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The DIRECTV Group, Inc. (DTV)

March 29, 2012 8:30 am ET

Executives

Jonathan Rubin -

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

Bruce Churchill - Executive Vice President, Chief Executive Officer of Directv Latin America LLC, President of Directv Latin America LLC and President of New Enterprises

Luiz Baptista -

Jacopo Bracco - Director

Alex Penna - Director

Evan R. Grayer - Vice President of Broadband

Robert A. Marsocci - Former Vice President - Corporate Communications and Senior Director - Communications - DIRECTV Inc

Patrick T. Doyle - Chief Financial Officer, Executive Vice President, Treasurer and Member of Proxy Committee

Analysts

Matthew Berry - Lane Five Capital Management, LP

Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Stefan Anninger - Crédit Suisse AG, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Jason Armstrong - Goldman Sachs Group Inc., Research Division

James M. Ratcliffe - Barclays Capital, Research Division

Andrew Entwistle - New Street Research LLP

Michael McCormack - Nomura Securities Co. Ltd., Research Division

Bryan D. Kraft - Evercore Partners Inc., Research Division

Jonathan Rubin

We'd like to get started. Good morning. I'm Jon Rubin, Senior VP of Financial Planning, Investor Relations. I'd like to welcome everyone to the DIRECTV Latin American Investor Day.

So hopefully, you see on the agenda here, let's see here. By the way, this agenda is in your package. If you don't have a package, we should have some extra copies in the back. But we have a lot to cover today. We're going to go through to 10:30, at which time we'll have a break. We've reserved about half hour for the break to give everyone plenty of time to check out our booth and demos in the back. We have some pretty exciting things back there. So I'd like to encourage everybody to take some time to look at some of the things we're showcasing including our exclusive -- some of our exclusive and unique content that we have. Also some of the new initiatives that we have for wireless broadband and over-the-top.

Then we'll go through to noon, at which time Bruce will wrap things up, and then we'll launch into a Q&A session. So I'd like to ask everybody to hold onto their questions until that time, and we'll leave plenty of time for your questions at the end of the session. After that, we're going to be hosting lunch. We have a lot of tables set out outside in the ballroom -- right outside the ballroom, along the hallway there. And we're going to be asking executives from across the company to host individual tables. So hopefully, you can join us. And if you didn't get all your questions answered or you'd like to find out a little bit more about some of our businesses, that would be a great opportunity.

So before getting started, of course, we are obligated to show you our customary cautionary language and also our Regulation G language. So that's about it. So with that, I'm pleased to introduce Mike White, Chairman and CEO.

Michael D. White

Thanks, Jon. I really like those last 2 slides, Jon, well done. Good morning, everybody. Welcome. We're excited to have a chance to share with you the story of our Latin America business today. And I think I know there've been lots of questions that have been raised over the last year or so about the Latin America business. We hope we'll be answering most of those questions today and giving you a much better understanding of both the performance and more importantly, the potential of that business.

If I just kind of give you the basics, most of you know this already pretty well. DIRECTV has 3 parts: our U.S. business, very large business with over $20 billion in revenue; our Latin America business, which has over $5 billion in revenue; and our Regional Sports Networks. As I said, our goal today is to both share with you much greater clarity and understanding of both the performance and the potential of our Latin America business. We've had a terrific couple of years with our Latin America business's performance, and I also want to hope you'll get the understanding that the best is yet to come.

So if I think about DIRECTV -- okay, guys. To me, this is a gem of an investment vehicle. The reason is it's not too complicated. We're not Unilever in terms of the number of businesses you got to try and value. There were really 2 big complementary and highly synergistic businesses. There's the U.S. business and there's the Latin America business from a geographic standpoint. You got 100 million households in the United States and you've got 140 million households in Latin America to tackle as an opportunity. We've got both the premier brand, but we've equally been smart, and I think you'll see a lot of that today, about how we also offer value offerings to consumers in the middle-income classes in Latin America, and frankly, our entertainment package that we've launched in the United States that's also off to a good start that, frankly, was inspired by some of the work that our teams in Latin America did.

You've got an opportunity to invest in both mature and emerging markets. And there aren't that many vehicles. We've got actually a healthy dose of emerging markets in the portfolio. And you've got both the mature, high cash-generating U.S. business and the high-growth, lower cash-generating business in Latin America. Highly complementary, and I would also argue, highly synergistic. Now I've said this before. The Latin America business for DIRECTV is a really important part of our portfolio.

Just by way of comparison. The nemesis of my former employer, The Coca-Cola Company, which has been doing business in Latin America for years and years and years, and I would argue is one of the largest and most successful businesses in Latin America. So for Coke, Latin America is about 10% of their revenue and about 24% of their profits. For DIRECTV, not even counting our stake, our 41% stake in the joint venture with Televisa in Mexico, Latin America is now 19% of our revenue and 24% of our profits. Not even counting Mexico. So in terms of size and scale, it's a significant contributor. But when you look at it through the growth lens, of course, it's even more important to the DIRECTV investment story.

Last year was an amazing year with almost half of our revenue growth and over 80% of our profit growth coming from Latin America. I don't think that's realistic to kind of count on that year-in and year-out. But suffice it to say, I think it's pretty clear that Latin America will be a disproportionate share of our revenue and profit growth for years to come. And in 2012 alone, I think you can fairly safely assume it's going to be north of -- well north of 40% of both our revenue and profit growth.

And finally, I would say in terms of Latin America, while we've had a terrific run the last couple of years, rest assured we think the best is yet to come. I don't care whether you look at household formation compared to the U.S., whether you look at the penetration of pay television or whether you look at our market share, we're winning on all 3 of those counts. We have 3 levers, any one of which can help us drive success in Latin America. And we'll share that more with you today.

We've got scale, which matters hugely in terms of both your programming cost and your infrastructure with a regional footprint that no one else has. And I think I've said this before. To me, the thing I always learned about Latin America from the day I got to DIRECTV is, yes, they're wonderful businesses. But as somebody that used to be a strategist, I look at them through the lens of whether you've got strategic sustainability. And we have got layers of advantage in that business that are far deeper than the U.S. business for a whole host of reasons that I think you'll hear about today.

And the business, as I said, is synergistic relative to our U.S. business, and it works both ways. First of all, our U.S. business spends over $100 million a year on what you might call R&D cost. Latin America gets the benefit to leverage that investment. The technology roadmaps for Latin America, while there are some tailored things for the lowest cost boxes you need, but by and large, all the advanced products are basically matching our U.S. roadmap. The middleware in the box, the most proprietary part of our business, is all leveraged from the work we've done in North America. Even 30% of our programming cost, which tend to be U.S. media companies, is leveraged. The broadcast centers, one of the biggest broadcast centers for Latin America is in Southern California and is run by the same organization that runs the U.S. broadcast center. All of the capabilities in that broadcast center are leveraged. The satellite procurement capability, the knowledge of the satellite business is leveraged. And most importantly, when it comes to speed-to-market, given the advances in the U.S. and that Latin America typically lags the U.S., we're going to be well-positioned to be ahead of competition on any advances.

Now by the same token, I would tell you that the U.S. is starting to learn some lessons from Latin America. I would tell you that the Brazil business, in the way they provide a white-glove treatment for their best customers, is something that we're looking at for our U.S. protection plan. I would tell you that the way they've tailored their value chain to manage the lower-priced offerings as well as the premium offerings is something we're learning from. And even as I said, the way they're dealing with the value customer has lessons for our U.S. business.

Now for DIRECTV as a whole, I think as you know, we've performed well over the last several years relative to our competition and relative to the S&P. This year, we're up over 12% ahead of the S&P. A key part of the driver of our stock price, we know, has been Latin America. If I just take your consensus valuation in 2009, it was around $6 billion. In 2012, it's around $14 billion. And we certainly hope this morning to convince you that it should be worth even more than that. With all that said, our DIRECTV multiple is still low. Heck, for me, I look at it relative to bottlers I used to buy and sell. It's less than bottlers, which to me, is crazy when we own the brand. And therefore, I think when you look at the growth and the size of the Latin America business and its relevance to our total portfolio as an investment vehicle, I think it's a terrific opportunity for investors. And rest assured, we at DIRECTV are committed to continue to deliver that kind of outstanding performance to our shareholders.

So as I close, let me just recap the key strategies. We've talked before about our U.S. business and what our mid-term goals are in terms of mid-single-digit revenue and OPBDA growth over the next 3 years. We have kind of rebalanced some things this year in terms of reducing credits and discounts, tightening up spending in a few areas and -- but in terms of the strategies: investing in the entertainment experience; driving growth in ad sales; driving our VoD offerings; driving our commercial business; expanding our TV Everywhere capabilities, which we just did a week ago; and taking our focus on customer service to whole another level. We've always been the best in our industry. Our goal is to look at other industries and see how we can take customer service to a whole another level. And in terms of Latin America, as I think you'll hear today, we've got lots of opportunities: to continue to drive our premium service with the A/B segment, exploding the middle market, and pursuing selectively emerging opportunities like wireless and over-the-top.

Finally, in terms of our Latin America business, over the last 2 years, we've stepped up our communication with you, our investors. Bruce has been out at a lot of investor conferences the last couple of years. And I think today, in many ways, is a culmination of taking that communication around our Latin America business to a whole another level. I look at it as Bruce Churchill team's coming-out party this morning. It's an opportunity for us to share with you our excitement and passion for the future of this business. In that regard, Brazil has also grown up, and our auditors tell us that it's time to report them as a segment. So in the future, you'll see revenue profits and CapEx for our Brazil business. In addition this morning, you're going to find a good deal more granularity around both the DTVLA P&L, as well as most importantly the capital spending. And we'll be talking about, going forward, what more information we'll provide on a regular basis.

In closing, the growth potential for this region is still huge. DIRECTV is well positioned to deliver against that. Most importantly, because apart from the strategies, the people you're going to see this morning. We have a world-class team of executives all across our Latin America businesses. I've done business in international most of my career, and having street-smart, savvy, experienced leaders with integrity in their value set is a gem. And we're recognized for that. I got a note just yesterday that DIRECTV Latin America was named #18 out of the top 25 places to work in Latin America. That's a tribute to the leaders you're going to see this morning, for the culture and the values and the mindset that they nurture in their organization and for the talent that they bring to work every day that makes this such a great business opportunity. With that, I'll turn it over to the leader of our Latin America business, Bruce Churchill. Bruce?

Bruce Churchill

Good morning, everyone. Welcome. And I'm very appreciative of everybody for coming out today because we really feel we have a great story to tell. And my management team and I are very excited about filling you in a little bit more about what we've been up to since we all last met, which was about 15 months ago when I participated in what was a broader investor day for all of DIRECTV. So I don't know what you guys have been doing the last 15 months, but we've grown our company by 45%. So we've been busy. Let me take this first section here this morning. I just want to review again what are the components of our company are for those of you that are maybe less familiar with our company and maybe were unable to join us 15 months ago, as well as update you on some of the performance of the individual components.

So I'll start with Brazil. SKY -- our brand there is SKY, SKY Brasil. It's really, in many ways, our flagship asset. It's our largest business with revenues of a touch over -- revenues in 2011 of a touch over $3 billion and OPBDA of a touch over $1 billion. In the time since we all last met, SKY Brasil has had tremendous success, gaining 5 percentage points of market share. And the real phenomenon and the story that you're going to hear about Brazil, going forward, is the growth of the middle class. There's still low penetration among that group and our ability to profitably serve that group. And that's what's really been driving our growth in Brazil. So as a reminder, we actually own 93% of that business. The minority shareholder is Globo, which is the largest media company and most successful media company in Brazil. And they've actually been partners in the business going back quite a long time.

Next is our platform which we call PanAmericana. This is -- PanAmericana operates in Spanish-speaking South America. So we pretty much operate in every country in Spanish-speaking South America, except for Bolivia and Paraguay. PanAmericana is actually our largest platform with over 4 million subscribers. We own 100% of it. And similar to Brazil, in most of those countries, you have relatively low pay-TV penetration. Growing economies, growing middle-class, and therefore, a market ripe for the taking. And I would say that what we have been probably pleasantly surprised about since we all last met is that even in the markets which are for Latin America relatively penetrated, so for example, Argentina, which is above a 50% penetration rate, we are still experiencing substantial growth in that market as well. So as we look across the whole portfolio of -- it's really 9 major countries for PanAmericana, we still see growth across-the-board. And the size of that business there is a little over $2 billion of revenue and about $700 million of OPBDA. And we own 100% of that, so we own all of that business.

And then finally, SKY Mexico. It is the one business that we do not consolidate for financial reporting purposes. We own 41%. It is -- the majority owner is Grupo Televisa, which is the most dominant Spanish-language media company in the world and operates obviously out of Mexico and is the most successful media company in Mexico. SKY is the #1 pay-TV provider in the region, and over the last couple of years has had absolutely explosive growth in serving the middle-market consumer there adding, I think, in total almost 2 million subscribers in the last 2 years alone. And again, the story, very similar, relatively low pay-TV penetration in Mexico still. Great potential in that market, we're the market leader. And again, through all the advantages that we're going to talk to you about today, we've been able to gain share, so continue to be very excited about SKY Mexico. And I would also say that it's actually very much part of our platform as well. We perform a lot of services for SKY. You'll hear about some of the content. We often look at buying content together. So even though it is not something we consolidate for financial purposes, it's very much part of the way we operate, and I also hope very much part of the way that you guys think about the value of the company. So those are the 3 platforms.

These are the 2011 figures that now include all 3 platforms. So they're different than the ones for financial reporting. But again, as you can see, we've had just, in 2011, explosive growth in both gross and net adds, pretty much all across-the-board. The mix of postpaid and prepaid, which is something you're going to hear a little bit about still, when you -- at all 3 platforms, about 60% postpaid. There's a very heavy weighting of the prepaid in SKY Mexico, and Alex is going to talk about that. But overall, if you take all the platforms, still roughly 75% of the business is a postpaid business. So the prepaid is something that we're very bullish about. We think it has great opportunities and is a great product for serving the emerging middle classes in Latin America.

This is that same data cut another way, which is to say where has the growth come from by market segment. And that's another theme you're going to hear a lot about today, which is segmentation. And as you will see from the last couple of years, a large part of our growth has come from the middle market. And what that means is that we have had to redesign the way we do operate our business so that we can offer packages at prices that are attractive to the middle market segment, which are lower prices. But we have to do in a way where we can still make money and make good returns. And so it's not just a matter of lowering the prices on the existing packages. And so we've done a lot of work, and I think you'll hear about this, where we have gone back to the programmers and we rejiggered, if you will, all of our programming contracts to account for the fact that we're getting lower prices at the lower end and higher prices at the upper end, breaking through the mentality that every programmer has to have all of his channels in every package, that I see as impossible when you're trying to design smaller packages. But a lot -- so starting from that end all the way through to the way you sell, to the way you install, to the way you service, to the way you upgrade, we've completely rethought our business in order to serve this market profitably. And it's proven, obviously, I think to be a good bet for us because it really has driven our growth.

Having said that, like our colleagues here in the U.S., we are also very much focused on the core bread-and-butter business of our standard def and ultimately our advanced products. And so we are also a leader by far in Latin America in advanced products. I don't think there's any other platform that comes nearly close to what we do in terms of HD and DVRs. And those products, by the way, are very -- are identical to the ones that you see here in the U.S., for those of you that are DIRECTV subscribers. It's basically all the same features and functionality. It's the same box. It's obviously somewhat adapted for Latin America. We have some unique characteristics in parts of the territory, but those are all very minor. So it's really all those great products that we take to Latin America. And they are, by far and away, the best products in the market. I mean, you can imagine -- you know how DIRECTV in the U.S. is the best product and the distance we put ourselves between cable, the distance is even bigger than Latin America.

From a financial point of view -- and these numbers do exclude Mexico because it gets a little tricky when you start trying to mix financial reports. But obviously, great subscriber growth, but also great financial growth. And we're very much focused on delivering, not just subscriber growth, we're not just buying share, we're also going to deliver profits. And we're very much focused on investing our money or the shareholders' money in growth that returns -- that generates great returns. So we've had great revenue growth, great OPBDA growth, not -- the cash flow growth is not as high, but I'll talk a little bit about that later today. But frankly, it's to be expected in a business where you have tremendous growth or the kind of growth that we've been having. And when you look at our business, we feel -- if you look at it overall, we feel that everything, the metrics and the way we operate it, it's all within reasonable lines when compared to other platforms around the world.

So for example, we compare ourselves to DIRECTV U.S. Okay, yes, our ARPUs are lower, that's the nature of the market down there. But when you look at margins, whether it's OPBDA margin or pre-SAC margin, we're actually a little bit better. For the most part, probably the biggest explainer of that is the fact that our programming costs are lower in Latin America than they are in the U.S. But in general, when we look at our business and try and compare it to other businesses in the same sector around the world, we feel that our margins or our operating metrics are better or as good as anyone else's. So we do feel that even with all this growth, which may not be returning as much cash in the short-term as some people would like, we have a business that is sort of financially and structurally sound.

Try this again. I kind of went through some of these points 15 months ago. But again, for the benefit of those of you that are -- that were not here, I would just like to remind everybody that maybe it seems obvious, but Latin America is a different place. It's different than in the U.S. And as you try and think about understanding our business, I would ask you to, in some ways, try and put your U.S. mindset aside and try and understand the way the market is set up in Latin America or the way the market works. And there's, I think, a number of ways. I mean, first of all, I think that in Latin America, satellite as a technology is even more advantaged than it is in the U.S. Obviously, you have the similar issue of the broad geographic reach. I mean, Latin America is a huge place. Brazil is a huge country. But what you don't have is really the ubiquitous cable networks that you have here or it's not -- even if they're there, the quality is just nothing close to what you are used to here in the U.S. Much of it is still analog, which means all of the channels are delivered in analog. There's very little upgrading that's been going on. And even the telco companies, with their wireline networks, which are mostly used these days for just voice anyway, the quality is not great. So even to the extent that the wireline footprint is there, it's just not the same as it is in the United States.

And I think the other reason you have to keep in mind, which is more historical, one, is that satellite started delivering pay-TV in Latin America about the same time cable did. Our company is 15 years old. And it's unlike the United States, where when DIRECTV was launched also about 15 years ago, there was already a well-established cable business there. So we've kind of been there from day one. And so in many cases, we're actually -- we have the largest share in a given country, so we're often the market leader, which is, I think, a very different model or different way to think about it than you are familiar with here in the U.S. We're going to hammer this next point over and over again. But just remember, pay-TV penetration is still very low, particularly when you start looking at it by segment, class segment. Third point, I think you have to remember that there are really what I've called here fewer programming choke points. I mean, clearly programming cost in the United States is creating a serious challenge for all of the pay-TV distributors in the U.S. We don't have that in Latin America. First of all, most of the -- much of the important national sports, which is really soccer, but as they say local leagues or when the national soccer team plays somewhere, it's available on free-to-air. And since we carry those channels and on top of that, we don't have retrans issues, which is the next point, we're not going to be blocked out from carrying the key [ph] to content. And we can figure our ways to differentiate ourselves in other ways. But not only do we have not to bear the cost of that content, because it's available free-to-air, but we're not going to be excluded from it. And that's probably equally important.

And I think the other thing to keep in mind is there really aren't such a thing as Regional Sports Networks, RSNs. And so to the extent that those are the categories that are driving a lot of the programming cost issues here in the U.S., at the moment, we don't face those in Latin America, and frankly, I don't foresee that happening. And finally, just as a reminder, there is no meaningful fiber overbuild anywhere in Latin America. My experience from having worked -- I spent a number of years working in Asia, now spent 7, 8 years working in Latin America. There is a big difference in emerging markets between what people say they're going to do and what they actually do. And I would caution everybody, as when you read things on newswires or news services and someone makes an announcement that they're going to spend this money, you really have to dig into it and see what are they really going to -- what they are saying they're going to do and then I would urge you to follow up and just find out what they really did. But for the moment, and I just don't see it happening, there's no fiber overbuild. And it's -- the challenges of that, the economic challenges of that are pretty high in Latin America. I mean, I think they're pretty high in the United States, where ARPU is at $90. It's a lot more challenging in Latin America, not to even mention just the thought of them. If you've been to São Paolo, the thought of trying to dig up the streets of São Paolo and put in fiber-to-the-home. But it's not -- I just do not foresee that as being a threat that we'll have to deal with in Latin America.

So the 3 key themes of today that you'll over and over again from my team is: the scale of the opportunity, why we believe there's still a lot more growth left in the market; our strength and the strength of our position, in other words, why we are best-positioned to capture that growth; and three, that we're doing it in a way that is providing great returns to our shareholders. And so I urge you to keep those in mind as we try and work our way through and tell you the story today.

So my team will be coming up in a few minutes. We'll start with Luiz Eduardo Baptista, otherwise known as Bap, a little easier, will talk to us about Brazil. Jacopo Bracco, who runs our PanAmericana platform, will talk about the PanAmericana business. Alex Penna is with us today from SKY Mexico. Evan Grayer is going to give us an update on our wireless broadband initiative that many of you have heard about. And then I'll come back again and talk little bit about the financial outlook, and then we'll all kind of lead the Q&A. But Jon mentioned that we also have a number of executives here. And I just did want to point out a few. We have Manuel Abelleyra, who was here from -- over here who runs our Argentina business. Roque Lombardo, who is -- runs our Colombia business, the one in the back. Michael Hartman, our General Counsel, who is involved in a lot of our business activities. Keith Suchy runs our finance operation. And Rick Nerod, who does -- Rick is somewhere here, right in the back, all our programming deals. So that group as well as many others are going to be joining us for lunch.

Also just from DIRECTV, our colleagues in the U.S., Romulo Pontual, who is the Chief Technology Officer of DIRECTV for the entire group. He does it for us as well. He's here. Pat Doyle, our CFO. And I believe Derek Chang is here as well. I saw him this morning somewhere. Anyway, if anyone who wants to talk about programming issues in the U.S., be my guest. And numerous -- there's a number of others here today, too. So we're going to spread ourselves out around at the lunch table. And I hope you take a chance to meet the team and learn a little bit more about the markets. So with that, we're going to move on to Brazil.

Luiz Baptista

So good morning, everyone. I'm pleased to be here sharing with you our successful story in Brazil. So first of all, about the market opportunity in Brazil remains large. I grew up hearing that Brazil will be the country of the future. I was 5, I was 10, 15, I was 40. And I was still hearing Brazil is the country of the future. And what happened was that the future never came. In reality, decisions, important decisions about the fundamentals of macroeconomic factors taken in 1995 by Fernando Henrique Cardoso and they were kept exactly the same way by Lula has helped Brazil to overcome this always expected future that finally came.

So economy is growing. I'm going to talk little bit about that with you. I'm going to talk about social mobility. I'm going to talk to you about on another country inside Brazil, which is the middle class, 100 million people that used to buy things just to eat, just food. And they started to buy other things, not only products but also services, so it's another country inside the existing one. I'm going to talk to you about our brand. We do have the premier pay-TV brand in Brazil. You have seen Gisele. We started with Gisele. It was tough 6 years ago to be differentiated by everybody else because it was only standard def, everybody talking about technicalities. And when we launched the high-def, we hired Gisele because we found out that we have more than 40 attributes that were widely known by you guys in the U.S., but it was tough to sell or to educate prospects in a 30-second advertising. So we hired Gisele, and she did a hell of a job for us.

We had grown our brand awareness terrifically in the last 5 years in Brazil. And because of issues mentioned by Bruce, DTH is perfect for Brazil, not only because of the sizing of the country but also regulatory constraints. So our regulatory agency didn't do a hell of a job in the last 10 years. So technology moved faster than regulatory decisions that were supposed to be taken by them. So several investors decided to put on hold cable platforms and new investments to upgrade this platform. So the infrastructure in Brazil is quite uneven and not as good as you can imagine compared to U.S. So physical presence and being everywhere is really a dramatic advantage in a country like Brazil. So SKY is best-positioned to compete across the entire market because we do have a physical presence almost everywhere.

So I'm going to share with you that we do have attractive packages for all segments from A to C. We have definitely a superiority in customer service, and I'm going to share some data with you about that. And last but not least, we had the opportunity to plan for almost one year our interest in this lower-end segment market, and I'm going to talk to you a little bit about execution and segmentation. And I'm going to try to share with you why the combination of both allowed us to be profitable even though in a lower-end market.

So about Brazil. GDP is growing around 2%, 3% a year. Income per capita is supposed to grow faster than GDP because the population is not growing as fast as the economy. So that's the first important driver. Another thing that was very common in Brazil was that people with 30 years old used to live with their parents because of the economics. So it has started to change dramatically 2, 3 years ago. And now there are forecast pointing out that every year, from now on and the next 5, 6 years, there's going to be one incremental million of households per year in Brazil. Pay-TV subscribers grew 20%, so 10 times faster than the country. Pay-TV penetration grew 5 point percentage only last year. So of course, from a service standpoint, pay-TV is one of the top picks right now in Brazil. SKY grew 53% of all subscribers. So really, really an awesome number. And we gain 5 points percentage of market share.

So there's a lot inside this demographics -- the so-called demographic bonus in Brazil. As I told you, in the first part of it, you can see that GDP is going to grow faster than population because we reached a certain level of maturity, so income per capita will go up. So most of this so-called middle class didn't consume lots of services. Now they started to consume. So the consumption projections for household in Brazil are supposed to grow from 57% to 63% in the next years. Between the social classes, the middle class, consumption is supposed to grow faster than in the A class. And it seems still important to remind you that the low bars here, the yellow ones, represents another country. They are so-called the D and E, and there are, let's say, 70 million people in this class. And so somehow because of the social mobility, there's going to be Ds becoming Cs, Cs becoming Bs and Bs becoming As. So the social mobility would also push customers to high-end products. So the combination of all these variables definitely points out to a very positive cycle.

So actually 49% of the households are middle-class households, right? But penetration in the high-end is 49%, in the middle class, it's only 18%. So there's a lot of room to improvement here. That's why pay-TV is growing so fast in Brazil. Pay-TV is the entertainment #1 in Brazil right now because I used to kid and say that the only product in Brazil that turned to be less expensive and with a better quality in the last 10 years is pay-TV. When I started doing business with pay-TV, the entry-level prices were around $90 -- BRL 90, I'm sorry, which will be, if we compare with the currency rates, around $50. So nowadays, the entry-level is BRL 49. We had inflation, we had several other things. So it was cheaper to go to a cinema with your wife 10 years ago than subscribe in pay-TV. Nowadays, it's exactly the opposite. So there's no better option from a family entertainment standpoint rather than pay-TV. So in the projections -- as a result of that, the projections of the penetration in pay-TV are pointing out to 35% possibly in 2015. If we would just apply the same metrics that what occurred last year, probably these numbers are going to be surpassed. So far, there are [indiscernible] more, 9.3 million subs in the upcoming years in Brazil in the next 4 years.

So who is winning that game in Brazil in the last 2 years? SKY and DTH. So DTH did last year 84% of all net adds. SKY did 42% of all net adds in [indiscernible]. So Claro, which used to be Via Embratel, the Telmex company did 39%. So even though selling for all segments, and I'm going to show you that we are selling for the As to Cs, we grew more than Telmex, that only focused on lower-end subs. So then you have Telefónica, you have Oi, the 2 largest fixed-line companies in Brazil. They do operate satellites for 5, 6 years but they didn't succeed so far.

So although it has become tougher to differentiate ourselves from a content standpoint, we invested a lot in trying to bring unique stuff for our subscribers. It's not only about all the terrific equipments that Bruce has mentioned to you before, but it's also about coming up with a pretty much compelling content offer, which is obviously leveraged by the HD. It helps us selling the high-def to our subscribers. So we have the qualifiers for the World Cup, several ATP 500 tennis tournaments, 11 so far. We had that NBA on an exclusive basis. We have La Liga, which is the most important soccer championship in Europe from a country standpoint from Spain. We have UEFA Champions League rights effective this year on. And we have all these attributes that were mentioned here about our set-top boxes.

So when I told you that we are the best service, we don't work looking for awards or recognition. That's not the reason why we do what we do. But I'm pleased to share with you that it's not just a coincidence. So we won for the last 9 years in a row the Brazilian J.D. Power version of pay-TV in our industry. We were considered the service company of the decade. We won several prizes in the last 5 years in Brazil. So somehow this is related to the branding and to the aspirational stuff that we are able to create and to sustain so far.

So moving a little bit to the pricing side of it. So I do have a retail background, so pricing for me is one of the most important part of the business. So that's definitely the only part that I still approve line by line. So this chart somehow represents the pricing points from BRL 39.90 to BRL 315 in the first case of SKY. So we do consider that up to BRL 76 in Brazil. As of today, we are currently talking about the C class, middle class offers. From BRL 76 to BRL 160, it will be mostly standard def world, not a FIT package, which is the lower entry-level package. And from BRL 160 and above, we have the A-class world, the so-called the high-def offers.

So we have SKY in first, we have Net. SKY is in the entire country. Net is in the top 100 cities in Brazil. It's the largest cable operator in the country. Then we have Claro, which is the other DTH competitor. We have Telefónica that, although they have MMDS and cable in São Paulo and Rio state, they are mostly focusing their efforts in São Paulo state, although they also have a satellite platform. So Telefónica has all the possible means of distributing pay-TV in Brazil. There's the other fixed-line company, which is Oi. Oi is everywhere in Brazil but São Paulo. So if you'd combine Telefónica and Oi, you're going to get all the fixed telco market in Brazil. Last but not least, you have GVT, which is a player that started with a successor strategy in second- and third-tier cities in Brazil. They have a physical presence in around 100 cities. And they just deployed their satellite pay-TV service. And they started only with high-def offers.

So as you can see here, SKY is the only provider with pricing for all the possible options. And that's not a coincidence, too. So we built it and we changed all the packages at least once a year to accommodate the margins and to correct things that possibly are not getting the profitability and the scale that we felt like will be appropriate or the returns segment by segment. So at the end of 2010, the prices really started to drop. And if you recall the chart that I have told you that we had 42% of all the net adds in 2011, if there will be a share of wallet share, we feel like we grabbed 70% of the money that was coming to pay-TV. And why is that? Because we are able to successfully sell for the entire set of customers. In opposite of all of our competitors, they are mostly selling in the very first segment, only for C class, around BRL 39, BRL 49.

Another interesting comments here for you guys is that when you check SKY, you don't see as a separate position between the blue and the green line. It's because we do not give up high-def for retention purposes because this destroys the return and the SAC of the business. That's exactly what Net did. That's what Claro is doing. They don't have regular prices they live up. It's the cocaine-like way of promoting things, only promotions across-the-board. And at one given moment, you cannot raise your prices anymore, so this is a type of challenge that these guys would end up facing, a moving target in terms of return and things like that and paybacks. So we don't use it, so different worlds. And this is important because somehow it supports the story why we were successful and profitable so for.

So about these 2 worlds. We spent almost one year in 2010, planning how to execute properly lower-end customers and high-end customers because we are very successful on the high-end world, so already supported by Gisele. So Gisele is the one positioning the brand as a top aspirational one, talking about the terrific stuff that [indiscernible] brings to us, thanks to the American technology roadmap. And then we have the lower-end in which we do have a terrific casting tool. So this gentleman here is Bernardo Rezende, well known as Bernardinho. Bernardinho is not related to soccer, but Bernardinho is an icon in Brazil. After Ayrton Senna, probably he's the most admired sportsman in Brazil. He transformed the Brazilian volleyball. He won 8 times the World League. He was Olympic medalist. He won 2 or 3 Olympic medals. So Bernardinho is an icon and his son is also one of the setters of the SKY volleyball team in Brazil. So you're going to see 2 movies here. One of them with Gisele, another one about price for lower end. And just for the sake of the understanding of the audience, the second movie is about Bernardinho, his son and several other top volleyball players that SKY sponsors in Brazil. So would you please allow the 2 films, please?

[Presentation]

So moving a little bit further on the high-def world. One of the things that we were concerned when we started to plan to enter the lower-end market was what's going to happen on the high-def, how we're going to treat customers, what will be our offer. And so we have, by far, the best high-def channels to offer. And we were able to grow not only on the lower end but also on the high-def. So we grew 127% to our base, reaching almost 850,000 high-def subscribers.

So we are planning to launch 9 additional high-def channels. And if we would consider that the second one is TVA, it's a company controlled by Telefónica in São Paulo and Rio de Janeiro. So it's local and that is also local because we're talking about 100 cities approximately. GVT is also in 100 cities, but recently launched their satellite service with 34 channels. Telefónica, which is a DTH platform, nationwide coverage but only selling in São Paulo. And Embratel, which is the only nationwide company, DTH nationwide company competing directly with SKY. So we do have an advantage. So these numbers change a little bit lately because our competitors are trying to get closer to SKY. But in a few weeks, we're going to launch 9 incremental high-def channels. And definitely, we're going to make their lives even tougher.

So on the lower-end world. As I told you, 10 years ago to go to a movie, you would spend BRL 20-something. Nowadays, it costs BRL 48 for you and your wife to go and see a movie. You can buy SKY FIT with a terrific picture quality and very good content because we build our packages based on audience. We have a terrific tool not very well known in Brazil, which is called VDC, which is the video data collection. So our FIT package has 7 of the top channels in audience in Brazil, and they are all dubbed. It seems obvious, but it's not. If you're going to check out our competitors' packages, you're going to see that they had put on the cheapest channels, not necessarily dubbed. Of course, it's not going to work in a country not that educated as Brazil. So terrific offer, very compelling, terrific growth.

Another important point to make to you guys here. We sold 1.3 million FIT packages in one year. Why we only have 700,000? Because after 90 days, we were able to realize that one out of the 2 FIT subs became Light subs, which is extended package in which we are making approximately extra BRL 20, no truck rolls, no extra CapEx. So that dynamic is that is occurring in a country as a whole, social mobility thing and so on and so forth, is also applying here, and we are taking advantage of it.

So what have we done on the field? So the growth that we experienced in Brazil lately is quite uneven. So having the physical presence, especially for middle class, is important. This is the type of people that they really want to get an eye-on-eye contact when they are acquiring something. So it's different than the way you do business in cities like Rio, São Paulo and top 10 capitals in Brazil. So we have also convinced our existing dealers, which occurred to be the same ones that make the installations and the sales process, so we don't have anybody just selling or installing. So in order to become a SKY dealer, you must do both. So we encouraged these guys to expand their borders, and they did it. So we grew only 24% more, our dealers' network, but we increased our coverage by 73% in terms of sales. So that was part of the success. Lots of door-to-door sales here, so different sales teams. And of course, that was a terrific way of keeping the quality of our services that -- and this is something that I'm going to touch base a little bit in a few minutes with you. So we moved from 74% of the A/B/C households in Brazil to 84%, so 10 points percentage of incremental coverage. So that's really important for C class. If you want to reach middle class, you must be where they are. It's not that these guys are going to go to you, come to you in a shopping mall. You must go after them.

So execution is definitely key. We have planned during 2010, and segmentation was the key -- has a key role helping us to rethink the cost model. So the market was growing, so we couldn't serve everyone the same way. So as Bruce said, we couldn't give the same programming just at a lower ARPU because the math wouldn't work. So we couldn't keep the same service levels because we used to have 90%-plus after 20 seconds in our call center because we used to serve only high-end subs, so we couldn't offer that type of service level with the type of CSRs -- with very qualified CSRs that we have. So we had to rethink about it, too.

The commission structure. So although the ARPUs, from 49 to 300, 6x, so in Brazil, if you sell a high def package, you're going to make 10x more money than the lower end. So the incentives for customers to -- for salespeople to sell high-end packages is really strong. All the leverages are related to the sales mix, so if somebody will sell 1 million of FIT packages, probably they're going to make 1 million times the individual commission. So they are not going to make as much money as they could if they sell the right mix and the adequate mix.

So we have implemented automated means to serve customers. So out of 2 contacts that we have today, one of them is supported by electronic means. So it's somehow helped us to keep the operating costs, from a customer standpoint, lower.

We have separate call centers. Customers doesn't realize that, but depending on how they are classified by our behavior scoring, we have 7 different categories. So depending on these categories, they -- when they called us, they are deviated directly through the adequate CSRs. So somehow, we have CSRs making BRL 500 and we have CSRs making BRL 1,500. So it's not transparent for our customers. They feel like SKY is serving them.

So -- and last but not least, it's impossible to say that we do track everyday what are the trends and what are the impacts of the way we are serving these customers in order to make sure that profitability will happen. So profitability in SKY Brasil is not a consequence, it's part of the daily process that we manage.

So what were the impacts? So in 2009, we used to have 0.88 calls per sub, only serving high end on a monthly basis. We improved to 0.57 calls per sub. Why? One out of 2 contacts were solved in our transaction website. It's a 100% transaction website. So of course, high-end subs prefers to deal and to treat their stuff on the web rather than calling the call center, so well, we are able to receive less calls per sub. So some productivity here. And we also started to think that, okay, we have the terrific, educated subs base, high-end subs, but lots of lower-end subs coming in, lots of calls asking about how to deal with remote controls, "What should I do if I lost a signal," so, "Do I need a truck roll?" So we started to deploy 2 or 3 key promos that we have just for lower-end subs, teaching them what to do in order to help themselves to solve a few issues. So we also had 35% reductions in calls.

So how can you grow 53% in subscribers and have a better quality of service? On the field, we used to do all -- you know what, the backlog of our services were never higher than 4 days. We were able to end 2011 with 1.9 days. So whoever asks something to SKY, if we do need to send a truck roll, it will be done after 2 days. So of course, the level of recalls reduced dramatically. And we were able to succeed on that field, too.

So because of that segmentation, the funniest part is that, when we didn't have all the segments serving, we didn't have different retention options for all these 7 subsegments. And when we deployed it, we kept intelligence out of the CSRs because they used to have a menu in which they were allowed to offer certain level of discounts for subs. And it was about them. If they felt like John deserved BRL 10, they would give up BRL 10 according to a scale. So nowadays, because of the intelligence behind all this profitability, the behavior scoring of each sub pops up on the screen and the only possible options for that sub show up on the screen. So the result of that is that the retained cost per sub improved dramatically, reducing 60% to BRL 13 in 2011. So we did better also on the margins despite the fact that competition pushed harder on and on in lower prices. The monthly churn, the reduction was 10%. It was surprising to us because we have very tight credit filters. Every week, my sales vice president insists very much that we lost, according to his statements, 40,000 new prospects every month because they don't apply, they don't qualify to get into SKY. But the reality is that we have a bad debt of 0.6%, and definitely, these subscribers that didn't apply, unfortunately, probably went to other competitors. But the reality is that it's a trade-off, it's a delicate balance. So we'd rather stick for profitability and managing the business in an adequate way. So it must be profitable. It's not about growing, it's about growing in a sustainable and profitable way.

So just a bit of a sense for you. So currently, we have the middle class with a typically 18 months payback. The start of that, which has a higher ARPU but still stunted that [ph] equipment. Of course, because of the ARPU, you know what, the payback is shorter. We have the high end, 20 months. So the average of our business is around 15 months. So back to Bruce's point on the speed that we are growing right now, somehow it explains the cash flow impact of it. But it's -- just summarizing here. Programming expense is under control, equipment subsidies being taken care of by the leverage of the features that we got from DIRECTV technological roadmap. Effective July 1 this year on, we're going to have a high-end box at least 35% less expensive than the existing one, so definitely, the high end SAC will be reduced. So we are confident that managing segment by segment is a key path for our sustainable success.

So you can take a look at either way, you can do it on the payback side or on the IRR. IRR, the high end is 50%. Lower end, it's 40%. So it's still very attractive. If you would compare, on the high def world, if you recall that chart that I shared with you about the pricing, in a 0-to-100 scale, being 100 the programming costs for the higher end of high-def subs, the low end will be 10. So the ratio between them, it's -- the programming cost is, on the FIT packages, 10% on the very high-end package. So somehow, it's reflected here, so still a very good business. Definitely, the way you manage all the segments is the key challenge to be pursued here.

So I'm going to talk a little bit about over-the-top. And later on, Evan will talk about the wireless broadband initiative in Brazil. So the online, we did an extensive survey with McKinsey. We were surprised because it projected in Brazil a market of roughly $500 million in 4 years. So we decided to build the business based on the experience that we have because we are by far the biggest Pay Per View sellers in Latin America, not only in Brazil.

So we decided to expand our experience on the Pay Per View world to this world, so -- and also considering certain lack of infrastructure in Brazil, so we start with transactional VoD using download. It's not that common in U.S., but considering the quality of broadband in Brazil, it was necessary, especially serving lower-end classes. And we do charge BRL 6.90 per movie, which was pretty much in sync to what we do in our existing business. We do have the subscription VoD, which is most likely Netflix, thus it's via streaming. It's BRL 14.90 a month, it's a subscription. And we have TV Everywhere just the beginning because it depends, of course, on the rights that you do have for that content, but we have ESPN360, for instance, for free for our pay-TV subs.

Content, it's everything that we do carry in our regular pay-TV business. We started with subscribers. From Q3 on, we're going to open the platform for non-subscribers. We started with PCs and Macs in Brazil and now we're moving further with smartphones and tablets, so something new is about to come in Q3 this year. And in titles, we decided to go for quality rather than quantity because we do have a background on the pay-TV business. So we know where the money is.

So from down to top, when a movie is released on the theater, 24 months to get to free-to-air. So just a comparison, we are focusing harder on the vicinities of our existing business. So we have the transaction VoD served online and the TV Everywhere for our existing subs. This is mostly positioned as a convenient stuff rather than something that would change dramatically our business. So -- and this should provide you a bit of a sense: 90% of the money that we did so far, after 2 months, it's in the green part. That's why Netflix is not succeeding at all in Brazil. They don't have a recurrent relationship with subs. They don't know exactly what people want to watch, and they don't have the contracts that allow them to serve the best green stuff in here.

So conclusions. Compelling pay-TV market growth opportunity continues to exist. Middle-market segment growth is fastest, but with penetration, also it's a key opportunity for us. We are still gaining share month after month from our competitors. We do have built a terrific engine via segmentation, so we do manage all these programming costs. Unlike U.S., the growth allows us to take the benefit of the rate cards and things like this. So the fastest we will grow, the less we will pay per sub. Somehow, it helps the model right now. And we will continue to invest in new content like La Liga, like the qualifiers of the World Cup, to differentiate SKY from its competitors.

So one of the things that we've been discussing about is that, should we -- do we have the opportunity to double SKY's subs in 5 years? Although we feel like this is aggressive. We think that this is achievable because we have 3 key drivers. We have households growing one million a year. We have penetration of pay-TV, still low. We have the social mobility. And last but not least, we can gain share. So we gain 5 points percentile just in 2011. If in the next 5 years we will gain just 1 point percentile, if the households calculations and projections are okay, probably, if the penetration is not 40%, it's going to be 35%. We can offset it by a higher market share. So we are pretty much confident that we're going to get there. Definitely, Bruce, the best days are yet to come.

Thank you very much.

[Presentation]

Jacopo Bracco

Good morning. So let me start with this overview and let me start with a general observation. Everything that Bapi has shown you about Brazil applies also to all the markets in PanAmericana.

So PanAmericana, as a whole, the market size is very large and the socioeconomic distribution is very similar to what Bapi has shown you for Brazil. Bapi and Bruce have talked to you about the advantage of satellite DTH for our region. It also applies to PanAmericana. We all share the strategy of being leaders in content, technology and in service. And I'll also talk to you about our segmentation strategy. It should really be the core of our growth engine as we move forward.

So on the other hand, what actually makes us unique is that, unlike Brazil and unlike the U.S., we actually operate with one single shared infrastructure to serve DIRECTV in multiple markets. So it's actually 9 markets. So again, what we share is the satellite. We share the broadcast infrastructure. And of course, most of the content that we offer is the same in all of our markets. That puts us in a very -- in a slightly different position.

So I'll also talk to you, as we've indicated, right, that we expect to continue growing significantly. And I'll make specific mention of Colombia, which we think will be our third largest -- large market and where we expect significant growth over the next few years.

So let me start about subscriber growth. For those of you who had been here in the investor presentation 2010, this is an update from that chart. At the time, we were showing the subscribers of third quarter 2010, so we went -- ended up closing 2010 with 3.3 million subscribers. And in 2011, we accelerated our growth. We added 800,000 subscribers, reaching 4.1 million at the end of last year. With that 800,000, we were able to sustain a compounded annual growth rate of -- since 2006 of 24%. And also, quite importantly, the share gains. Just last year, we gained 2.1 percentage points in share, and we're now at 21% when you take the market as a whole, up from 12% back in 2006.

So for those of you who are not familiar with PanAmericana, let me tell you that we operate in 9 countries. So if you start from the bottom and you go clockwise, so you have Uruguay, Argentina, Chile, Peru, Ecuador, Colombia and Venezuela. You have to be able to recognize those 3 flags, otherwise, you can create a political nightmare. Puerto Rico and the Caribbean region, which is actually based in Trinidad and Tobago.

It's a large market, 51.5 million households, almost the size of Brazil. And actually, the largest market is Colombia with 12.5 million homes, followed by Argentina, 12.2 million. And for those of you who were here last time, I should mention that we've updated these numbers. There've been a new census in Argentina. We've also updated some of our data, so actually, the number of homes has grown more than the organic growth of the market, again, as a result of these updates in the data. Pay-Television market is 19.7 million homes and it increased almost 2 million homes from the third quarter of 2010. And since we've grown 900,000 subscribers since the last presentation, it means we're capturing anywhere from 40% to 45% of the new market growth in PanAmericana. And I think that is a testament to our ability to out-execute our competition.

So let's talk about competition. So in our region, we're now #1. We're 4.1 million subscribers and 21% market share, as I mentioned. That makes us #1. We're followed by Cablevisión Argentina with 3.6 million subscribers. But rather than talk about all of them, I think the way to think about it is, very much like the U.S., our competition is comprised of large cable companies and telcos. But the large cable companies are mostly cable companies that operate in a single market. So Cablevisión is mostly in Argentina. UNE is only in Colombia. VTR is only in Chile and Intercable is only in Venezuela.

Now the 2 telcos do operate pan-regionally: Telmex and Telefónica. But even then, actually, the core or the bulk of their subscribers are cable subscribers in a single market. So Telefónica has about 700,000 or 800,000 cable subscribers in Peru and Telmex has about 1.8 million, 1.9 million subscribers in Colombia. The balance of those subscribers are not a fiber-to-the-home deployment or IPTV, the balance is actually DTH. They've now been operating a DTH platform to complement their services for a few years and that's the difference between what they had in cable. Again, reinforcing what Bruce mentioned before, we are not seeing any meaningful fiber-to-the-home or IPTV deployments in any large scale.

The other hand, cable is actually not as developed as it is in the U.S., as Bruce was mentioning. In fact, in PanAmericana, we estimate over 70%, 70%, 74% of all the cable homes are entirely analog. And so while, cable, they are actually upgrading their infrastructure progressively, they're doing so in the highest income areas, and they are unlikely to do it in the middle market where kind of the return on their investment for the infrastructure is very hard to achieve with the price points that you need to operate in that lower-income segment.

And clearly, analog cable is good for us. We're very competitive in terms of the quality of the product. But we're also very competitive against digital product for all the reasons that Bruce and Bapi have already mentioned. We are significantly ahead our competition in terms of the quality of our service. So then what happens? So we stand to gain if cable does not upgrade. But if they do upgrade, when they do they tend to raise their prices to be able to justify their investments, make us more competitive, so we gain either way. And we've seen that in several of our markets, including Argentina.

So in addition to being #1 now pan-regionally, we also have very strong positions in local markets. We're #1 in Venezuela and Puerto Rico, with 44% share or -- and 32% share. In Ecuador, we're becoming #1 actually this quarter. We closed the year, we have a 25% market share. And actually, about Colombia, which I'm going to talk again later, we have an 11% share, and many of you will note that we have not grown share there. But what has happened is that most of our competitors' growth has come from formalizing subscribers that were receiving service, but they were not actually being reported in previous years. So it's really, we've been growing organically more than anybody else, and we do -- when we have put in place a lot of things. Last year, we've made some structural changes so that we expect that we're going to be accelerating our growth in that market.

So if you look at the pay-TV penetration in our markets, the number that stands out there is that 62% penetration in Argentina. That is the highest pay-television penetration in Latin America, one of the highest in the world. And a lot of times, people ask, okay, how much can we grow more in Argentina, or how much can the market grow more in Argentina? And the reality is the market is not showing any sign of saturation. Many times, we've talked about presumed ceilings. So it's not going to pass -- go past 60%, it's not going to go past 55%. And yet, year after year, it keeps on growing. So I see no reason why, over the next few years in Argentina, we will not have a penetration above 70%. Now does it get to the 90-plus that we have in the U.S.? I'd like to think yes, but of course, we'll keep a little bit of skepticism or some sandbagging, depending on how you want to look at it. But if you take -- the second thought is, if you take that 62% as a reference and if you apply that to the other markets, then what you're really concluding is that this market can grow to past 30 million homes. So that's 50% more than what it is today.

So how do we go about capturing this opportunity? So just like the U.S. and just like Brazil, our strategy again is being leaders in content, technology and in service. We mentioned that. But the way that we make it actually sustainable is we'll leverage our scale. And we leverage our scale advantage, just think of it globally where you can taking advantage of the global scale of DIRECTV, the largest pay-television company in the world. We also leverage the DTVLA scale, the largest pay-television company in Latin America. We're now increasingly leveraging our scale at the regional level, PanAmericana, also leader in our region, and as well in the countries where we have strong positions. So that's really the first pillar of our plan and we're going to talk about it with some examples, give you an idea. But the idea is, again, leveraging the scale to grow, which in turn gives us more scale in a virtuous circle, right? That's the idea.

The second pillar, like Brazil, is we have to capture that middle market opportunity. And we do that by enhancing our customer segmentation. There are 2 points worth mentioning at this point. So one, we can outperform competition in the middle market because what people in the middle market want is they want the best products, and we have the top brand in the region. So what they want is an affordable version of DIRECTV. They don't want to have to go to a second-quality or a second-tier type of service. Their main issue is only affordability. And as we capture the middle market, we expand our scale. It does not just benefit the middle market segment. It benefit the entire economics so the profitability on the high end and as well as in the middle market.

And the third pillar again will be Colombia, and we'll get to it.

Let me talk about scale. Again, in PanAmericana, as I mentioned, we have this unique position where, in addition to leveraging the global scale, we need to manage our scale at the regional level. So let me start with some examples at the global level. We operate the same systems as DIRECTV U.S. In fact, our broadcast center is integrated in California with DIRECTV U.S.'s broadcast center. So for example, when we launched HD last year, instead of investing on a new chain of HD equipment, there was one available in the U.S., it's being broadcast in the U.S. broadcast center.

Another example, when we brought our HD DVR to the market. First of all, we brought a product that had no match, that still has no match and I see no -- I have no expectation anybody is going to be able to match for years to come in terms of features, right? But the few HD DVRs that our competitors bring in the region are actually a lot more costly than the ones that we're actually to purchase, taking advantage of the global purchasing that we do.

In content, and here I'm going to give you an example of the DTVLA scale. In 2010, for example, we purchased rights for the FIFA soccer World Cup. I'm not sure if there are many soccer fans here. But typically, this crowd does have many international members, so you know what soccer is. Big event, the biggest sporting event in the world. We had the most complete coverage of that event in Latin America. And we were able to get that because we work very closely with our partners, that's SKY Mexico. Again, we leverage the pan-regional scale.

At the PanAmericana level, there are many operating scale efficiencies. So for example, we have a call center peak. And in call centers, you tend to plan the capacity to be able to manage peaks, right? Otherwise, your service level goes down. So when we have a peak of service in Argentina, while we may have capacity available to serve Puerto Rico, which is actually call center agents which are based in our call center in Colombia, and we can shift that capacity amongst the countries because, typically, the countries will have different peaks, different seasonality. That creates not only efficiencies, but it actually creates a better service quality.

And it's not just about the efficiencies, but it's also about the processes and the best practices. So for example, we benchmark and compare the performance of all 9 operations. We also compare ourselves with Brazil and the U.S., and in that, we keep on finding ways to improve our processes. So for example, in the last 2 years, we've been able to reduce the number of calls we get from each subscriber every year by 34%, right? So that's very substantial savings that we can get leveraging our scales. In IT, another example, we're actually in the process of implementing CRM system. It's going to improve our operations. It's going to improve our subscriber -- our customer satisfaction. But the way we're doing it is we're doing one single implementation. We're making sure everybody will have the same processes so that we can gain not only in terms of features but incredible efficiencies in doing so.

And even in advertising, good examples. Last year, for example, Ecuador, just took an advertising campaign that had been produced in Argentina. "Cats and dogs," it was called. And they just adapted. They changed the pricing. They did some dubbing because the Argentine accent can be a little bit offensive to other -- in other countries. And they ran it in Ecuador with great success. So we become very skilled at finding all of -- all these kind of opportunities, again, to make us more efficient, more profitable and also be able to grow more rapidly. And while we do that, we also do provide our managers significant latitude to operate in their market within that framework, again, to generate efficiencies.

And this chart shows you some of our content advantages. So this year, for example, we will have the most complete coverage of the London Olympics. We will produce 900 additional hours that are exclusive to DIRECTV or the brand DIRECTV Sports, so nobody will have in the market such a complete coverage of the Olympics as we do. And that is only possible, again, because we've bought those rights for the entire region. We -- it would not have been possible to buy these rights and to make this investment in production and in quality of the product if, for example, we were just doing it for Ecuador. It just doesn't have the scale to sustain that kind of programming investment. But if you do it as a whole, you can afford -- you can do things to really differentiate yourself.

The other big event that we have, again, a complete coverage of the UEFA Euro Cup, which after the World Cup is the most important soccer event, and it's in August this year -- actually, July this year, August is the Olympics. But there again, we will have full coverage. Nobody else will have -- will be able to see all games. It's only available on DIRECTV. And we don't -- not only do a full coverage. What we do is we bring all of the -- we bring to bear all of our technology, all that we can do to differentiate the way you see the -- you watch television. So with the Olympics and the Euro Cup, we'll have multiscreen mosaics. We'll have on-screen statistics and interactivity. And this year, we're also doing some events in 3D. And the reason we're doing 3D is, again, we are the top brand in the market. It's important that we sustain that message, and therefore, we can do it. All of our HD equipment is 3D capable, so very easily, the content is available to us. We're making it available in the region.

The other thing in this chart you see here and you have a little demo of it on the Internet on the back is we launched, for example, DIRECTV CINEMA. So every month, in our linear channels, every month, we broadcast a whole lot of movies. It's almost 5,000 unique titles every single month that we broadcast. We do some video-on-demand on our DVRs, we do Pay Per View, we have the premium movie channels and we also have the basic channels, which all have a lot of movies because, clearly, it is a big part of the entertainment experience. The problem with that is that, if you look at the guide, it's hard to find those movies. So what we did is we created an interactive interface. DIRECTV CINEMA is in fact -- it's an interactive interface. And you can look at those 5,000 titles, you can search for those 5,000 titles in a way that is friendly for you as a consumer. You can do that on the screen of the television or you can do it on the web. So for example, if you want a comedy, you can look at the list of comedies. If you want a drama, depending on what you're up for that night or -- you can also say, "Hey, what are the movies starting in 30 minutes? I'm having dinner now. I would like to watch a movie when I'm done. Is there any way where I can see the movies that are going to be showing in 30 minutes? Because I want to see what's available." And also, if I want and I'm searching and I find a movie that is actually going to be broadcast only in 15 days, it works as a reservation system. So you say, "Okay, I want to keep that movie in my library." Of course, I assume -- I presume you have a DVR, and if you don't have, we'll be happy to upgrade you to a DVR. Of course, we have an upfront free and a DVR fee, which we charge every month. It's a good return for us. And then, you will have a great selection of movies. So if you think about it, 5,000 new titles or for -- unique titles is a huge movie offer. It's actually unmatched by any OTT in the region, probably even in the United States. I mean, sometimes, our customers forget and we need to make sure they're reminded DIRECTV is the best entertainment experience and we offer a lot. It's -- there's hundreds of contents available to you anytime.

As a result of the launch of DIRECTV CINEMA -- it's -- it was launched in January. In the last 3 months, we tripled our Pay Per View sales, for example. Even though it was not just for Pay Per View, it's to make movies available to you.

The other big advantage on scale is we can deploy capital very efficiently. So you may have seen, right, we've made commitments for a new primary satellite, and it's back up. And when we did that, we really -- we said, well, we took a long-term view of this business. I mean, the satellite life is typically 15 years, sometimes it lasts more. And over 15 years, we'll be close to 2030. I don't want to count how many years I'll be by then, but the point is the industry is going to be migrating to high definition. It's going to take some time, but we designed a satellite that will give us the capacity to grow our service both on the short term and on the long term as we go through this transition. We're also making investments in broadcast infrastructure to prepare for the new satellite but also to meet the current capacity needs, which are continuously growing. And finally, we're doing a lot of investments in our service, right, in our call centers and field operations again to meet the growth -- the rapid growth of our business.

So let's go to segmentation. So we look at our markets in 3 operating segments. And I don't want to confuse here, but we call it high, middle and low, but really, the middle market that we've been talking to you about is our low segment. But there are 3 categories of product, if you want. And if you look at high, right, you see the potential. The addressable market is about 3 million homes. And these are the -- kind of like the global consumers, capable of paying close to $100 or more for their service.

The middle where you have about 10 million homes, that's really the segment that they have to make choices. So they will say, "Well, I really want HBO but HD. I would really want it but maybe not now. Maybe next year," right? They're making choices. So we need to be flexible and manage those expectation and finding a comfort level so that they can stay customers for a long time.

Lower segment is the largest. There's 30 million homes in the lower segment. And we clearly need to be in that segment for our growth. And that's the customer that is actually -- really have affordability concerns. He wants the service because, at that level, in that socioeconomic strata, there aren't as many entertainment options. Taking a family to the movies is a very expensive endeavor, but certainly a lot more expensive than a month of programming. And they also have security concerns. If you're in that segment, you want your children to be at home in the evening, not to be running on the street, which is the next best entertainment option they may have. And again, security, it's a big issue. So the point for us is we needed to make it affordable.

So if you look at the pricing line, you'll see that we have a high range in prices, so it goes from $20 on the low end to $90 on the high end but even more depending on the options that the customer will choose. And in those 3 tiers, we offer increasing level of service. So it starts with content, more and more channels; also, the type of technology. I mean, everybody gets digital technology because DIRECTV is 100% digital, unlike cable. Then you start providing DVRs beginning in the middle market, and then HD, MRV. And all of the new features we're going to be launching start always on the top end because they're the more expensive.

Service. Also, we offer 3 levels of service where, really, at the high end, we really have a VIP service; where, at the low end, customers do expect that they're going to be going through a lot more of IVR. We try to make it very friendly because we want satisfaction at all levels, but the cost of providing that service is very different on the 3 segments.

And most importantly, the subscriber acquisition costs. If you look at this, I mean, that's a big range. I mean, if we have maybe a 4x range on price, we have maybe an 8x range on subscriber acquisition costs. And clearly, what we wouldn't want is to have to spend $800 for a customer that is -- can only afford to pay $20 a month, right? So we're able to segment properly so we can manage our profitability in each segment.

So one of the strategies we attack to address the low end. And many of you have been hearing us talk about prepaid, and Bruce has mentioned some of it. But I want to spend some time on it because, again, PanAmericana is where we first launched prepaid in 2006 in a large scale. So we now have actually years of experience with that product and we've -- we're continuously improving and we have some lessons. So for example, let's look at the chart on the left. So if you look at the bottom, you see the reported subscribers, which are the number of subscribers that are in the financial statements. So in our 4.1 million subscribers, there are only 800,000 prepaid customers reported, but those 800,000 customers are those that were active on the last day of the month of the quarter. It doesn't mean that there are only 800,000 customers that are generating business for DIRECTV.

So if you look at the history, we've had -- we sold 1.7 million customers -- or systems, prepaid systems in the region. We estimate that we've lost 400,000 of those. And 1.3 million, which are the prepaid customers that have at least connected once so -- in the last 60 days -- sorry, 180 days, those are our addressable market. So we treat them as a potential market to go simulate the recharge so that they can be reactivated and resume seeing pay-television. So what it does is, when I -- when these 500,000 customers reactivate the service, they contribute to our profitability, but the cost to DIRECTV to reactivate that customer is actually 0. I don't have to do a truck roll. Most of the times, all he has to do is, customer goes in a pharmacy, pays cash, gets an electronic PIN, goes into his phone, sends the electronic PIN by SMS, it automatically reactivates the service and we are generating profitability, right? So what it actually does, it improves our return on our initial investment, which was that $100 to $150 that we spent but only when we sold it the first time, not when we reactivate.

So I really like this chart. We like this chart because I'm a DIRECTV shareholder and I'm always looking for ways to have better return on my own investments and I'm not very good at that. But the one thing that I know is I look at this and I say, "God, I'm glad I'm a DIRECTV shareholder," because if I can get a 50% IRR on my postpaid and if I can get a 70% IRR on my prepaid, I mean, that's very good business. I mean, I cannot find anything as good as this. Of course, Bruce disagreed that I would actually use my money to do the SAC and get that return, but I get it as a DIRECTV shareholder. But again, these are very good numbers. I mean, if you look the ARPU, these are our actual numbers, right? So our ARPU, comparing prepaid and postpaid, prepaid is just a little over half. But very attractive return. Why is it so attractive? The low SAC, the low subscriber acquisition cost, and the lower cost of providing service.

So let me move on to the third pillar of our strategy, which is Colombia. So as I've shown you, right, Colombia is the largest market in the region. And in Colombia, over the past few years, I don't know how many of you are -- follow Colombia or are familiar with the -- with their economic developments, they've -- growing significantly. The main reason was, about 10 years ago, started a big push for improvements in security that have -- that are, again, continuously improving year after year. But in addition to security, Colombia is one of the most diversified economies of the region, not only in terms of the internal economy but also the exports. Exports are forecast to grow 20% every year in the next 5 years. Type of exports, you have oil, you have coal, you have coffee, bananas, emeralds, apparel and flowers, so again, manufactured products, commodities. And what's happening, of course, Colombia has -- is going to benefit tremendously from the free-trade agreement with the U.S., has been finally -- which was ratified by Congress. And the result of all of this is what's happening.

So GDP per capita has grown almost 6% just last year. Inflation, in control at 3.7%. And all 3 major rating agencies have upgraded Colombia to investment grade, boosting foreign direct investment 90% just last year, 90% growth from the year before. So we're very bullish on the economic prospects of Colombia, but it's not just about the economy. It's also about the structure of our market. There've been many changes that happened over the past 18 months particularly with acceleration last year in the regulation and the structure of our market.

So Colombia has had a historic issue that has affected our market of -- informality. And by informality, I mean 2 phenomena. One is piracy. So you'll have small cable operators in interior, they're very informal. They will pirate signals of pay-television channels and they'll feed it on their headend to serve a number of subscribers without having to pay for the programming. That's one. The other is underreporting. So you have cable operators, a little bit more formal, so they take away -- take signals that they report less than the subscribers that they have. So again, they save in programming costs and they also save on taxes because they are not reporting those subscribers.

So to give you an idea, the government estimate that there's about -- there's maybe 3 million or more underreported homes in the market, and the government sees it as a big opportunity to improve their tax base. I mean, that's taxes that aren't being collected. So the result of that awareness after substantial political -- I'm not going to use any word, but I -- it's very political movement. Actually, they've passed the constitutional reform. Our regulator was independent of the executive by constitutional determination. And to be able to reform our regulator, they needed to pass 2/3 of their Congress, and that passed. That happened last year. And that really shows the commitment that the authorities have to fix that problem. And as they are going to be fixing that problem, they're going to be bringing that market into the official market. They're going to be making DIRECTV more competitive and able to capture a large share of that new market.

The last point there is the -- on the revenue taxes. So in Colombia, we actually have the highest pay-television revenue -- pay-television taxes of the region. In addition to VAT, we used to pay 10% of our revenues in taxes to our industry regulator. Again, through several movements, we've -- that rate is coming down. Just the last 18 months, it's come down from 10% to 7%. We expect it will continue to go down because there's a need to align it with the telecommunication tax, which is only about 2% of revenues. So clearly, some operators can shift revenues from one service to the other, underreporting their taxes, but that is benefiting us directly because that 3% goes straight to our bottom line. So in that environment, that is very positive. Let me show you what we've done.

First of all, we were -- we got the soccer rights, the local soccer rights ahead of anybody else. The new championships started now in January. And we are in fact the only operator that has those rights because our competitors have been unable to reach an agreement with the league to get the same rights. They're not exclusive, we didn't purchase them exclusively. We do produce them. We are the league's partner in production, so we make sure that the product's quality is the DIRECTV standard. But so far, none of our large competitors have purchased it. So we have an advantage.

But we also launched a new prepaid product, and even though that prepaid product has a lower price, right -- it has those COP 49,000, this COP 50,000 down to COP 35,000, which is $28 down to $20 as an entry price. Because the model is different, what's happening is the connection rate of those customer is 40% higher. So actually, the profitability of the new product, even though it's more affordable, it's actually similar as the one we had before. We're also investing in the growth of our distribution network and we're also boosting our advertising, strengthening our brand. So I want to show you our current campaign and the player who's acting in this advertising. His name is Falcao, he's Colombia's top player. Currently, he plays in Spain. Let me show you. Can you roll the video, please?

[Presentation]

So all these efforts we've made in Colombia, they're actually paying off. So as we near the end of the first quarter, I'm happy that, actually, in Colombia, we -- this quarter, we're going to double the net adds that we had from the fourth quarter. But that new prepaid, we actually had launched it in October so we had already been accelerating our growth. So if you compare what we're going to grow in Colombia first quarter versus first quarter last year, it's actually 5x more net adds.

So in conclusion, again -- did we change the order of this? Let me go with this one and see what happens when I press the button and I go to the next slide.

Again, we have that challenge: Can we double our subscriber base in 5 years? 55% total pay-TV penetration. I mean, if you think about 55% compared to the 62% in Argentina, you would think why it's reasonable. But I think, if you look at it in terms of the growth, what it implies is a little over 8% growth of the market every year compared to the 11% that we had every -- each year in the past 2. It's a reasonable number.

The other point there is the share. Now clearly, 21% to 27% market share is a meaningful gain. Again, if you compare it to the 2 percentage points we gained last year, I think it's doable. And in reality, what we're seeing is that -- is we still have room to grow with our prepaid, hasn't been entirely ruled out in all of our markets. So we have potential to keep on accelerating our growth to make us get to that 8 million customers in 5 years.

Let's see what happens. Nothing happens. Back. Ha, I guess I pressed it twice.

Conclusion, we're well positioned to capture more than our fair share. I think you saw, I mean, we've -- 40% to 45% of the growth of the market, we're capturing. We have the scale advantages to continue maintaining leadership in content, in technology and in service. We have a great segmented strategy that not only gives us growth, growth opportunity but does that profitably. And because the middle market is really not exploited, we will continue growing and we can certainly aim for those kind of growth we've shown you in the other slide.

So with this, I conclude. Jon, you're next. Thank you.

Jonathan Rubin

So we're right on schedule. So we're going to ask everybody to come back at around 11:00. So that's about 30 minutes from now. Thank you.

[Break]

Jonathan Rubin

If everybody could be seated, we'd appreciate it. We're going to start now with SKY Mexico.

[Presentation]

Alex Penna

Good morning, everyone. I'm going to start with an overview of the competitive environment in Mexico, which has changed significantly over the last 3 years. Back then, the competitive environment was a bit cozy. I could say that was one nationwide pay-TV provider, the SKY Mexico, competing against a large number of regional cable companies. This large number, it's over 500 companies. And we all marketed 5 programming packages, pretty much along the same price points. And that's the way we competed back then. We are in 2012, but in 2011, it -- we already have had 2 nationwide pay-TV providers, which were the 2 satellite companies, SKY Mexico and DISH Mexico, a joint venture between the Vargas family and DISH USA.

There -- by 2011, there has been a major consolidation of the cable industry in Mexico, carried out by 2 players. One, Grupo Televisa itself by acquiring ownership percentages in Cablevision Monterrey and Cablemás. And also, the other consolidator in the industry was Megacable, which is the largest cable company in Mexico.

And in 2011, with the entrance of DISH in 2009, it entered with what I would call a disruptive pricing offer, very low price, about $11 per month. And that changed the pricing points in which the whole industry was accustomed to operate in Mexico. So that's why it was somewhat disruptive, the offer that DISH came to Mexico with.

Pay-TV market overview. Mexico has about 29 million households, of which 39% or $11.5 million ended 2011 with some type of pay-TV service. There is no doubt that, as already said by my colleagues, satellite technology in Mexico, the same as in Brazil or PanAmericana markets. It's definitely the winning technology for video services because of the nationwide coverage that it provides. So as you can see in this graph, DTH growth since 2008 has had compounded annual growth rate of 55%, and -- while the cable players in the same period only grew by 5% compounded annual growth rate.

There is a high growth potential since we ended 2011 with only 39% pay-TV penetration in the market, and we fully intend at SKY Mexico to capture the lion's share of this potential. SKY Mexico is a clear pay-TV market leader. We ended 2011 with 32% market share. We are followed by DISH and Megacable with 17% each. So 1/3 of the pay-TV market in Mexico is held by SKY Mexico, the other third divvy up between Megacable and DISH, and about 19% is owned by Cablemás, Cablevision DF and Cablevision Monterrey, which, as I said, are properties of Grupo Televisa.

In 2011, we, at SKY Mexico, had gross additions of 1.6 million subscribers and net adds of 1 million. And that was the case since we launched the VeTV product, the low-priced product, 2.5 years earlier. So since then, we moved from growing net adds annually from 120,000, 130,000 to 10x that, 1 million every single year. That's pretty much it with regards to the market over there.

In terms of a quick analysis of competitive strengths and weaknesses of the main pay-TV players in Mexico, as you can see in this chart, SKY has, among its strengths, an extensive sales and installation network; its exclusive content, which is very important for our success in the pay-TV market in Mexico, and I'm going to talk about that more later on; and what I also commented, the nationwide coverage.

Our weaknesses, we have no triple play services, and our price is -- we're still viewed as the most costly pay-TV service in Mexico. But there is a good reason for that. It's all the exclusive content and premium service that we provide to our subscriber base. And I'm going to talk about that later.

DISH, as I mentioned, came into the Mexican market with very low price offer. So that's their -- that has been their main strength. They have also used Telmex to leverage their distribution and collection services. And they also, as a DTH platform, have nationwide coverage. What are their weaknesses? Well, they don't -- they opted for not getting the over-the-air channels of Televisa and TV Azteca. And in Mexico, I think that's critical to have, obviously, the Televisa over-the-air channels because we have a say in Mexico. Most of the people seem to subscribe to a pay-TV service to watch the over-the-air channels. So it's funny, but it's reality. It's pretty much a matter of the quality of the signal that they get in a digital service like SKY compared to trying to get those over-the-air channels with an antenna.

So DISH, besides not offering the over-the-air channels in Mexico, they have no exclusive contents. And I think the combination of those 2 is going to be a competitive disadvantage going forward. And the cable companies, they are very focused on their triple play offers. But still, despite the consolidation that has happened in Mexico of the cable companies, there is still -- they operate in very limited areas of the country, and therefore, to generate scale with that limited operation, I believe, it's more difficult.

Let's talk about what has been the major driver for the growth I mentioned, we have had over the last 2.5 years, which has to do with this product that we call the VeTV. And we designed this product in a very careful way to respond to the low price offer that DISH made in Mexico. What DISH's approach was pretty much $11 per month on a typical postpaid package service. And their offer, since they didn't count with the over-the-air channels of Grupo Televisa and Azteca, they offer a concentrated on the traditional U.S. pay-TV channels -- networks: Fox, Discovery, and so on and so forth. And that was their offer and their marketing motto was to say, "Well, those are the channels that most of the pay-TV subscribers like to watch."

We, in designing our VeTV product, we -- and knowing that in Mexico, it's very important, the Televisa over-the-air channels and the audience that it generates, we had a different approach to attacking this C and D segments of the population. We obviously included those over-the-air channels and added some other traditional pay-TV channels like Fox, like Discovery, like a few others. But obviously, being very careful in structuring this offer in such a way that wouldn't be attractive enough for the existing customers of SKY to consider downgrading from their existing packages to this new offer.

So I think the numbers there show how successful this offer has been. Since the launching in the last quarter of 2009, we ended up 2011 with more than 2.3 million subscribers, which on its own makes VeTV the largest pay-TV company in Mexico. So it doesn't count on all the other subscribers we have from our traditional products.

We priced $2 above what DISH did with their $11. We priced at $13. And we have added the possibility for the subscribers to -- if they want a contract through Pay Per View to watch movies, that's possible. And we also made the adult channels available for an extra fee. So that's the offer that I was talking about. If we look at it on the left-hand side, all the over-the-air channels that we included in our package. And when you look at Familiar, Niños, Deportes', cinema and music, you're going to see and recognize the traditional U.S. pay-TV channels or networks.

Another very important feature of this VeTV product has been that we designed this as a prepaid product and not as a traditional postpaid product for pay-TV customers. And the reason for that is very simple. Classes C and D, most of the people there don't have a very stable monthly income. There are months that they do have the money, others they don't. So I think it's critical, and I think history has shown that we were right. We designed this VeTV product as a prepaid product, giving the flexibility for the subscribers to one day have the money. They watch TV for a month because that's the package that they can buy. It's a monthly package. And once they don't have the money, they just stop watching TV. And the -- what they commit to us is to make a minimum of, during the life of them as subscribers, to make a minimum of 12 recharges, and they don't need to be consecutive.

And as you can see, we have managed through to have a churn under 15%, which is pretty much in line with what we have in our traditional postpaid product, which I think it tells about how important it was to offer on a prepaid basis and not on a postpaid basis. And we have managed to have reconnection rates of about mid-70s to date.

Let's talk a little bit about the marketing and service approach. Enter -- entry fee for the VeTV product is only about $15. And we also -- when designing this product, we had -- very clear in our minds that we had to slash costs in the various segments of the chain from commissions to the sales force, through costs of customer care and also negotiating with programmers for lower tariffs than what they were used to charge SKY for their traditional products. So we took care of all that. And as you can see, on those frontals [ph], that's not the traditional salesman that is standing in a fancy shopping mall in Mexico City, no. It's a door-to-door sales approach, in which our sales force go out, go over entire communities and knocking doors and selling the product.

And we also, in terms of client service, looked at not -- without lowering the standards of our client service, which is considered one of the best in Mexico, but we focused on finding ways to use our IVR, or the automatic call resolution, to solve the service needs of this huge new base of subscribers. And as you can imagine, through automatic call resolution. And resolving 80% of the calls through the IVR has helped us to contain costs very effectively and still providing a good quality service to the subscriber base.

Let's talk about our traditional subscribers, A and B and C classes, what we have been doing in order to continue effectively competing against the cable companies with their triple play offerings in that segment. And as you can see, we launched our HD service in 2010, and we have achieved a very important growth to date. And we plan to accelerate this growth throughout this year and the ones to come.

And our offer is the most complete offer in Mexico. We have over 40 channels in HD, 5 free-to-air channels, 32 traditional pay-TV channels. And more important than that, our HD offer, which is totally different from any other pay-TV player in Mexico, is that it contains thousands of hours of transmissions of our exclusive events with HD qualities. So when you look at the HD offer that we have in Mexico, has no parallel and -- with any other provider of HD services in Mexico.

And as you can see, we have been, since launching, we have had a major growth. And the way it works in terms of selling this product is you have the traditional programming packages: Basic, Fun, Movie City, HBO, Universe, which is a more complete programming package. We decided to market our HD services to those subscribers starting at the Fun package, which runs for about $35. And we have the HD service for additional $8 a month. So a subscriber has to pay $43 if they have just one set-top box. And if they decide to have their high-end DVR, the Sky+ HD, so they're going to pay twice as much as $16 a month. So add to the $35, they pay for the Fun package. You add $16 more, and you have a DVR HD service and one television set.

Our competitive advantages in Mexico besides what I already mentioned, nationwide coverage and exclusive content, but we believe those factors play a major role in terms of a competitive edge, which has to do -- we operate -- besides our own sales force, we operate through 9 master dealers who, by their turn, have a number of distributors. And when you count them all, we have a sales force of 1,800 distributors, which nobody else in the country has something nearly close to that. And they handle approximately 2,500 points of sale. And then we have first-class service to our premium subscribers through 950 client service representatives in our outbound and inbound call centers. And those are available to service our subscriber base 18 hours daily.

Let's talk a little bit about our exclusive content, which as I mentioned, differentiates SKY Mexico from our competitors. And I think SKY Mexico has been fortunate enough to have, I think, the largest list of exclusive content for any pay-TV system in the world. And there is no doubt that sports content is very important in Mexico, and I believe everywhere. And in that area, we are the only pay-TV system who transmits the whole Mexican Soccer League, the Spanish League, the LFP with other tournaments, Copa del Rey and SúperCopa. We recently acquired the transmission rights for the FA Cup, the Football Association Cup, which is pretty much like the Copa del Rey in England. We have the Carling Cup, and we also own the exclusive rights for the Dutch, Scottish and Portuguese Cups in Mexico.

Also in terms of the U.S. pro sports, which I'm not sure in Brazil they have that much relevance, but in Mexico, there is a large number of followers of all these properties, like we have the exclusive rights for the NFL SUNDAY TICKET, the MLB, NBA, NHL. NHL, there aren't that many followers in Mexico, but still a good property to own. And in addition to that, as you can see, Jacopo already have mentioned, tennis. We own the rights for a number of ATP and WTA matches. Baseball, we recently acquired the rights for the most important teams of the Mexican Baseball League. Basketball, we have the exclusive rights of the Spanish Basketball League and a few other contents.

So -- but the message here is, in Mexico, everyone has very clear in their minds that if you are a sports fan, you got to have SKY. And that what has sustained our participation with the A and B classes, and for sure, it's going to impose our future penetration of the C and D classes.

Main events for this year. Jacopo already mentioned, in the case of PanAmericana, but pretty much the same rights we have in Mexico. We don't have the exclusive rights for the 2012 Olympics in London, but we are going to be the only pay-TV system that's going to have the largest coverage in SD, and most importantly, in HD, dedicating 5 channels to cover this event. And the Eurocup 2012, there we have half of the matches on an exclusive basis. So we are going to be the only pay-TV system transmitting the whole event, but with half of the matches on an exclusive basis.

Just a quick look on the recent SKY Mexico's financial results. We have achieved double-digit growth in revenue and EBITDA over the last 4 years. And we have managed to maintain high margins, particularly driven by our cost discipline. As I mentioned earlier, when I was describing the launch of this VeTV product, we made sure that wouldn't have any negative impact on our margins. And as you can see, we have managed to keep the margins in the mid-40s.

We, at SKY Mexico, have a very healthy balance sheet, with debt-to-EBITDA ratio of 0.6x. And we have delivered to our shareholders a fair amount of money through dividend payments since 2008. They have received roughly $480 million over that time span.

So to conclude, the message is pretty much the same as in Brazil or in PanAmericana. The Mexican market of pay-TV is still under-penetrated. As you saw, it's about 39%, so there is still lots of room to grow. And satellite is the winning technology, no doubt about it, for their flexibility to cover the country completely and being able to install quickly. And through the sales force and the distributors, that I mentioned, SKY has in Mexico that nobody is even close to that sales and installation force. And also, we're going to continue delivering this strong financial performance that we have accustomed our shareholders to and through -- driven by these operating scale benefits and commitment to cost containment. Thank you.

Evan R. Grayer

Good morning. I'm the guy without the fancy video intro, but it's a pleasure to be here this morning. I've been looking forward to this opportunity to talk to you all about what we've been doing with wireless broadband. And my message is the following: there's a tremendous opportunity in residential broadband in Latin America, number one; number two, wireless technology can be an important part of addressing that opportunity; number three, DIRECTV is going to take a pragmatic and disciplined approach to addressing the opportunity.

So why is there a large market opportunity in broadband, in residential broadband in Latin America? Quite simply, penetration rates across Latin America are very low. And not only are penetration rates low, but where people have residential broadband, the quality of the service is not very good. So there's an opportunity to enter. Wireless technology can play an important role in residential broadband because it's very hard to upgrade those fixed networks. A lot of them are DSL networks with copper in poor condition. In many of the markets, there is one competitor, or there's no competitor, there is no fixed Internet infrastructure at all. So wireless, while it's not something that can address the need everywhere, maybe not in, for example, in wealthy areas of São Paulo for single-family homes, maybe it's not the right solution, but it's the right solution in large swaths of the territory in Latin America.

And what do I mean by DIRECTV Latin America is going to take a pragmatic disciplined approach? Really, what I'm saying here is that we're going to look first for the low-hanging fruit. And we're going to look for the low-hanging fruit when it comes to spectrum acquisition. That means if we're going to -- when we're looking at spectrum options, we're not looking to go up against Claro or Movistar. We're looking for options that maybe spectrum has set aside for new entrants. We're looking for opportunities to acquire companies like MMDS, or wireless Internet companies, where we can acquire video subscribers at the same time as we're acquiring the spectrum that can help justify the cost of the spectrum. And we're just open to transactions that come our way. And there are a lot of interesting opportunities for spectrum in 2.5 and 3.5 gigahertz across Latin America.

In terms of the deployment itself, it's a success-based approach. So we're looking at those markets, like I said, the low-hanging fruit, where there's opportunity. Places like the outskirts of the major cities where there's no fixed Internet infrastructure, gated communities that have been -- that are developing outside the major cities, or the secondary markets in Brazil and other countries that don't have good Internet today. And we're doing it step-by-step, as you'll see in the plan that I present later in the presentation. Incrementally, and we have mileposts along the way, where we check our progress. Up till now -- and I'm going to talk about some of the rollouts we've done so far, we've had a lot of success, and we'll see how we'll go 6 months from now, one year from now, and we'll assess the opportunity.

And finally, it's very tempting when we look at these wireless Internet opportunities to include in our analysis the benefits of the core business. And there really is substantial benefit to the core business that I'll talk about. But when we make the decision whether to deploy, whether to go ahead and build a network, we look at the cash flow contribution to the business from the business itself on its own 2 feet. So, like it says at the bottom of the chart, wireless broadband plans are growth and cash flow oriented. We're not including in the analysis the benefits to the core business. But, of course, they're nice, and they're very real.

So I said penetration rates are low across the region. In Brazil, our largest market, for example, they are 29%. In Venezuela, they are 21%. This is for residential broadband. So I don't think I need to explain very much more, there's opportunity there. When it comes to the actual services provided, in Brazil, mighty Brazil, this market is growing so much and has advanced in many ways. 30% of the people or 70% -- better said, 70% of the people are receiving 10 -- 2 megabits or less. So there is opportunity to do better than that with wireless broadband, much better than that with wireless broadband.

Now there is the 30% that's receiving over 2 megs. And maybe if some of you have gone down to some of the capitals, you'll see the advertisements for these kinds of services. But this is for a select group of very wealthy South Americans who live in specific urban areas. In the other markets, the infrastructure is just not very good. So the best places to compete are certainly outside the wireline footprint where wireline service is bad. And very importantly, we know who our subscribers are. Not only who our current subscribers are, but also where we intend to get additional subscribers. So we match those 2 things, where there is not great broadband infrastructure and where we think we can get a lot of -- where we can serve a lot of our subscribers. And that's the low-hanging fruit. We're going to go for it first.

So when I talk about wireless broadband, what am I really saying? Well, these are towers that we have here. They're kind of like towers you have for a mobile phone network. But the truth of the matter is that a lot of them aren't standalone towers like that. They -- we put them on poles, we put the transmitters on the roofs of buildings. And importantly, the equipment we're using is lighter, has a smaller footprint than traditional wireless equipment, so the installations are a lot less expensive because technology has just come that far. It's not like the legacy infrastructure that many of the wireless carriers have. And importantly, we're serving as a residential plan. This is not a mobile or cellular wireless plan. And we're serving single-family homes, and we also have a plan for MDUs or multiple dwelling units.

Now I didn't have a video, but I have show and tell. This is a modem that we install in the home. Currently, it's done professionally, although it might not always have to be done professionally, but the DIRECTV or the SKY installer is usually at the home anyway to install the video service. And what he does is he looks for the best signal in the home. He plugs this in. The only physical connection is plugged into the electricity, generally put in the window. And we have a process where we check the quality of the connection. So we won't activate a subscriber -- and this is very important, we won't activate a subscriber unless we know that the quality is good today, and it's going to stay good. Because protecting the quality of the experience for our subscriber is obviously very important. We have a reputation for quality across the region, and this product is just supposed to enhance that, certainly not take away from it.

In a certain percentage of the cases, we also have an outdoor modem if we can't get a good signal. And actually, we have one here. You can see it out in the booth outside if you'd like to, but I decided not to haul it in here for the presentation. So also -- and this is an area where we can compete in some of the big cities. You see this fancy-looking apartment complex in the middle of the slide. That is a -- on top of an MDU or an apartment building, we can now put microwaves. And microwaves 5 years ago used to be very expensive. Today, they're a few thousand dollars. And we can serve that apartment building with very fast Internet service. So there is an opportunity in the MDU space to provide service in the big capitals of Latin America with this microwave solution.

So you saw what our network looks like on a diagram. We actually have a few networks that are real. And the first one was in Mendoza, Argentina. Now to deploy any sort of wireless Internet service, the first thing you need to do is acquire a spectrum. So several years ago, we acquired 50 megahertz of spectrum in the 7 largest markets of Argentina. That includes Mendoza and, of course, that also includes Buenos Aires. We selected Mendoza as our test market for several reasons. Number one, it's a sophisticated market. Some of you may know, it's the capital of wine production for all of South America. I recommend it as a place to visit and to drink the wine. But more than that, you have a very sophisticated group of people who want Internet service.

And number two, there is some good competition for us to test ourselves against in Mendoza. There's a triple play cable provider, and then it's also ubiquitously covered with DSL service. Now that DSL service, like I spoke about before, has varying degrees of quality, so we could see how we competed. Also, in terms of just testing out the wireless system, Mendoza has urban, suburban and rural, what they call in the wireless industry morphologies, so we could test how the system itself did.

So before we launched, we did some focus group testing. And one of the things we learned from our subscriber base especially was they wanted -- they were very open to receiving a broadband service from DIRECTV. And the reason was is they associated DIRECTV with quality, like I said earlier. And they -- that quality reputation applied not only they thought to the TV service, but they also thought that they'd be able to enjoy our level of quality that they received a telecommunication service from us like a broadband service. So we launched in 2010. That's a 3 megabit service, and we charged around $25 for that service.

So how did we do? Well, we did much better than we expected, to be honest. Within a year, we achieved a 30% penetration of our customer base in Mendoza. Most of the customers switched over from DSL. So it turned out that what we thought we would see from the focus groups turned out to be true, that people were willing to take a broadband service from DIRECTV.

Now the next 2 points have to do with the core business, the part that we don't take into account when we do our financial analysis, an increased sales, the existence of the DIRECTV Net product, that's the brand name of the product, increased sales in the core TV business. So Argentina in 2011 grew its sales by 25% which, especially given the pay-TV penetration levels in Argentina, is very, very impressive. But in the coverage area in Mendoza, DIRECTV increased its sales of the pay-TV service by 58%. So, obviously, a very good sales record.

In addition, the DIRECTV Net service has a positive impact on customer retention. So Argentina, in general, has a monthly churn rate of 1.3%, very, very good. Within the DIRECTV Net customer community, monthly churn is 0.7%, so even better. So we are very pleased by the impact on the core business. And also these churn rates in particular are enhanced by the data we saw coming out of our customer surveys. We conduct frequent customer surveys. Some of you may be familiar, it's called an NPS, a Net Promoter Score, and we saw the Net Promoter Score increase by 25% for those customers that have DIRECTV Net. Now interestingly, the customers weren't only happy with the broadband service itself, but they were happier with DIRECTV in general. So a very positive reaction in Mendoza.

So given the success there, we thought it made sense to move forward and acquire a spectrum in other markets. So the first place that we've acquired spectrum is Brazil, obviously, an important market for our company. We acquired 2 companies, one is called INSA [ph]. That transaction is completed. The second is called ACOM. That transaction has been signed, but it's still awaiting regulatory approval which we expect to receive in the near-term.

With these 2 companies, we have 50 megahertz of TDD spectrum -- and I'll get back to that in a second, and 20 megahertz of FDD spectrum that reaches almost 20% of Brazil's GDP. So TDD, FDD? What's this about? So TDD is a technology, and in particular, TD-LTE is a technology that's receiving a lot of attention around the world. It's been adopted by China Mobile. China Mobile is the largest mobile phone provider in the world. It has over 600 million -- I always find that amazing, 600 million subscribers. And so that alone is, in the industry parlance, an ecosystem.

So this TD-LTE technology is going to have substantial scale. So that has impact on costs, which is very positive. Also, that scale is going to lead to a lot of R&D investment by the vendors in this technology. And since there's -- as many of you know, there's such demand for enhanced capacity among the wireless providers around the world, we think that the performance of these networks is going to increase dramatically over the years because of all the R&D that's going into the technology.

Also, TDD as a technology is very good for asymmetric services. By asymmetric, I mean when there is more download than there is uploaded. And when it comes to broadband, or data services, there generally is more download than upload, usually a 4:1 ratio. So TDD makes a lot more sense when you're dealing with data services. FDD makes sense when you're dealing with voice, when generally, a conversation is equal. Not always, but equal, that one person talks and the other person talks about the same amount.

And one more point about TDD -- and if anyone wants to talk to technicalities later, I'm happy to do it. With TDD, it's a lot easier to add capacity to existing base stations than it is with FDD. So once we get to scale, we can actually just stick cards into existing base stations to serve additional subscribers without having to do that with FDD. With FDD, it's also possible to do that, but it's more expensive, and you need more spectrum. So anyway, we decided to go with TD-LTE. We're actually one of the first deployments in the world. China Mobile actually has base [ph] stations up, but it wasn't commercial yet. And we're providing 2 Tiers of service, 2 megabits and 4 megabits.

So I think this is probably a slide of interest to this group. What do the financials look like? Well, as you can see, we have a plan to invest around $150 million in network CapEx over the next 3 years. And this reaches the bulk of our existing spectrum that we currently hold. Now with this $150 million investment, we think we will create a network that can support $150 million of annualized revenue. So you can do the math. Looking at the ARPU, that's around 500,000 subscribers. That's the kind of network we think we can build with $150 million investment over the next 3 years. And what that network does is it sets us up for a business that we think can generate returns on its own, remember, not including the benefits to the core business I talked about earlier, on its own, with an IRR in the mid-20s with margins in the 45% to 50% range. And with additional ARPU to the business of $23 to $30. So this is what we think this is in general, or what we're thinking about for the next 3 years.

So this really comes back to the initial slide. We're going to take a gradual approach to this opportunity. We're going to make -- our deployments are going to be selective. We're going to look for the low-hanging fruit. And as we move forward, we're going to evaluate how we do. We're going to look for places where wireline speeds are not very good, and there's a lot of those areas. So -- and we don't think it's going to be very quick, that it's going to happen very quickly that wireline networks are improved. We don't think, as Bruce said at the beginning, we don't think there's going to be substantial areas with fiber-type builds, and we think that wireless is going to have great opportunities going forward.

So anyway, we are going to look for opportunities to generate additional cash flow on its own and support the core business moving forward. And we think we have a fantastic opportunity with wireless broadband. Thank you very much.

Bruce Churchill

Okay. Thanks, Evan. I thank everybody for sitting through the session patiently. So what I would like to do in this final session here before moving to the Q&A is just kind of provide a quick recap of what I hope you've heard today, as well as in trying to put some of the pieces together for the overall business. So I think as I mentioned earlier, the 3 key themes that I think you heard, and I hope you heard were: the scale of the opportunity ahead of us that we still believe in; the strength of our position, the brand, our experience in the market, our presence in the market, the content, the service, the way we deliver our -- the product; and then the fact that we provide great returns. And my colleagues started to talk about this question when they demonstrated to you or showed to you how we were able to achieve very attractive returns at every segment of the market. So in other words, we are happy to invest in a middle market customer and just as happy to invest in an HD customer. We make it up -- we make money at every price point. So as I said to somebody, this is not the old A&P strategy, which is I'm probably dating myself, but we lose money on every transaction, but we'll make it up on volume thing, it's not that, right? We make it -- we make money on every transaction.

So -- well, let me talk a little bit then about the overall business. So again, I hope you heard that we're really going to pretty -- we're going to aggressively go after the growth opportunity because we believe we can do so profitably. There's still a big opportunity there. Satellite is definitely the winning technology, and we're going to continue to invest in this market on a success-based approach, which is to say, as long as we can make good, attractive returns on pay-TV subscribers, we're going to do it. And similarly, in broadband, if that plays out, we'll look to continue to build that out. So again, there's very much a linkage between the operating strategy and the financial strategy.

So let me just talk to you about where we think we're going with this business. So for those of you that were here with us 15 months ago, this is a chart I put up which took a look at where we were at the end of 2009 and where we thought we would be 5 years from that point. And at that point, we said we thought over the 5-year period that the market would double in size. If you'll actually look, what's happened then between 2010 and 2011, almost half of that growth that were shown in that chart has already been captured. But I think as you heard both from the Jacopo and from Bob, we still believe, sitting where we are today, that there is still an opportunity to potentially double the size of our business. So we remain very bullish again about and still about the opportunity ahead of us.

The reason is -- the reason that I think everybody has hammered home, which is the still low pay-TV penetration, even relatively low in the A, B households, which are still very attractive customers to us. Well, I know we've talked a lot about the middle market, and we're definitely aggressively going after the middle market, but we have not lost sight of our traditional A, B households. And through the upgrades that we do, through the continued introduction of the new products that we get from our colleagues in the U.S., we will continue to be the market leader in that segment for years to come. And on the middle market side, as I said, the penetration rates still are very low. We believe we've redesigned our business to serve it profitably. So that those are -- we're going to continue to grow aggressively after all those segments.

So what would that impact be financially? So talk -- and I'm going to talk initially about top line ARPU. What will happen to ARPU? There are really 3 things that affect the ARPU. There is a country mix issue just because ARPUs tend to be a little higher in Brazil than they are elsewhere in the region. There's product mix, so how much HD and SD versus middle market. So that will affect ARPU. And there is, obviously, an issue of foreign exchange. As we look out going forward, or I look out going forward sort of for a 5-ish year time horizon, my sense is that these factors will largely -- there'll be some ups and downs in both of them. They will largely offset each other. But probably not entirely. But to some extent, as I have said before, I expect ARPU to sort of drift down modestly. I mean, for example, faster growth in Brazil will tend to have the effect of propping up the overall segment ARPU. And that's, in fact, a bit of what happened in the last -- in 2011, for example.

High growth in the middle market will tend to force the average down. But, of course, we offset that partially through our upgrade programs, as well as continuing to sell to the A and B households. So there's a bit of 2 pressures there. And I think in general, we assume that the local currencies will weaken against the dollar. Now we'll be able to offset that at least partially through price increases and historically, we have, in fact, been able to increase our prices, even in many of the high inflation environments such as Venezuela and Argentina, where we're having, from time to time, put through price increases not just once a year, but twice a year. And I think even onetime, 3x a year.

So the ARPU will sort of be flat to down. And we've talked about the sub-growth components. So that's -- that would drive the top line growth. I think the next sort of logical question is, well, then what happens to margins? And again, I think we've demonstrated now 2 years into our middle market strategy that we've done a pretty good job of preserving the margins for -- a big part of our costs or the largest parts of our costs are, in fact, variable, specifically programming. And we -- by linking our programming cost to the ARPU, by getting lower prices for lower price point ARPUs, we're taking channels out of packages, et cetera, we've been able to preserve the programming margin. In fact, if not -- if anything, maybe slightly enhance it, as we've moved into these middle market packages.

And the other thing that I think also in general, particularly in the area of programming, we'll continue to protect the margins as we have -- we basically have a local currency cost structure, particularly in programming. It's all local currency. So even to the extent that there's some fluctuation in the currency, that doesn't really affect our margin per se. And then -- so those are kind of the variable costs. And then on the fixed cost side, we've been able to kind of keep -- I think if you look at the percentages here like broadcast ops and SG&A, we've been able to keep those costs relatively flat as a percent of revenue. We have had -- there are investments that do need to be made, and in a perfect world, of course, I would like those costs to be frozen forever, and then we will just get the benefit of the additional margin going forward, but that I don't think we're quite at that point yet. But we've been able to keep it to a place where it's not eating into our margin.

And then the other big category here is the upgrade or retention cost. But in our case, that's really almost all upgrade. Those are -- I view those largely as investments. I think that there's a bit of an uptick in 2011 as we went through a pretty aggressive upgrade program in Brazil on the -- in the HD as we had introduced HD. But those investments have returns, IRRs, which are very similar to the ones we showed you with the programming packages. We -- and we manage that investment in the same way. So I think that those costs will also remain largely in line. So you got an OPBDA margin that's sort of in the 32-ish percent range that I think will be sustained.

Now I think there's been a lot of confusion possibly about our capital spending. And maybe I apologize, I was partly responsible for that maybe when I gave guidance of $1 billion of capital, I think, for 2011, and we ended up spending a bit more. But what I wanted to demonstrate to you is, the reason why we spent more is that we grew more. We're -- it's not that we started to go spend a bunch of money on things that are not productive to our shareholders. So if you were to look at sort of a $1.6 billion CapEx spend, which is probably -- well, I don't think we'll get there this year, but it's sort of where I think it will be in the years ahead. 80% of it is related to growth. It's subscriber acquisition, and it's upgrade. We say upgrade and retention, but again, it's mostly upgrade. So as long as we can continue to make investments with the kinds of IRRs that we've shown you, I think that is a wise investment for the shareholders and it's certainly, I think, the right thing to do for our business.

The balance of it, the sort of other 20%, is split between -- we have a couple of strategic projects, there's the broadband project that Evan just mentioned. Jacopo mentioned that we invested in some new satellites for PanAmericana, and that's about $100 million a year. That started last year and goes this year and then 2 more years. That, frankly, was just a decision we made. We did a very simple NPV calculation, and we negotiated a deal with Intelsat where we put more money up front in return for fewer lease payments in the back end or on an NPV basis, we probably saved ourselves $100 million. Given that opportunity, I would probably choose to do that kind of investment again. But that's sort of in there, baked in for the next few years. And maybe, to the extent that tapers off, maybe there's a little bit more in broadband, but there's other 10% in the strategic-type projects and there's 10% in kind of all the other stuff you need to get the lights on, keep the lights on, distribution centers, IT, et cetera, et cetera.

So again, yes, it's more than I thought it was going to be, but it's really driven by growth. So in thinking more about this capital issue, and obviously, the related issue, therefore, what does it do to cash flow? I've tried to look at it a couple of different ways. So in the left-hand side, we just said, "Okay, how does our -- if you're getting from OPBDA down to your cash flow before interest and taxes margin, how does it differ from the U.S?"

And while we have a slightly better OPBDA margin, if you look at working capital, actually, we generate cash out of our working capital just because we're growing and putting in a lot of subscribers, they're paying in advance and then you pay everything else out later. So it's actually a net positive for us. But our -- the basic PP&E stuff, as a percent, is roughly in line with the U.S. business. Now, if anything, maybe that number is -- you'd expect it to be higher, maybe it should be even a little higher, but it's not going to be dramatic. So I think that the -- you then say, "Okay, what's left?" The difference is the investment in growth. So I believe it demonstrates that we kind of -- we are, in fact, being quite disciplined about our allocation of capital and that we're spending it on things that generate returns.

The other way to look at it, which is somewhat hypothetical, whereas we said, "Okay, what would have happened if we had just stayed where we were and sort of kept the growth levels at where we were in 2009?" So in other words, in 2009, we added about 700,000 subscribers. But if we just said, "We added only 700,000 in 2010 and 2011", and therefore, we also tapered the investment in upgrade spending. What you will see is instead of having roughly $400 million of cash flow before interest and taxes, we did, in fact, closer to $1 billion.

So if we had invested in growth would the cash have been there? We have less revenue, yes, absolutely, we accounted for that, less contribution margin, if you will, to work with, but net-net, we would have had about $1 billion. So again, I think it demonstrates that we're making decisions that are financially responsible. Now that I don't think, I personally don't think that's the right business strategy, which is not why we pursued it, but it just demonstrates sort of the way our financial model works, if you will, at the company.

And then, finally, looking at it from a return-on-invested-capital point of view, we took a look at ourselves and compared DTVLA to our U.S. business, to DISH and to some of the cable, big cable companies. And again, I think what you'll see is that, a, the overall level is very respectable and the trend is very positive. And as we grow, I would expect those ROICs to continue to improve. So we're obviously very much in line with the U.S. business, way ahead of the cable guys. So I think, again, it's just another way to look at this issue of "is the capital spend being spent wisely?" And I think the answer to that is I hope that you are convinced that, in fact, we are spending the money wisely.

So looking forward then, where do we think we end up? I've talked about the ARPU. I've talked about the margins. I gave this guidance for 2012 a couple months ago. I'm not going to stand up here and change my guidance. It's still early in the year. Having said that, I will tell you Q1 was a lot stronger than we thought it was going to be. We probably will add north of 550,000 subscribers in the first quarter. And I think the other area that we had assumed might be a little more challenging was foreign exchange, but the Brazilian reais has not weakened as much as we had assumed. So the financial side of the performance will be probably better than we assumed for the first quarter as well. So we'll see how the rest of the year shakes out.

And then, finally, I guess trying to tie that altogether and trying to tie together what Jacopo and Bob said and say, "Okay, 5 years from now, what kind of a company will we be?" I think we'll be a company of 16 million-ish, maybe more, subscribers. These figures, by the way, exclude Mexico. So you add Mexico into that, and I guess I'll be rivaling my colleagues in the U.S. in terms of the size of the platform.

Revenues, north of $10 billion, based on my view on ARPU. Margin is as I said, I expect to be largely maintained, so the OPBDA should be north of $3 billion. And I don't really see foresee the CapEx growing that significantly. We got a lot, there's a lot of CapEx being invested in growth now. As we go into the middle market. I think SAC per sub tends to be a little lower. So we may get more subs but at a lower SAC, so the overall pie is probably not going to change that much. So I foresee our businesses, in fact, probably still growing, but throwing off very good cash flow. And I'm often reminded by my colleagues at DIRECTV U.S., that business took, I think, 10-plus years, it wasn't till 2004 that it became a meaningful cash generator. So we're generating some cash now. But as long as the growth is out there, we're going to invest in that growth, And I think it's the best solution for everybody.

So that concludes our formal remarks for the day. A couple of colleagues are going to come up. Just Mike? Okay. Okay.

Michael D. White

They can sit there. I think that you can kind of field the questions and throw them if Bob or Jacopo or Alex.

Bruce Churchill

Sure. Okay.

Michael D. White

We'll just throw the questions. Jon, I think it's probably easier.

Bruce Churchill

And then maybe Jon can...

Michael D. White

Jon you're going to...

Bruce Churchill

It's a little hard to see people so you got to...

Question-and-Answer Session

Jonathan Rubin

Yes. We have a couple of microphones on each side. I'm going to ask everybody to please speak into the microphone so that everyone in the room and on the webcast can hear your questions. So if you just put up your hand and get started.

Matthew Berry - Lane Five Capital Management, LP

Matt Berry for Lane Five Capital Management. What are the specific reasons for Mexico's much higher OPBDA margins? And in addition to that, is purchasing the outstanding amount of Mexico and consolidating that business something that you would consider any time soon?

Bruce Churchill

The probably the biggest driver of the improved, better margin in Mexico is lower programming cost. It's the biggest difference. The biggest player in the market and they have been for a while, and in spite of all that great content that Alex told you about, that which is all embedded in that, he still has some of the best programming margins in the business. As far as consolidating it, someday, you look, I'd love to own more of it, but I think the fact is Televisa doesn't want to sell any. So we have a very good partnership today. I think, as Alex mentioned, we do get pretty decent dividends out of that business. We work a lot together. And I have to tell you, I would -- the flip side of being able to consolidate would mean I'm now the majority partner. Operating in Mexico without Televisa as your partner is for very brave people, I think in television. And they are the -- if you want to have a partner in Mexico, you better be with Televisa, so that's where we are, and I'm very happy to be there.

Michael D. White

Suffice it to say, we love the business in Mexico and we love Alex, but so does Televisa. So I think we'll probably stay more or less where we are.

Unknown Attendee

For Bruce or for Bob, wherever he is, I was curious, you made a comment about Netflix not succeeding in Brazil, which I know they just launched, but that was a pretty definitive statement as he's known to make. So I'm wondering if we can just get a couple of more comments from him about why it's not working and why it sounds like he doesn't see it working for the foreseeable future? And that might be true across the region and not just Netflix but just generally over the top.

Michael D. White

Bob, do you want to?

Robert A. Marsocci

I think we have said so far, Dan, so just to be clear, we...

Jacopo Bracco

So the -- we used to kid and say that the first signal that the business is not doing okay, when executives start to show up in front of the audience and say "users". So nobody's paying for the service in Brazil. That's the reality we have. But we have heard rumors around, 15,000 people, probably 5,000 paying for something. So I think the business itself has some challenges in Brazil, they didn't consider in appropriate way. So the lack of infrastructure in Brazil, lousy connections, they don't have quite the same rights in Brazil that they were able to get in U.S., so they are getting the older stuff. As I told you, we are selling -- we do have a recurrent relationship with our subscribers, and 90% of the money is coming from transactional and TV Everywhere, not from the subscription, old-fashioned mode. So they don't have a local structure. It is a fortune. Brazil has become an expensive country, I was telling you, a couple of you folks during the break. So any eyes, it's very expensive, Brazil right now. So not having a low cost structure and not having anything such as we have throughout Latin America to leverage the fixed costs somehow is making them rethink about their business in Brazil. So to the extent that if we are wrong and the business will double, we win. That's fine. That's okay. But for somebody that is trying to build something from scratches, very tough, very difficult. And we realize that one year ago. We thought for more than one year to launch that service. So it wasn't only about taking the decision, it was about how to implement it without hurting the core business, making sure that they're going to give up something compelling for existing subs.

Michael D. White

So suffice it to say, then, I think -- look, no one's making -- I mean, rerun's a very good shop. But Brazil is quite a different animal locally. You can't stream, content rights tend to be -- remember, Bob said, we do more downloading because the speeds are so poor in Brazil. One of the other differences, the guys, when they -- when we first put our strategy together, people don't realize in the United States, there's something like 50 million households that have either PlayStation or an Xbox. In Brazil, that's...

Bruce Churchill

2%, 3%.

Michael D. White

2% or 3%. I mean, it's just -- and so the gateway isn't the same. You got to bill and collect locally. There's so many things that -- we'll see, I'm sure they'll take a run at it. I mean, our view was to be very thoughtful in trying to leverage what we're good at. We've kind of put the website together. We've got content rights that we think are relevant and we know how to bill and collect. So frankly, and as Bob showed you, we're going aggressively at whether it's TV Everywhere or DOD. And if there's an SPOD market, we'll be there.

Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division

Craig Moffett from Bernstein. I think you said that your spectrum licenses, the 2.5 licenses and in that area in Brazil cover about 20% of GDP.

Bruce Churchill

Right.

Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division

Can you talk about what your broadband plans would be outside of the areas where you have spectrum licenses and whether you think more spectrum licenses might be available?

Bruce Churchill

Yes, well, I mean our hope is to try and get more spectrum. Some of it is currently held by Telefónica. They acquired it as part of their acquisition of TVA, so it's used for MMDS. And then, lot of it is still unlicensed, and the Brazilian government is actually going through a whole auction now. What actually happened was the holders of those licenses for the 2.5 actually had a 190 megahertz. The government took 120 back, and they're about to auction that off. But that's going to be for mobile, that'll be the big guys, Telefónica, Telmex, Oi -- who are bidding on that stuff. We're not participating in that. But the 50 megahertz block that we currently have in our cities will be available in some other cities. And there's an auction process going on now, and we'll look at how that plays out. It's a very complicated and tough to actually see how it's going to play out. And then, in other parts of the continent, there are holders of the spectrum that we're in conversations with to see if we can pick up some more spectrum in other territories, other countries.

Unknown Attendee

Just a follow-up, and that is how well does that 20% synergy be matched if the area does not cover the volumes for [indiscernible]?

Bruce Churchill

The question was how well -- how much does -- how well does our 20% holding match the area that's not covered by a wireline, a good wireline. I don't know the answer off the top of our head. But I will tell you that we have all of our spectrum is in actually second-tier cities. They are state capitals, a lot of them, but they tend to be second-tier cities. So in general, I would say that the quality is not high in any of those areas, unless Evan -- so they're actually the second-tier cities. But interestingly, in Brazil, I'm sure there's still a lot of growth in São Paulo and Rio, that sort of historic core. But a lot of these second-tier cities where a lot of the growth is occurring as well. So I'm actually cautiously optimistic about what the potential, even within that fairly limited piece at the moment.

Unknown Attendee

Bruce, you got the Olympics and the World Cup Soccer coming to Brazil in the next 6 years. Those are big events for the whole continent. Can you talk about, obviously, very early, what the strategies can be? Can those 2 years be big unit growth years but lower margin years? Some sort of guidance on that.

Bruce Churchill

Look, our experience has been with regard to the World Cup with FIFA. What we have found is it tended to give a lift to the business. It really did boost sales, both back in 2010 and 2006. But then, it didn't drop off. It kind of set a new bar for kind of the level of the industry. And historically, our ability to get anything quasi-exclusive or like -- from programming content perspective for our platform has been limited to PanAmericana or Mexico. I mean in Brazil, the big sports rights are controlled by Globo and they're actually generally shown free to air. And if they're not on free to air, then they're on Sport TV, which Globo's widely distributed sports channel. So I guess I would hope with the Latin American World Cup that, again, we'll get a big -- it could be a bit of a lift. I don't think it will, in any way, alter our fundamental economics, because we're not going to go out and spend a lot of money in trying to get those rights exclusively. They're effectively already sold and it'll be on free to air. And the Olympics, again, we'll look at those opportunistically if some rights come along. But I think our strategy in the content side isn't so much about getting a lot of this big content exclusively, it's -- or saying that it's the only place to watch it, but it takes something like the Olympics, okay? There's so much programming there that, obviously, a lot of it is on free to air, but a lot of it just can't be. And with the advantage we have is that we can open up all these channels and make all these events available to our subscribers. And the great thing is that because these events are all produced for the world, they're all in HD now and as we buy the rights, you get the HD feed, then the SD feed. So we can bring a truly differentiated product to the region. But I don't foresee us spending a bunch of money on some rights there just for that kind of thing. We tend to kind of buy rights around the edges, really enhance them, create something that's very unique for our customers and they've responded.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Matthew Harrigan from Wunderlich. I have a couple of questions. One relating to your MDU strategy in some markets, like Rio and São Paulo. How was that evolving the video side? I know the microwave MDU offering is going to limited at first, but what type of speeds could you achieve with that? And then on the speed path on the TDD-LTE, is that pretty much going to be logarithmic, is that something that becomes more exciting over time? And then, lastly, on the programming cost, what's going through the heads of the U.S. guys and the Latin programming providers as far as your trading-off the number of households they reach versus advertising and such? Because it seems like you've gotten them to refrain from demanding to be in every home and all that. You commented on that earlier.

Bruce Churchill

Okay. Why don't I'll start with the programming one, and I'll probably have Evan answer the broadband question. I guess part of the reason -- or surely, a big part of the reason that we've been able to convince the programmers to move to this sort of multiprice-point for these programming structures is that we can offer them growth, right? So it is truly incremental revenue to them. Because you genuinely, I mean, I once used the word honestly and thought of having an honest conversation with a programmer, but it's a disconnect. But look, you can look at them in the face, "If you don't give me the lower price where I can therefore price this package at an affordable price to make money", you're just not going to get the distribution. And fortunately now, we have a couple years under our belts for that. So I think they figured that out and they figured it out for both the subscription part of their revenue stream as well as the advertising part. I mean, those channels, as you see, I mean you take the case of Mexico, 2 million more subscribers out of the blue for those guys. So yes, they may not get all their channels in but they got a lot of the good ones. Probably, the good ones carry a lot of the best advertising anyway. So I think it works for them in that regard. Was there another part of the programming?

Michael D. White

Yes, there's MDU for Bob. Do you want to? Bob, do you want to comment on the MDU [indiscernible].

Robert A. Marsocci

MDU? Or that was -- MDU was on the broadband, is that right?

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Well, actually, both, home video side.

Robert A. Marsocci

Oh, okay.

Jacopo Bracco

One of the reasons why we didn't pay so much attention to MDUs in Rio and São Paulo is that because cable was there before us for a long time. So in cities like Rio and São Paulo, if you'll compare our participation on the MDU share kind of thing, it's really low. If you're going to go for new buildings and in the second-tier cities, as Bruce has mentioned, we are doing okay. 6 years ago, we didn't have a business model that would be able to compete with cable. Because of the reduction of basically complete cost, we are able to successfully meet competition in second-tier cities and in new buildings.

Michael D. White

Evan, you want to take the question...

Evan R. Grayer

On speeds to the MDU, we could very comfortably give more than 10 megs to an apartment. We're actually looking at a technology that could bring a gig to the building. So you're really talking about very fast speeds.

Michael D. White

I think the other question, Evan, was over time, will you see the 2 and 4 megs to the home with new technologies -- will that grow?

Evan R. Grayer

Yes. Well, like I said, LTE, we see a lot of R&D going into LTE. In offering the 4 megs, we're being very conservative and very safe. Because like I said, we want to ensure the quality experience, but there's definitely room to grow.

Bruce Churchill

To be clear, I mean, because we've looked at the cantenna in the U.S. I don't see it competing with DOCSIS speeds of 15 megabits a second. I mean, this strategy is very much targeted for Latin America, where 2 to 4 megs is a terrific responsiveness for the internet sub. Yes, down here.

Stefan Anninger - Crédit Suisse AG, Research Division

Stefan Anninger from Crédit Suisse. It would seem that given your positive relationship with programmers, that there would be the possibility for margin expansion, at least on a pre-SAC basis over time. And given that, eventually, you would expect subscriber growth to slow that there would be some decline in SAC, so overall, it would seem that there's a fair argument for OPBDA margin expansion over, let's say, the next 5 years. The guidance you gave was for sort of flattish margins. And I was just trying to get a sense of why that would be given those 2 factors. And then, just a second question, you've given some nice detail in here that will allow us to forecast both the U.S. -- it's not the U.S., I'm sorry, PanAmericana and Brazil separately. Going forward, do you expect to provide more disclosure to allow us to forecast that on an ongoing basis?

Michael D. White

Well, there's a couple of questions there. I think, first of all, the Latin America margins are already above the U.S. margins. So I'm loathe to kind of make projections that they're going to get even higher. And as Bruce said, if you look at our return on invested capital in an the industry where we have cable guys and telcos with 5% and 6%, are you kidding me? So we're already a 20% with the growth business. So frankly, I think when I model it out, I never want to count on programming cost improvements either, by the way, even if they come. So I think there's certainly some of the line items in there. Over time, we'd certainly hope to get some scale leverage out of subscriber services expense, out of G&A, okay? So I mean I think there's some opportunities for productivity in there. But I think, sitting here today, look, this is a very attractive business where, to me, this is a once-in-a-lifetime growth opportunity. A very few businesses have this in front of them with the strategies, the strength to try and tackle, so that's our primary focus. And frankly, if we had upside in terms of margins, I'd probably invest it back in further growth. So for right now, we're quite comfortable with that. I think in terms of the disclosure, look, the segment rules, given the size of Brazil, you'll be seeing revenue profit and CapEx -- we haven't made a final decision on kind of what we'd show. But I frankly think you've got more than enough data there guys to go model to your heart's delight, so.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

It's Marci Ryvicker from Wells Fargo. I know that the wireless...

Michael D. White

Sorry, By the way, the relationships between Brazil and PanAmericana are not dramatically different, either. I mean, there are some differences, they're subtle, but they're not from -- directionally, it's a similar kind of a look in terms of its economics.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. I think this question is more for Mike about just long-term strategy. The wireless initiative is relatively new in Latin America, but very successful, especially for the core business. Is there a time that you foresee pursuing a wireless strategy, maybe in the United States? And I know that you try with the cantenna. Was that it? And you're looking at both U.S. and Latin America as 2 completely different?

Michael D. White

Yes. I mean, they are -- first of all, they're quite different because the strategic landscape in Latin America is quite different, so I think the opportunity is more significant there. Second thing is I find all these discussions, people get sloppy with the term wireless. So you're talking about residential broadband or are you talking about getting it and mixing it up with the AT&Ts and Verizons of the world and buying handsets from Apple and all of that entails the backhaul. I just can't see, coming into a scale-driven industry, as the #5 player with a greenfield startup, where you got to go buy handsets and all that, if you're really going to be a full-line player. Hard to see a business case yet for that. In terms of the question of broadband to the home, we continue to look for opportunities and ways to do that. But again, keep in mind, even in the U.S. with the cantenna, we were talking about $60 a month, which is high from a price value standpoint, from the consumer research we did. The price performance was not DOCSIS levels and was probably not going to get to DOCSIS levels. So it might be kind of an improvement on DSL, but we were talking 7 to 10 megs a second. And the bigger problem was caps. So the caps that we were given when we tested it with Verizon were 5 gig a month. That's not a proposition that you can kind of sell the consumers with that. Now we'll see. I mean, as they try their own little idea, good luck. I'm not sure how they're going to get it through the house or get it installed for that matter. But our view always with the cantenna was, if anything, again, it was going to be a supplement in certain geographies, but it wasn't something you could do on a national basis. Certain urban areas, it would never make sense because there's too much already available in the United States for broadband. So look, we're always looking for an opportunity, but I got a see a business plan that would make sense. We've looked at these technologies, we've modeled them with our experts and we have absolutely not given up. We talk to everybody. I think I've said that many times. We'll continue to talk to everybody. But as I said, you got to be very clear about what's the business plan. And if there's a business plan and a technology that's viable, we'll explore it. We'll keep an open mind.

Jason Armstrong - Goldman Sachs Group Inc., Research Division

Jason Armstrong from Goldman. A couple of questions, maybe first for Mike. There's always been the question of how you sort of achieved full valuations for this asset in the context of sort of broader company. In talking about the 2 assets, U.S. and LatAm, you used the words synergistic and complementary multiple times in your intro. Are we to take away from that, that sort of the best approach here in your mind is these 2 assets under the same roof and just giving LatAm a higher profiles at analyst events such as today? And then maybe second question just back to wireless broadband in LatAm. You talked about sort of evaluating this in the context of where cable and DSL footprints are not and where you might have an advantage. Can you talk to us, longer term, that the competitive environment probably surfaces other LTE operators coming from wireless? Talk to us about the competitive evolution and what you think sort of the value proposition you have versus them.

Michael D. White

Yes, I think on the first question, Jason, the -- if you look at the entity, first of all, there's not 100 pieces here for you guys to model. There is 2. There's a big U.S. business and there's a Latin America business. So from an investor standpoint, it's not complex. Clearly, you can see today, we're trying to give you guys much more transparency. So you have an awful lot of data, I think, as you look through the numbers to answer whatever questions you have about cash flows or return of invested capital. I'm like Bruce, as long as we're getting an attractive investment returns, return on invested capital is what I look at, there are very few growth opportunities as attractive as this anywhere in the business world that I know of. So we're going to go for growth. I mean, growth is our priority as it relates to Latin America. I suppose if we don't get credit for Latin America and after what -- this kind of disclosure and articulation of the strategy, my second strategy is, fine, if you guys want to give us a 5.9x EBITDA multiple just like Warren Buffet described the IBM CEO, I will march my way to the banks to borrow money at 2% after tax and buy back shares, which is what we've been doing. The math is such that it's just a compelling return of capital to shareholders ultimately to do it that way. So I don't see -- I still believe that because of the intellectual sharing -- I mean, this is satellite business, guys. It means all the engineering capability, the intellectual horsepower, the [indiscernible] technology team has is shared between the U.S. and Latin America. To me, this is a very synergistic and as I said, I think highly complementary opportunity, given the cash generation capability of the U.S. and the growth opportunity in Latin America. So for me, my guess is, over time, we're only going to find more synergies in both ways. We're going to get more synergies benefiting the U.S. as we learn from some of the mass market or middle market strategies in Latin America. And by the way, we're already sharing talent. We're already moving folks. I mean, Bruce has given us a couple of guys that we've moved from the U.S. organization. David Olsen went from the U.S. into Bruce's organization. So it's also synergistic from a talent standpoint.

Bruce Churchill

Yes, the -- trying to predict also the evolution of LTE. And maybe, Evan, you may want to say something. But I guess, I think it goes back to a little bit of the distinction between service to the home and to the mobile device. And our focus is clearly purely on the home. I guess, longer-term, to the extent that we have built a network that is a technology that is compatible with what will ultimately also be the mobile standards in all likelihood, an LTE of some kind, there could be the potential of putting our network together with someone else's network and moving to more of a mobility world. My guess is we'd do that with somebody who's already in the business just because, like in U.S. It's really -- it's tough to go head-to-head against a Telefónica or a Telmex. I think that's -- it's kind of like going against Televisa in programming in Mexico or against Carlos Slim in the mobile world is a pretty tough order. So I don't see us doing that. But I think there's still plenty of time. I mean, 4G hasn't really rolled out at all. In Latin America, a lot of the merchants, a lot of the mobile companies are bidding on spectrum now to build out 3G. So again, this isn't the U.S. it's a very different situation. I think there's still a pretty long path ahead of us.

Michael D. White

Evan, do you want to add to that in terms of the competitive set and how it might evolve?

Evan R. Grayer

Yes. I thought that was basically what I would have said. I mean, the only other thing I'd say is in terms of competing in the residential market, I think what Bruce said is right about if we evolve toward mobility. But in terms of competing, I mean, the market is very big. We don't need 100% of it. I think there's room for a competitor, so...

James M. Ratcliffe - Barclays Capital, Research Division

James Ratcliffe from Barclays. First of all, could you talk a little bit about if anything you've seen thus far in terms of customers actually coming through on their 12 re-up commitments in Mexico? And in general, what level of enforceability do you have in these markets when customers make that sort of commitment on the prepaid side? And secondly, if you can give the landscape on where we are in terms of ability to repatriate capital and take the cash these countries are generating out, if there are any changes we're seeing either better or worse?

Michael D. White

Yes. Okay. Alex, do you want to take the first question on...

Alex Penna

So the question...

Michael D. White

Ability to enforce the 12 months on the prepaid thing.

Bruce Churchill

Yes, or talk about the experience now that we're 2 years into pay-TV or whatever, but what do we see?

Michael D. White

And then Pat, maybe you can take the repatriation.

Alex Penna

Well, as a matter of fact, as I said we -- when new customer comes in and signs up a contract for pay-TV service, he is assuming, among other obligations, to make minimum of 12-month recharges. And the obligation is pretty much that they don't go beyond 180 days without making a single recharge. So if they happen to not comply with the contract terms, then they get canceled. We go for DECA. And we take, in Mexico, legal action against subscribers that don't fulfill the contract obligations, both for the postpaid and for the prepaid. But so far so good, as I said, our experience has been that despite the growth of subscribers in this segment, we have had mid 70s recharges, recurring recharges on these universe of subscribers. So experience so far has been pretty good.

Michael D. White

Pat, do you want to talk about the repatriation?

Patrick T. Doyle

So on repatriation, I think we're actually in pretty good shape, other than Venezuela, which I think obviously is not a DIRECTV issue that more of anybody operating there. But if you look at Brazil and Argentina in particular, no issues there with repatriating cash. There's technical issues on having available earnings that you retain, which we're fine on their withholding taxes are 0 coming out of both of those countries. And some of the stuff that you hear more nationally about low tax to earnings and bringing them back, that generally doesn't apply to us because the rates down there are fairly comparable to the U.S., and some of the entities, like take Brazil for an example is what we call check the box. So it's treated as kind of a partnership for U.S. tax purposes. So those earnings are flowing through already and being taxed and the foreign tax credits used in our U.S. return today. So again, other than put Venezuela to the side as far as what's going to happen there, we don't see any difficulty in bringing cash back. Argentina, as you know, has gotten a little bit tighter on restrictions on cash, so that's kind of TBD on where the country is going with that. But as far as in general and over the long-term, we don't really see any issues, whether it's from restrictions or from tax or tax leakage of bringing cash back to the states.

Unknown Attendee

Yes. Is there any potential for competition in Mexico from the telephone companies? And can you share, in Mexico, what percent of your footprint where there's overlap with cable?

Michael D. White

Alex, do you have the...

Alex Penna

With regards to your first question, yes, it is interesting that you don't see a lot of telephone companies operating the pay-TV market as in other countries in Latin America. And the first one has been Telmex that has expressed their interest in getting into the pay-TV market, but because of regulatory and legal issues in Mexico, as you all know, they haven't been able to get the license to get into this market. And if you look at the other major player, which is Movistar and Telefónica, they also are not in the pay-TV business. And I believe, I don't know their reasons, but I believe. I think it's a bit too late for new entrants in this market, despite the fact that I said the market share or the penetration, it's about 39%, but I think the growth, it's going to be among -- divvied up among the existing players. I don't think there is space for newcomers into this market.

Michael D. White

I think the other question was basically how many homes passed -- I suppose cable passes. I mean, because effectively, obviously, SKY Mexico covers the entire country. So I don't know if...

Alex Penna

I don't have this on the top of my mind. If you, Michelle, knows the current coverage of cable companies. But if I would have to guess, I think the cable companies altogether must have, must cover 60% of the country.

Bruce Churchill

I guess the only other comment I would add, just on your -- Telmex, in a way, is in television already. The DISH product is a stalking horse for Telmex. It's distributed by Telmex, it's installed by Telmex and it's billed by Telmex. They don't own it. And depending on whether it's a Telmex marketing document or a Telmex legal document, they either do or don't include it in their pay-TV sub count. So in some ways, there really should, I suppose, it would be -- if the law changed, what would happen? Based on what Telmex has done in the rest of Latin America, what they would most likely do is try and buy cable, frankly. I don't foresee them saying, "Okay, we're going to rebuild, overbuild our entire telco footprint to now deliver television," because they already have the DTH product. I don't know if you disagree.

Alex Penna

No, I don't disagree. But I would rather -- since this is not clear in public terms, that's why I refrain for making additional comments.

Andrew Entwistle - New Street Research LLP

Andrew Entwistle from New Street. It's a question about the non-Mexican bits of SKY Mexico. You've got about 50 million subs or 50 million pops in a fairly fragmented set of markets, reasonable macro conditions, GDP growth. I'm wondering whether that's a big opportunity area or whether it's just too fragmented and too restricted for you...

Bruce Churchill

Are you talking about Central America?

Andrew Entwistle - New Street Research LLP

Central America, Caribbean.

Michael D. White

Central America and also Dominican?

Andrew Entwistle - New Street Research LLP

Yes.

Bruce Churchill

Then again, we used to -- DIRECTV used to sell into Central America. But frankly, it was a bit of a struggle. SKY Mexico now has a couple hundred thousand in Central America.

Alex Penna

160,000.

Bruce Churchill

160,000.

Alex Penna

60, 1-6-0.

Bruce Churchill

Yes, 160,000 in Central America. I don't know, what's your opinion of -- how would you rate the opportunity in Central America versus what's left in Mexico?

Alex Penna

Well, in Central America, I think it's a different ball game. Why is that? As Bruce said -- 4 years ago?

Bruce Churchill

I think, we -- yes.

Alex Penna

5?

Bruce Churchill

4 or 5.

Alex Penna

Yes, when we took over the operation that DIRECTV had in Central America and added the DR into the region because it never operated there. DIRECTV, I think, during the time they operated in the region, they achieved what? 40,000, 50,000?

Bruce Churchill

40,000, at that moment.

Alex Penna

40,000 subscribers in the region. And since we took over the operation there, we have been able to grow the business from 40,000 to 160,000, close of business 2011. The size of the opportunity down there, I don't think it's extremely attractive. The reason being that there, yes, Claro TV, Mr. Slim has attacked all the markets in the region with a very low ball price offerings. And different from Mexico, where I highlighted the fact that one of our major strengths, the exclusive contents that we have, that is not the case in Central America and the DR because we don't have the rights for most of the exclusive content we have in Mexico for the region. We have some, but not all that we have. So our major assets to continue operating profitably in Central America and the DR is the exclusive rights that we have for the Spanish soccer league, which attracted a lot of followers in those countries in Central America. So the size of the opportunity, yes, we're going to grow, but I think we are going to grow marginally. So in the spectrum of opportunities for growth that we have in Latin America in general, I don't think Central America is a very relevant part of this opportunity.

Unknown Attendee

I guess this is for Bruce. In your 5-year plan, you indicated that you expected CapEx to be roughly flat at about $1.6 billion. I was wondering if you could give us some granularity as to what your assumptions are for both gross adds from in between now and 2016? Gross adds and then the SAC or upgrade per customer? And then, secondarily, what do you think the risks are there? So is there -- how much risk is there that the SAC actually increases you per customer?

Michael D. White

So let me start and then Bruce can chime in. First of all, I don't think it's a 5-year plan. I think what we were trying to do was not get into a discussion about 2013 guidance when we're in the first quarter of 2012. So let me be clear. We're not trying to provide 2013 guidance, guys. What we were trying to do was to give you enough confidence that we understand where the levers are, that in fact, our recent performance suggests that we have the opportunity to double that business. And I think I noticed in all their slides, they continually kind of refer to management challenged them to double the business. Well, guess the management is guilty, okay? But I think what you come away, I hope, with is a better understanding of the underlying economics, that there are a whole host of levers between household formation, which is better in the U.S., penetration, upgrading or social mobility, I think, as Bob talked about it, and market share. And I forget whose market share was, I think Jacopo's market share was a little conservative at one point. There's all kinds of levers that we can pull in driving that business. So I feel like this is a tremendous opportunity. I think, Bruce, you can talk about the risks and the CapEx and kind what you're thinking is on that.

Bruce Churchill

Well, I think the CapEx components are along the lines of what I laid out at $1.6 billion. I mean, most of it is going to come from the growth. I don't see those other parts particularly growing that much. I mean, you can do the math, probably figure out what it takes in terms of gross adds to get to the kind of numbers I'm talking out. The risks, there's always the risk of some macroeconomic dislocation of some kind. There is the risk that inflation could return to some of these territories. And either we can't price to inflation or it has an impact or broader impact on the particular country. So yes, look, these are still -- it's still Latin America, okay? I'm not deluding myself here. But I think that -- I think, one thing is that I do think Brazil is different. I do think, and Bob told a little bit of the anecdotes about how that country has changed and with the much bigger middle-class and a much -- a broader part of the population now with a stake in the society, that it's become much more of a consumer society, it has much more of a domestic economy. It's not just about exports, et cetera, et cetera. So in some ways maybe, it's nice that of all of them, Brazil may be the most predictable. But I'm not necessarily assuming it's just going to be all smooth sailing.

Michael D. White

Yes, I would tell, with Latin America for 25 years, guys, I mean, I think there are some real structural differences, especially in Brazil today. But I don't ever remember Latin America being a straight line. So there are risks. We think we understand them as local operators. And the team you've seen here today, these guys know how to deal with the government. They know how to deal with an economy where you have to worry about price points and higher inflation. So I would argue, there are always kind of things that can change, and we have to take that one year at a time as we go, but I can't imagine a more agile executive team to navigate whatever may come.

Unknown Attendee

Right. I guess, Bruce, well, I guess what I was wondering was what you think the risks are that the SAC and upgrade per customer is going to be at that time?

Bruce Churchill

Oh, I see, so at that time. Okay. Look, I mean, then again, I think if anything, it's going to be flat to down. As we go more middle market, as you saw in a lot of the charts, the SAC per middle market customer is considerably lower. And we have quite rigorous rules about it's not just an investment. But if you're a FIT or a Light customer in Brazil or a prepaid customer in PanAmericana, you get one box, I mean, that's it. We don't -- if you want 2 boxes, boxes, that's not part of the deal. So again, we try and be very disciplined about that. And in general, if you were to look at the cost of boxes over time, they tend to drift down. In the standard-def world, I think you’re at the more flat part of the curve because the cost have gotten so low, but I think in HD, there's still a ways for them to go. And because we're part of the U.S. business, and we actually are all part of the same -- when it comes to buying boxes, we just give our numbers to the procurement guys in the U.S. and it's part of the big global buy, so it's all part of the same pricing. So I think we'll continue to benefit from that. My experience as someone who's managed people, the minute you save money here, someone wants to go spend more in marketing. So the challenge is keeping that all in check, but yes.

Michael D. White

All right, Jon, right there.

Michael McCormack - Nomura Securities Co. Ltd., Research Division

Mike McCormack from Nomura Securities. Just maybe a follow-on to the capital intensity question, which looks like in the sort of 5-year look, you're going to have capital intensity coming down by half. But thinking about that, clearly, there's an impact from lower SAC additions. How can we get more comfort on the ARPUs that are sort of drifting down, if we're seeing much more of that lower end or middle market customer coming in the base?

Bruce Churchill

Well, it's difficult with a crystal ball. I've tried to point out, I think, with the factors are affecting ARPU. And we've been at it now a couple of years, and you actually haven't seen ARPUs go through the floor. We're very -- we don't restrict the sales of the middle market products. But we have a, in the case of Brazil, for example, a very rigorous and systematic way of constantly trying to upgrade people where we can. We're still selling the traditional bread and butter, SD, and as you saw real growth in HD. So those are offsetting factors. There is this, the pure math of it all, that obviously, with a lot more middle market, it is going to average down, but I don't -- if you gave those -- if took off those numbers that I threw out of what the revenues could be in the number of subs, you're going to see that the ARPU is -- you can figure out the math, it's not dramatically below where we are today. We're currently about $60. I guess I could be wrong if foreign exchange. That would be one that's a little more difficult to predict. Although, again, we try and price out of that. So if, to the extent, that's inflation-driven and therefore, when you report it in dollars, it all comes down out in the wash. But there is definitely a pressure towards downward, but I see it as a kind of -- it's a pressure that's working both ways, so it might inch its way down. I don't see it changing dramatically.

Michael D. White

And there's certainly a challenge for SAC.

Bruce Churchill

[indiscernible] for SAC is related. They're all kind of appear...

Michael D. White

They're going to kind of go in tandem, I would say.

Bruce Churchill

Yes.

Michael D. White

But I think your best way to judge is to watch the quarters this year. I mean, you're going to see the business this year. We've been at this several years now in terms of this value strategy. So we haven't seen, as Bruce said, it kind of drop through the floor. We think we can manage it. I mean, we're obviously watching it. But we tend to look more at those IRRs and the return on invested capital for the business as a whole to ensure that those boxes that we place, whether they're in an upgrade situation or in a new subscriber, I mean, that the LTVs, the paybacks are better than the U.S. in terms of number of years -- number of months, sorry. So I mean, that's what we keep an eye on is to make sure that, that stuff continues to get attractive.

Jonathan Rubin

Okay. We're going to take one last question.

Michael D. White

Okay, Jon.

Bryan D. Kraft - Evercore Partners Inc., Research Division

Bryan Kraft from Evercore. Just 2 questions. One, can you just update us on your thoughts around the risks of price controls in Argentina and Venezuela related to inflation? And secondly, the $150 million annual revenue target or potential for fixed wireless, what does that imply in terms of timeframe? How many years out and what kind of household coverage?

Bruce Churchill

So on the Venezuela and Argentina price controls issue, there's -- it's a fact of life that we live with these issues in those countries. So far, we've actually been able to put our price control, our price increases through. The issue in Argentina is partially an economic policy, one about trying to control inflation. It's also partially a political one to hurt a particular player, and we're not that player, thankfully. So in our case, we've been able to get our pricing increases through very difficult -- can I promise you that that's going to continue? I can't, but I guess what I will say is that another advantage, and we haven't really talked a lot about it today. But our physical presence and our long-term presence on the ground is a real competitive advantage. I mean, we have people that have been around a long time, that are senior, that are very experienced in how you deal with these things, and again -- and there's nothing untoward about it. And so I'm not talking about doing anything that's illegal. It's just -- but government say they're going to do one thing, and then when you go talk to the minister about something they go, "Well, we didn't really mean it and we didn't mean it for you." And so there's all these stuff that you can -- you end up finding where you work your way around. But you can actually do that if you actually have experienced people on the ground. So I'm pretty comfortable and confident that our teams will be able to navigate those challenges going forward. And then, I don't know, Evan, the question was on the...

Bryan D. Kraft - Evercore Partners Inc., Research Division

The $150 million revenue, Evan, over -- when does that materialize? How many households? And what are you thinking?

Evan R. Grayer

Well, in our plan, that would happen around 2000 -- I think on my tray -- probably around 2014, 2015, that we have around the 500,000 subscribers. And the homes passed somewhere between in the 7 million, 7.5 million.

Bruce Churchill

I think, again, what we were trying to share with you is this isn't one we have to go build the whole superhighway and spend billions of dollars. We can kind of be success-based, be thoughtful about where it make sense and how we roll it out and kind of what I call, a capital-light way.

Michael D. White

Okay. Just allow me to close up, Jon. And then you get some closing comments?

So let me just make a couple of closing comments, if I could.

Bruce Churchill

Sorry, could I get that out of your way?

Michael D. White

Thanks, Bruce.

So first of all, I'd like to thank Bruce Churchill and his team, Jacopo, Bob, Alex, Evan. Great job, guys. Thank you for sharing this morning. And I hope all of you have a much better understanding of why I truly believe that our DTVLA team, the best is yet to come.

The opportunities are still enormous in spite of the growth that we've had the last 2 years. I think the growth picture is as exciting today, if not even more so. More so, because I think we've demonstrated a capability in knowing how to go tackle this growth in a profitable, disciplined way. I think you've seen that, and I hope you get a chance, most importantly, to see the quality of the executives that lead that business, from Bruce on down. These guys are savvy. They're street smart. They're strategic. They're disciplined. And they always operate with the utmost integrity and they've built fabulous teams underneath of them, many of whom you saw in the back. So if you didn't get the chance to walk through the booth side, I encourage you to do that.

And lastly, I guess I should make a comment about the U.S. business, Jon. Just while everybody's here, so I don't get one-offed in the lunch or something. We're operating about where I would have expected us to in the first quarter. Things are tracking in line with what I expected to see. We're doing fine in terms of our gross adds, net adds and churn. Our price increase has been accepted. Seems to be sticking. Costs are more or less in line, probably a little high in a couple of categories that we're working on, but nothing that gives me any concern for the full year at this time. So I feel pretty good about where we're at, all right?

With that, I'll turn it over to Jon to close us out and we'll be at lunch.

Jonathan Rubin

Yes, thanks, everybody, for joining us today. For lunch, we have a buffet outside. So hopefully, most of you can join us, get the food and then walk down the hallway, there's 3 separate rooms with tables inside each of the rooms. And as I mentioned earlier, we'll have executives from across the company sitting and hosting each of those tables. So thank you, again, for joining us.

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