DIRECTV (DTV) Q4 2014 Results - Earnings Call Transcript

Feb. 19, 2015 7:10 PM ETAT&T Inc. (T)
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DIRECTV (DTV) Q4 2014 Earnings Call February 19, 2015 2:00 PM ET

Executives

Martin Sheehan - Vice President of Investor Relations

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

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

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

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Craig Moffett - MoffettNathanson LLC

Scott Goldman - Jefferies LLC, Research Division

James Maxwell Ratcliffe - The Buckingham Research Group Incorporated

Kannan Venkateshwar - Barclays Capital, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Amy Yong - Macquarie Research

Thomas William Eagan - Telsey Advisory Group LLC

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

Operator

Good day, ladies and gentlemen. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to DIRECTV's Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note this call may be recorded.

It is now my pleasure to turn the call over to your host, Martin Sheehan, Vice President of Investor Relations. Sir, you may begin.

Martin Sheehan

Thank you, Erica, and thank you, everyone, for joining us for our fourth quarter 2014 financial results and outlook conference call. With me today on the call are Mike White, our President and CEO; Pat Doyle, our CFO; Bruce Churchill, President of DIRECTV Latin America; Michelle Locke, CFO of DIRECTV Latin America; and Larry Hunter, our General Counsel. In a moment, I'll hand the call over to Mike, Bruce and Pat for some introductory remarks, but first, I need to read to you the following.

On this call, we make statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results to be materially different from those expressed or implied by the relevant forward-looking statements.

Factors that could cause actual results to differ materially are described in the Risk Factors section and elsewhere in each of DIRECTV's annual reports on Form 10-K, quarterly reports on Form 10-Q and other filings with the SEC, which are available at www.sec.gov. Examples of forward-looking statements include, but are not limited to, statements we make related to our business strategy and regarding our outlook for financial results, liquidity and capital resources.

Additionally, in accordance with the SEC's Regulation G that requires companies reporting non-GAAP financial measures to reconcile these measures to the most directly comparable GAAP measure, we provide reconciliation schedules for the non-GAAP measures, which are attached to our earnings release and posted on our website at directv.com.

With that, I'm pleased to introduce Mike.

Michael D. White

Thanks, Martin, and thanks, everybody, for joining us today.

As I look at it, I'm really pleased to report that despite some second half macroeconomic challenges in Latin America, in particular, I do think both of our sectors, North America and Latin America, finished a very strong year, having achieved virtually all of the objectives we set forth at the beginning of the year, particularly when you exclude Venezuela.

Now before I turn the call over to Bruce and Pat for more details, let me just offer a couple of observations on 2014 results as well as our priorities for 2015.

Let me start with our bottom line consolidated results. As you saw in our release, we generated a 12% increase in adjusted diluted earnings per share in 2014, surpassing $6 a share for the year, which is quadruple the earnings per share the company generated in 2009. Importantly, we also surpassed $3 billion of free cash flow generation for the first time ever, I think an impressive 21% growth rate from last year. And on a per-share basis, free cash flow per share grew over 30% for the second consecutive year.

Now looking forward for DIRECTV, of course, our top priority in 2015 is to successfully close the merger with AT&T and also ensure we'll be ready to hit the ground running as a combined business with compelling bundled offers and services on customer day 1. Our 2 teams continue to work diligently on integration planning, and I'm really pleased with the progress to date, although there's still a lot of work to do.

Now as far as the regulatory review goes, we have all of the international and state approvals that are required under the merger agreement, which leaves us with the FCC and the Department of Justice. The FCC's comment period has run its course. Although until the question of whether third parties can review our programming agreements is fully answered, it's difficult to say when the FCC process will conclude. As of today, the FCC's informal clock runs out on March 23.

As for the Department of Justice, we believe AT&T and DIRECTV have comprehensively responded to every one of their requests, and no new requests are expected at this time, which means that at this point, I believe the Department of Justice is in the process of evaluating all that information as well as certainly coordinating with the FCC.

So we remain confident that we'll close our transaction some time before the end of the first half of the year, although understandably, there's still some uncertainty as to the exact date. In the meantime, we all here at DIRECTV continue to focus on running our business as well on a stand-alone basis. Therefore, all the forward-looking information I give you today is based on DIRECTV operating for the entire year as a stand-alone, separate company.

So let me start with Latin America. Despite the macroeconomic, political and operational challenges that we encountered in 2014, I think DIRECTV Latin America had a very solid year, navigating a really difficult environment. The team was able to continue solid subscriber performance by adding 903,000 net new customers during the year, just short of our original target of 1 million. The shortfall was in part due to a focus, explicitly conscious one, to ensure that in this challenging environment, we had higher-quality postpaid subscribers, that we were able to reduce discounting and strive to price our services in line with local inflation and shift promotions to our prepaid offerings for those customers who can't meet our higher standards.

This subtle shift in our focus, which I think is the right thing, enabled us to grow local currency revenues 13% in Brazil and 40% in PanAmericana during the year. The combination of solid local currency growth combined with our continued emphasis on managing costs drove an 80 basis point increase in PanAmericana's annual OPBDA margins, excluding Venezuela. This formula also worked in Brazil, where although our OPBDA margins did decline slightly, we still were able to maintain full year OPBDA margins at our 30% target level.

Now despite these accomplishments, I actually think the highlight of the year was attaining our primary objective where Bruce and the team focused on improving Latin America's cash flow generation and did that by over $400 million compared to 2013. Now there was a lot that went into that, primarily lower set-top box spending, which was driven by the rollout of a prepaid model in Brazil; a much more disciplined upgrade spending approach across the region; as well as some box purchases, which we were able to get done at the end of 2013 in advance of expected World Cup demand.

Now keep in mind we continue to make sizable investments in satellites as well as related broadcast center infrastructure as well as accelerate the rollout of our broadband service. In fact, we increased our investment in broadband by over $100 million compared to 2013, which did weigh on both our OPBDA margins and our total cash generation. But that broadband investment resulted in 4.5 million homes having access to a high-quality broadband service by year-end. Early results continue to be promising for our new service, and we surpassed the 100,000 subscriber mark in Brazil and look forward to further expansion in 2015.

In addition to all of that, Bruce and his team renegotiated a very important and large programming deal with Globo in Brazil, which includes TV Everywhere rights. And for the 13th consecutive year, Sky Brasil won the equivalent of the J.D. Power award for superior customer service.

Summing up, I think our Latin America team is doing an outstanding job navigating a very challenging macroeconomic, political and competitive environment. And as I look forward, Bruce and I are very much aligned on our key priorities.

First, to continue to profitably extend DIRECTV and Sky's leadership position in both the high-end and the mass market segments. As an example, we expect with our new DLA-1 satellite going into service as we speak and the DLA-2 satellite that we'll launch later this year, we'll have the opportunity to significantly extend our competitive advantage with more HD content than ever for our high-end customers in PanAmericana.

Second, to remain agile in order to protect margins amid these macroeconomic challenges. We'll continue to modify our tactics as appropriate to acquire new customers as well as ensure smart pricing across all market segments. We must also remain disciplined in regards to cost management to ensure we keep Brazil's margins in the 30% range while also striving to make meaningful improvement in PanAmericana's margins x Venezuela.

Third, we'll continue to prudently manage our investment in the build-out of our world-class pay-TV infrastructure. We expect that our spend on these projects, actually, will decline this year by about $50 million to a little over $300 million. This investment covers projects that support the growth of our pay-TV subscriber base, ensure consistent service levels and greatly improve our operating performance, particularly in areas such as our call centers and IT systems while also future-proofing our business by upgrading our satellite fleet and ground infrastructure.

Fourth, we plan to significantly expand our broadband service while proving out the business model as we scale that business.

And finally, our bottom line goal continues to be generating positive free cash flow in 2015, which will set the stage for significant accessible free cash flow in the next few years as we complete many of these infrastructure projects.

So with those priorities in mind, the current macroeconomic outlook for 2015, I do think, will likely be even more challenging than 2014. So given that we don't have any events like World Cup in 2015 to boost demand, we expect significantly less subscriber growth in the region than 2014. And although we plan on solid performance on a local currency basis, the current outlook for foreign exchange will certainly weigh significantly on dollar-denominated revenue and OPBDA results, and Bruce will cover that more later on.

Turning to the U.S. We exceeded our internal plans for the year virtually across the board with regards to all of our major metrics in spite of more aggressive offers from cable and expanded rollout of telco video and the occasional but, I suppose, inevitable programming dispute that we see out there.

Reviewing our progress on the primary pillars of our U.S. strategy, we maintained our focus on attracting high-quality subscribers and also increased gross additions over last year, something that I think is no small accomplishment in such a mature market. And although churn came in 2 basis points higher than a year ago, we were able to exceed our goal of maintaining market share by adding 99,000 net new subscribers during the year. Now that modest sub growth, along with solid ARPU growth of 4.7%, drove us to achieve our stated objective of mid-single-digit revenue growth for the year, in fact, 5.4%. This growth was driven not just by price increases and incremental demand for services like our HD DVR but, I might point out, also by ancillary revenues like ad sales, which was up over 20% this year, as well as our commercial segment, which was up 11%.

On the cost side, our diligence in fighting against exorbitant content rate increases, significant further progress on our productivity initiatives and tight management of every cost area drove us to substantially beat our 2014 OPBDA plan by generating over 6% growth and improving OPBDA margins for the third consecutive year.

Effective cost management was also exhibited in the $300 million decline in our CapEx spending, which was primarily driven by lower set-top box costs and a shift to the use of less expensive refurb equipment as well as lower satellite payments.

The combination of the strong OPBDA growth as well as the decline in capital spending for the year resulted in an 8% increase in cash flow before interest and taxes in the U.S., in line with the formula that we've laid out for you on many Investor Days.

Shifting to our operating pillars. As we've talked about all year, we continue to make excellent headway improving the customer experience. This year, we improved processes and policies with regards to onboarding new customers. We reduced billing issues, and we improved problem resolution, and we continue to recognize loyalty.

Just a couple of examples of the terrific work done by our teams. In operations, we increased on-time arrival of our technicians to 98% by year-end. We doubled the number of customers on paperless billing, and we enabled over 7 million customers to choose what date they want to pay their bill. We saw a 41% increase in customers using our online help center, which allows them to access help when and how they want it and significantly reduces calls to our call center. And we streamlined our referral program, cutting customer escalations in that area by 75%. In fact, in all, we eliminated over 12 million annual phone calls, and we reduced truck rolls by about 300,000. And of course, as you know, we became the top-rated pay-TV provider as measured by Net Promoter Score, having more than doubled our score over the last 3 years.

Now I think this is still just the tip of the iceberg as to what we've accomplished during the year and what we can continue to do around the customer experience.

Finally, with regards to advancing the customer experience, we also made significant improvements in the amount of content available to our subscribers as well as how our customers can access that content as well as introducing new services and capabilities. To name just a few, we recently signed new contracts with both Fox and Disney that will dramatically increase the amount of on-demand content we'll be able to offer in the coming months, both on the television and on devices and online. We introduced 72-hour Lookback as well as Startover services that, several years ago, folks said was impossible for satellite TV to deliver. We introduced global viewing history, which allows our customers to start watching a show on one device and pick it up on another device right where they left off, including on the television. And we successfully launched the DIRECTV 14 satellite, which gives us both critical backup capacity for our HD programming in the U.S. but also additional capacity for new services such as 4K Ultra HD.

And speaking of that, we recently began offering 4K Ultra HD VOD service, which was a first in the MVPD industry. And of course, at the end of the year, we launched Yaveo, our Spanish-language OTT offering, with over 3,000 hours of VOD content and 3 linear channels for just $7.99.

And all of these accomplishments, I think, were achieved while we go through an intensive integration planning effort with our friends at AT&T. So I think you can see why we continue to be the premier place to go for consumers who want the best video experience anytime and anywhere.

And as I look at 2015, in many ways, I suppose it'll look a bit like 2014 with a few small changes. I do think the U.S. macroeconomic environment will probably slightly improve over 2014, certainly, at the beginning of last year. But as always, we expect a very competitive environment from both traditional competitors as well as new over-the-top providers.

Our programming costs will move above the high end of our long-term outlook, as we've previously communicated to you, albeit driven in large part -- partly by our strong performance in 2014 but also due to a couple of major renegotiations of contracts with both Disney and the NFL. That outlook has forced us to increase prices probably a bit more aggressively than I would have liked to, to offset those cost increases. And of course, that fact will certainly pressure both gross adds and churn for the year, although we're off to a strong start so far.

All of this means that we'll have to do an even better job when it comes to improving the customer experience, advancing our entertainment offerings anytime, anywhere as well as driving productivity improvements, tightly managing our costs. So I think that makes for a challenging 2015 for our businesses, but that's been the case every year I've been here. And I'm confident that we'll meet these challenges and perform as well as ever in 2015, both before and after the merger with AT&T.

So with that, let me turn the call over to Bruce, who'll go into Latin America's fourth quarter and 2015 outlook.

Bruce Barrett Churchill

Great. Thanks, Mike. As Mike mentioned, DTVLA wrapped up a solid year despite significant macroeconomic headwinds, including fairly substantial currency depreciation during the year, particularly in the fourth quarter. We accomplished this strong performance by continuing to focus on operating these businesses in local currency; through smart pricing, particularly relative to inflation; managing margins; and taking a disciplined approach to capital expenditures.

During 2014, we also heightened our focus on taking a more disciplined approach to acquiring subscribers to ensure we maintained attractive financial returns over the long term. This included the rollout of the prepaid offering in Brazil as well as implementing various sales filters in the region for postpaid customers.

With that as an overview, let me run through our fourth quarter results, starting with Brazil. With respect to Brazil, I would highlight the following. Gross additions continued to be strong in the fourth quarter, reaching a total of 492,000. Demand for the product is still strong in all segments. I'm particularly pleased that the number of gross additions taking HD increased by more than 50% over the fourth quarter of 2013. Churn is still a challenge, reflecting both a weaker economic environment and some operational challenges we still have as we implement a new billing system. The bottom line result was a net loss of 1,000 subscribers in the quarter, leaving the business at about 5.64 million customers at the end of the year, about 5% higher than at the end of 2013.

Turning now to the financial results of Sky Brasil. The larger subscriber base and a 1% increase in local currency ARPU drove a 7% increase in local currency revenues versus the prior year period. Our fourth quarter margins were pressured by costs associated with the same systems migration challenges I mentioned earlier and that we probably will face for another quarter or 2 this year. In addition, the ramp-up of our fixed wireless broadband business also weighed on margins. The combined impact resulted in an 8% decline in local currency operating profit before depreciation and amortization, or OPBDA, in the quarter and a drop in our OPBDA margin to 29%, just under our 30% target. In dollar terms, revenue and OPBDA declined 4% and 18%, respectively, but the average value of real in the quarter decreased about 12% versus a year ago to BRL 2.55 to the dollar.

Now moving on to PanAmericana. Gross additions in the quarter of 488,000 were slightly above last year, reflecting broad strength across all the major countries. Churn remains low across the region, and reconnect rates for our prepaid product improved, resulting in 119,000 net additions for the quarter. Our cumulative PanAmericana subscriber total reached 6.83 million at year-end, about 10% higher than a year ago and consisted of roughly 2.4 million prepaid customers using our on/off metric at the end of the quarter. Using our 90-day metric, the number of prepaid customers would be nearly 3.6 million, an increase of 21% from 1 year ago.

Turning to the financials and excluding Venezuela. We saw a 35% increase in local currency revenues in the fourth quarter, driven by a 10% increase in the average number of subscribers and an aggressive approach to price increases, a key factor in helping us improve our margins. In U.S. dollar terms, the segment, excluding Venezuela, generated just under $600 million in revenue, a solid 8% above last year's fourth quarter and, in my view, one of our key achievements for the year.

To give you a sense of the size of the currency depreciation in the year-over-year comparison, the Argentine peso depreciated 40% and the Colombian and Chilean currencies about 15% each versus the fourth quarter of last year. In dollar terms, excluding Venezuela, OPBDA increased 27% to over $140 million, while the OPBDA margin increased 350 basis points. These improvements were mainly due to our ability to effectively pass through cost inflation with strong local currency ARPU growth, flat subscriber acquisition spend as well as improved scale. Including Venezuela, dollar-denominated revenues and OPBDA for the segment climbed slightly to $808 million and $231 million, respectively.

Ordinarily, at this point, I would pause to a make a few comments about Sky Mexico. However, Televisa will not be releasing its results until next week, so I am unable to make any specific comments at this time. Suffice it to say we continue to be very supportive of Sky Mexico and our partnership with Televisa and remain pleased with the leadership position that Sky has established in Mexico.

So now let me turn to 2015. Overall, I would say we are expecting a macroeconomic environment that looks a lot like the second half of 2014, with slow growth and more volatility than normal. Having said that, we remain positive about the outlook for our business and confident in our ability to navigate these challenging times.

I say this for the following reasons. Demand for our product remains strong. If anything, it is more a matter of deciding who not to sell to than it is a matter of generating interest. For example, due to our higher credit filters in Brazil last year, we've turned down over 1 million customers who wanted to buy Sky. I expect that demand this year for Sky will remain strong at approximately 2 million gross additions.

While demand in PanAmericana also remains strong, the absence of the World Cup will have a greater impact and will result in a decline in gross adds to somewhere in the 1.5 million to 1.6 million range, excluding Venezuela. I expect churn in PanAmericana to uptick only modestly. What I do not expect in PanAmericana is the volatility that we experienced last year due to the timing of the World Cup. It should be more uniform quarter-to-quarter. Churn will remain elevated in Brazil for the first half of the year as we complete our systems migration work, but improve in the second half to produce a full year year-over-year improvement. Overall, I expect the 2 platforms combined to add about 500,000 subscribers, again, excluding Venezuela.

Projecting U.S. revenue and OPBDA is a bit more challenging, so let me start by talking a little bit about local currency performance. In Brazil, we expect mid-single-digit local currency ARPU growth, similar to the nearly 6% we experienced in 2014, which, when combined with the subscriber growth, should result in revenue growth in the high single digits. We expect full year margins to hold at about 30%, although first half margins will be lower than the full year average as we work our way through the systems issues. I would like to point out that we actually expect pay-TV margins to improve about 100 basis points for the year, but that improvement will be offset by our continued investment in broadband.

For planning purposes, we have assumed that the real depreciates further in the mid-teen percentages compared to the 2014 average of BRL 2.35. Based on this assumption, Sky Brasil dollar-denominated revenue and OPBDA decline in the mid- to high single-digit percentage range.

We expect the combination of price increases and subscriber growth to generate respectable local currency growth across the board in PanAmericana. But assuming 30%, 20% and 10% currency depreciation in Argentina, Colombia and Chile, respectively, U.S. dollar revenue x Venezuela will grow in low single digits.

As for margins, we expect our pay-TV OPBDA margin to be flat with last year, but the rollout of broadband will likely result in a slight decline for the overall segment. Including Venezuela, which made up a little over 25% of revenues and 45% of the OPBDA in PanAmericana's 2014 results, our expectations for PanAmericana are for mid-single-digit revenue growth, driven by more aggressive pricing in Venezuela as well as flat OPBDA mainly due to declining margins in Venezuela, where it remains challenging to match price increases with high inflation. This assumes no significant changes to the SICAD 1 rate of about VEF 12 to the dollar for the year.

Maintaining margins and generating cash flow remain areas of high focus in 2015. Specifically, we look to modestly expand our margins in pay-TV to offset the margin compression caused by the expansion in broadband. Full year CapEx spend is expected to be roughly flat with 2014 at about $1.45 billion as lower SAC and satellite CapEx will be offset by the higher broadband investment of approximately $200 million in total.

Lastly, despite the significant foreign exchange headwinds and the additional investment in broadband, even excluding Venezuela, we expect to be free cash flow positive, albeit modestly for the second straight year.

So in light of the current environment, I believe we're taking the appropriate actions and putting the right business practices in place in both Brazil and PanAmericana to ensure we achieve our targets for 2015 and create value for the long term.

With that, I'll turn it over to Pat. Pat?

Patrick T. Doyle

Thanks, Bruce. The DIRECTV U.S. business delivered a strong quarter in terms of subscriber and revenue growth while also improving pre-SAC margins for the sixth straight quarter, capping a very strong year for the company, as Mike said earlier.

As we discussed on our third quarter call as well as at recent investor conferences, our new offers began to get traction in the marketplace early in Q4 and continued strong throughout the quarter, resulting in a 3% lift in gross adds. The consumer electronics channel drove most of the improvement, increasing additions over 30% from a year ago as we expanded the number of locations offering DIRECTV in stores like Costco and Walmart, provided additional holiday promotions and continued to invest in, in-store labor. These results raise our average SAC costs but also bring in our highest-value customers.

In addition, we got a modest lift in gross additions from the various programming disputes and channel drops from our cable and satellite competitors in the quarter. Churn was also a highlight in Q4 as we achieved the lowest fourth quarter churn rate in 16 years. To put that in perspective, that's back to 1998, when the business was only 4 years old and we had roughly 4 million customers. The low churn was driven by strong results from our win-back programs as well as lower voluntary churn, driven in part by enhanced retention offers for our better customers as well as improved customer service levels coming out of Q3.

And of course, underlying these improvements is the continued significant customer experience enhancements Mike laid out for you earlier. The net result was 149,000 subscriber additions in the quarter, our highest quarterly level since we shifted our strategy to focus on higher-quality subscribers back in 2001.

Moving on to the financials. Revenue growth of 5.4% was driven by higher ARPU as well as the slightly larger subscriber base. ARPU growth climbed 5% in the quarter, driven by our annual price increase and increase in the penetration of our Genie HD DVR, strong performance from our NFL SUNDAY TICKET offer and the start of a new lease fee on new customers for set-top box. In addition, we continued to see strong results from our commercial business, which grew revenue 12%, and ad sales continued to outperform, topping $200 million in the quarter for the first time, up 23%.

Moving on to the cost side of our P&L. Upgrade and retention expenditures were down 12% on a cash basis as were the driver of our improved pre-SAC margin in the quarter. Lower set-top box costs, higher usage of refurbed boxes and a lower volume of upgrades drove the improved performance. As the cost of refurbished boxes is expensed, most of these savings were seen in CapEx spend, although upgrade and retention expense on the P&L still declined 4%.

In addition, G&A and other cost of sales were relatively unchanged from last year, adding modestly to margin improvement. OPBDA was pressured in the quarter primarily due to increased subscriber acquisition costs as well as higher content costs. The combination of higher gross additions and higher SAC per gross add drove cash acquisition costs up nearly 11% in the quarter.

Similar to upgrade cost, a higher mix of refurbished equipment resulted in a bigger impact on P&L acquisition expense, which climbed 11% -- 16%. SAC per gross addition was about $60 higher than a year ago due to a higher mix of customers coming from the CE channel, an increase in the mix of subs taking more expensive HD DVR equipment as well as higher advertising expense, all of which offset lower set-top box costs and a rise in the mix of refurbished set-top boxes.

With regards to content costs, programming cost per subscriber, or ACPU, increased 7.3% compared to last year's fourth quarter, driven by rate increases on programming contracts, including our new deal with Disney, although the timing of channel launches and some favorable renegotiations allowed us to come in slightly lower than we originally expected. The resulting quarterly OPBDA decline of just under 1% was below our internal expectations mainly due to the SAC associated with our over-performance in gross additions.

In summary, although we, perhaps, didn't have a flawless quarter, the sum total of our performance resulted in one of the best years we've put together in quite some time, particularly when considering the significant pressures our business faces on a daily basis.

For 2015, looking at the U.S. business on a stand-alone basis, that is without the effect of the AT&T transaction, the year is expected to look a lot like prior years with a few subtle differences. Revenue is, again, expected to grow in the mid-single digits, driven mainly by a rise in ARPU. As you may have read, we are currently putting through an above-average price increase to our customers. This year's price increase is one of the highest in our history and consists of package price increases, an increase to and expanded coverage of our regional sports fee as well as a modest increase in our set-top box lease fees. We're obviously reluctant to put through such a big increase, but it's important to note that even a higher-than-inflation increase of 4% wouldn't cover the full amount of the programming cost increases we expect to experience from our content deals in 2015. So unfortunately, we have to increase prices more than we would like. This price increase is likely to weigh in gross additions as well as churn and could even result in modest decline in our cumulative subscriber base during the year.

And as we also said at recent conferences, ACPU will likely increase about 10%, driven by new content deals such as Disney and the NFL, additional content renegotiations during the year as well as the usual annual cost increases on existing contracts. This is higher than our usual 7% to 9% projection, in large part due to our strong performance in 2014, when ACPU only grew 6%, resulting in a more challenging comparison for 2015.

We expect all of our other expense categories to grow less than revenue growth, resulting in OPBDA growth in the low single digits, a bit below our mid-single-digit long-term range. In addition to content costs, the lower OPBDA growth is also being driven by our over-performance on OPBDA in 2014 as well as an increase in the use of refurbished set-top boxes, the cost of which are expensed. Most importantly, however, the higher use of refurbished equipment, combined with lower set-top box costs and lower expected gross additions, will reduce our CapEx spend roughly $200 million in 2015, resulting in U.S. business continuing to drive high single-digit growth and cash flow before interest and taxes, in line with the formula we laid out for you over a year ago.

Looking at the quarters, first half of the year will likely exhibit a slight decline in OPBDA as we continue to see strong gross additions midway through the first quarter and also expect ACPU increases over 10%. And lastly, on the U.S., there will be one fewer game in 2015 versus 2014, resulting in Q3 likely having the lowest revenue ARPU and ACPU growth during the year.

Wrapping up on the consolidated level. As Bruce mentioned, foreign currency volatility makes providing accurate U.S. dollar forecasts extremely challenging. But using the FX assumptions Bruce laid out for you and excluding any merger costs in 2015, we would expect EPS to come in at about $6 a share. Also, keep in mind that we have suspended stock repurchases, which, in previous years, has bolstered our per share results. Importantly, we expect to continue to grow free cash flow in 2015, although modestly as the lower CapEx in the U.S. is partially offset by higher income taxes. Again, this will be highly dependent on foreign exchange rates.

So with that, I'll turn it back to Martin.

Martin Sheehan

Thanks, Pat. Before moving on to Q&A, investors should note that we have members of the media on this call in a listen-only mode. I'd like to remind the media that they are not authorized to quote any participants on this call, either directly or in substance, other than the representatives of DIRECTV. In addition, we are webcasting this call live on the Internet, and an archived copy will be available on our website. [Operator Instructions] Erica, at this time, we're ready to ask the first question.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to the side of Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Two questions. Mike, can you talk about customer segmentation and how you're thinking about addressing the more price-sensitive customer going forward, particularly in light of the price increases you laid out at the beginning of -- for the beginning of 2015? I know you have some over-the-top product that you've been working on, but how are you thinking about segmenting and serving that lower end of the market? And then, Pat, can you just talk about the plans for retention spending? It looked like it helped churn in Q4, which was obviously a really impressive number. Do you expect to meaningfully grow your cash retention in '15 over '14?

Michael D. White

Thanks, Ben. So on the customer segmentation front, actually, first of all, I think as you know, we launched a new package about a year ago. So we got now 2 offerings for price-sensitive customers: one we call SELECT, one we call ENTERTAINMENT, one that includes ESPN and one that does not. And we've seen pretty good acceptance of those, I would call it, more slimmed down packages. Without a doubt, I think as the ecosystem evolves, we're going to see continued pressure for folks who can't afford the kind of average bill that it takes for the full service. And I think we're looking at the question of whether to do a slimmed down over-the-top package. But keep in mind, the margins are pretty thin on that package, and barriers to entry are almost none. So it's not clear to me it's a particularly profitable idea, but it's certainly something that we're considering. But I would also tell you it's -- an important consideration is would I do a broadband-plus idea if we were merged with AT&T ahead of a pure-play, over-the-top kind of idea like DISH has done. And I don't think we've yet kind of finalized our thinking in that regard, but we certainly recognize the challenge of serving those customers. And we'll continue to -- having said that, please remember we've got an enormously successful high-quality premier service. And as you can see from our net adds in the fourth quarter, and so far this quarter, they've been pretty strong as well, and the strength, I think, of the Rob Lowe campaign, we continue to have a great interest in our full service offering. On retention spend, I'll let Pat talk about the spending piece of it, but just on churn, I would say you have to kind of look at the -- you look at things differently by quarter. So when I look at the churn, I feel very good about where we came out, both for the full year and for the fourth quarter, and our first quarter looks good as well. Having said that, we really don't see the impact on churn from the price increase until March, and so I think we're trying to be very cautious and smart and expect to see significant pressure from the above-average price increase, although we haven't seen it yet. So we're just trying to be cautious in that regard. Pat, you can talk about retention spend.

Patrick T. Doyle

Yes. So Ben, I think as you know, coming out of the third quarter with some higher churn, we had mentioned that we had done some things on the retention side, particularly addressing our higher-value customers. So we definitely -- we saw the benefits of that in the fourth quarter. I will also tell you that I feel probably better than we ever have been as far as our ability to really look at the retention spend, to turn it up and down and to also make sure that we're getting a positive return on that spend. So some of the technologies that we put in place over the last couple of years kind of really give us a high confidence that we're getting the return on investment. Looking at 2015, I would say no, we're not -- our plan is not to increase our retention spend meaningfully over what we would have seen in 2014. Obviously, we'll react to competition and offers that are out there, but we're not forecasting anything materially different in 2015.

Operator

We'll take our next question from the side of Craig Moffett with MoffettNathanson.

Craig Moffett - MoffettNathanson LLC

Yes. I wanted to ask Mike a question or 2 about the upcoming plans with AT&T. They've talked a lot about the synergies that you can achieve. Now that you've been planning for the acquisition -- or the merger for the better part of a year now, can you just shed some more light on where the operating synergies in the business come from outside of the programming costs? And then specifically, as it relates to programming costs, you said before that you've been signing contracts at higher-than-expected rates. Are those longer-duration contracts at this point? And if you could just talk about the kinds of durations you're signing and what AT&T will have in those contracts when they inherit the asset.

Michael D. White

So first, Craig, I got to kind of clarify how the process works. So keep in mind, we have been scrupulous in being careful to respect the regulatory process and the fact that we still do not have approval. And as a result, the approach to this integration planning is highly supervised, shall I say. And that means that I don't have a lot of visibility into the AT&T U-verse business nor should I at this stage of the game. Now we have spent a lot of time planning together bundles as well as channel strategies and operating strategies as well as how do you close the books and how do you ensure you hook up your call centers and so on and so forth, things like that. But I certainly wouldn't be in a position to give you any kind of detailed color on the operating synergies other than to say that I continue to see more opportunities than not. Even in areas like our technology platform having one set of apps, not 2 for TV Everywhere, having one dot-com website, our set-top box technology, we think, there is substantial net present value synergies for shifting to one kind of platform over time. So I think there are lots of areas of opportunity. Having said that, I don't really have visibility into things like G&A or even subscriber services at that level of detail at this time. But I think from our side, we've always felt that our first opportunity is to be able to sell broadband in probably 40% of America, maybe 50% of America and to provide a great value for customers by having a bundled offer different than today, where we actually charge for the modem and it's a substandard speed and everything else. We think if we take AT&T's ability to increase its speeds, to be competitive, and I think they can, if you take a satellite-first video concept and then you marry it with their broadband, I think you're going to have a heck of an offer for consumers, which is going to unlock growth opportunities for the company we couldn't otherwise get on our own. As it relates to programming, I'm not going to get into any details on that. But suffice it to say, certainly, since the merger was consummated, and again, we have to be very careful to respect the differences and, I guess, we call it Chinese walls between the companies, we don't want to cross any of those lines inappropriately. Having said that, I've obviously had in mind, on every deal we've done, various considerations. Some of them relate to term. Some of them relate to porting rights. Some of them relate to other things. And I would just say I think you can rest assured that every deal we've done since the merger was announced, we've at least had in the back of our minds what is the right best answer for the company for the long haul, finding a way to appropriately balance the fact that I still run a company here that's a stand-alone company, and we'll only do what I have felt is in the best interest of our company. But at the same time, I have other considerations that I'm also trying to balance, and I frankly think Dan York and our team has done an outstanding job of basically doing what's best for DIRECTV as a stand-alone company as well as what will be great for AT&T once we're merged.

Craig Moffett - MoffettNathanson LLC

That's really helpful, Mike. Can I just follow up with one last question about that, which is as you think about those programming agreements, do you envision that the increased scale of adding U-verse subscribers, if you were to have an extra 6 million subscribers, would really change the tenor of your negotiations with the programmers?

Michael D. White

I don't think we've built substantial synergies in that regard into the model, Craig. They're mostly, I think as AT&T has said, by getting U-verse to our rates one way or the other, and we'll see when we kind of close and have our strategies all lined up. Obviously, we'll communicate to you all then. But I know both AT&T and we continue to be confident in the synergy commitments that they've made. And in fact, we think that they'll be able to exceed those commitments. But I don't think that's the primary thinking behind this, Craig, and there's probably more to it than that. There are a lot of factors that go into this, but suffice it to say our focus was on growth and our ability to sell broadband service, a good broadband service coupled with a great video offer and make it a seamless bundle, that is truly good for consumers.

Operator

We'll go next to the side of Michael McCormack with Jefferies.

Scott Goldman - Jefferies LLC, Research Division

It's Scott Goldman on for Mike. Maybe a couple of questions around LatAm for Bruce. Bruce, maybe you can walk us through a little bit on the puts and takes on LatAm ARPU for the year, I guess, in light of your outlook on the sub growth there. And then maybe a bigger-picture question on LatAm as you go forward. How do you guys generally think about this business? Do you still view this as a real big growth business or just moving into a bit more of a free cash flow story going forward?

Bruce Barrett Churchill

Okay. Well, with respect to ARPU, there's obviously a number of factors that play in here. First of all is, of course, we price locally. So we do whatever we can in every market, particularly those with high inflation, to at least stay even with the inflation, although that can often be challenging, particularly in those markets which have either explicit or quasi-explicit price controls. But as a general rule, we expect to continue to be pretty, as I said, aggressive, I think, about trying to put through price increases to match inflation in most of the key markets. And that is what helps us not only then maintain the ARPU when you eventually translate into dollars as best we can but also more importantly, maintain the margins because, obviously, a lot of the costs are reflected by inflation, particularly employees and that sort of thing. So I think those are the key drivers of ARPU going forward is going to be our ability to continue to price to inflation. In general...

Scott Goldman - Jefferies LLC, Research Division

Is there less pressure coming from the middle market side?

Bruce Barrett Churchill

Pardon me.

Scott Goldman - Jefferies LLC, Research Division

Would there be less pressure coming from the middle markets?

Bruce Barrett Churchill

Less pressure from -- less price pressure?

Scott Goldman - Jefferies LLC, Research Division

Yes.

Bruce Barrett Churchill

I'm not sure I...

Scott Goldman - Jefferies LLC, Research Division

Less ARPU pressure from the middle markets.

Bruce Barrett Churchill

Well, no. I mean, inflation affects everything, so by -- just as we have -- we increase it -- maybe it's easier to put through a price increase with advanced products because you probably are dealing with a customer who is more easily able to absorb it as opposed to a prepaid product or a lower-price package, if that's what you mean. But in general, we don't -- we do put in -- put through price increases across the board where we can. With respect to our general outlook, I think we remain, long term, very bullish on this business. We still think pay-TV penetration is relatively low. We still think we have developed a model which is best able to serve the areas that are going to grow the most, which is the mass market. We think we're way ahead of our competitors in terms of delivering prepaid in an effective and profitable way. Having said that, certainly, latter half of '14 and certainly, the way '15 is shaping up, this may not be a gangbusters growth year, but the long-term view hasn't changed. At the same time, because we are starting to achieve scale not only across the whole region, which, frankly, we've had for a while, but in more and more of our countries, I think we're able to generate more cash flow and, in fact, more profit growth because some of you that were around maybe for the Investor Day in late 2013, I think it was, we talked about our -- I don't know if we called them core countries or Tier 2 countries at that time, but it's sort of the other countries in PanAmericana other than Argentina and Venezuela, other than the big ones, specifically Colombia, Chile, Ecuador, Peru, Uruguay, et cetera. And we saw some very good growth out of those countries, both in terms of sub growth but also profits and cash flow, margin expansion and cash flow growth. So we still believe in that strategy and still believe that the long-term outlook is very positive for this business.

Michael D. White

Yes, I would echo what Bruce said, Scott. I think having been around Latin America most of my career, things go through cycles. Anybody who looks at the underlying demographics, particularly in a country like Brazil, the young population, the projections for more and more folks to move from C and D class into B and C, and then to Bruce's point, the low penetration rates, I think in the long run, this is still tremendous growth opportunity. And then, of course, we've got our broadband expansion as well. Having said that, with these kinds of headwinds from an economic standpoint, you do have to play a little more defense in the short run. And I think the cash flow thing is more a function of the fact that once you've launched the 3 satellites, one last year, one this year and one next year, 2 for PanAmericana, one for Brazil, and you build out your broadcast centers to support those satellites and you complete the billing system migration in Brazil, which we will do over the next 2 years, just inherently, the business is going to generate a little more cash flow, depending on what decisions we make about broadband, so...

Operator

We'll go next to the side of James Ratcliffe of Buckingham Research.

James Maxwell Ratcliffe - The Buckingham Research Group Incorporated

Two if I could, both delving into ARPU in the U.S. You mentioned strong performance in SUNDAY TICKET. Can you give us any color on that thing in terms of the SUNDAY TICKET ARPUs you're seeing and trends in paid subscribership? And secondly, I know political ads and advertising in general has been a focus. Can you talk about to what degree the better targeting capabilities drove political ads in 4Q?

Michael D. White

Sure. Thanks, James. First of all, talking about NFL SUNDAY TICKET, I think we had one of our best years ever in terms of NFL SUNDAY TICKET. In fact, paying subscribers, which is the important thing, because remember, we offer it for free with new subscribers, but actual paying subscribers increased about 10%. It was over 2 million in total. And in fact, our cash revenues increased in the low double digits, which, to be honest with you, pretty much offset the annual cost increase in the contract. And that was a combination of an increase in demand from our existing subs, some renewals, a strong renewals as well. The over-the-top test, I think, went well, but it's quite small and immaterial in terms of the total numbers. But with the outlook for continued growth in content costs, driven by our new contract, pretty much in line with most sports, I would say, something slightly higher than mid-single-digit growth rate. Over the long run, we'll have to increase prices commensurately with that in terms of SUNDAY TICKET. But we're very pleased with both the core performance. But also, I think we got a lot of good learnings out of the over-the-top, the whitespace offering in both universities and apartments, and we'll have more to say about that. We haven't yet finalized our 2015 plans. So we'll review those, of course, with the NFL. But once we've done that, we'll come back and talk to you about where we go with that. In terms of ad sales, we had a terrific year in ad sales, a real tribute to our team. And I think it was a lot of work that was done over the last several years, including political ads, but also addressable ads. So the political ad thing was a nice little add-on to our ad sales, although our share of the joint venture with DISH wasn't a huge number. It was just -- I don't know. It's $10 million or something. So it wasn't huge, but it was a nice addition in terms of both capability and as well as the growth. Our total ad sales growth last year was really strong, and in 2015, I think we can probably do double digits again, probably closer to 10%, but it really -- the real story there has been addressable ads. So it really is kind of marrying the precision of digital targeted ads with the power of the 30-second spot, where we take databases, and we can give precise ROI information on a company's ad spend, which you can't do with traditional advertising. It's been a huge home run for us. Now recognize there's only so much inventory we have. So you're always kind of shifting lower -- kind of lower ad dollars to higher ad dollars from a mix standpoint, but we doubled our addressable ads in the fourth quarter and are very excited about the capability we've built in the company to continue to grow it in 2015. So in total, we expect ad sales to be another good driver for us, with double-digit growth in 2015.

Operator

We'll go next to the side of Kannan Venkateshwar with Barclays.

Kannan Venkateshwar - Barclays Capital, Research Division

Just a couple of questions. The first is on the Venezuela exchange rate. And I think a lot of companies have most of the SICAD II rate, and I wanted to figure out what's -- how you're thinking about the exchange rate there and what the impact might be if you move to SICAD II. And secondly, from a U.S. domestic perspective, I know there are a lot of moving variables, and this may be slightly difficult, but is it possible to quantify the impact of the programming dispute that DISH had on the net add number that you guys ended up with?

Michael D. White

Sure, Kannan. I'm going to ask Pat Doyle because, obviously, we discussed with our auditors the whole question of Venezuela. And by the way, I might point out, guys, that is why we have gone out of our way to disclose as much as possible to you what the revenues and profits are in Venezuela, so you can put whatever rate on it you want. But Pat, why don't you talk about some of the accounting procedures...

Patrick T. Doyle

Yes, so I mean, as you know, there's 3 rates, and there have been 3 rates for a while in Venezuela. There's the official rate, which we haven't really been able to take advantage of in any exchange. The SICAD rate, which we have had modest amounts that we have exchanged there. And then until about a week ago, there was a SICAD II rate, which was supposed to be more kind of an open market, but it was very thin in the amount of activity there. So Venezuela has now effectively eliminated the SICAD II rate and substituted it with, again, something that they're calling an open market rate, it's not clear how much volume or how much activity, what the rate would be there. So we continue to evaluate it. We continue to discuss with our auditors and also look at other multinationals that are in Venezuela. For us today, we think the SICAD rate is still the best rate. And like I said, even if some of the companies that have gone to SICAD II, and now where there really isn't a SICAD II, it's probably going to create a little bit of angst with other companies. But be assured that we continue -- this is a topic that's right at the top of our list, and both us and our audit committee and our auditors, we're constantly monitoring this. But for now, we believe that the SICAD 1 is the best rate for us.

Michael D. White

But I think it's a moving target, and even those -- I mean, I've talked to a couple of fellow CEOs who have moved to the SICAD II rate, and they've moved like the week before the Venezuela government went and changed and said they're going to do something different. So until we know exactly where it's all going to settle out, and we'll monitor it closely, the only really depth of exchange has been the SICAD 1 auction process, where we've gotten little money out. So from an accounting standpoint, that is the rate we believe is the appropriate rate for us to use at this time. Having said that, we all recognize some of the macroeconomic challenges the country's going through. And I think as and when something else emerges, then we will have to reconsider what rate to use at that time. In terms of the U.S., to be honest with you, the dispute was actually not really until the middle of December. So it probably had a very, very tiny modestly positive impact on our fourth quarter net adds. In fact, I went back and looked at our gross adds by who they come from, and the ones we got from DISH didn't change from the third quarter or the second quarter as a percent of the total. So we might have gotten a few, but those disputes tend to be what-goes-around-comes-around, and so we've made an explicit policy since I've been CEO. I'm not going to try and take advantage of it in any way, shape or form. I don't think that's a smart thing for the industry. But we probably picked up a very, very modest amount in the December numbers, but it wasn't huge.

Operator

We'll go next to the side of Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I have 2 questions. First, Bruce, you talked a lot about macro issues, internal billing systems and foreign exchange in Latin America, but how would you characterize the competitive environment? And then a question for Pat on U.S. programming expenses. Is that -- I would assume that, that 10% growth for '15 is a high watermark and that going forward, we'd see more of that 7% to 9% growth.

Michael D. White

Bruce, why don't you go first?

Bruce Barrett Churchill

Yes, okay. So on the competitive, I would say, look, I don't think it's changed dramatically. It's always been quite competitive pretty much in every market. Obviously, the big regional competitor is América Móvil, and probably the other significant one is Telefónica, although they're not nearly the scale of América Móvil. So we've been dealing with this from a competitive point of view for quite some time. With respect to Brazil, I would say that the pricing has -- to some extent, maybe you're not seeing as much promotional pricing as you used to, as I'm sure -- as we've seen in the past. And everyone is facing the same competitive constraints or the macro constraints that we are. The one exception to that is probably Oi, which has some very aggressive price promotions out there. I'm not sure how that works out for them from an economic point of view because obviously, we've looked at those and have declined it and decided not to follow. But in general, I would say the competitive environment remains pretty much the way it has been.

Patrick T. Doyle

Yes, Marci, on the programming, your assumption's right. I think coming into '14, we definitely saw 2015 kind of staying in the 7% to 9% rate that we had articulated. I think as Mike mentioned and I mentioned, we really had a year in '14 that ended up being a lot lower at about a 6% growth than we had anticipated. Some of that was stuff like Dodgers, which we chose not to carry. So we do see that after you get through '15, that the cost growth would get back into that 7% to 9% growth rate that we had shared before.

Michael D. White

But probably, Marci, it comes down ratably over each year. So in other words, it certainly will be within that range, but probably in the upper end of that range, based on what we know today, in 2016. And then 2017, it moves to the lower end of that range.

Operator

We'll go next to the side of Amy Yong with Macquarie Capital.

Amy Yong - Macquarie Research

Mike, I was just wondering if you could comment on the regulatory environment and how might changes with Title II or net neutrality, impact either the consent decree or the timing with the pending merger with AT&T? And would there be any chance, given how long Comcast-Time Warner Cable's taking, that the FCC, DOJ would review your deal before Comcast-Time Warner Cable?

Michael D. White

Thanks, Amy. I suppose I'm not entirely sure on either front, but let me tell you what I know. On the second question, first of all, just on the clock, today, I believe we're about either 4 or 5 days ahead of Comcast. They had the clock stopped for some additional requests from the government last fall. As a result of that, we're now, I think, 5 days or 4 days, something like, that ahead of them. Whether or not it stays that way since it's an informal clock, who knows? But as of today, I suppose, in theory, we're ahead in the queue. In terms of the Title II and the net neutrality stuff, I think the thing that -- to be honest with you, the thing that impacts the timing and the reason that I've been cautious about it is this programmer lawsuit for which oral arguments are going to be heard tomorrow. Interestingly enough, I guess both lawyers have been given 10 minutes to make their oral arguments. So it suggests to me that the court will make a decision quickly. And once that is decided, then my guess is the FCC will have some kind of a new schedule depending on how the court rules. So my guess is over the next 3 or 4 weeks, it will become much clearer what the timetable will be from the FCC. But I don't think that the Title II actions that the commission plans to take next Friday will impact the timing of the negotiation. And keep in mind, we don't have broadband, so it's truly not merger-specific. Having said that, it's very clear that whether it's Comcast or us or anyone else, that the commission certainly is very concerned about the Internet and making sure that it is open and free. And frankly, we all support open and free. I think it's more -- there are differences in terms of how one ought to get there, but I don't think it affects the timing. But that's not to say that it may or may not be a consideration when the FCC actually makes a decision about conditions that it may or may not want to impose on either deal, and I think we'll have to see. But certainly, my expectation would be that subject would be a subject that would be part and parcel of those discussions.

Operator

And we'll go next to the side of Thomas Eagan from Telsey Advisory.

Thomas William Eagan - Telsey Advisory Group LLC

Mike, I was hoping you could talk about the consequences of the rollout of the programmer-led over-the-top services such as HBO, CBS, Nickelodeon. Are the programmers increasing their leverage with the distributors or not?

Michael D. White

Well, I'm sure you'll get 2 different answers, Thomas, when you talk to programmers or you talk to distributors. Look, I think the more important thing is, first of all, if you -- I mean, we've had a few disputes, okay? And we know which channels customers care about and which ones they don't. And if someone wants to put it over the top, heck, I can put it like Pandora. The Pandora app on DIRECTV today, we can put another app on and for the one channel. And it really is a function of, I think, being responsible and thinking about are you trying to give a worse deal to those that are taking a bundle that are, frankly, your best customers, and I think there are ways to accomplish this. I frankly think World Wide Wrestling didn't necessarily take the right approach. I think our biggest concern is that if you're going to go offer stuff over the top, outside the bundle, great. I've been a very strong proponent of more choice for customers, and we think we should have more choice. And I'm sure that will be an important topic of our negotiations and discussions, and every single one of them is different, okay? So I mean, every programmer, the situation is different. And when you ask about leverage, depending on how much great quality content they have and how consistent it is across all of the channels that they, shall I say, ask our customers to have on their service. And so I think it really is -- there's no doubt that there are going to be customers that would be better served with smaller bundles. And I think that's just a fact given that most customers want more choice, but I think you also have to recognize as they do that, they're probably potentially also undermining their own advertising model. So I don't think it's a one-way street at all. I think it's a complicated area, and I think none of us can sit here with a crystal ball and know how it all sorts out. I think that's why we've said we've got to have an ability to do things over-the-top if that's what the customer wants. Having said that, I've always said I'll be more than happy to price my services -- satellite-plus service and content separately because we believe that our economics and our low-asset base model of, I don't know, $15 billion net asset base for the U.S. to cover the entire country is still, on a marginal basis, a low-cost way to deliver high definition. And if you ever want 4K, it'll be the only way that you get a really good model to get it there. So I think it's certainly going to be interesting to see. Our primary concern is how it impacts trade-down and cannibalization of the core business, and I think we all agree if there's separate customers out there that are broadband-only and you can get them and get them into the ecosystem responsibly, terrific. I'm all for it, and I'm all for greater choice for consumers. But what I don't think is going to work is if one tries to kind of go à la carte at a price point that is attractive because we'll make the comparison of that particular channel versus having to carry a bundle, where consumers may not care about a lot of the other channels.

Operator

We'll go next -- we'll take our final question from Matthew Harrigan with Wunderlich.

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

With reference to 4K again, it seems like it's a nice marketing lever on the affordable luxury side. I mean, you're in tandem with Samsung right now. I know you indicated you got some other guys coming along. But can you talk about that in, perception-wise, and I guess you -- it's all ready, you're going to have a time-to-market advantage. Can you talk a little bit about your QoS and -- I mean, satellite, for a while, had HD quality. It was a lot superior to cable. I assume you would assume the same here. And then perhaps, most importantly, finally, breaking the dam in terms of getting a little bit of linear content because I think that's been the problem as much as anything else.

Michael D. White

Yes, no. I think you're right, Matthew. The first and most important question right now is what content's going to be available in 4K. Now there a lot of ways to get there. The best way is to shoot in 4K, but that's quite expensive, and that's why I don't think you see any of the guys jumping in for linear streaming. And to be honest with you, I don't expect to see linear streaming anytime soon because of the cost, HD trucks and everything else that you'd have to -- new cameras, you name it. What we have found is a number of different ways that are less expensive or more expensive to take a film that -- particularly for film and upweight it. I saw an execution of it at CES for Life of Pi. That was spectacular, just spectacular. Now I think Fox spent a couple of million dollars on that particular execution, but we know you can do stuff for $50,000 a film. And that's why my own guess is VOD will be the first, particularly for movies, the first priority from a 4K standpoint, and that's what we're ready for. And we are working on getting more content available. By the way, the AUDIENCE Network is all shot in 4K. Now I do think we have had a number of interesting conversations with programming partners about are there a few events we might want to partner up, maybe even with a television set manufacturer, the programmer and DIRECTV and consider an individual event shooting in 4K and streaming that on DIRECTV. The good news is with our new satellite capacity, we have the capacity to do linear channels. We have the capacity to do quite a bit more than we're doing today. So we'll be prepared either way it goes, but I think it's interesting -- I do think you'll see more 4K TV sets sold this year based on the strength of the marketing that you're seeing and lower prices from the TV set manufacturers. But I'm not building plans around this, all of the HD channels converting to 4K anytime soon. But we'll see down the road as things evolve.

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

I guess the Knicks look just as bad in that BT Sports 4K game in London, but what can you do?

Michael D. White

Exactly.

Operator

I'd like to thank everybody for joining the DIRECTV Group's Fourth Quarter 2014 Conference Call. You may now disconnect your lines, and have a pleasant afternoon.

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