America and using their volumes down there. It includes marketing, sales and marketing, on value engineering of the box. And we have just finished up concluding on our requisition for equipment for 2014. We do this about now for next year. All in, if you look at the boxes that we have, the outdoor units, even like power supplies, the cost of equipment next year for basically ordering the same type of equipment will be $100 million or more, less than it was in '13. And again, that's driving our scale, taking advantage of the size of our orders, allocating amongst OEMs to get the best pricing. And then also, thinking about the box and value-designing out cost.

We talked about these ancillary revenues, and they're really important to us. Like I said, it's clear that there's a limit on how much pricing you can put through on programming packages to customers. So this is one of the ways that we want to ensure that we're driving incremental revenue over the next few years. Paul talked about -- a lot about ad sales and commercial. Those businesses have done very well for us. Both of those categories will grow at double digits or more in 2013. We're hoping, ad sales, we can kind of keep that double-digit going for a while; commercial, probably high-single digits, 2 very important categories to us.

On home security. We think this is tailor-made for us. We've got the sales and marketing machine that can sell this. We've got a great network in the field, as you've heard, that can help us install this. We think there's a ton of efficiencies. We think our brand will help here a lot. And we really do think we can grow that into a substantial business over the next 5 years.

SVOD, EST and OTT, I mean obviously, those are a little bit more early in our stages. But it's clear, we're going to get revenue out of these categories. We've spent a lot of time thinking about it and the infrastructure needs to deliver this. But we're going to drive revenue out of those areas. It's just less defined as I'm sitting here today with you.

Romulo talked about the efficiency of our structure, and I think there's no doubt -- and a lot of people, I don't think, realize how much we use the satellite and the cloud in our delivery. But here, you can see our CapEx spend versus our major cable competitors, and obviously, ours is a much better utilization of our capital to deliver the same product. And then down on the bottom, similar to Latin America, about 70% of the CapEx spend that we have is really driven by set-top box, technology in the home, satellite, with expansion of the quantity and quality of the services that we can provide. And then you see our return on invested capital. Not surprising, with the efficiency of our delivery system, our aggressive return policies, that our return on invested capital is far in excess of our competitors.

So looking forward for the next 3 years, what do we expect at DIRECTV U.S.? I think a lot like the last 3 years. Our goals have not changed. We want to grow revenues at mid-single digits, which is our reasonable price increases, like I said, and driving other ancillary revenue streams, advanced services, pay-per-view premiums.

Programming cost. Like I said, we're not assuming any dramatic change over the next 3 years. Our business is geared up, on a cost side, to continue to deliver these type of returns without any dramatic change in them.

SAC and upgrade costs. We think we can stay fairly flat over the next 3 years. Again, that's back to all of these efficiency things you heard about productivity, driving down set-top box cost. We feel very good about the fact that that's a big enough category that we can continue to find productivity and efficiency in there. As I mentioned before, kind of the other overhead categories have got to grow at a low rate, and our goal is to grow those at a rate that's below 3% over the next 3 years. That gets us to the mid-single-digit OPBDA growth. And again, we are -- internally, this is a focus. I mean, this is -- we live and die by kind of figuring out how to kind of manage whatever the external pressures are to get there.

CapEx, I think as Mike said, we think actually, it will trend down over the next few years. We've got some satellites in the U.S. that will launch next year, the beginning of the year following, driving down set-top box cost. So we think we can get to a lower run rate on CapEx. And then that pushes us to a higher growth rate in cash flow before interest and taxes. Again, that's our algorithm, is grow OPBDA mid-single digits and grow cash flow better than that. You see how that compares to consensus? Obviously, our goal is going to be to prove to everybody that those consensus numbers are wrong and that we will beat those numbers.

So I'm going to move over and talk about DIRECTV consolidated now, talk a little bit about our track record and why we think that gives us confidence going forward. I'll talk about our liquidity position and capital management and then also talk to you about why we think that DIRECTV is still a very compelling investment today.

I mean, here's our consolidated performance over the last 4 years. Obviously, against most standards in the business, this is tremendous, I mean, revenue growing at almost 10%, OPBDA growing at high single digits and, of course, with our buyback program, EPS growing in excess of 30% CAGR over the last 4 years.

Mike talked about this before. We've been very aggressive in returning capital to shareholders. It's reduced our outstanding shares by a significant amount. I mean, if you go back long enough, we were over 1.4 billion shares outstanding. But even in this last 4-year period, we've taken our shares outstanding from over 800 million now to below 550 million shares. And then as Mike mentioned before, during that period, it certainly reflected

in the stock price, which is up over 100%.

So on the balance sheet and our liquidity, we feel really good about where we are. With the debt issuances we've had, we're at about 2 -- 2.5, 2.4x levered. We've gone out, and now we've established relationships with investors in both the U.K. and sterling and in the euro market. We've been back to the sterling market. We think that gives us a broad diversity and availability of capital at the best price as we can play off investors.

[Technical Difficulty]

But I do think there are some lessons that we're going to find in terms of how you go about working with more price-sensitive customers that might not be exactly the prepaid model but might be a hybrid of it. And we're looking at a couple of those pieces to get to a lower SAC model in the U.S. to service those price-sensitive customers, which particularly, as prices go up, we can't lose sight of. And I guess last thing, we'll get some earnings on the broadband side that will continue to inform our thinking there as we look at options for the U.S. Again, the speeds are quite a bit lower there. But if you look at kind of what they're going to do in apartment buildings that Evan laid out, there may be some opportunities there for us to think differently on broadband as well.

Richard Greenfield - BTIG, LLC, Research Division

Mike, Rich Greenfield. You tried to buy Hulu pretty aggressively, or at least it seems like you tried to buy Hulu pretty aggressively. You had a slide up before that talked to having interest in a lower-cost over-the-top, I assume some form of virtual multichannel video service. And I guess in the context of -- it sounds like Verizon's about to buy Intel Media to do something along those lines, I don't think low-cost. But could you just frame for us how you think about the over-the-top opportunity? I mean, you have world-class customer service. You have great iPad apps and all of these stuff. Why are you not being super aggressive in going into that space? Is it just not that attractive?

Michael D. White

Well, first of all, we've looked at that space, and from an acquisition standpoint, there's not a lot out there. I suppose you can buy Netflix for 250x earnings, but I don't know how I'd ever make a return from my shareholders out of that. We were very aggressive in looking at Hulu. By the way, financially, it would have been a challenge. I mean, it wasn't a simple -- it's a business that makes no money today, okay? And with limited barriers to entry, when you get into the digital space, you have to remember kind of Zucker's old phrase of analog dollars, digital pennies. I mean, there are differences when you look at that space in terms of lower barriers to entry, the digital pennies challenge. With that said, if we can find the right content, just as with Hulu, we thought there were some unique things that we could bring to the party, leveraging our existing subbase, leveraging in Latin America. We thought there might be more we could do with the kids kind of part of it. I mean, there were some other aspects to it that I'd rather not kind of get into here. So as we're looking at that space and as both Paul and Pat mentioned, it's kind of a little bit premature for me to get into a lot of details. But clearly, over the next 3 years, we are looking at electronic sell-through. We are looking at subscription VOD, and we are going to look at some OTT ideas. Now the challenge on over-the-top is there's not much out there to buy beyond Netflix and Hulu on a general base. And no, I actually don't think that the Intel idea is a very good idea. Look, I mean, we have a low-cost platform already that service nationally. So if I'm going to pay 50% more for the content to go over the top and then I'm going to ride on somebody else's highway -- and by the way, just rule of thumb, our U.S. business is something on the order of $15 billion on its net assets for the nation, whereas Time Warner Cable is like $40 billion for 20% of it. Just ours is a low-cost highway to service customers, so it doesn't do anything from our standpoint to kind of go do that thing. And frankly, I'm not convinced what rights you're going to get. It's a challenge to get the rights. And to execute it on -- across the nation on Internet, not clear to me. The Internet's ready to handle free TV HD, much less Ultra HD. What we are looking at, Rich, is niche ideas. I think that's -- if we can get the rights and in every one of our negotiations, Dan York and his team -- one of the integral discussions is about digital rights. If we can find some rights, and we're already well down that path, but I'm not prepared to talk about it today, we do think it's the technologies, not the challenge, for us. If you look at our NFL SUNDAY TICKET product and what we're able to do streaming on devices, including Androids and everything else, HTML coding, you name it, CDNs, we got all that stuff. It's the rights landscape, and so -- but frankly, I'm optimistic that probably, over the next 12 months, you'll see -- we'll have more to say about that in terms of what our first priorities are going to be. I'm just not ready to talk about it today specifically. But we think it's an opportunity. I mean, as Romulo said, it's $5 billion of revenue being spent in that area, and it's going to grow. And particularly, for millennial cord-cutters, which is where we thought the Hulu opportunity might be, I do think there are some opportunities there, and so we're going to be opportunistic in looking at that space. Yes.

Unknown Attendee

Can you talk about when you're making investments in South America? What kind of hurdle rates do you use for deploying new capital there and things like GVT or something like that? And how would that have changed over the last year, 1.5 years, and then how would that compare to the United States?

Patrick T. Doyle

Yes, I think when we look at something like GVT, I mean, we don't have kind of what I would call a specific hurdle rate type of transaction like that. We certainly look at the fact that it is in Brazil. We always put a more of a risk premium on our expectations on return on something like GVT. So versus where you would be in the U.S. -- and it's pretty easy, whether you're looking at our weighted average cost of capital. We definitely go through a different exercise there because we don't think that's the appropriate hurdle, so I won't tell you what it was for GVT. But it was significantly higher than the weighted average cost of capital in the U.S. All of them now, whether you're looking at Hulu transaction or anything else, we always compare it to kind of the baseline of what kind of returns do we think we can get from just returning excess cash. So anything we've looked at on the strategic side has a pretty high bar because we kind of know what kind of returns we can get to you all by just returning cash. Not always the right answer, obviously, particularly when you look at the long term. But we always compare, and it definitely puts a fair amount of discipline on us when we go to look at opportunities outside.

Michael D. White

Yes, I think you got to separate acquisitions where there's other risks involved, and therefore, you have to have a higher bar, and it was substantially higher. In terms of our core business, as we showed you, we fully expect that business over the next 3 years or so to be in the mid-20s from a ROIC standpoint, which is well in excess of whatever cost of capital adjusted for country risk you want to use. And as far as Venezuela is concerned, we manage it for cash. We don't put fresh cash in. Yes, John? I don't know who's got the microphone.

Unknown Attendee

So one question. Are some of these additional services, like cloud-based UIs or even over-the-top products and so on?

Michael D. White

Sorry, could you speak up a little bit?

Unknown Analyst

So if you look at some of the newest services that you spoke about during the presentation, which is cloud-based UIs and over-the-top services, that obviously needs a broadband connection. And 1/4 of your boxes are connected so far, but given that all the cable companies are now running usage-based pricing experiments, what are your thoughts on the business model from over-the-top perspective, especially for your business?

Michael D. White

Well, again, I think we're looking opportunistically at over-the-top. My guess is they are going to get to usage-based pricing. It's also why I don't believe a broad-based "Let's replicate 200 channels DIRECTV and do it over the Internet" is something that would make sense for us to go do on the Intel model. But where there are smaller niche-based content, if you could get to cord-cutters or millennials or other folks that are price-sensitive, I think there's an opportunity there. As far as our core business is concerned, we continue to be committed to growing our pure-play video business. We look at broadband ideas. But to be honest with you, we haven't yet seen one for the U.S. with the kinds of price performance you need to have for it to make sense for us to go make a big investment. Yes, Ben?

Benjamin Swinburne - Morgan Stanley, Research Division

Pat, in your forecast for the U.S., you talked about flat acquisition costs, which is retention and SAC. Can you just give us a little bit more detail on how that happens, that that's not what we've seen historically for the industry? And then somewhat related on the balance sheet side, as you grow your business and, I guess, for Mike as well, the financial capacity of the company's going up. Do you guys plan to keep this leverage target as DLA [ph] froze up cash flow? Does that change how you think about it? So any thought there would be great.

Patrick T. Doyle

Yes, I mean, first, on the SAC and the upgrade and retention, let me take upgrade and retention because I think that's the easiest. I mean, we clearly stepped up quite a bit. It was a conscious decision. We got more demand. Surprisingly, the Genie product was very popular, which I don't see in that $300 million as we actually had a lot of people that we didn't target that were willing to pay upfront fees to get the Genie product. So we think that's the kind of the volume, what I would call takers. We think we're kind of at the right level, but we're going to drive down. We know set-top box cost, we're going to drive down, all right? We also had some other things where we were swapping out some old boxes in '13 that won't repeat itself, so there's just kind of a little bit of a tailwind. SAC's kind of the same story. I mean, we really spent a fair amount of time looking at the major components of hardware and install. And then the whole direct sales challenged the team to go in and find efficiencies, continue to keep the gross adds at the kind of levels that we want but drive cost out of it. And again, hardware is going to be a big piece of that one. And the number I gave you kind of driving $100 million out from '13 to '14, it's not like we're done. I mean, we've already got plans for a lower-cost down box in 2015 that we just signed off on last week. That's going to give us another step down in cost. So this is -- with the programming doing what it's doing, this is a constant battle. It's not just a "Hey, '13 to '14 looks good." But that's what really helps us. It's kind of the volume. If you take the takers, about the same. It's just driving the costs, underlying costs down.

Michael D. White

Before we get to the leverage question, I just want to point out a couple of things about SAC, in particular, because I see all the stuff get written that makes no sense. Look, if you want to run a world-class direct marketing capability, you all forget that of the $850 or whatever in SAC, a little less than half of that is what it takes to acquire and retain subs. So whether you go over the top or not, okay, you can reduce box costs, I suppose, and pay more in usage-based pricing. But you still got a substantial investment if you're going to run a world-class national direct marketing, commissions, advertising, et cetera, et cetera, et cetera, as a big piece of SAC. And so I don't think we were necessarily saying -- I think we said total capital spending hit a high watermark for the U.S. business in 2013 and should modestly come down. I think as Pat pointed out on operator retention, that's right. I think if you look at SAC, you've got the box savings, but then you've got some modest inflation usually going on with commissions or the advertising, in particular. The cost of media is inflating. So it tends to mitigate out. And then you got mix movement as you upgrade customers. But in total, in terms of capital spending, we're quite comfortable that you should see flat to modestly down for the U.S. business over the next 3 years. On the leverage question, let me start on that. Look, the first and most important consideration is as we have assessed the capital structure for our company and the risk profile, we feel strongly it's important for us to be investment-grade. That is kind of the first and most important thing so that if something happens, you can tap into the markets, you got revolvers, all of those kinds of things that are really, really important for us to have. Now there is no single point number, okay? We have one number that we've talked about, which is 2.5x OPBDA. But there are other things we look at and that I look at, in particular, like not all OPBDA is created equal, especially Venezuelan OPBDA, okay? And so we have to think about some of those other dimensions in making the judgment that we make about where we're actually going to net out in terms of that. Now clearly, sitting here today, we've been a little more aggressive than you could probably justify if you were purely looking at the cash matching the OPBDA from DTVLA. But the reason is because it's not like 7 years from now, we're going to get it. It's because I have a high degree of confidence that Bruce and the team, over the next 3 years, are going kind of start to get to a more normal level of cash generation. And in fact, they've laid out plans to do that with specific improvements this year, '15 and '16 so that we can see along the way that we're getting there. Look, clearly, if we got to there, where we have substantial amount of it, and I think we use the word accessible cash, I'll go back and look at it again at that point. But as we look at it sitting here today, I think we want to, at least, have a better kind of demonstration of how much cash we can actually access before I would want to revisit kind of the total metric, and then we'd also have to talk to the rating agencies. I don't know if that's...

Patrick T. Doyle

Yes, and I think the one thing kind of going into it, Mike was saying on how we impart our judgment on it. We always look to it and say, what's kind of the standalone leverage on just the DIRECTV U.S. business? And where it is today, we're comfortable, obviously, and our board's comfortable. If that starts to get out of whack and you start to see more leverage on the U.S. business, it would make us a little bit more nervous. We don't see that in our forecast. But back to what Mike was saying, when we kind of look at all of the other factors, there's a bunch of things that play into it, that really comes down to our final decision on that.

Unknown Attendee

One for each if I could. So Mike, on wireless, has what you've learned in LatAm, so far, changed your view at all on the potential for wireless in the United States? And as part of that, was...

Michael D. White

On what?

Unknown Attendee

Wireless in the United States.

Michael D. White

Wireless in the United States.

Unknown Attendee

Whether it makes sense or not. And as part of that, was the analysis in the United States about accessing wireless spectrum or the cost of the build-out and acquiring customers or both? Because you obviously had the potential maybe at some point to partner with DISH in some way and have access to that spectrum, which was acquired pretty cheap. And then on the financial side, Pat, you indicated on one of the slides that credits are going from something that was hampering ARPU growth to something that's going to improve ARPU growth, and I'm not sure I quite caught how you're going to be able to do that within the overall business plan.

Michael D. White

So on the question on broadband to the home, we've gotten a lot of learnings. Evan kind of didn't give you all of the bumps along the road, but we did have a few bumps where the technology didn't work as advertised by our first provider, and then we shifted. We now have a lot of confidence in the platform and what it can deliver. But the bulk of it is still that 2 to 4 megabits a second speed. And as we look at that for the U.S., I'm still not convinced that that's a good enough speed. We had some experience in the U.S. with something called a cantenna, which we tried with Verizon's 4G network, piloted it in Pennsylvania, and it worked. But for $60 a month, just what we were having to price it at or thereabouts to get, I don't know, 5, Tony, 5 megabits a second. Compared to DOCSIS, it just wasn't -- I don't think it was good enough from a price performance standpoint. Now if you get enough spectrum, perhaps, you can do more, but then you've also got a substantial build-out cost. I mean, we've done some modeling. This is -- if I could get my hands on enough spectrum, which, right now, I don't know where you get it, the cost of the spectrum, you'd still have to spend another $10 billion or so to build out less than half of the U.S. And it just, A, doesn't look like a product that's got the price performance to compete long term, and B, the math and the returns on investment don't look that attractive as we look at it today. But technology is constantly changing in that space. We continue to have a team under Romulo that is always looking at spectrum and trying to figure out where we might go, what we might do. But sitting here today, we don't have a clear view of a technology that would deliver a good enough product, particularly 3, 4 years out because that's how long it'll take you to build out, with the kinds of returns that both make sense for the customer and make sense for our shareholders. So I'd say that's kind of where we're at today.

Patrick T. Doyle

Yes, on the credits, there are several things that are impacting it. Probably, the most important one is if you go back a few years ago, we had Free HD for Life if you met certain requirements. We decided to move away from that. We went to kind of an advanced service fee with a $10 discount for the first 2 years, and then that discount would go away. We're going to start to see the benefit of that. And then I think Paul's team on some of his offers has moved the amount of discounting that we see on promotions, which is starting to benefit us. And then on top of that, I think with kind of what the trends we're seeing on churn and upgrading people, our plan is to moderate or decline on the amount of credits that we give to retain customers that are calling up. I mean, it's kind of part and parcel with the quality of our service and churn. So it's really a confluence of several factors that are coming together over the next few years.

Michael D. White

John?

Unknown Attendee

I just wanted to get your latest thoughts on DISH-DIRECTV merger? And if DISH's wireless spectrum, if that could be helpful as maybe a lever to get it by regulation?

Michael D. White

I never get asked this question, so I'm really disappointed, I must say. Look, it's probably not particularly useful to speculate. I think we've said before -- I've said before that no different than 10, 12 years ago, there would be substantial synergies of a strategic nature and of a tangible nature from a combination. With that said, I think, one, you would have to have a credible build-out plan for that spectrum. We've done our own kind of thinking about it without knowing whatever Charlie knows, and I don't yet, yet know exactly what that plan would be. So I guess we'll wait until the end of the Seinfeld show, and then we'll find out, okay? And then you guys will have to decide what the valuation is of his stock when he tells you what it really is going to cost to build it out and what the cash flows are that are going to go with it. Separately, obviously, we are a regulated industry. And if you look at it, in about 1/3 of the country, you'd go from 3 to 2. And while I certainly believe our industry has changed substantially, and I believe there are a lot of reasons why consolidation in our industry would be pro-consumer to try and improve the balance between programmers and distributors, you still have to go sell that in Washington, D.C. And I would say that's still an open question. So I think with all that said, we're a public company. We work for our shareholders. If we can find a way to strengthen our company for the long haul that adds value to our shareholders, we're always open-minded. Okay, Tuna?

Tuna N. Amobi - S&P Capital IQ Equity Research

So one for Pat. You mentioned -- we were talking about the SAC factors. I wasn't sure if the SAC was going to be impacted by the hybrid satellite/cloud platform. I would expect that at some point, you would expect some kind of benefits from that to favorably impact SAC. So if you can clarify that. And separately for Mike, so should we assume that you're talking to Netflix about possibly having an app on the platform? You've got Pandora and YouTube already, right? Is there any sort of philosophical reason why you don't think that's the right move, or would that, perhaps, depend on what -- if Netflix was able to do a deal with the cable guys and figure out the economics, would that, perhaps, put you at some disadvantage if you do not respond? Any clarity on that would be helpful.

Michael D. White

So on the first question, where you're talking about kind of the hybrid satellite/cloud, look, there's no question as we are looking and have them with our RVU technology, where you can do smaller client boxes, how one big storage, kind of the DVR with a terabyte as storage because the cost of storage continues to get cheaper. Our vision is to have the satellite, a wire, the 1 terabyte storage in the home and have everything else boxless and wireless, okay? But we're probably still a couple of years out, I would say. You'll see some progress with us on the wireless piece of it, but to get those clients, I mean, to go completely away, I think we're a little ways away from it. But certainly, over time, we expect that'll further save money on the install. But as I said, you're looking at total $850 out of which it gets some modest savings on boxes or some time savings from the technician's side having to run wires beyond the major wire in the home. I'd say it's kind of modest. So I don't see it is making a dramatic impact on our SAC, either up or down. I mean, it doesn't cost -- we're already making those investments. I mean, the last couple of years, we've been investing tens of millions of dollars in building the cloud side of that platform. So that's not new, and that's why our capital spending is kind of at a high watermark as well. We've kind of been building that foundation, the stuff underneath the water.

Patrick T. Doyle

I mean, I think it has some underlying benefits, not so much in SAC because in Romulo's group, having a delivery of both satellite and cloud as a customer demands certain kinds of content, he can determine what is the cheapest and most efficient way to access the content. So he's got the 2 alternative deliveries, and if he sees it over on the cloud, he can get it to the customer much more effectively and efficiently than by satellite. So he's going to pick whatever median gets him the best result.

Michael D. White

I mean, in terms of Netflix, something like, what, Tony, 30% of our customers today are also subscribers to Netflix. It's not that hard. I mean, you've got to change input. It's no big deal. I think if the consumer demands it, we'll be there. It's not that hard to do. We did it with Pandora and YouTube. But it's not necessarily in our interest to undermine our pay-per-view movie business, to be honest with you, where we make nice margins, in order to help readout. So I don't -- and furthermore, I think he's got some restrictions with some of his content contract from a right standpoint that we'll have to see, but it's not very hard to do. It's just, from our standpoint, not necessarily yet either demanded by the customer or necessarily in our interest as we look at kind of where our revenues and profits are. We got a big focus on trying to grow the movies business. We talked about that 3 years ago. We've delivered on that. And in fact, we're getting even better performance out of our pay-per-view movie business than we thought, and we think can grow it further. So as it relates to over-the-top ideas, I'm not so much thinking, "Let's go become Netflix." I don't -- that's usually not a good strategy. I'm trying to think about niche offerings that would particularly appeal to our customers or potentially others, and then we'll have more to say about that probably later in the year. Craig?

Craig Moffett - MoffettNathanson LLC

[indiscernible]

Michael D. White

SUNDAY TICKET, I don't have anything new to tell you about SUNDAY TICKET, unfortunately. I would tell you, though, next year is the 20th anniversary of SUNDAY TICKET. As Romulo showed you, we made a significant investment in upgrading the whole -- kind of the second screen application this year, and I think we've got some more enhancements for that plan for next year. And we've had very, very constructive conversations with the NFL, but it's complex. I noticed Charlie hasn't even got his Disney deal done yet, particularly when you get into things like digital rights. But I am very optimistic we will get an exclusive deal done on NFL SUNDAY TICKET, so we still got another whole other season to go, so kind of ways to go.

Thank you very much, everybody. Have a great holiday.

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