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Dish Network (NASDAQ:DISH)

Q1 2014 Earnings Call

May 08, 2014 12:00 pm ET

Executives

Jason Kiser - Treasurer

Brandon Ehrhart -

Joseph P. Clayton - Chief Executive Officer, President and Director

Robert E. Olson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Charles W. Ergen - Co-Founder and Chairman

Thomas A. Cullen - Executive Vice President of Corporate Development

Analysts

Philip Cusick - JP Morgan Chase & Co, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Walter Piecyk - BTIG, LLC, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

James M. Ratcliffe - The Buckingham Research Group Incorporated

Vijay A. Jayant - ISI Group Inc., Research Division

John C. Hodulik - UBS Investment Bank, Research Division

Craig Moffett - MoffettNathanson LLC

Thomas William Eagan - Telsey Advisory Group LLC

Jason Kiser

[Audio Gap]

Robert Olson, our CFO; and Paul Orban, our Controller.

Before we get to the prepared remarks from both Joe and Robert, we need to read our Safe Harbor disclosure. So for that, we will turn it over to Brandon Ehrhart.

Brandon Ehrhart

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

All statements we make during this call that are not statements of historical fact constitute forward-looking statements which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by such forward-looking statements. For a list of the factors, please refer to the front of our 10-Q. All cautionary statements we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements, which we assume no responsibility to update.

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

Joseph P. Clayton

Thanks, Brandon, and good afternoon to those of you on the East Coast and good morning to our West Coast participants. Now today, I'm going to report on the progress that we have made in the first quarter as we continued to improve our best-in-class video experience, to grow incremental revenue streams and to strengthen our core pay-TV business. Charlie and Tom Cullen are also here to take your questions on our spectrum status a little later.

Now most noteworthy, in early March, we signed a new long-term programming contract with The Walt Disney Company. This historic agreement is really about the future of digital television, both in terms of technology and advertising. This landmark deal also delivers the best in sports, news and entertainment, both in and out of the home. In fact, DISH is the Southeastern Conference network's first nationwide television partner. It's also worth noting that our agreement with Disney also gives us carriage rights for the Texas Longhorn network. Now when combined with the nationwide availability of Pac-12 sports and the Big Ten Network, there is no better place for college sports fans than here at DISH.

Now turning to our marketing efforts. During the NCAA college basketball tournament, we introduced a new national marketing campaign featuring the voice of award-winning actress Rebel Wilson, as Hopper, the DISH kangaroo. The advertising message played off the consumers' trend of streaming March Madness, a phenomenon that has grown exponentially over the past few years. And unlike the competition, only DISH allows consumers to Sling all of their live and recorded TV anywhere.

Now let's move on to broadband. We continue to see significant growth in both dishNET's satellite and wireline businesses. In the first quarter, we added over 50,000 dishNET customers, bringing our base to approximately 489,000 subscribers. We're focused on adding higher-quality customers, up-selling subscribers to more monthly services and improving operational synergies. This allows us to leverage the power of DISH satellite TV with the dishNET broadband bundle.

Now as veterans of an industry that continues to mature, we have concentrated on improving productivity and on maximizing the value of our core pay-TV business. For example, with careful application of customer retention tools, our first quarter churn came in at 1.42%, a 5 basis point improvement compared to last year. In total, we gained a little over 40,000 pay-TV customers in the first quarter. And secondly, in a mature business, you must exercise discipline in realizing efficiencies, and that's exactly what we did in the first quarter as we drove higher sales close rates, improved call center utilization and lowered service call rates.

Now we still have more work ahead of us, but we believe that we have the right plans and programs in place to attain our goals.

Now to provide you all with additional details on our financial performance, here's our CFO, Robert Olson.

Robert E. Olson

Thank you. As Joe noted, we continue to make progress in growing our core business. Our pay-TV base increased by 40,000 subscribers in the quarter. This was modestly better than the growth we saw in the first quarter 2013 due to slightly better churn this year. Pay-TV churn was down 5 basis points year-over-year as we continue to refine our customer retention efforts.

Our broadband business continued to experience solid growth. We ended the quarter with 489,000 broadband subscribers, up 240,000 subscribers versus the same time last year. Broadband churn rate was down year-over-year. But with our larger base, total disconnects were higher.

Revenue increased $219 million or 6.5% in the first quarter compared to last year. This growth was largely driven by pay-TV ARPU, which was up almost $4 or 5% year-over-year. On a sequential basis, we saw about half of the benefit of our price increase in our first quarter ARPU and expect to see the full benefit in second quarter ARPU. Our broadband business also contributed to the subscriber-related revenue growth, accounting for $42 million of the year-over-year revenue increase.

Subscriber-related expenses increased by 8.2% in the first quarter versus last year. This increase was largely due to higher pay-TV programming expense. The higher broadband subscriber-related expenses contributed roughly 1 point of the year-over-year increase. The higher programming costs were primarily driven by increases in our contractual rates. The increased broadband expenses were driven by higher average subscriber levels.

Our pay-TV SAC per activation for the quarter was $862, which was roughly in line with our recent number. The year-over-year decrease of $20 was driven by a reduction in manufacturing costs of Hopper with Sling receiver systems and a onetime impact associated with increased inventory subsidies provided to third-party sales channels in first quarter 2013, which we discussed in our call last year.

Satellite and transmission expense was up $14 million sequentially and $26 million year-over-year. These increases were primarily driven by the satellite and tracking stock transaction with EchoStar, which was effective on March 1.

Administrative expenses were down sequentially, but up $30 million year-over-year in the first quarter. The year-over-year increase was largely driven by onetime items, including spectrum, M&A expense in 2014 and a favorable sales tax settlement we received in 2013. We also incurred additional engineering expense from EchoStar associated with enhancements to our Hopper receiver system. We expect G&A expense to be relatively flat compared to 2013 for the rest of the year. Depreciation expense was up $19 million year-over-year in the first quarter. The year-over-year increase was driven primarily by a larger percentage of Hopper receiver systems within our installed customer base.

Despite relatively flat operating income year-over-year, net income declined by 18%, driven by reductions in other income. Interest income was down $23 million year-over-year. While our cash and marketable securities balance was higher year-over-year, the sale of certain debt security in the fourth quarter reduced our average rate. Interest expense was up $14 million year-over-year as we issued $2.3 billion of debt in the second quarter 2013.

We generated $383 million of adjusted free cash flow in the first quarter, which was considerably above net income. We expect free cash flow will be roughly in the same ballpark as net income for the full year 2014. There is normal seasonality to free cash flow, with the first quarter typically higher and second quarter typically lower due to the timing of tax payments.

Relative to our year end 2013 balance sheet, we saw reductions of approximately $800 million in cash and marketable securities driven by the March 28 payment to the FCC for the H-block licenses.

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

Joseph P. Clayton

Okay. Thanks, Robert. As I said earlier, we are focused on continuing to strengthen our best-in-class video experience, to grow incremental revenue streams and to maximize our core pay-TV business while making strategic investments for future growth.

Thank you all for joining us today for our first quarter earnings call. Now we'll open it up to your questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Phil Cusick with JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

I guess the first one for Charlie, if I can. With SoftBank and Sprint talking about high volumes of data over the Clearwire spectrum and cable WiFi coverage expanding over time, did your wireless effort -- did you envision that look less attractive than it did sort of 2 to 5 years ago when you started talking about it, or has it become even more important as you look to push against cable?

Charles W. Ergen

Yes. Certainly, from when we started looking at it really 6 years ago, it is quite a bit more important for any number of reasons. But the first are the macro trends. The data usage is growing in exponential rates, and that looks to continue in the foreseeable future, particularly in -- with the growth of video, which is going to be the biggest use of that. So -- and the technology improvements and the amount of additional bandwidth that's available can't keep up with that demand curve as we see it. So spectrum, in fact, has become more valuable. The second thing is, is that working with the FCC, we're able to now have the option to convert our spectrum to downlink spectrum. And downlink spectrum, in the old days, everything was synchronous, right, because all our voice calls were synchronous. We talked as much as we talked up as we talked down. But now, the ratios have materially changed where there can be 6, 8, 10 to 1 downlink more than uplink. So downlink spectrum is more in demand. So to give you an example, we have as much nationwide spectrum -- or virtually the same nationwide spectrum today on the downlink side as Verizon does, and they have 100 million customers on their network. And our spectrum gets even better because we're in 20 -- we have 2 20-megahertz blocks. And of course, with LTE, the 20-megahertz block is the sweet spot because that's maximum throughput you can get in the LTE technology. And then from there, it's nationwide. So that means you get the same frequency nationwide. So you're not all chopped up like a quilt with some PCS frequency, some AWS frequency, some 700, some [indiscernible]. It's all chopped up. Ours is nationwide in singular frequency. And finally, it's a virgin frequency, which means that any new technology or any new use, you can put on that network from scratch, you can design it from scratch. And technology is changing in how you use spectrum. It also changes in how you'd use your core and how much smarts you put on the tower and how you do all that. And when you enter the marketplace with our spectrum, you're able to do that in a more efficient manner. And -- because 5G is not backward compatible to 4G, and 4G is not backward compatible to 3G, and 3G is not backward compatible to 2G and EDGE and GPRS, and all the different technologies and hodgepodge of these things out there. So the spectrum is very unique, and so it's more valuable. And I think that -- if I had to -- if I think there's one place that analysts get it wrong and the marketplace gets it wrong is probably in valuing in our spectrum. The good news for you is that it's going to be valued for you in the sense that there's another auction probably coming up probably in the fall for AWS-3 spectrum. And that AWS-3 spectrum is adjacent to our spectrum. So it's a very similar spectrum to the spectrum we have today, and it'll be 25 megahertz of downlink spectrum in that auction. And realize, we own 50 megahertz of downlink spectrum. So you're going to get a pretty good market comparable in that auction for what our spectrum is worth. And so I would say it's materially more valuable. WiFi is going to continue to have -- there will be more public spectrum available. It's going to continue to have problems in terms of propagation, interference, and you're never protected with the quality of service and the consistency of service that you want to give your customers. And of course, it's not going to be ubiquitous. It'll help, and there are certainly strategic things that cable and other people will be able to do with it. But it's not going to replace the need for your own licensed spectrum so that you can give a quality service to customers. So that's a long-winded answer, but I think that we may be wrong. But we'll have a better feel for the value of our spectrum from a financial point of view probably later this year. But I think it will be materially different than what people are analyzing.

Philip Cusick - JP Morgan Chase & Co, Research Division

That helps. And as you think about the business differentiation, it sounds like you don't believe that having a product out there, using all the spectrum are going to any less differentiated today than it would have been 3, 4 years ago when you envisioned it.

Charles W. Ergen

Well, I mean, I think that -- we saw the world change in 6 years ago into several different technologies, right? We had the home covered on a nationwide basis, but there were things such as broadband. There was something called OTT that was starting to be used around the world, and then there was mobile. And all those things have to come together, and they come together in the ecosystem of communications. And it's not just about a pay-TV subscription or a subscription for a mobile -- a number of minutes or number of gigabytes, right, gigabit. So it's really about how the whole ecosystem works, whether it be a subscription, whether it be advertising. The advertising model completely changes with OTT and mobile because you have one-to-one connections for the most part, which means your major advertising is totally focused on a person. And you have big databanks now. You have Big Data, so you know a lot about that customer, and so you're able to put a meaningful ad to that customer. Advertisers will pay more for that. And that infrastructure has to be put in place, and no one company has all those things. And we start thinking about how you could do that and you -- to do that, you're going to need -- you have to work with programmers and develop an OTT product and an OTT ecosystem. Obviously, we've done that with several programmers, with the largest being Disney. So that's where -- we're working really hard at that. And you need a mobile platform to get it out to people, and we have spectrum that will allow us to do that. And of course, you need mostly downlink spectrum for that. And you also are going to need a broadband service. And that's probably the one weak link that we have in the sense that we really only play in the satellite broadband market today, which is more of a niche market, perhaps 5 million homes potentially in the United States. We're working with fixed wireless, which I think would add another 30 million homes economically. And then you have the backdrop of Comcast and Time Warner in the cable industry which have a virtual monopoly on the broadband side. So how all that comes together will be for the regulators and for us to weave our way through that. But we are well positioned strategically and financially for the changes that are going to develop.

Operator

Your next question comes from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Two for Charlie. The first one, do you -- just curious if you see strategic or financial rationale of an AT&T and DIRECTV combination, especially given that DIRECTV doesn't have spectrum.

Charles W. Ergen

I do see a financial -- I mean, this is from -- I'm not the expert here, and I haven't looked at it from an AT&T perspective in detail. But there certainly is economic rationale for an AT&T, DIRECTV or an acquisition of DIRECTV by AT&T because I think it would be accretive, very high price, materially higher than even DIRECTV is selling for today. That could be an accretive transaction for them. And if the reports are true that DIRECTTV has hired bankers, to perhaps shock the company, AT&T would be -- and some other companies would be crazy not to look at DIRECTV. It's a really good company, and it's got really good financial metrics. It probably makes little less sense strategically because they don't buy long-term strategic -- they buy you some strategy, but they don't buy you what you really need to probably compete with where the industry is going. But certainly from a financial point, it makes a lot of sense, and they'd be crazy not to look at it.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

And if this does happen, do you see your options changing, whether it be in wireless or pay-TV or even dishNET?

Charles W. Ergen

Not really. I mean, I think it puts us -- in many ways puts us in a stronger position if that were to happen because it allows our spectrum to go in a way that would be detrimental to some people and beneficial to others. And so I think it -- I think we're just well positioned depending on how a thing goes. I do think that strategically, how we look -- we're a small telecommunications company. We don't get to -- there's 2 things we don't get to control, which is we don't have the kind of money to go outbid Sprint for T-Mobile or outbid AT&T for DIRECTV. And so we're -- we have to be well positioned so that no matter what happens, it's all good for us, and I think we're there. And secondly, Washington will make rules and regulations and merger approvals and things and decisions that will affect us, and they'll pick winners and losers. And the good news is that the administration and the FCC have talked a lot about competition and being in favor of competition. And that would be good for DISH because we like to compete. The negatives would be that there are some headwinds there. The Time Warner, Comcast merger is unprecedented concentration of power, particularly in broadband, and that would certainly raise concerns. And some of the comments on net neutrality where there might be a charge for a fast lane would totally change the dynamics of the industry. And we're hopeful that perhaps the Chairman's comments were misunderstood, and we'll get more detail on where the FCC is headed on that. But that would be a concern. And so based on the kind of things that come out of Washington could drive us to one direction or another. I'll give another example. One other example is the upcoming auction for AWS-3. We had fought really hard for interoperability. That would have made that spectrum more valuable to DISH because we've been interoperable with AWS-1 and AWS-3s. Our AWS-4 spectrum would have been inoperable. We weren't able to get that through the commission, so that's a negative for us from an auction perspective. So we've had some things that are positive. The old downlink is a big positive for us. The H-Block auction is successfully completed since last we talked. That's a big option -- positive for us. And then we have some things like potentially net neutrality, Comcast, Time Warner and interoperability that didn't go so well for us. So that drives us in certain directions depending on what happens. And we really have no control over those things other than to go make our positions known and try to work with the officials and staffs.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Right. I have one follow-up. It feels like over the years, you've kind of you've gotten your building blocks in order from a spectrum perspective. After the AWS-3 auction, would you say that you have all your building blocks at that point?

Charles W. Ergen

I think we're going know exactly where we stand. I think you're going to know what the value -- we will know what the value of our spectrum because somebody would have bought like spectrum in the open market, so we'll know what the value is. We will know we have -- we think we will have critical mass of spectrum. We think we have that today. And there'll be one more final auction, which will be the incentive auction. That could happen as early as 2015, and that would be something else that would be of interest potentially to us. But I think we'll know where the -- we'll know where we stand. And there's one more piece to that in the sense that the spectrum screen is expected to come out next week in terms of how much spectrum a company can own. And that looks like that screen is going to be increased materially in over 200 megahertz that a company can own. So that's interesting because that probably shows a roadmap for what future consolidation can happen within the spectrum community. So we'll have to wait and see what that says officially. But all I can say is we have -- I think we have most of the building blocks we need even without the next auction. But that can only be -- that can only be helpful because it sets a floor on the value of our spectrum and strategically places us -- there'll be winners and losers in an auction. And winners will be happy, and the losers won't have a lot of places to go. So I don't see how that hurts us.

Operator

Your next question comes from Walter Piecyk with BTIG.

Walter Piecyk - BTIG, LLC, Research Division

I just want to follow up on that question. Assuming DT is just unwilling to move forward with Sprint, then you're not really having to bid against Sprint for T-Mobile. So does T-Mobile have any interest to you as far as a strategic partnership, or would you rather just wait for the spectrum screen to show people the roadmap and maybe have some of those other opportunities take place? And conversely by the way, if they do, in fact, try and they fail in that attempt to get approval for that transaction, does T-Mobile hold any value for you as a partner, acquisition target, whatever?

Charles W. Ergen

I think that -- I think T-Mobile is Sprint's to make a decision on, and we wouldn't -- just can't compete in that process. They'd have a lot of synergy and they -- there's logic to what -- why they would want to go after T-Mobile. It looks like a tough regulatory hurdle based on what people have said, but you never -- you could go broke betting on Washington. So if, in fact, Sprint didn't proceed or was denied, then T-Mobile would have strategic interest to us, yes.

Walter Piecyk - BTIG, LLC, Research Division

Okay. And also on the spectrum values that you referenced, how do you view the difference in value between uplink and downlink? So when you see that kind of blended number that's going to come out of the auction, how would you allocate the difference in value on uplink versus downlink?

Charles W. Ergen

The vast majority of the -- in my opinion -- and it could be literally 10 to 1 in this next auction -- the value will be on the downlink side of the spectrum for 2 reasons. One is you use a lot more downlink spectrum, so it's just inherently more valuable. And most people's networks, they do not have congestion on the uplink side except possibly in a football stadium at game time. That's about the only time, but they don't have uplink. They don't have congestion. They have congestion in the downlink. So downlink will be the biggest value. The second reason that downlink will be the biggest value is the uplink spectrum in the upcoming auction is impaired and it has a lot of technical issues that have to be cleared before anyone could use that spectrum. And we think -- we haven't seen the rules on it. We haven't seen where NTIA has given us some road map there. But it looks like it could be 5 to 10 years before you could use that uplink spectrum. And so I think you -- I think for the -- it's almost as simple as take the value of that auction and multiple -- multiply it by 2, and that's a value of DISH's spectrum. So what the marketplace is saying is that auction on the paired spectrum, that, that auction is going to go somewhere between $5 million to $10 million. And I think the minimum reserve price will be higher than that, so [indiscernible]. I think the analysts -- I think analysts just have that part wrong in their analysis, but that's my personal opinion.

Walter Piecyk - BTIG, LLC, Research Division

Right. And in that case, for that auction, you're saying the uplink is the interference on that paired spectrum. So if the net number comes out like $1, then the downlink -- the respective downlink value is obviously much more than your typical 4 to 1 ratio on usage?

Charles W. Ergen

I mean, if it was $1, it would be probably $0.90 for the downlink and $0.10 for the uplink, or $0.95 for the downlink and $0.05 for the uplink. That's -- again that's -- I'm not as knowledgeable about what other players would want uplink for, but that would be my view.

Thomas A. Cullen

And Walt, this is Tom. Let me just clarify. It's not necessarily an interference issue. It's that, that spectrum is currently occupied by several federal agencies. So the NTIA has to coordinate the clearance of that, which will take some time.

Walter Piecyk - BTIG, LLC, Research Division

Right, got it. So timing of availability of spectrum, okay. And I...

Charles W. Ergen

I just remembered Economics 101. And as a freshman in college and there was something called supply and demand. And there's a lot of demand for downlink. There's an oversupply of uplink relatively.

Walter Piecyk - BTIG, LLC, Research Division

Got it. And [indiscernible] wants to hop on for a quick one, too.

Unknown Analyst

Charlie, the PSS [ph] that you signed with Disney seems to be a paradigm shift moving from household-based video delivery to per stream video delivery. Just wondering if there's anything you can give us in terms of how you think about this changing the video landscape overall as you move from signing up a whole household to just signing up me, and whether this can be television-based or this has to be tablet or mobile phone-based. What are the restrictions or limitations on what you can and can't do with this as you kick it off later this year?

Charles W. Ergen

Okay. It's really a big picture, which was really Disney was our worst relationship with a programmer. And I hope that Disney is now our best relationship, and what -- we realized the industry is changing and that there's -- that there can be more economics to our content providers. And while some people think we're against advertising, we're actually probably more pro-advertising than anybody other than the network broadcasters. And so OTT, in a sense, is an experiment that they're willing to go make -- they have kind of set the rules for that. Now as they're leading -- as a result of them leading, they're setting the rules of that. And the rules are pretty smart I think on their part in the sense that we're going to be able to go to people on a one-to-one relationship and give them more of a slimmed-down version of content that people -- primarily aimed at people who aren't paying for content today. Or if they're paying for content, it's going to Netflix. It's not going to the current programming partners. The second part of it is that we also are going to experiment a lot in the advertising realm in the sense that we believe that we can increase the advertising to our programming partners by getting higher -- when you take the data that we have and the data that they have and you put that together, we can go to a customer in a way that we otherwise couldn't go to them with particular ads. So we're going to know that you had -- we know you have a car for 8 years. Or we know that you went online to look at a car. We can download a car ad to you instead of downloading a car ad to you when you just bought a car last week. That doesn't any make any sense, right? We can download movie trailers on Thursday night because you're more likely to go -- and Friday night because you're more likely to go to the movie on Friday night or Saturday night. We don't have to download that trailer on Sunday night when we know you're not going to a movie on Monday. And so we can do a lot of things that increase the revenue pie to our programming partners, but also increase the revenue to us. And it's not a zero-sum game. The hardest thing about a programming negotiation today is every $0.01 we pay Disney is $0.01 out of our pocket and $0.01 -- it's $0.01 we got to charge customers. But in the advertising model, it's a win-win situation. And so that allows us to do some things that are different. And I think that we have to work with Disney and other programmers to make this a product and share our results and try to make it a product that's economical for where things are going. I believe it's also a precursor to mobile. Every part of infrastructure that we put in place for OTT is exactly the infrastructure we need for mobile. And for mobile, the advertising is even better. Because in mobile, we're going to a smart device and we're going to know your physical location and we're going to make it interactive and we're going to -- we have your credit card information. And the ads are, in fact, interactive. They're not static ads. The world of static ads isn't going to make much sense in the future. And so the ads are going to ask you to do something, and that's going to be a more valuable ad for advertisers. And again, with mobility, you need airwaves, you spectrum and so we're well positioned there. So it's all part of a kind of 2-step process to OTT and mobility that we believe makes programming partners a lot more money than they make today. So there's only 2 ways to make money in this business. One is you own the content, and the other is you own the distribution. And we're a distribution company. We're not a content company. So we're not a 2-headed monster between content and distribution. We're just a distribution company. And for those programming partners who want to work with us, we're going to make them more money and then we're -- right, by getting them more eyeballs and more advertising revenue. And we're going to make ourselves more money because it's going to go through our pipes.

Operator

Your next question comes from Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

I just want to continue on the PSS [ph] Disney agreement for either Charlie or Joe. There's been a lot written about what else needs to be done to get this off the ground from a contract perspective. I don't know if you would talk to that. But if not, how confident are you, you can actually launch a product this year? And how do you make money, Charlie, at $30 of ARPU, which I think is at least what the press has talked about? And how big is the market? Disney just seems to describe it as for the broadband-only homes, cord-nevers, whatever catchphrase or buzzword you want to use. But when you look at the economic opportunity here, how do you make money at $30? Do you have a truck roll, and how big is the market?

Charles W. Ergen

I'll take other the first part of that, and if Joe wants to jump in. First of all, we don't know if we make money at it. But we think that the -- we think the money -- that the SAC is materially less because, obviously, you wouldn't necessarily have to have a truck roll. It can be a self -- if you have a smart TV or Chrome or Roku box or Kindle Fire. You don't need us to roll a truck [ph]. It can be immediate. So if you order it, we can give it to you immediately because it will be -- you will have to be online to use it. And it goes to a smaller niche of people. I think that we're in agreement with Disney on that in terms of how we approach the marketplace. And we're trying to getting incremental revenue, we're not trying to go change the system that we have today with a person having 4 TVs in their house and trying to convert them to this. So I think -- and I think there's a bigger advertising data component of this that we can monetize in a way that we're not able to do as well on satellite. We have mostly national commercials, so those go at a lower CPM than a local commercial, right, might be 5, 6, 7, 8 to 1 more for a local commercial. But not only are we -- we're going to be able to do local commercials. We're going to be able to do commercials down to address the house or the location of the person. So that will increase those CPMs. It's a benefit to both of us. And then, finally, we have enough programming contracts to launch this service now, but we don't anticipate we would launch before the end of the year. It's that kind of -- there have been reports of maybe earlier, but I think the end of the year to come out with a product that works. And we certainly have a few more spots for the programmers if they so choose to. So we're comfortable launching with what we have and think it's still a meaningful product, but we think that there's a few other programmers that would like to experiment with this. And this can take a bit -- we have to do -- invent some technology on how to insert ads and how to monitor the data. There's a few things we have to invent that's going to take us some time. So we're looking at something by the end of the year. Joe...

Joseph P. Clayton

Just to follow up on that. I mean, the pay-TV in this industry itself today, the entire industry, is missing this key customer segment. Let's call it the young adult market, for lack of a better word, from, say, like 18 to 35. And we do know that they're young. They're well-educated. They're mostly urban dwellers. And they are not going to spend $100 per month for their video content. Maybe they'll spend the $20, $30 that you mentioned. We know they're not going to watch 250 channels. They might watch 20, 30, so it will be a smaller offering of channels. And we know they're not going to watch it on a 60-inch, 62-inch flat-panel display, they're going to watch on their tablets, PCs or smartphones. So even though there may be a potential of some cannibalization to our existing satellite TV business, we believe the majority of this will be incremental because we're missing it today. So that's kind of a market look at it.

Operator

Your next question comes from James Ratcliffe with Buckingham Research.

James M. Ratcliffe - The Buckingham Research Group Incorporated

Two if I could, one following up on the OTT offering. Do you need hardware in the home to do this? You mentioned they're going to be watching on tablets and PC screens and phones and the like, but does this require a set-top box for you, or can you get away with just having clients on other third-party devices, the Rokus or Amazon Fire or Xboxes and the like of the world? And secondly, thoughts on integrating other OTT providers into your core DISH DVS offering, such as having Netflix as an option in your box and search across multiple platforms?

Charles W. Ergen

You got -- you don't have to have a separate piece of hardware. I mean, I shouldn't say it, you have to have a smart TV or you have to have a way to connect to the Internet, whether it be smart TV, or whether it be Chrome or whether it be a Roku or Kindle Fire. You could have a separate box and you could do a lot of interesting things with that box in terms of graphics and an operating system. But it can work on game players, game consoles, too. So for the most part, customers may already have the devices. And the second part of the question was...

Joseph P. Clayton

Other providers.

Charles W. Ergen

Oh, I think that's a strategic call that I don't think that we've made a decision on it, but you have 2 choices it of being a closed platform or you can be an open platform. Open platform probably, at the end of the day, is more consumer friendly, but probably a little bit more disadvantageous to our current business. So those are -- we haven't made decisions on that yet.

Operator

Your next question comes from to Vijay Jayant with ISI.

Vijay A. Jayant - ISI Group Inc., Research Division

Just continuing on this new OTT offering, Charlie, can you talk about digital ad insertion environment. How does that -- is going to be shared with the content guys? Is it similar to the current splits or there's a new economic model developing there? But also just strategically, when you're creating this new offering and you said it's going to be a niche product, what is that niche that this offering could sort of take from the current ecosystem and you can gain share? We thought it would be sort of non-sports, but now you've got some of the best sporting channels from the Disney platform. So any help on just where the opportunity would be there?

Charles W. Ergen

Yes, I mean, I think that the advertising model will be -- it will be similar the way it is today. We have minutes -- we normally have minutes as a multichannel provider, and the programming partner has minutes. We're certainly open to sharing our data with our partners, so that we -- they can place ads in a way that will be more meaningful to them and they make more money. We don't see help -- we see helping our partners as a positive, not a negative. Obviously -- so the model will just be higher CPMs as we get scale. It will take a while to get scale. But we'll have real data. I mean, the world of TV was pretty obsolete. If you think about world of TV 30 years ago, you had 4 channels to watch, and you didn't had a -- you had a scrolling guide, if you had a guide. And TV ads are all static and they just play. The world today is that you can interact with that ad. You can buy something. You can get information quickly. You can -- you have plenty of channels to go and your biggest problem is finding out what to watch. And so we have to look of that paradigm and say, "Let's put a product in there that makes sense, right?" People aren't going to come home and say, "I want to watch Comedy Central." They're going to come home and say, "I want to watch The Daily Show." But they're not going to go come home at 9:00 when it's on, they're going to come home at 10:00 and then watch the next day or so forth. So how do you go do all those things? Do you really need to watch Shark Week on Discovery during Shark Week, or maybe you want to watch it when your kids are studying sharks in school, right? So that changes everything, and OTT allows us to give a better product to the customer. The advertising -- I will predict that the advertising will be -- someday will be huge. And when you add mobility to it, the advertising revenue between OTT and mobility will be much greater than the broadcasting or the programming people get today. Right? So the future of advertising will dwarf what they're getting today. That'd just be a different system. And we can put our head in the sand or we can go out and -- we can go obsolete ourself. And we've obsoleted ourself before as a company when we went from big dishes to little dishes. And we're willing to obsolete ourself by going to the next generation of where this thing is going, which is in-home and at-home, fixed OTT and mobile. And it would be malpractice not to do that because then, we would be stuck as a -- then we'd be the wireline business. I mean, we'd be a twisted-pair copper that does voice, and a business that would be declining at 4%, 5% a year. And that's just not what we chose to do. History will prove us right or wrong. I think the jury's out.

Operator

Your next question comes from John Hodulik with UBS.

John C. Hodulik - UBS Investment Bank, Research Division

Back to the M&A and, Charlie, following up on your spectrum screen comments, it looks like -- our math suggests AT&T has a little over 130 megahertz per market. You guys have are about 54. I mean, given the new spectrum screen and 200 megahertz that you mentioned, I mean, in your mind, as you read the tea leaves, is there anything that would prevent AT&T from buying you guys? I mean, it seems like that would be a better fit, given the fact with what you just talked about and the need to move to sort of nontraditional video. And I guess following up on that, the other side of that transaction, DIRECTV, with your new OTT product and others coming, I mean, how does that impact potential combination between DISH and DIRECTV as you see going forward, at least from a regulatory standpoint?

Charles W. Ergen

From a spectrum screen perspective, the only -- I think AT&T, Verizon or T-Mobile could buy DISH or vice versa.

Joseph P. Clayton

If the rules go.

Charles W. Ergen

If the rules are what people -- right, we haven't seen the rules, so -- Sprint, if the rules are what we think they're going to be, then Sprint probably couldn't buy us without having to give up some spectrum, right? Or we couldn't buy Sprint without having to give up spectrum. The DIRECTV -- DISH, I mean, obviously, that would be, from a transaction point of view, that'd be the highest synergy transaction that DISH could do. But would -- and it potentially would face some regulatory headwinds depending on how they come down on Comcast, Time Warner. But it's certainly a different landscape than it was 11 years ago when we tried it. But the other part of it, I think, that all those things that you -- all those potential transactions, it ultimately boils down to economics in price. And so I think the -- our board, I don't think, would be inclined to do something with the valuation of DISH that didn't include the true value of our technology, our spectrum, our management and everything else. I mean, I think we are well positioned for the future, and we put long-term things in place to the detriment of a short-term stock price. And so I mean, as example, I think that DIRECTV would be too frothy for us to for our board look at those kinds of prices. It makes all the sense in the world, but you're not going to give up 2/3 of the synergy to another company that you believe you're better positioned than. So that just -- that's look to be too frothy, but it doesn't make -- it could make a lot of sense for AT&T or Verizon or somebody else that has a different motivation because it's very accretive. So...

Operator

Your next question comes from Craig Moffett with MoffettNathanson.

Craig Moffett - MoffettNathanson LLC

Charlie, 2 quick questions. First, you said categorically in the past that you would not separate the spectrum from your core satellite business. Is that still the case that there's sort of a categorical view that if you were going to do a transaction for the spectrum, it would have to include the whole company? And then separately, just a clarification on the Disney deal. As I understand it, that yield does not include the typical obligations to carry other -- all the other suites of programming. Can you just put any detail around that as to how much additional programming from other programmers it does require, and what your vision would be for how broad that offering would be when you go to market?

Charles W. Ergen

Okay. I'll take the second part first. We're not going to give -- talk about the details of the Disney deal other than to say that we have enough programming contracts in-house today to launch the service. So that's not going to be a stumbling block in terms of -- it is much narrower -- it is a much smaller -- it's a skinny-down version of pay-TV targeted at a different class of people. But we don't believe we're getting or Disney's getting today. There's certainly -- we'll certainly reevaluate with Disney and other partners as we go along and do the right thing long-term as it moves forward. So it's not going to be -- this is going to be groundbreaking material, huge thing in 2014. It's just the precursor to where I think industry is going and certainly the precursor to where we think we're going with mobile. So it's just that it's getting out and going -- it'd be like doing broadband back in 1998. I mean this is -- this is dial-up, and now we're supposed to be broadband. We'll get -- the OTT will be similar. It's going to move in directions we can't foresee. I don't think we've ever said we'd categorically wouldn't split up our spectrum, but certainly, our preference would not be to take a strategic asset that we worked on for 6 years and then split off of for profit, pay taxes on the profit and then be back to just DISH Network and what we view as a mature business and potentially a declining business, right? We think that the spectrum is an integral part of where DISH Network needs to go and -- that those -- that the best value to our shareholders is keeping those things linked, right? And as you mature in the satellite side of the business, you're able to bring -- you're able to combine the mobile side and the OTT side into an ecosystem that, when you put it all together, has tremendous value.

Operator

We will now take our final question from the analyst community. [Operator Instructions] We will begin the media portion of this call following the answer to this final analyst question. Our final analyst question comes from Tom Eagan with Telsey.

Thomas William Eagan - Telsey Advisory Group LLC

Charlie, I was wondering if you could comment on the impact of some of the announced deals between Comcast and Charter? So we know that Comcast is it taking the systems on the East and the West Coast and that Charter taking systems in the central states, Ohio and Wisconsin. So for example, does that change the landscape for you guys at all?

Charles W. Ergen

I don't know if Tom may have some comments. He knows cable better than I do. But obviously, the merger itself is the biggest concern, right? Because it gives unprecedented concentration of power in broadband, and with programming and with leverage against programmers, who we had to compete against. So obviously, Comcast-Time Warner is going to get better pricing than Comcast or Time Warner alone. That means that programmers get less money. They get to pass it on. They get to pass cost onto somebody else. Where is it going to go? It's going to go to little guys, right? So that's not -- and then, of course, obviously to the extent you control the pipe to the house, and if you believe what I believe that most video, long term, is going to come through that pipe, particularly from an OTT's perspective, suddenly you have a virtual monopoly, which is very similar to where cable was before DIRECTV and DISH got to satellite business, and we're going go backward in time there. And so that's concerning. And then it gets even more concerning when you start thinking about paying for fast lane. Only the big players will be able to play. You'd never -- you'd never have a DISH Network startup in that environment. You wouldn't have a Facebook startup in that environment, or Google. I mean, it'll just be really big companies, and that's concerning. The other part of geographic concentration, I think, makes sense for the cable guys. It makes all the sense in the world because there's economies of scale and some synergy by operating in a particular geographic area. And so that just seems to be smart business on their part. It just makes them more -- that makes them more formidable as competitor, but we don't begrudge the fact that they're doing smart things.

Joseph P. Clayton

Yes. Given the marketing and operating efficiencies in local markets, like concentrating geographies, but it also improves their position in terms of the local programming, which could include RSNs. So in general, yes, of course, we're concerned about Comcast-Time Warner, just the sheer scale of the entity, the dominance in broadband and the potential for very disruptive bundling are all things that concern us.

So we'll take in, what, media questions now?

Jason Kiser

Okay. That concludes the...

Joseph P. Clayton

Yes, thanks everybody. We're going to media now.

Jason Kiser

Okay. That concludes our Q&A with the financial analysts, and thank you all for joining the call. We have a little more time for questions from the media.

Operator

[Operator Instructions] Our first media question comes from Liana Baker with Reuters.

Liana Baker

Just a follow-up for Charlie about a comment you made before. Could you elaborate on your comment about DIRECTV being too frothy at those prices? What do you mean by that?

Charles W. Ergen

Well, I mean, I think the question was DISH -- would DISH look at DIRECTV, or that's how I interpreted the contract. And answer is, of course, we'd look at DIRECTV if they're for sale. Of course, we would look at them. And there would be a lot of synergy and a lot of -- that would make a lot of sense from our perspective because there'll be just a ton of synergy between the 2 companies, right? Anyway, there's probably no deal that DISH could do that wouldn't have that -- that would have that kind of synergy. But we'd also have to be realistic about valuations. And the price levels that they would be at today, based on the relative value to where we think we are, would probably be a kind of a nonstarter for us because we just -- we would view -- I don't want to talk for DIRECTV, but I think they might be very skeptical of where we are on wireless spectrum and what the real value of that is. They wouldn't really know how to value that, right? Hell, the marketplace doesn't know how to market -- value that today, right? The valuations are all over -- are $5 billion, $10 billion apart, right? So nobody really knows how to value that. So that made it very difficult for them to say it. They would probably say Dish is overvalued because they're getting value for -- All we can value is our subscribers. And when we look at that, we think they're are allocating too much value to their strategic position in the spectrum. We look at them another way where we'd say we're well-positioned for the future, right? We've spent 6 years investing, right? And now that we're ready to harvest our investments, we don't want to pay a value for something that's purely financial, as opposed to strategic. So we look at that and just say, for us, you guys don't need to speculate in the press about us because that seems -- we can never outbid an AT&T or a Verizon or anyone else for DIRECTV, because they would have a financial motive. And we're really holding interest in the strategic motives. So then for us the valuation is different or the analysis is different. And I think an AT&T could -- could easily pay triple digits for DIRECTV and still be accretive to them. So I -- we don't mind getting in a battle, if we got a shot to win. But we have no shot at that, right? So...

Liana Baker

What did you think of all the reports and analysts notes saying that AT&T actually is trying to smoke DISH out? What did you think of those reports?

Charles W. Ergen

Idle speculation. I mean, we're not -- we're a pretty simple company. We're a public company with a Board of Directors. There's no smoking us out, right? There's -- we have people who talk to us all the time about things, and they know how to do it. They usually call us up and then we'll have a meeting. And there's not -- smoking out some sounds like some plot for a TV sitcom or something. It's just not the way it works with us, right? It -- we're -- I mean, Tom can answer this better than I can because he heads up Corporate Development. But I think in this industry, everybody's talking to everybody, right, as you might expect. The only company that potentially seems to maybe have put themselves up for sale, if reports about them are true, it would be DIRECTV. So obviously, that makes a lot of sense for people to talk to them. Because if they hired bankers you know who to go to, you just go the bankers to have a conversation. DISH is just a public company where we have conversations with everybody. And sometimes those conversations are about acquiring another company, sometimes it's about merging companies. Sometimes they're about selling companies. Sometimes they're about joint ventures. And it's 1-800 DISH. It's not like you're going to negotiate it on the front page of The Wall Street Journal. That doesn't make any sense.

Operator

Your next question comes from Scott Moritz from Bloomberg.

Scott Moritz

Charlie, the question -- maybe you can help us think about this. There've been kind of a chain reaction deals since Comcast-Time Warner, talks of deals between DIRECTV and AT&T. And you say you still have very good options. What would be your options if those deals all came together?

Charles W. Ergen

Well, I think the same things it's always have been, which is in the goalpost, if we can build a network out ourself, that's not likely, but that certainly, with changes in technology and verge in spectrum and the fact that we have more downlink and uplink, there's ways you can go about doing that. On the other end of the spectrum, we might sell the company, right? And then there's everything in between, which is whether we would merge with somebody, acquire somebody, partner with somebody and so forth and so on. And in any transaction, there's winners and losers, right? So Comcast-Time Warner, there's a lot of losers on the sidelines for that one, right? Comcast and Time Warner, and I think their shareholders will be winners on that one, assuming they get regulatory approval and there's not conditions that -- the conditions aren't very strong and they can be a monopoly, they're going to be winners, right? But the problem is everybody has to compete against them. It's losers, right? And potentially, the American consumers are losers. So how do you then put together things that would be beneficial to American consumers and beneficial to shareholders? And AT&T and DIRECTV might be one of those chain reactions. But there would be others and you can use your imagination on what would be for me to talk out of school, but you could use your imagination on.

Scott Moritz

All right. A follow-up on that. Is DISH prepared to oppose the Comcast-Time Warner Cable deal?

Charles W. Ergen

We haven't -- we're going to read all those stuff and we'll make a decision. But we're not opposed to being opposed to something if it's not the right thing to do. I mean, I think we will have a strong opinion on how it would affect our business and how it will affect the American consumer. And if the condition was that they had to do wholesale pricing like it's done in other countries, we might think that might be good for consumers, right? So we -- that might not be good for us, but we might not oppose it if it was good for consumers. If it's allowed to be -- to charge for a fast lane and be an unregulated monopoly, that would probably be that the consumers and bad for our business and we'd probably oppose it. So we'll just have to wait and see. But we very rarely win in Washington. So we're going to be a small -- a little small voice in this big, big merger, and there'll be other much bigger voices than ours. But we will have an opinion and we participate in the political process, and we will participate in this kind of groundbreaking potential merger.

Operator

Your next question comes from Alex Sherman with Bloomberg.

Alex Sherman

Charlie, given DIRECTV and AT&T are in fact talking about a deal, which we have reason to believe is the case, with the Time Warner Cable-Comcast merger and Sprint's potentially trying to do a deal with T-Mo, my question for you is, are we reaching the last episode of Seinfeld here? Is the endgame near? Are we hitting a point where DISH is going to have to make a large transitional loom or do you feel like your options still leave you with years of runway ahead of you.

Charles W. Ergen

If all those things happen, then we'll evaluate that particular condition. But it -- the only thing I can give you is, I'm not that smart, but when I used to play poker and everybody was throwing chips and betting crazy on the table and I had really good cards, I always felt it was better just to sit back and watch them go at it, right? And every time they went at it, I'd learned something. And they -- and as I sat back, they didn't learn anything about what I had. And I learned to trust my cards. And I wasn't a very good poker player, but when a bunch of drunken fools were throwing money around, occasionally I was able to pick up a pot at the end of the day. So it's crazy how eerily similar it seems to me today with this crazy stuff on the press and everybody is kind of gone -- wild swings in the market. And it just seems to me to be kind of similar, and it seems to me that my recommendations to our board would probably let's it all -- let's see what all happens. Because we know, we know that there's an auction coming up that will tell us kind of what our value is. And strategically, that auction is going to tell us whether we have a better hand or a worse hand. And why not wait and see? But is there anything that I've read about that would -- I'd worry about? No. I mean, all those scenarios, if they all happen, I wouldn't worry as a shareholder of DISH. And it's probably unlikely that all those things happen in a way that the press is reporting. It's -- it always happens a different way. It just never -- the movie always has a twist and Seinfeld always has a twist. And it never happens exactly the way you think it is. And I don't think it -- even the way I think things are going to happen, isn't going to be the way it's going to happen. So that means that you want to have -- you want to get good cards as you can and you want to keep getting cards and you want to wait and see until it's all out there, and then you make your move. I don't know how to explain strategy other than that.

Operator

Your next question comes from Tom Gryta with Wall Street Journal.

Thomas Gryta

You talked about not being able to outbid for DIRECTV and about the financial side of that, but do you think you could get it pass regulators, and what would be your case for that?

Charles W. Ergen

Well, I mean, I guess I would be cautiously optimistic. You could get it through regulators. I think you'd have to show them that you're -- that as a result of the merger, competition would be enhanced. That from a big picture perspective, competition would be enhanced, not eliminated or concentrated. And a more -- a stronger DISH, DIRECTV, in the wake of a Comcast-Time Warner charter consolidation, new entrants in the marketplace, OTT and concentration and broadband, is probably not a bad thing for consumers. And I think you could probably make that case. What was the other part of the question? I mean, you -- but it wouldn't be a sure thing by any means. You'd have to have -- you'd have to really -- you'd have to spend some time with the regulators and make your case. And they only have to decide yes or no. And we don't know what we're going to decide on Comcast-Time Warner right now. So -- right? I mean, I don't think it's a [indiscernible] to complete. I don't think that -- I think people are afraid to talk about it because everybody has to deal with Comcast. But it's -- that's got serious consequences to the future of telecommunications and content and everything else in the United States. That's a big merger. It would not be the one -- it would not be a merger that typically would sail through Washington, let's put it that way. Even though, obviously, they're very well connected.

Thomas Gryta

Do you think it would be helpful to get a DIRECTV-DISH deal in front of regulators, while they're considering the cable merger?

Charles W. Ergen

I would say, strategically, that probably would make more sense so that you -- because I think people would understand the fairness of that, and you probably either would approve both of them or you would disapprove both of them. But I think people would understand the fairness of them. If they can go to 30 million subs and higher, somebody else ought to be able to go to 30 million subs, too. That's the dangerous catalyst that potentially happens. But we can -- we're small guys, we can't afford DIRECTV.

Operator

Your last question comes from Ryan Nakashima with Associated Press.

Ryan Nakashima

Charlie, I wanted to ask you, you said that you have enough programming contracts now for an OTT service. Could you expand on that? I mean, do you have like enough broadcasters, enough range of programming to effectively market to this niche that you look at?

Charles W. Ergen

Well, I mean, the -- I mean to say, we wouldn't launch with Disney channels alone, so we'd want to have enough critical mass between general entertainment and sports and children's to launch, and we think we have that to do that. Although I would say that I think Disney, by itself, is a pretty good compelling content to the niche that we're going after. I mean, were not going to launch with just Disney, but I wouldn't be opposed to doing that because there's an awful lot of people who love their sports or have kids, or love sports and have kids, that don't -- can't pay $100 a month. So -- and we're not getting those customers today and Disney's not getting those customers today. And the cord-cutter stuff is not this dramatic thing we're suddenly -- the video business is a mature business, but it's hanging in there pretty well, based on the first quarter numbers. And it appears that's going to hang in there for a period of time. But it's a bit like the lobster that gets boiled, right, the old analogy, which is you don't really know you're dead and boiled until too late. And DISH is just a company that would rather be upfront and make some mistakes, and be ahead of the curve than be behind the curve, because then you're at the -- then you can't shape your vision of what you think is important. So we may be a little ahead of our skis here and so forth, but -- and I don't think -- so OTT is not going to move the needle for anybody this year. It's probably not going to move the needle next year. There's a lot of programmers who are not interested in it yet, or would have unreasonable demands that it wouldn't make sense to do it. But I'm very comfortable with the content we have today. That if we can get our systems all ready to go by the end of year, then we would launch with what we have. And there's probably several others that will -- probably several others that will participate just because they're pretty creative and they're looking for long term. But if we do, we'll announce it.

Jason Kiser

All right. Thanks, everybody.

Charles W. Ergen

Sorry for monopolizing everything today, but I guess it was...

Joseph P. Clayton

Thanks to everybody who joined the call, and we'll talk you all next quarter.

Operator

Thank you. This concludes today's conference call, you may now disconnect.

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Source: Dish Network's (DISH) CEO Joseph Clayton on Q1 2014 Results - Earnings Call Transcript
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