DISH Network Corporation Q2 2008 Earnings Call Transcript

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DISH Network Corporation (NASDAQ:DISH)

Q2 2008 Earnings Call Transcript

August 4, 2008 12:00 pm ET

Executives

Jason Keiser – Treasurer

Stan Dodge – EVP, General Counsel and Secretary

Charlie Ergen – Chairman, President and Chief Executive Officer

Bernie Han – EVP and CFO

Analysts

James Radcliff – Lehman Brothers

Jason Bazinet – Citigroup

Gary Rean [ph] – GR Advisers [ph]

Greg Mafidus [ph] – Sanford

Ingrid Chung – Goldman Sachs

Tuna Amobi – Standard & Poor's

Kit Spring – Stifel Nicolaus

Doug Mitchelson – Deutsche Bank Securities

Lee Kufermann [ph] – Meck Advisors [ph]

Tom Eagan – Collins Stewart

Gerard Helarin [ph] – JRPG [ph]

Operator

Good afternoon, my name is Hamilton and I'll be your conference operator today. At this time, I want to welcome everyone to the Dish Network quarter two 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question and answer session. (Operator instructions) Mr. Jason Keiser, we'll now begin your conference.

Jason Keiser

Thanks, Hamilton. Well, thanks for joining us. My name is Jason Keiser. I'm the Treasurer here at Dish Network. I'm joined today by Charlie Ergen, our Chairman and Chief Executive Officer; Bernie Han, our CFO; and Stan Dodge, our General Counsel. Before we open it up for Q&A, we do need to do our Safe Harbor disclosures. So, for that, I'll turn it over to Stan.

Stan Dodge

Thanks, Jason. Good morning everyone. Thanks for joining us. We invite media to participate in listen only mode on the call and ask that you do not identify the participants or their firms in your report. We also do not allow audio taping and ask that you respect that. All statements we make during this call that are not statements of historical fact constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that could cause our actual results to be materially different from historical results and any future results expressed or implied by such forward-looking statements. For a list of those factors, please refer to the front of our 10-Q.

All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risk described in our reports and should not place undo reliance in any forward-looking statements. We assume no responsibility for updating any forward-looking statements. With that out of the way, I'll turn it back over to Jason.

Jason Keiser

Thanks, Stan. And Hamilton, I think we'll just open up the line for questions.

Question-and-Answer Session

Operator

Yes sir. (Operator instructions) Our first question comes from the line of Vijay Jayant.

James Radcliff – Lehman Brothers

Good morning, James Radcliff for Vijay. A couple of questions. First of all, topic of churn, what's driving the higher churn? Can you disaggregate it between voluntary, involuntary, and particularly within voluntary? What is driving people to leave? Are they just canceling service to cut their family budget, or are they migrating to other providers? And secondly, if you could talk a little bit about CPE CapEx, it seemed to be on a gross add basis flat year-on-year, but you're now paying margin in the SATS. So is that the mix of boxes with lower cost mix this year or was it purely box cost cut? And finally, what was total CPE CapEx in the quarter? Thanks.

Charlie Ergen

Okay. This is Charlie. In terms of churn, I'd say it's probably four things that have been driving it. One is economic. Obviously the effect on housing and the total economy has some effect on you when customers can't pay their bill. They either downgrade or drop off completely and watch free TV, particularly on some of your low end type customers.

Second issue would be piracy and fraud. As you know, our system has been – has been compromised and it's compromised in two ways. One is you can get a fairly simple smart card to put in and beat our system. But, there's been an inflow now for free-to-air boxes, where they actually can get a set-top box that takes the MPEG2 signal and because you – because they have hacked the code, allows you to light up all the channels for free from a free-to-air box. So, customers who are legitimate customers today and are paying us $600, $700, $800 a year, suddenly in this kind of environment see a flee market on the Internet, they can get for $150 or something a box that lights up the channels they are watching and paying for free, there's a percentage of people who are going to do that.

Third thing then is it's really competitive – is really competitive offerings in the marketplace. The biggest being probably the phone companies and FiOS and U-Verse where there are a lot of introductory offers and offers out there that – and I think they had about 300 – close to 303,000 net additions in the second quarter. So, they have taken those some from us and some customers from others. Obviously, in the high definition front, we haven't been as competitive as we would like in the second-quarter, particularly versus DirecTV.

And finally, operational efficiencies really in two ways, one is just our total overall customer service. In terms of are we giving customers a great experience and are we doing everything right? So, customers don't have to call us and we certainly have – we certainly made some progress there. We certainly have room for improvement there. And also, from a marketing perspective, are we getting our message out in terms of the things that we do better than anybody else, which I think is significant So, those are kind of the four areas that would not only do drive churn but also affect gross additions. So, let me give you a long winded answer because – I guess, because one of those things we don't control, which is the economy, so we don't spend – focus a lot of time on things we don't control. What we have done is made sure we're solid financially and make a solid balance sheet, good capital structure, and so we're well prepared, make sure we have a pretty good cost infrastructure in terms of how you run the company.

So, we're about as well prepared as we can be for an economic downturn which we think, obviously, many people say will continue for a while. So, we're about as well positioned so we can do there but there's not much we can do in that economic environment. We certainly don't want to spend money chasing customers in a way that is not economical for us. We don't want to start lending subprime kind of crazy things to do things to drive numbers if it doesn't make sense. We have to have the courage to stay the course for long term gain at this company.

The other three things we can do a lot about. Operational efficiency is again, I think, we made some progress and we're answering our phones on time, even better than our internal metrics today. So, we're delivering a better customer experience than we were last quarter, and we got room to go.

From marketing – from an HD perspective, well, it didn't effect the second quarter particularly a lot. In the third quarter, we actually launched successfully our second satellite this year after suffering a failure earlier in the year and that satellite will be online by end of this month. And so that's going to help us in terms of giving us more coverage, more – it has higher power, so perhaps give us better service to our customers, a better signal quality to our customers and not freeze up some – more channels for high definition television.

Additionally, starting as of August 1st, we were at 114 HD national channels, I believe. DirecTV talked about being at 100 channels last year. I think the latest thing I saw, they were at 95 channels in August 1st, so they talked about last year having 100 channels. They didn't meet that goal. We were actually the first company to have today I believe 114 national HD channels, including one that's in 1080p for video on demand, so that's true video on demand. So, we've made progress there although that's in the third quarter, obviously, not in the second quarter.

In terms of piracy and the fraud initiatives, we have started – we've started last month sending out a new generation of smart cards that will help eliminate the free-to-air box and piracy problem. It'll take some time to send out to all of our customers and it's incremental gains as we find certain segment groups that we turn off first, but we're committed to go on after anybody who's stealing our signal and making sure that anybody who goes out and buys anything in the piracy or set-top – or free-to-air box is going to lose money on it because it's not going to work. So, the three things that we can do something about, we got things in progress and I'm pretty pleased that we have action plans to deal with all of those. As far as --

Bernard Han

Yes. The customer equipment CapEx for the quarter was $213 million and yes, that does include, obviously, the mark up that we now pay to EchoStar for the set-top boxes and you see that a little bit in our stock in the last couple of quarters since we started paying the margins to EchoStar. You can see our stock has been indeed a bit higher than it's been in the past. The difference between the second quarter and the first quarter fluctuation, I would just attribute that to normal fluctuations we see quarter-to-quarter in our stock metric.

James Radcliff – Lehman Brothers

Okay. And just to follow-up, could you talk a bit about how you're positioning yourself for the long-term business at AT&T versus DirecTV? Thanks.

Charlie Ergen

Well, as you know, AT&T has notified us that they are not renewing the contract or since that has expired. The contract really allows for them – required them to give us notice if it wasn't going to again extend beyond its original date, and so they've given that notice. They've also given notice of a repayment of the $500 million investment that they made in EchoStar and both of those things were contractually allowed by AT&T. And I would say that, from a big picture, I'm not sure – you have – I mean, only AT&T can answer this question, but I don't think – at least, we – DISH Network can't read a whole lot into that. They contractually were allowed to do that.

Our loan from them was at 3% interest, probably their CFO looked at that and made a very logical decision to say that doesn't – we can probably do better with that money. Their operations people probably said, we're probably in a better position to have flexibility with – if flexibility going forward in video, whether if you want to stay with a BBS partner, it'd be better to talk to multiple partners than one and see what the best deal out there is. So, we have to be ready as a company. All I can say is we don't have anything to say. I mean, only AT&T can talk about what their true intentions are, but we have to be ready one way or the other. We'll be ready with AT&T or we'll be ready without AT&T.

Obviously, our relations – I think our relationship with AT&T has been good. I think our teams generally – genuinely like to work with AT&T and their management. I think that the teams have worked well together. I think that the product offering from Dish and AT&T markets has been successful and I think the product is working well for AT&T. But on the other hand, they're going to look at the marketplace and decide what's best for AT&T, and that may include Dish, that might not include Dish and they also may have other strategies that they're pursuing. So, what to – we don't know where those stand and we'll be ready with AT&T as a partner or we'll be ready to compete, and that's the job that we have to do at our company and we think we can do either one.

James Radcliff – Lehman Brothers

Alright, thank you.

Operator

Our next question comes from the line of Jason Bazinet of Citi.

Jason Bazinet – Citigroup

Thanks so much. I'm looking at your valuation and it seems to me that it's pretty compelling at these levels and obviously the market has some concerns about the churn, but it seems like the other big issue the market's grappling with is, sort of, the two to three year outlook on CapEx. And so, I was wondering if you could just comment on a couple of things. Have you made a final decision regarding where the 700MHz spectrum will ultimately reside, Dish or SATS? Second, in terms of FCC proceeding regarding carrying local channels on both HD and standard def, what sort of incremental CapEx would you imagine if there was an adverse ruling out of the FCC? And then, third, should we expect any more satellite launches over the next few years other than Echo15 slated for 2010? Thanks.

Charlie Ergen

Let's take the satellite launches. We have a satellite being launched by a Canadian company in the fourth quarter of this year that we have leased all the capacity on. That should be operational by the first of next year. We then have Echo14 launching, I think, the end of next year. Then we have Echo15 in 2010. I think it's reasonable to expect that we would launch something in the neighborhood of one satellite per year, end up with 10 satellites in our fleet that are operational. And they – while they have 12 to 15 year lifetime, I think we're on a kind of a path of one a year to add capacity both for HD mandate – I mean, FCC mandate, as you mentioned, for high definition, must-carry [ph] in replacement and so forth.

The CapEx question, I guess, from a big picture, we're kind of – we finally got to where we want to get to which is where we thought we would be last year. We were delayed on our launches and then, of course, the last one in March failed. But we now have enough capacity up to switch our systems to truly MPEG4 technology. And so, we think that, from a CapEx perspective, that's not material changes to what we are doing because the way we designed our system to be – to go to MPEG4 in a transitional way as opposed to all at once. We can upgrade our customers as they go to high definition television. Not all of our customers are going to go to high definition television tomorrow. We think that's going to be over next three, four, five years that they switch and we'll upgrade them at that time.

We are starting to ship almost exclusively MPEG4 product and, certainly, by next year, we'll be shipping exclusively MPEG4 product to new customers. So, there's no CapEx – there's no additional CapEx for those customers because they're HD ready whether they start with HD or not. Because we lease boxes, we have some more flexibility there.

The – quite the unknown is where the FCC will come out with some kind of dual analog and digital carriage under a must-carry scenario. Then in that case, we wouldn't have the satellite capacity to do that and we would have to either spend additional capacity over time and find new spectrum for new satellites, or we'd have to take down some existing markets in local analog business today.

So, the FCC has been pretty prudent about that. If you look at their past rulings, they truly understand at the staff and commissioner level that satellites don't have the same kind of – that satellites have capacity constraints from spot beams that in a way that cable doesn't have a constraint. And I don't anticipate that the FCC would put some kind of mandate on the DBS industry that we can't physically, technically do today. And obviously, they were prudent in the sense that they – for the HD must-carry, they gave some amount of time to go out and build new satellites. We still have spectrum constraints that we have to deal with, but at least they give enough time to build a satellite. So, I don't anticipate that, but it's a risk factor. The 700 megahertz is in Dish, (inaudible). Is that right? I don't --

Bernie Han

Yes, the question was more about the intention and the plan.

Charlie Ergen

Well, I think the 700 megahertz, I think, is a great frequency. It has a lot of great attributes. I think it's a real asset of Dish and we have a lot of strategic plans that we are looking at as to best how to deploy that. Obviously, there's nothing we can do until early next year when that spectrum becomes available on the digital transition, assuming that digital transition takes place as scheduled in February of next year. And we'll certainly have our strategic plans done before then in terms of how we might utilize that spectrum. But it certainly gives us a chance to do some things. Obviously, we've looked at it more from a video perspective and we think it allows us to do some things in the video space that we can't do today.

Jason Bazinet – Citigroup

Thank you very much.

Operator

And next we have a question from the line of Gary Rean [ph] of GR Advisers [ph].

Gary Rean – GR Advisers

Hi. It's obviously difficult to exactly track this, but, it appears based on the ARPU that the turn must have accelerated later into the quarter. Is that – am I correct to making that assumption? Is that something we can read through and to – something that's happening in the overall economy?

Charlie Ergen

I don't think you can know. I don't think you can read that into it. I think that – I would say it this way, our churn is – it's seasonal, and I think we've tracked, in general, we've tracked our seasonal norms with the exception that it's a higher, it's always been – it's higher this year than it was last year, right, but it's been seasonally higher at every level, so – or every quarter or every month. So it's tracked and the trends that are out there are – seem to be continuing trends, and seem to be consistent, and again, I don't – I can't give you – I can't quantify this but some of it's the economy. But I think that everybody's got that issue, and I think you can kind of see trend and certainly DirecTV has been able to overcome that, so far.

The other trend that's unique to DISH is really the piracy-fraud thing which we uniquely have. And I think that's a factor that we're – that we'll get to handle on as we get our new security system in place, and I think then they will know – we'll be able to quantify that at that point but we can't today. But it certainly a material item in churn, there's no question about that. And just go on the internet and talking to people, and certainly some of the undercover investigations that we're doing now, we certainly have evidence that that's a material part of the churn for us today. And then it's hard to know how much of it's – I think we've probably done a better job at customer service. I don't think that that is probably as great of an issue as it was, maybe, in past quarter. We've done – you know, we've done a better job there.

Gary Rean – GR Advisers

Thank you.

Operator

Our next question comes from the line of Greg Mafidus [ph], Sanford.

Greg Mafidus – Sanford

Hi. Charlie, I know you may not be able to comment extensively on the TiVo litigation, but I'm wondering, specifically, what your contingency plans are in the event that the Delaware Court has not taken the case and if you have to go in on September 4th, potentially, with the risk of having to shut down as many as four to six million DVR's. What kind of contingency plan would you have in place to do or what exactly would you do if that turned out to be the case?

Charlie Ergen

Well, I really can't comment on our contingency plans. But let me put the TiVo litigation in perspective for you. One, is TiVo is – on September 4th, we have a hearing where TiVo have said that we didn't – it's a very narrow issue but the issue is that we didn't comply with the injunction of the court, and the court said that we have to turn off infringing set-top boxes. DVR's. It in no way restricts our ability – and what we did was – we were – we designed around the TiVo patent. And patent law encourages companies to be innovative and our guys were very innovative and used some very sophisticated algorithms, and so forth, to design around the TiVo patent. And obviously, as they explained the TiVo patent to the Court – to the Court of Appeals, everything we know that we've designed around that and got an external confirmation that we have successfully designed around that. We then turned our boxes off and downloaded new software to them and turned them back on again, so we believe we comply with the injunction.

I don't believe that TiVo is going – I believe that we'll prevail at that September 4th hearing and we will be found that we were not contempt of the judge's order.

If we were to be found in contempt, again, hypothetically, which I don't think is going to happen, we would merely go to the Court of Appeals for stay of that. I don't think TiVo can – I don't think TiVo is going to change patent law But that you can't design around patents. I think that's a pretty – it think that's a principle. It's been in patent law for a long time and I don't think that that's going to change in this case. There's just too many cases out there where people have been able to with around patent in very similar situations.

So, we certainly would go to Court of Appeals. Additionally, we're not prevented from – there's nothing that – nothing that TiVo has accused as of today and the course, for September 4th, that says we shouldn't be able to ship our own – ship fares [ph] today. So, we continue to ship DVRs that don't infringe today.

Having said that – I mean obviously, at some point, I believe we'll prevail. But TiVo – we're going to have conversations with TiVo one way or the other about how we work together. And again, its – I'm just stubborn. I know this case inside and out, I've sat through trials, I've sat through the engineering models, I've sat and have the best and the brightest explain this – and I'm just stubborn. We don't violate their intellectual property today and I want to prove that. And so, we're going to go to the September 4th hearing and see who's right.

And so far, TiVo's been right. So far, TiVo has won the court cases and at some – let's make it clear, we – through the Court of Appeal process, we're – we have to pay for intellectual property that the court says that we violated and, we're going to have to pay them for that. Now, we've changed that intellectual property in a way that we don't violate that anymore. And, I'm just stubborn enough to say “Why am I going to pay for something that we don't – that we don't violate?” And, its one of the great things about our technology that we were able to completely change the software. We were found not to violate the hardware, only the software. And, we changed the software. And, I think it's a real feather in our cap towards technology. It's a feather in our cap that we can design around it. It's a feather in our cap that we could turn the boxes off and restart them with new software and our bet is that we prevail on the September 4th hearing. Having said that, that still doesn't mean we won't have a relationship with TiVo, because I think we should. I think there's ways that we should work together, and I've said for the last year or so that at some point in time, we should have a relationship but we wouldn't go on to a relationship where somebody accuses us of something that we don't do.

Greg Mafidus – Sanford

Thank you, Charlie. Very helpful.

Operator

And next we have a question from the line of Ingrid Chung of Goldman Sachs.

Ingrid Chung – Goldman Sachs

Thank you. So first, Charlie, we're actually a little surprise that you're on the call today given your comments last quarter. Did you cancel your vacation? And then secondly, in the 10-Q, you state that 15% of your gross adds come from – or came from TE in the first half of the wait. Could you break that percentage down in terms of what 2Q look like versus 1Q? And then following on the same topic, did some of your competing channels in the former BellSouth systems show any sort of pull back as you ramped with AT&T there?

Charlie Ergen

One is I – we got our 10-Q and everything done so I could be here because I didn't think we'd get it done until next week, you know, as we normally do. Takes a little longer. And because we have some operational efficiencies and Bernie and his staff done a good job, we actually had to get that early so I didn't have to change anything, but I did feel like a loss of subscribers was worthy of me being here and I'm glad to able to make the call.

The AT&T, we don't – I don't have it broken down to anything first quarter and second quarter in terms of percentages. That's just the general overall percentage, I don't know if you want to add some to that Bernard.

Bernard Han

It was higher in the second quarter as you would guess with the expansion of our relationship with AT&T.

Charlie Ergen

Okay.

Bernard Han

That's about all.

Charlie Ergen

And it's a mixed bag with AT&T in the sense that as you saw them in a situation, you lose distribution from other forms of distribution. So, it's not all incremental gain. When we picked up the BellSouth territories, it surely wasn't all incremental gain. Obviously, AT&T delivered new subs from that form of distribution we weren't getting, but we lost subs from our traditional distribution path.

Additionally, AT&T, because of U-Verse, actually, competes against the satellite providers. So, where they have U-Verse, they are more inclined – not more inclined, they do so, U-Verse first over our products. So, our current customers call them. They may try to switch them over even though they have a Dish today.

So, it's a bit of a mixed bag. But overall, AT&T has been a positive impact on our business and bigger relationship and, obviously, that's something we think will continue. But whoever they – whatever they decide to do, if they stay in the satellite business with somebody, it's probably an overall positive. But there's ways that you would go either way in terms of strategic things you could do. And they're – this is one of the things where you have some good choices in life and all of them are good. And I like to be positioned that way as a company where we have good things we can do in the marketplace and I think we are positioned that way.

Ingrid Chung – Goldman Sachs

Okay, great. Thanks. And then, just lastly, in terms of marketing. Now that you do have the HD content. How much more aggressive are you going to be in 3Q?

Charlie Ergen

Well, I think as soon as the next satellite gets turned on, we have a chance to be more aggressive than we are today. We're a little bit more aggressive today, obviously, and we're doing a couple of different things. One is – the first big thing we do, we have the only 8-All HD package. So, if you're going to buy an HD TV set and you don't want to put anything on it that is not HD, we're the only guys that have the system for you to do that, right, and it starts with less than $1 a day. So, that's pretty aggressive. But, its aggressive in a way that it's – from a pricing point of view, it's pretty aggressive from a packaging – program and packaging point of view as well. If you go to a cable company, before you can get it – you'd probably be buying $50 of products before you get your first HD channel. It's a kind of add-on tier. So, it's competitive in that market.

The second thing that's – and more important is that we are able now, for the first time, to go out with our total MPEG4 product. And, we want to do that last year, but, we just didn't get the satellites up because there have been launch phase for other satellites and we got delayed even though our satellites were ready to launch. And so, now we can go to our total MPEG4 product. That means that when we put boxes out today in MPEG4, those boxes are going to last a long time. And, whether you want HDTV today or just want to be HD ready, that system works for you. So, when you buy our MPEG4 product, it means that – we call it TurboHD, when you buy that product from us today, that means it works on your HDTV set. It means it works on your regular TV set. And, it means that if you don't have any HDTV sets today, it will work on all you TV sets in your house and will work on any TV set you'd be – if you buy HD in the future, it will work in that TV set. So, total fool proof from a technology point of view point forward. So, we're putting those – by putting MPEG4 and Turbo HD together, by going into new encryption system that secures our signal, by utilizing technologies such as Sling, by, hopefully, solidifying our position that our DVR technology is our own and doesn't violate somebody else's intellectual property, those are all the things that we have going forward. And, those are the things that give us confidence going forward as a company that we're going to – we'll be competitive in the market place.

Ingrid Chung – Goldman Sachs

That's great.

Charlie Ergen

(inaudible) more competitive than we've been the last year.

Ingrid Chung – Goldman Sachs

Right. Okay, thank you.

Operator

Our next question comes from the line of Tuna Amobi of Standard Poor's.

Tuna Amobi – Standard & Poor's

Thank you very much. Charlie, I want to get a sense of any potential continuing obligations related to the AT&T existing subscribers. You know, what else [ph] customer support, stuff like that and any timing for those would be helpful in terms of the possible financial obligations involved there.

Charlie Ergen

Obviously – let's assume that the contract expires at the end of this year and we have no relationship with AT&T going after that. Then we obviously have customers that we – that came through AT&T or even perhaps even customers that they built with us. So, we have an ongoing relationship – obligation to those customers as thus AT&T. And AT&T still provides first level customer service to those customers. We would provide more advanced service levels to those customers as we would any customers. We don't think that, in any way, is an increase in customer service cost or anything. It's something we would do anyway, because those customers are obviously are on our books as a customer. So, we actually – have probably have a little bit less customer service cost to those customers because AT&T have obligations that survive the contract that they have to support. So, I think we're well protected from a contractual point of view in terms of keeping those customers that AT&T – both of us continue to provide a high level of service to those customers.

Tuna Amobi – Standard & Poor's

Okay. And in terms of AMC-14, can you update us on any insurance related claims or is any portion of that insured?

Bernard Han

That's really a – it's a person [ph] of the SATS issue, not a DISH issue. But we did receive – STAT did receive the insurance payments that were received last quarter round.

Charlie Ergen

So what – if you stick around (inaudible) we'll probably go over that. But that didn't affect DISH in any way other than we didn't get the capacity that we thought we're going to get back in March. It's really August before we got that capacity.

Tuna Amobi – Standard & Poor's

Okay. Great. And lastly Charlie, any thoughts, bigger picture, on cable's foray into WiMax? Do you think that changes the question, long-term, and what is that mean for – to the competitive landscape in terms of how you compete with cable?

Charlie Ergen

I don't know exactly. I don't know that I totally understand how they are going to – what they're going do in the WiMax field, and how they're going to get into, but obviously, at this point, I think – a couple of trends. One is that cable's is getting – and kind of like subscriber front, there certainly have issues but when it gets to – and video, they're kind of treading water, but when it comes to broadband, it seems like there starts to be a clear – pretty clear chance that they're winning the broadband wars over the phone company's DSL. Their adds are – they're getting much, much market – trends to market share versus DSL are compelling.

Obviously the phone companies have an advantage when it comes to wireless in a big way. And so, it's going interesting how that battle kind of evolve between our cable guys able to get in the wireless business before the phone guys can get into broadband business – video business, right. And to some degree, we are a bit on the sidelines who are watching that. And I think we have – I think our focus, as a company is just to be the best we can be at video, and all forms of video, and make sure that we can make that video accessible no matter where you are, and that's really what we have to focus on. And we have to hope that the customer's access to broadband on a level playing field, and that's kind of how we see it kind of evolving. The competitive dynamic of what cable does with WiMax will be interesting because the big phone guys will have to react to that. And we'll have to be prepared for all the different things that might happen there. And that's what we have to do strategically and we think we're pretty well positioned there today.

Tuna Amobi – Standard & Poor's

Okay. Thank you.

Operator

And next we have Kit Spring of Stifel Nicolaus.

Kit Spring – Stifel Nicolaus

So, I think we just got a press release from CableVision saying that the network DVR has been overturned and that they'll be allowed to use it. How does that potentially impact you in the future? And then, maybe, could you just talk a little bit more broadly about what your video on demand strategy is and whether net neutrality will hold and allow you to do video on demand over broadband? Thanks.

Charlie Ergen

I have to look at the – I'm not as well versed on the Cablevision DVR. But, I mean, I think that's a positive for industry and DVRs since they're coming off servers with DVRs and give them some rights to do things, and I think that's probably a net positive for total DVR. Obviously, we think we have a lot of intellectual property on our own technology there. So, we think that's probably a positive from us. It may affect the STATs – the other company, STATs, more than Dish.

But, first of all, I guess, I'd start with saying what we think that there's real business out there for the customer services [ph]. But what I really want is a set-top box that gives me TV and that TV comes – and I can watch any TV I want and that TV could be something like Monday night football but it also could be a movie. That movie could come in through video on demand or it could come to HBO or it could come from the internet, through broadband connection, and we think, we're well positioned to do that. All of our VIP receiver—series of receivers, we have three of them today, all those are broadband ready and all those can be hooked up to a broadband connection today and can deliver you video on demand and we do that – we just started that – we just started that with August 1st, but we just started – and we have rolled out all of our DVRs but we're just rolling out video on demand where it truly is video on demand. So, you may have 10 or 15 channels who have movies that start when you press the button. They're already downloaded to your hard drives so they're resident on your hard drive. And when you want to watch that particular movie, you just push the button and it starts, and you can rewind and stop and pause and everything else and skip forward, so forth and so on. Just like video on demand in a cable company today.

We also thinks that the broadband connection, it gives you those movies that maybe aren't the top ten or 15 or 20 movies that people watching, they may be movies from the past but you can go out and get TV shows and movies that way. And you can do that in a seamless way. You download and store it in the hard drive. And we think that's kind of – we think, we're well positioned there from a technology point of view. The one – the two, really, remaining things for us are the operating system and how we make that easier to use which we continue to make improvements on, although it's relatively easy to use today. And the second thing is how – how do you architect the storage of all that broadband and how open do you make your system. So, are going to allow the people to go to amazon.com like TiVo does, or you're going to have more of a – or are you going to allow them to use your servers to get your movies and so forth. And that – those are strategic decisions that we haven't made yet in terms of how we would design that. But, again, we probably will – we've done enough testing now, they're be a pretty good feel of where we want to go for the combination, what I would call, the true end harm – home system where you have basically a satellite system and broadband hooked into one system that's barely seamless to the customers to where he's getting his video. And, that certainly is going to be the future. And the company that do that the best, are going to be successful. Net neutrality relates to that in the sense that what they actually see now knowing that Comcast can't clog their pipes from other users and kind of a net neutrality, favorable rolling to net neutrality. It means that if that were to hold up to the court and to Congress and everything else, that our customers would be pretty secure and knowing that we can deliver a good standard of service to any broadband connection, would that be a cable or phone or a wireless WiMax system or so forth – or even satellite system. So, as long as you can deliver a consistent level of service, then the total video platform that we're developing should be very, very competitive. And so, again, those are long-term things that we work on that don't show up on quarterly results. They'll show up on quarterly results in two or three years from now, but, they don't show up in this quarter.

Kit Spring – Stifel Nicolaus

Thanks.

Operator

Our next question comes from the line of Doug Mitchelson of Deutsche Bank.

Doug Mitchelson – Deutsche Bank Securities

Thanks. A few questions. So I guess I'll just ask them one by one. Charlie, you've addressed us with a lot of the execution issue that you highlighted on the call. But, since you did loose subs in the quarter, and it's the first time in the company, at least public history, that we've seen that. I mean, just any general comments on how you'd feel the company is executing given the challenges? Is that a good number for this quarter?

Charlie Ergen

No, it's not a good number and obviously, we're disappointed about it. I would say – bit on the other hand, I guess, because I'm here day to day, I would say our second-quarter was better than our first-quarter, even though the sub-number was worst. And not just because we made progress in trying to execute the kind of things that we need to do long-term to make sure we are a very viable company that can take advantage. A lot of things that we see going on the market place today, including the fairly weak economy. So how do we take advantage of that? There's lots of things we have to do, and we executed better on those things on the second quarter than we did in the first quarter, and we really kind of got wobbly in terms of execution probably a year ago. So, we really haven't done as good a job executing for the last year, and the second quarter is the first quarter we made any progress. And that just kind of the first step as I really – and again it's all my fault, I was just – I really wasn't on top of this business from an operational point of view as well as I should have been. But as got into it, and I traveled around and saw our operations, the first thing was we really had to make sure we have the right people in the right place. And that was done pretty much in the end of the first quarter. And now – then we had the – and during the first quarter we developed the plans that thought we needed to do to put things on a more firm footing. Second quarter, we were actually able to go out and start doing that, and third quarter we'll do a better job, and the fourth quarter we'll do a better job than the first quarter, next year we'll do a better job. And at the end of that – at the end of time – at the end of that period of time, the lesson learned is we'll stay on top of our operations, certainly at my level, well enough to make sure that our operations ultimately are better than they have ever been. And there –- we get to a different standard of our own company. And it'll take us some time to get there but we're certainly not going to take a back seat to anybody when it comes to operational excellence and as long as we have the right people in place that wants to achieve that, that certainly something we totally control. We control whether we give outstanding service and whether we operationally are efficiently, we definitely control that. And then – those are the things that we're – we've done that in the past and we're certainly capable doing that again in the future and we're making progress and – but there's nobody, there's nobody in our industry today that is operationally excellent. There is nobody in the video business, and if you look at the kind of independent survey of customer service and everything else, we're still one or two in most surveys but none of us are good enough. And we all have to do a better job and whoever gets there first is going to – it's kind of like the airline business, right, where nobody is really that operationally efficient today with the possible exception of Southwest Airlines, and we better be the Southwest Airlines of this business. And there's really no reason why we can't be.

Doug Mitchelson – Deutsche Bank Securities

I guess, in one of those lines you noted in 10-Q that you believe you can still grow subscribers and you have qualification against that. And I think, one thing that we're all struggling with is what 2009 would like if you didn't have AT&T distribution. Do you – is there anything you can talk about in terms of 2009? Do you still think you can grow subscribers in the future if you lost AT&T distribution?

Charlie Ergen

I think, we can still – I learn – I think we can still grow subscribers no matter what and, again, it's a – with or without AT&T. And it's just – it really – the part that I don't know and I can't predict in 2009 is to lose AT&T, what dynamics then, going – what dynamics then, happen? Right? And what if AT&T done in the alternative? Right? And what forms of distribution do we pick up if we lose AT&T and what kind of things can we do from a competitive point of view that we otherwise might not be able to do with AT&T? And those are lots of unknown questions, so what you do from a strategic point of view is you make sure that you got kind of plan it both ways. Right? To some degree, AT&T decisions are our decisions too. It's not a one-sided thing. And so, we'll be prepared either way and I can say is we have confidence that we can grow this business and we want going to grow this business in a smart way. We think that that's still growing video subscribers but there's other things we can do in the business that grow our business. But we're not going to go out there – I mean, I guess there was a time when a mortgage company said, “Man, things are slowing down, the economy is slowing down. We are having a harder time getting people to sign up for mortgage, so let's lower credit standards.” And whatever happens – we just don't want – and somebody should have had enough guts to say, “You know, we better run along a good long-term business and the financial discipline to do that.” And, since a lot of the money here is my money, we intend to look at it from a long-term point of view and make sure we have the discipline in place and not do many crazy things. And a lot of things that got us in trouble have been stuffs where we probably I didn't do. The kind of long-term things that kind of – I didn't make long-term decisions that we should have made. I've always said I don't like giving away programming. And I'm not saying you wouldn't do that from time to time as a promotion, but, giving away programming is probably not the smartest thing we've ever done. This comes back to haunt you when the free programming runs out and those are other that we probably have could have done a better job on. Now, we might have had slower sub-growth two years ago, but we probably wouldn't have as high a churn today.

Doug Mitchelson – Deutsche Bank Securities

Okay. And then just one last data point question. So the 1080p HD channel that you are offering is pretty interesting. I mean how many channels out there do you think your customers would like to see in 1080p? It's more valuable for some channels and others I imagine? And, what kind of channel capacity do you think you have for offering 1080p [ph]? Maybe by year-end when you get another couple (inaudible).

Charlie Ergen

I think – I think we'll probably – I think, again, I don't know exactly, but, we have 10 or 15 channels probably in 1080p that we'll put up. Realize that we're starting with pay per view movies, our video on demand. So, the way that works is we don't actually need – we don't need a lot of capacity for that because we actually download that in the middle of the night, that capacity to your hard drive, so it doesn't take up a full linear channel while we do that and then the video on demand movies is there, so, I Am Legend, or whatever, the first movie that we started with, that just got downloaded to everybody in the middle of the night. It takes us a couple of hours to download it and then it was done. No more capacity was needed for that movie in 1080p. So, there's not any question, and I think you probably hear the same thing from DirecTV but the satellite industry is going to be over delivered the best quality of HD and the satellite industry going to be able deliver the most channels. I think, DirecTV is sort of going 130. We said, we're going to go 150. Our track record is we just don't talked about it until we're ready to do it and we're certainly over a hundred channels today. So, I just think it's a huge advantage as to the extent that HD is a factor in the marketplace, satellite has a huge advantage and we are now more competitive within the satellite industry than – much more competitive than we were a month ago and we will be more competitive by the time we turn Echo11 on by the end of this month. And we'd be even more competitive when we launch the next satellite by the end of the year. So, we got good things going on in HD. We'll take – we won't take a backseat to anybody there. And, again, our DVR's. We think we won't take a backseat to anybody there and, certainly, the TiVo litigations is important at that or whatever. How we will finally end up with that relationship will be important.

Doug Mitchelson – Deutsche Bank Securities

Alright. Thanks for the time, Charlie.

Operator

And next we have a question from Lee Kufermann [ph] of Meck Advisors [ph].

Lee Kufermann – Meck Advisors

Thank you very much. Three questions regarding the priorities for the use of your cash flow and your borrowing capacity. I get a little rusty here because of my age, but I think at the end of '02, we announced our first repurchase program. I went back and I looked. I think, we had 8.2 million subs at the end of '02 and our ARPU was about $49. And at the end of '04 which may have been, I guess, the second repurchase program, the subs were 10.9 million and the ARPU was 55 and currently, with 13.8 and the ARPU, I guess, is running 69. In – we're currently running, by my calculation, something like $2.50 or billion, one billion, to our free cash flow. In this entire period, I've just gone through the stock, is largely unchanged if you adjust for the distribution. Now, just curious, if I can get it, you had a little bit – how do you see you using your free cash flow that you are generating in this business going forward?

Charlie Ergen

Well, normally I can't answer that question very well because I answer the same way, which kind of changes everyday as we look at – where our stock price is and what the business opportunities on there but we know, at least in the short term, what we're going to do in the sense that we have a note to pay AT&T in around the first of September. That's $500 million, we're going to pay that off and we have a billion dollars that comes due, I think, on October from one of our past high yield financings and we'll pay that. So, that's – and we have $1.9 billion in cash on the balance sheet, something along those lines. So, that's where the vast majority of our cash would go short term.

Then we look at – we get beyond that. Probably a question for the next quarterly conference call, which is – what do you do beyond that? We look at whether we – if there's acquisitions and other places we could use our money. We look at whether we should be paying a dividend. We look at whether we should buy gone [ph] stock back and our board – and we make a decision as to where we think the focus is going to be. Usually, when it comes back – when it comes to something like buying stocks back, there's certain – there's certainly a price that we think it's attractive to buy back if given other alternatives. On the other hand, in the market place today we see an awful lot of opportunities. We're not bidding against private equity companies for outrageous kind of amounts of money for companies that were fully overvalued. In the last couple of years, suddenly valuations have come back. The earth, so to speak, and we think there's attractive opportunities out there. So, we'll take a look at all those things and decide what's the most prudent long term thing for us to do. Obviously, we took $700 million and bought 700Mhz off it in an auction. That's a fairly long-term investment. We're not going to get a return on that next year but that's a critical piece of real estate that's not – wasn't going to be around if we didn't – if we didn't get it. So, just try to use it in a prudent way. But in the short-term, we're going to pay off debt.

Lee Kufermann – Meck Advisors

Thank you.

Operator

And next we have Tom Eagan of Collins Stewart.

Tom Eagan – Collins Stewart

Great. Thank you very much. Charlie, you mentioned that the new encryption. You may – you're going to start the roll out the new encryption software. You just announced last week that you got to 100 HD channels. So, is it fair to say that in July maybe you didn't see improvements over some of the customer metrics that you may have seen in Q2 or is it not fair to say? And then I have a follow-up, thanks.

Charlie Ergen

Well, I guess I'd go back to my earlier point which is of the four things that are affecting our business today, one of them we don't control, and I wouldn't say the economy is getting any better. I think that the economy's likely to continue to slow down, maybe it got a little better because of rebates but that's kind of a short-term phenomena. I think – I think the economy is going to struggle for awhile. So, take that one aside.

In the second-quarter, we made some operational improvements, but, we surely weren't being more competitive from an HD perspective and we certainly weren't – we certainly we let – weren't more secure. Starting August 1st, we are a bit more competitive in the HD when we launched 17 new channels. And so, hopefully that that will show – hopefully that's a positive and that – I don't know how long that takes to show up. And certainly, we started sending out the new encryption system. But the new inscription system, you have to send them out to everybody before you turn it on. So what happens is, it does come in incremental stages because you do – you do target certain segments. So your premium, for example, you may have a premium channel that you send out all the cards on and then you flip the switch so nobody can get that premium channel anymore, right? And so, you do start seeing some incremental benefit from that. And the way I would say it, the way I would term it, is that the third quarter we're making – we'll continue operational efficiencies. We got more competitive in HD. Probably, see no benefit from piracy and probably, see no benefit from the economy. In the fourth quarter, we'll see more operational efficiency that I hope. I hope will see more improvements on the competitive front from an HD perspective. Hopefully, we got some more clarity on the TiVo situation and hopefully, the judge has made a ruling on September there in our favor. And then, probably, first of next year, as when you got to see the games from a piracy point of view, right? And a benefit from the satellite launch that we'll launch within a year. So, that's kind of your timeframes and you continue to make improvement there and everything else along the way.

Tom Eagan – Collins Stewart

Okay. And then, secondly. With the February of '09 migration. You got to think that in cable and satellite providers would be able to garner some of the 13 to 15 million over the year households. We expect DirecTV to work with your RVAC partners to offer some kind of really cheap dual player phone and video. In cable guys, would do the same thing. Maybe 30 to 40 bucks for a dual play. What is the strategy you guys have with or without AT&T as a partner, to try to grab as many of those OTA households as you can?

Charlie Ergen

Well, if I had a strategy, I won't tell you. I think we're well positioned for the digital transition. And again, we're the only one of those players, you mentioned, that actually has a digital transition set-top box. Which we're selling, we got pretty good reviews and I think it's the highest rated digital set-top box out there by many reviewers. So, I think, we're well positioned there. But, we'll see how – I don't want to overstate it because the customers are going to get a digital transition or going to be at the lower in the food chain. So, – but you're correct, I think there probably is some opportunity there.

Tom Eagan – Collins Stewart LLC

Great, thank you.

Charlie Ergen

I think we have time for one more question, maybe.

Operator

And the next question will come from the line of Gerard Helarin [ph] of JRPG [ph].

Gerard Helarin – JRPG

Yes, Gerard Helarin from JRPG here. I got a couple of questions for you about business some more fairly forward-looking. What are you doing? How's the Atlanta DVB-X trial going? Can you comment on that?

Charlie Ergen

Well, that's – a lot of that has being done over on the sat side, but from a DISH perspective, we think it's very interesting.

Gerard Helarin – JRPG

Okay.

Charlie Ergen

And, I think it's a very interesting technology. One of the great things about that technology is that you can reuse frequencies and you can reuse multipath –

Gerard Helarin – JRPG

Yes.

Charlie Ergen

In a way that some other technologies don't allow you to do. And so – this is a very fairly mechanical question, but when you go OFDM, type of modulation schemes, the fact that you can reuse your multipath for your advantage is relatively revolutionary breakthrough in technology. And so, anytime you can find a standard that could utilize that, and there's several in the world today, its interesting, and so therefore, we're testing all that to make – to see what we think may make sense, if anything makes sense. And --

Gerard Helarin – JRPG

When do you think you might try testing the marketing of that?

Charlie Ergen

I don't think we're far enough along that we could – that we could say. That maybe a good question for the next conference call.

Gerard Helarin – JRPG

Okay. Now, let me shift a little bit to AT&T

Charlie Ergen

I do think the technology – I think there still things that you have to overcome. Not the least of which is just production of cheap enough chipset.

Gerard Helarin – JRPG

Yeah, although Qualcomm might want to help you with a slight variance of DVDH.

Charlie Ergen

I think Qualcomm obviously understands to some degree they've got some interesting parts of their technology. I get some disadvantages in their technology. But many things they're doing today, you also can make a profit at it. Timing's everything and there's probably not an ability to make a profit today, quite frankly. We don't mind losing money if we got a pretty good certainty of recouping that money but the timing is a little – to me, I would say in general, timing's a little early.

Gerard Helarin – JRPG

Do you sell many of those pocket dishes? Because that seems to be one of – that would be a – (inaudible) right now, it seems pretty expensive.

Charlie Ergen

Well, we do sell some – most of them are sold at retail, not through our distribution. But it's not a material part of our business today. I think it can be, long term, but again it's unclear to me what devices – what device or devices people watch video on. Clearly the TV set is number one and today, it's probably computer number two, but it's going to be a handheld phone or handheld portable device or something is going to be part of the equation.

Gerard Helarin – JRPG

Where would you go to buy one of your set tops now besides your website?

Charlie Ergen

For the digital transition?

Gerard Helarin – JRPG

Yes.

Charlie Ergen

You go to Sears or – from a national perspective, you go to Sears. And otherwise, you go to – you have to look and see there's quite a few other retailers that are regional or local in nature to sell it or you go to a satellite retailer themselves. Or you go to our website.

Gerard Helarin – JRPG

And, talking about AT&T for just a moment, if I was them and if I was renewing a contract the size of yours, I'd probably notify you too. What do you think they're going to try to go after from a pricing perspective or service perspective? What do you think is important to them?

Charlie Ergen

Well, I have lots of conversations AT&T and they just remained private and you'd have to ask AT&T what they're looking for.

Gerard Helarin – JRPG

Okay.

Charlie Ergen

But I've – I think – all I can tell you is that the – I can only tell you that the relationship has been good, in all levels within our companies and we've liked working with them but we're not – we have to be prepared, with or without them. That's all I can say. And, I think --

Gerard Helarin – JRPG

Realistically --

Charlie Ergen

I think they have strategic objectives that they clearly would like to – I think they have strategic objectives how much satellites, how important satellite is, they have to tell you and those strategic objectives.

Gerard Helarin – JRPG

Realistically, that you'd think they'd go with Verizon supplier?

Charlie Ergen

You know, you'd have to ask them. I think – I'd put it this way, it would be difficult to have a national video service that you were trying to bundle with both your wireless and wireline business if you had the same thing as the other guys have. So, there's 3 or 4 wireless players out there and there are only 2 satellite guys, so I think there's going to be a – I guess, the way I would term it there's probably going to be opportunity for both companies out there. Both Direct and DISH, somehow.

Gerard Helarin – JRPG

Okay.

Charlie Ergen

But I don't know how that all shapes out, and to the extent that that even plays into where we want to go. I guess that was our last call. We'll be on November. We will talk to you guys then.

Jason Keiser

Operator, we're done on this end.

Operator

Thank you, sir. And thank you ladies and gentlemen for tuning to today's conference. You may now disconnect.

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