DISH Network (DISH) Q3 2018 Results - Earnings Call Transcript

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About: DISH Network Corporation (DISH)
by: SA Transcripts

DISH Network Corp. (NASDAQ:DISH) Q3 2018 Earnings Call November 7, 2018 12:00 PM ET

Executives

Jason Kiser - DISH Network Corp.

Timothy A. Messner - DISH Network Corp.

W. Erik Carlson - DISH Network Corp.

Paul W. Orban - DISH Network Corp.

Thomas A. Cullen - DISH Network Corp.

Charles William Ergen - DISH Network Corp.

Warren Schlichting - DISH Network Corp.

Analysts

Walter Piecyk - BTIG LLC

Philip A. Cusick - JPMorgan Securities LLC

Marci L. Ryvicker - Wolfe Research LLC

Kannan Venkateshwar - Barclays Capital, Inc.

James Ratcliffe - Evercore Group LLC

Brett Feldman - Goldman Sachs & Co. LLC

John C. Hodulik - UBS Securities LLC

Jonathan Chaplin - New Street Research LLP (US)

Jason Boisvert Bazinet - Citigroup Global Markets, Inc.

Scott Moritz - Bloomberg LP

Mike Dano - FierceMarkets, Inc.

Sheila Dang - Thomson Reuters Corp.

Operator

Good day, everyone, and welcome to the DISH Network Corporation's Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jason Kiser. Please go ahead, sir.

Jason Kiser - DISH Network Corp.

Thanks, Lisa. Thanks for joining us, everybody. Joined today by Charlie Ergen, our Chairman; Tom Cullen, who runs Corporate Development; Erik Carlson, our Chief Executive Officer; we've got Brian Neylon, the President of DISH; Warren Schlichting, the President of Sling; Paul Orban, our Chief Accounting Officer; and Tim Messner, our General Counsel.

Before we get into Erik's prepared remarks, I think Tim has to do the Safe Harbor disclosures.

Timothy A. Messner - DISH Network Corp.

I do. Thank you, Jason. Good morning, everyone. Thanks for joining us. All right. We ask that media representatives not identify participants or the firms in your reports. We also do not allow audiotaping of this call and we ask that you respect that. Statements that we make during the call that are not statements of historical fact constitute forward-looking statements that are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results and/or our forecasts. For more information please refer to the risks, uncertainties and other factors discussed in our SEC filings. 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 risks, uncertainties and other factors discussed in our SEC filings and should not place undue reliance on forward-looking statements which we assume no responsibility for updating. As part of the process for FCC Auction 101 we filed an application to potentially participate as a bidder for those spectrum assets. Because of the FCC's anti-collusion rules, we are not able to discuss what if any spectrum resources we may intend to bid on, and we will not be answering any questions about that auction during today's call.

With that, I'd like to turn it over to our CEO, Erik Carlson.

W. Erik Carlson - DISH Network Corp.

Well, thank you, Tim. If you tuned into our earnings calls during Joe Clayton's years as CEO, you know he had his own special way of greeting participants, and as you may have read, we lost Joe last Saturday. Far too early. He was a giant in our industry, a passionate leader who left an indelible mark on our company, and so in honor of Joe, I'm going to open with, good afternoon to our East Coast participants, and good morning to those of you on the West Coast. Thanks for the memories, Joe.

I've got a few remarks on our three primary lines. DISH TV, our legacy business, Sling TV and of course our Wireless business, our future business. So, let me start with Wireless first. As you may have seen the news in the last 24 hours, we've announced that Ericsson is serving as a key partner for us in our NB-IoT build-out. Ericsson's assignment is to deliver radio access and core network, and has delivered our national RF plan. Charlie and Tom are both here to take any questions you may have on that front.

Turning to DISH, over the past several quarters I've had the opportunity to highlight recognition our company has earned for its excellent customer service. And once again, I can congratulate our team.

Late in the third quarter, DISH earned J.D. Power's top award in our industry. Number 1 in overall customer satisfaction among national TV providers. The award really recognizes our focus on delivering a top quality customer experience as a premium TV brand. This is an ongoing theme at DISH and its disciplined effort to identify and address our weaknesses, while we continue to build upon our strengths.

Service most certainly is one of those many strengths. So I'd like to congratulate everyone who has worked so hard for that honor, especially our front-line team. Now while we have enjoyed positive churn trends over the past several quarters, churn is a bit more complex this quarter.

Our overall churn rate was 2.11% for the third quarter compared to 1.46% last quarter, and 1.83% in a year ago quarter. While service fundamentals remain in place, we can point to the Univision situation as having contributed to roughly half of the net sub loss in the quarter. Now loss attribution is not a perfect science, and lots of factors go into that data. But that will put you in the ballpark as you work to understand our trending.

Also last week, AT&T pulled HBO from DISH for the first time in HBO's more than 40-year history. First let me apologize to our customers for that inconvenience. I want to be clear on what's behind this. It's not a disagreement over rate for an la carte premium service. This is about HBO requiring DISH to sign up for a guaranteed number of subscribers, and that's really regardless of whether another DISH customer ever chooses HBO. We don't think that's the right deal for our customers, it's definitely not the right deal for us, nor is it likely good for the industry, and we welcome any questions on that situation.

I'd like to conclude with Sling. Sling continues to maintain its leadership position in live, over the top, Internet delivered Pay-TV. The power of live continues to prove itself on Sling as customers increasingly embrace it for sports, including college and pro football, and we remain dedicated to continuous improvement in reliability and streaming performance. We long ago learned how crucial performance is in live TV.

We continue to focus on delivering our uniquely-flexible relationship-based style experience regardless of what side of the pay wall a customer happens to be on in any given moment. We're offering great content, great experiences regardless of the subscriber status. And Sling users, including former subscribers and those we call occasionals, are welcoming the extra reasons to choose to engage with Sling.

Another reason to choose Sling will be the arrival of Discovery's content on the performance later this month. That content will come without any impact on price and Discovery has been an excellent partner for us. So, we think Sling customers will love having Discovery on the service. Now we're still finalizing our launch plans, so look forward to more news from us on that launch.

With that, many of you will recognize Paul Orban's name. As our Chief Accounting Officer, he's been with us for every customer we serve, both at Sling and DISH. With Steve's departure in August, Paul now serves as our Principal Financial Officer. Paul is going to make a few brief remarks on the quarter before we open up to Q&A.

Paul, take it away.

Paul W. Orban - DISH Network Corp.

Thank you, Erik. First off, I appreciate the opportunity to share with you the highlights of our third quarter performance. As someone who was here for the launch of DISH Network, I've seen us transform an industry before and I'm excited for the next part of our journey.

In reviewing some of the highlights for the third quarter, both operating income and EBITDA were up from the prior year. Operating income was $563 million, $114 million or 25% increase over the prior year. EBITDA was $743 million, a $62 million or 9% increase.

As we have done in prior quarters, it's important to note the positive impact of the new revenue recognition standard, which was implemented back on January 1. This had a $41 million positive impact to both operating income and EBITDA. The benefit from this new standard will decrease over time as the deferred cost began to build up.

With respect to operating revenue and expense, revenue was down 5.3%. This is largely due to a lower subscriber base and the decrease in Pay-TV ARPU. Our operating expenses decreased 9.6%, primarily due to a lower subscriber base, lower subscriber acquisition costs, operational efficiencies and decreased programming costs related to Univision.

As Erik mentioned, while the Univision situation is having a negative impact on our churn rate, it's having a positive impact on our subscriber-related expenses. The lower subscriber acquisition costs were partially helped by the adoption of the new revenue standard.

Continue to keep in mind, while we are building our wireless network, we capitalize nearly all of our interest expense. Also, our effective tax rate is lower in 2018 due to the Federal Tax Reform Act.

And looking at our metrics, Pay-TV ARPU is down due to a higher percentage of Sling subscribers in the Pay-TV subscriber base and a decrease in revenue related to pay-per-view boxing events. This decrease was partially offset by DISH TV programming price increases in February and increases in revenue per subscriber related to Sling TV.

The Sling increase was mainly driven by the mix of customers taking higher price packages and add-on revenue, such as ad sales and cloud DVRs. In addition, the impact of the $5 increase on our Orange package began this quarter and will be fully realized starting in the fourth quarter.

Our DISH TV churn rate increased due to Univision and our DISH TV SAC was lower largely due to lower advertising expense per activation. Free-cash-flow generation continues to be strong with $968 million in free cash flow during the first nine months.

With that, I'll turn it over for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. We'll take our first question from Walter Piecyk with BTIG.

Walter Piecyk - BTIG LLC

Thanks. Charlie or Tom, can you talk about how you expect CapEx to ramp as far as the NB-IoT? Now, you have these things signed with Ericsson and I think SBAC also talked about you signing leases. Haven't really seen much in the CapEx line. How much does it go up in Q4? And how do we expect that to ramp throughout 2019?

Thomas A. Cullen - DISH Network Corp.

Hey, Walt. This is Tom. Yeah, you saw the Ericsson press release. We're bringing up towers now as we speak, and that will continue through the fourth quarter. It's more than just SBA. We have signed lease agreements, master lease agreements with all the major tower companies as well as a bunch of regional ones. We also have site acquisition and construction firms under contract throughout the country. So things are beginning to ramp. The CapEx guidance hasn't changed since what we've given previously, which is we expect the total wireless spend between now and the end of 2020 to be between $500 million and $1 billion.

Walter Piecyk - BTIG LLC

Got it. So you don't – so as far as the cadence of that, it sounds like it's not really going to hit that hard in the fourth quarter. It's probably more of a 2019 event. I mean, are you actually going to be hanging antennas on towers in 2018?

Thomas A. Cullen - DISH Network Corp.

We are. We're doing that right now. But to your point, I think the bulk of the activity will be in 2019, but we've got a pretty good backlog scheduled for the next 60 days.

Walter Piecyk - BTIG LLC

Got it. And the maturity that's for next year on the debt, I think it's the 7 7/8%, is the plan just to pay that with the cash that you will obviously have available on the balance sheet or are you looking to do some type of additional debt issuance to keep cash at a higher level?

Jason Kiser - DISH Network Corp.

Yeah, Walt, this is Jason. Right now, the plan is to pay it off.

Walter Piecyk - BTIG LLC

Got it.

Jason Kiser - DISH Network Corp.

Walt, are you on the line? Do you want to ask...

Walter Piecyk - BTIG LLC

I am. And I just got a – I have a couple of quick follow ups. I just want to make sure, conceptually, based on the subscriber numbers that you talked about for Univision, it looks like you're probably losing at your average margin, you're losing $45 million a year of EBITDA from the subscribers that you lost, and you're picking up $150 million. Even if Univision only wanted $1 a month, and I'm sure they want more than $1 a month, you're picking up multiples of that in EBITDA. So it looks like a fantastic trade in terms of dropping Univision and only losing that many subscribers as a result. I just want to make sure I'm not doing anything wrong in the math there.

And then as the follow up, more of a conceptual question for Charlie. You're dropping Univision and it looks like it's never coming back, but yet you're taking a channel like Discovery and actually expanding its distribution to Sling. Maybe just walk us through, like what's the difference between a Univision? Is it that they're available direct to consumer and that there is no way to get something like Discovery without being part of a cable bundle? Just wondering how you're thinking about some of these broadcast channels versus some of the cable networks because I think people generally didn't think you would need a channel like Discovery longer term. And so just trying to understand how you think about the puts and takes of those negotiations going forward.

Charles William Ergen - DISH Network Corp.

Yeah, this is Charlie. I'll try to – I'll start maybe conceptually. We would love to do business deals with anybody and everybody as long as those business deals make sense for us, and we try to make sure in any business deal that we also try to make sense for our partner because if business deals don't make sense for both parties, then there is frustration on one side or the other. So Discovery is a point where we were able to actually extend our contract and do a new contract with them before it was even up because we were able to sit down and work as teams that where we found new places we could work together that might be beneficial to both companies, might not. We might not be successful, but we're working together to try to improve the linear TV model as it is today and to expand on the streaming model. So it works when parties are engaged in that regard.

With Univision, a little bit of bad luck, and that this is not – in the sense that there's a management change in Univision at the time that our contract was up and there was probably – and the way we've always dealt with Univision is we're the leader in – we've always been the leader in Latino programming in this industry, so we've always been structured a little bit differently. It took a little bit of time for Univision management to really come to understand that and what the puts and takes were.

We had long voiced our frustration of their most valuable product of soccer being available on Facebook to our customers for free, even though we don't believe that was allowed per our contract. We – didn't make sense for us if they were selling the product for $7.99 to pay something materially north of that for our customers. We had real data on their ratings, and while they were saying they were the number one Hispanic channel, we knew that that wasn't true with our customers. We knew that the number one channel distribution was actually Netflix, right? And Telemundo had previously usurped and passed Univision in many of the day and night times.

And then so all those things, when you put all those things together, I think there was an unrealistic expectation. In fact, the previous management, it was kind of like, well, why do you want that number, it doesn't make any sense. And it was like, that's the number we need for budget purposes. So that's not a real strong argument. You might need it for budget purposes, but consumers won't pay that. So we have to fight for our customers. The customers expect us to fight for them. We expect that our customers are not telling us that they want more programming; they're telling us that they're not seeing the value in linear TV today. And it's up to our industry to try to make it more value.

So Univision, it's a good company, with good product. It's a valuable product, but – and if both sides knew what they knew today four months ago, that probably would have been an easier task. But and so now we're in a weird position where because we've given our customers discounts and many of our customers have gone to get Univision for free with an off-air antenna or perhaps from one of the streaming services online that's free, or perhaps from Univision directly, or perhaps from one of our competitors. We actually would face backlash if we put Univision back up again. So the problem is compounded. So that's – it's not that both management teams haven't tried to figure something out. They just haven't been successful at it.

Walter Piecyk - BTIG LLC

But it looks like a phenomenal financial trade for you at this point.

Charles William Ergen - DISH Network Corp.

Well, it's not. In the short term, the answer to that is yes. The problem is that, and I think our challenge to Erik and his management team is to continue that. But what happens it's not that you – you continue to lose customers, all right, over a period of time. So it eventually tails out, right. And, obviously, the worst pain is the first four months. But secondly, for new customers, if you don't have the product, you get less new customers, right. So the challenge, which I think we can meet here, is so it's not quite as profitable as maybe you laid out, but it's certainly, at least initially, more profitable than doing a bad deal. The key is...

Walter Piecyk - BTIG LLC

No. And the flip side of that is like you look at this, Discovery will help you get customers on Sling. So that's the other side of this.

Charles William Ergen - DISH Network Corp.

Well, no, the real thing, the challenge for us is we believe we can actually increase our market share next year in Latino because we're going to be able to go out to customers and give them Univision. Just a simple example, but with an off-air antenna to give them Univision product without them having to pay for it, and our competitors are charging for that. So we're going to be more competitive with those people who are willing to get Univision another way. And even if that's directly from Univision, it will be cheaper than what we would have to charge them. So we actually become more competitive for in the bell curve the 40% of the people who are willing to get Univision with an off-air antenna for free. Right?

And so we actually will be stronger in that category as opposed to being strong against the whole category where we're all charging for it. So there's a different dynamic there. It's a long-term play. If you take it half a step backward by taking Univision down, we'll take a step forward in 2019.

Walter Piecyk - BTIG LLC

Thank you very much.

Charles William Ergen - DISH Network Corp.

So that's the gist of it. But it's maybe not quite as rosy as – I know you've given me a soft ball question there. It's not quite as rosy as you say.

Walter Piecyk - BTIG LLC

Thanks, Charlie.

Operator

We'll take our next question from Philip Cusick with JPMorgan.

Philip A. Cusick - JPMorgan Securities LLC

Hi, guys. Thanks. One for Charlie. Can you talk about where you are in building an ecosystem of customers for the NB-IoT system? I know you need a certain number of customers in every market in a year and a half. And then for Erik, you said that Univision was about half of the losses. That helps a lot. How should we think about these losses coming in through the third quarter and then tailing in through the fourth? Thanks.

W. Erik Carlson - DISH Network Corp.

Yeah, so, Phil, that's correct. As I indicated up front, it's not a perfect science. But our best data tells us that Univision, that situation accounted for about half of our net subscriber loss that we had for the third quarter. Obviously, as that continues to increase in tenure, right, so we're in month four – actually, month five right now, the losses will continue to tail off. Although we will continue to have losses in the fourth quarter.

Charles William Ergen - DISH Network Corp.

Yeah, and for us, it's how do you turn – how do you make lemonade out of lemons? And we believe we have plans to do that. We believe there is a – we know – we now have been able to track our customers that leave with Univision, and we've discovered a new market for ourselves that we previously – we prefer not to play in it. We prefer to keep everything in the ecosystem. We prefer that our customers pay for Univision. But to the extent that we can't they don't want to have a contract with us, we're going to find – we're going to be able to put an off-air antenna for our customers to get it for free. And we know that in the urban markets where most of our customer, Latino customers are, that is a very attractive alternative for our customers. And we've ramped that capability up and we'll continue to ramp that up.

As far as the IoT, we're building, basically, a neutral-host IoT network, a narrowband IoT network. We obviously have to get it built before we can get customers. So it's one thing to talk about what you're doing. It's another thing to actually show them and let people get on your network. So we don't have lots of customers to talk about today, and I don't think we'll have lots of customers to talk about until we get our network built. But it's something that we think – it will be a very functional narrowband IoT network that will work. We'll have lots of competition, and when we first announced it 20 months ago, there was nobody else that had announced narrowband IoT programs. But obviously today, the major carriers all have narrowband IoT programs in place, including T-Mobile on a nationwide basis. So we'll have a lot more competition than we anticipated. But we like competition, and we'll do the best we can.

Philip A. Cusick - JPMorgan Securities LLC

Erik, if I can follow up, how should we think about the remaining base of customers split between urban homes, where you compete with cable, versus rural, where it's just satellite?

W. Erik Carlson - DISH Network Corp.

Well, I mean on the DBS side and we've talked about this in the past as, I mean, obviously we have traditionally been focused on rural. That's where, obviously, the business grew from and our distribution grew. And on the DISH TV side, we continue to be focused on identifying profitable subscribers that can be with us long-term, and that points us to a less connected house and points us more towards a rural profile. And since our distribution is there, that's where the majority of our customers are coming from today.

And then on the Sling side, obviously it needs broadband to work. So obviously, from a Sling perspective, we're focused more on an urban customer, somebody who has high-speed broadband. And the nice thing about that is you don't see a lot of cannibalization, and it allows us to focus on, really, if we execute at the highest level, providing a Pay-TV service to 100% of the customers who want Pay-TV.

Philip A. Cusick - JPMorgan Securities LLC

Thanks, guys.

Charles William Ergen - DISH Network Corp.

And so just, whereas our Latino – this is Charlie – but our Latino customers are mainly – are a paradox of that. They're mostly in urban areas, which allows an off-air antenna to work for them. Our normal DBS customers, that's not the case. They live mostly in rural. And obviously, most our local channels are delivered via satellite there as long as we can get a retransmission consent deal with somebody, which we historically have been able to get.

Philip A. Cusick - JPMorgan Securities LLC

Understood.

Operator

Our next question comes from Marci Ryvicker with Wolfe Research.

Marci L. Ryvicker - Wolfe Research LLC

Thanks. A question on wireless and then one on Sling. So in terms of wireless, I think we get the $500 million to $1 billion build for Phase 1. When do we need to start worrying about the $10 million for Phase 2? Does that come right away, like in 2021?

Charles William Ergen - DISH Network Corp.

This is Charlie. Yes, it will come in 2020 and 2021 and 2022. And it will – we will certainly be a lot more open about how we're going to do that as we get farther along in that business plan. For us, we have to focus – fortunately or unfortunately, obviously, we're focused on the initial build-out because we have to get that done to get to Phase 2. And so we have the capital to do Phase 1. We don't have all the capital we need to do Phase 2. But that capital could come in many shapes and forms. And like anything else, when you have a really good business plan, you can find partnerships and/or capital to make those things happen. If you don't have a good business plan, you can't do that. So when we launched DBS, we had a much bigger issue. We weren't proven – we had never done something of that magnitude and scale before.

But we had a good business plan, and we were able to find partnerships. For what would have normally cost us capital didn't cost us capital because people partnered with us and then we raised capital to use for things like a launch or something like that that we actually – or a satellite that we actually had to pay for. So, I think you'll probably see some kind of combinations like that.

But we've got to get the – look, the elephant in the room is obviously we have to get to – there's certainly skepticism in the marketplace that we somehow don't meet our – or don't qualify for the build-out schedule in Phase 1, and again we're confident that our narrowband IoT with our flexible – meets the terms of our licenses and we're working really hard to make sure we make the March deadline.

Marci L. Ryvicker - Wolfe Research LLC

Got it. And then my question on Sling, I don't think anyone is surprised by the sub numbers. I mean, they are lower than what we had seen. Is it more an issue of a gross add or a churn? And if people are churning off, do you know where they're going?

Warren Schlichting - DISH Network Corp.

So, hey, Marci. It's Warren. So, it's a good question. We continue to march forward with our focus on the customer experience. We do see folks that come and go. And so, I think as we've talked in the past, we're embracing that behavior with no contract and this easy low switching cost. We see a lot of people returning to Sling.

And so, where we're focused is how do we give folks just an awesome customer experience, so that this new behavior that we're seeing is rewarded when the customers actually come back to us. And that's – a lot of that has to do with just the way our – we've got this unique structure. But just – we like to think we're pretty good at video, and we've focused on the basics and folks seem to be coming back.

Charles William Ergen - DISH Network Corp.

This is Charlie. I mean, I think one of the phenomenons you're seeing is I don't think that OTT business is slowing down. I think it's probably accelerating. But you're seeing a lot more players in the marketplace than just DISH and Sony, now with DIRECTV NOW and now with YouTube and others and Hulu.

You're seeing major players that are all gaining subscribers, and everybody has a little different offering, a little bit different slew of channels, a little bit different interface.

Obviously, Disney has talked about going direct to the consumer. So, you're going to see an awful lot of people in the category, and at some point there will be too many, and at some point there will be a consolidation.

But so, it's probably more that the category is growing, and the competition is just tougher, and most people probably aren't making money in the business today based on their programming cost. And so, at some point, somebody is going to get profitable and kind of lead the pack. And so – and we think that Sling we can be – we think we have a lot of advantages and some really, really technology, and we think we can be a long-term player there.

Marci L. Ryvicker - Wolfe Research LLC

Are you profitable now, Charlie, in Sling?

Charles William Ergen - DISH Network Corp.

It depends on how you look at it. But under Charlie Ergen's definition of profitability, I think I'd like to make a little bit more money than we're making today.

Marci L. Ryvicker - Wolfe Research LLC

Okay. Thank you.

Operator

We'll take our next question from Kannan Venkateshwar with Barclays.

Kannan Venkateshwar - Barclays Capital, Inc.

Thank you. Charlie, you've spoken a couple of times about partnerships for your wireless plan and you've mentioned this in the past as well. And some of the cable companies are starting to talk about potentially using third-party spectrum to reduce their MVNO cost. If you could just share your thoughts on what kind of partners you're looking at and whether some of the opportunities on the cable side might look interesting in the future. So that's the first one. And secondly, on the virtual MVPD side, is there an opportunity for Sling to essentially sell itself on a wholesale basis instead of a retail basis? Thanks.

Charles William Ergen - DISH Network Corp.

I would contend that we already sell Sling on a wholesale basis to the consumer given the low cost and their cost of programming there, but let's talk with the partnership kind of question. So, the broad answer is we don't talk about individual conversations we're having with people, but we will say that we certainly have a lot of interest in what we're doing.

The thing that's different about what we're doing is we're building a 5G network with a completely clean sheet of paper from the ground floor up without the legacy of the incumbent networks, which were built – which have 2G and 3G and were built for voice. And we're transforming to – and this isn't 5G marketing, this is real 5G. And what I mean by that is we're transforming what's happening – instead of building a network primarily for voice, we're building a network primarily for digitizing the physical world. And I'll give you just a simple example of that because this will blow your brains out if you try to really totally understand it. But Uber is a good example of transforming digitization to the physical world. When you pull your phone out and push the Uber button, five miles away a car starts turning immediately towards you, right? So you transform something in the physical world.

The future is going to be that not only are you going to – not only is that car going to move towards you, there's not going to be a driver, right? And so there is no network today in the United States that can do that at the level that you need to do it. They don't have the latency, they don't have the throughput and so forth and so on.

So anybody that's in – so the kind of people that are interested in what we're doing in terms of – and by the way, China is doing the same thing. So if we want to lead in 5G, I will guarantee you you're going to have to have a stand-alone network because that's the only way you're going to compete with other people in the world who are doing stand-alone networks.

So car companies are going to be real interested in what we do. People like Uber are going to be very interested in what we do. If you're in robotics and manufacturing and you have to synchronize all your sensors and now your robotics are on cables and you want to make those things wireless so that the robots can move, you're going to like what we're doing. If you're in health care and you want to operate on somebody in a rural part of the country with a trained surgeon, you're going to be able to do that with our network, right? So if you want to do virtual reality and you want to have a headset on that's wireless with tons of capacity, you're going to like what we do in our network.

So you not only have to have really efficient use of spectrum in terms of how you architect your network, you also have to virtualize your network. And by that I just mean you're taking a lot of hardware that's in the marketplace today and you're going to turn it into software which is going to lower your OpEx, CapEx but it's going to make your network more flexible so that you can change your network at a moment's notice.

And so cable companies, to your point, would they want to start – would cable companies want to start with the old technology or do they want to move to the new so that they can leapfrog what the incumbents do? If I was the CEO of a cable company, I'd want to leapfrog, right?

So because our network is fundamentally a neutral host, it means that any of the people we talked about could be part of our network. Think of us as wireless AWS, right? With AWS you can just add more capacity to AWS. You get to use your own data. It's secure and it scales and it's a very – think about that in a wireless space. That starts to make some sense to an awful lot of people that are looking at it. So not the analyst and not the – maybe even the FCC hasn't caught up with what we're trying to do because maybe we haven't articulated it well yet. But we're going to be a big factor in where this country goes and we're really pleased to see the executive order where 5G is a national priority. We will be part of that, and if it's a national priority, you have to have a ground floor up network because the legacy is – it just eliminates a lot of the things you can do in 5G.

Kannan Venkateshwar - Barclays Capital, Inc.

Can I just follow up? I mean, I think in the filing with the FCC objecting to the T-Mobile-Sprint deal, I think there was a suggestion, if I'm not wrong, of potentially partnering with T-Mobile and Sprint or somehow participating in that network. Is that a way to accelerate some of your build-out? Is that something that you would consider?

Charles William Ergen - DISH Network Corp.

I think our objections to T-Mobile-Sprint are just really fundamental on a competitive nature that consumer prices are going to go and there's too much concentration in the network. Maybe on point to your question, in other countries where four has gone to three, as part of those deals, the two incumbents going to three had to – part of their conditions were to facilitate a fourth provider. And that could have been in build-out or spectrum or MVNO deals or things like that.

So I think there is some historical precedent in other countries for that kind of thing, but I don't know that that was material part of our opposition.

Kannan Venkateshwar - Barclays Capital, Inc.

All right. I'll leave it there. Thanks.

Operator

Our next question comes from Vijay Jayant with Evercore.

James Ratcliffe - Evercore Group LLC

Hi. It's James Ratcliffe for Vijay. Two if I could. First of all, in the Q, you mentioned there's a new long-term incentive plan with 4.5 million options or so that vest based on performance metrics. Can you talk about what those are and what metrics you're using to judge the performance of the business and if any are related to wireless? And secondly, on the HBO front, I know you mentioned earlier that the key issue here is the minimum subscriber level. Did the prior deal have a level? And if so, what is it about the new proposal that isn't acceptable? Is it that it's higher or the term? Any more color would be helpful. Thank you.

Charles William Ergen - DISH Network Corp.

I'll take the second part of your question, and Erik will probably take the first part of the question. On HBO, the key point is that they would require us to have a minimum number of customers that we pay on. The problem with that is that that wouldn't be maybe unusual in an environment 20 years ago, but the environment today is you could – if you run the math on that, you could be in a situation where your competition, AT&T DIRECTV, which owns HBO now, right, and they're already doing this, they're giving HBO away free for life. So why would a customer pay DISH when they can get it from DIRECTV free for life, right, or from AT&T free for life.

So, therefore, you're paying on customers that you don't have, and they're giving it away for free but they're still getting paid on customers, right. So that would be – there's no – that would be malpractice. There's no company that would sign up to a deal like that. And then additionally, HBO sells direct to consumers, right? And you don't know what price they're going to have, I mean, what they're going to sell it at, and unless you contractual guarantees and things like that, that, of course, we haven't been offered. So it makes sense if you're AT&T, what they're doing makes sense, right. In other words, they will lose some money from DISH in terms of the subscribers who are paying on, but they will get subscribers from DISH, particularly in rural America, because they're the only other alternative for the customer.

So this is purely an anticompetitive play that we tried to warn about. They said they weren't going to do it at trial. They said they were never going to take HBO to – it had never been done before. We've always been able to reach agreement with HBO. First time in 40 years. The only difference is AT&T and DIRECTV now own it. You guys are smart guys. You guys are analysts. You guys can figure it out. It doesn't take a rocket scientist to figure out what's going on here. But we can't sign a deal that we would lose, that we would actually pay for their customers. That doesn't – then that's what it would be. So that's the gist of that. And, Erik, you want to take the incentive?

W. Erik Carlson - DISH Network Corp.

Yeah, sure. So I think one of the things that we pride ourselves at DISH about, and we have for quite some time, is that we take a long-term approach to the business. And so we have long-term incentives as management from time to time. The incentives should really help us focus on things that cannot only impact the business today, but help prepare us for the future. And generally speaking, I mean, we're focused, obviously, on growing customer relationships and our capabilities. Definitely improving the customer experience. Having a good balance between acquiring profitable customers and having cash on the balance sheet. And then really focused on fielding the best team we can. So our incentives generally are focused in on those four areas.

James Ratcliffe - Evercore Group LLC

Thank you.

Operator

Our next question comes from Brett Feldman with Goldman Sachs.

Brett Feldman - Goldman Sachs & Co. LLC

Thanks. Just a quick follow up on the HBO question. It does appear as a blackout. Can you give us any color into maybe what fundamental impacts we could see in the fourth quarter, and whether it's churn or financial? And then a second question on spectrum. Can you give us an update on the conversations between SNR and Northstar with the FCC regarding their status as designated entities? And then if we just assume that your argument prevails and the R&D as designated entities, what would you expect happens then? Do you anticipate that the spectrum would be returned? Or are there other things in play at that point in time? Thanks.

W. Erik Carlson - DISH Network Corp.

Yeah, I'll take the second part of that first. I guess it's one of the frustrating things in terms of the DE structure with the two DEs. Obviously, according to the courts who are the third-party arbitrator, that we didn't qualify as a DE, but we weren't given the chance to cure. And we still – and so now, we've been given a chance to cure, but it wasn't the normal chance. Usually, we'd go in and talk about things and I've always found when you talk about things you probably can come to more common ground about it than if you're just filing paper. But we're in a situation where the process, at least so far, has just been to file paper.

So, that's been complete. I think in late October, all those filings were in. So, the FCC has all the information they need now to make a decision. And at the core of it is the discounts of about $2.5 billion on the spectrum. And there's other side issues with the return spectrum and penalties and other things, but the core issue is this build-out, there were 30 – I think, there were 36 things that the FCC found lacking in our application, so we took that seriously.

And we said if that's the case, we're going to make it right. And with the DEs, we've gone in and changed all 36 things. And I think people that have objectively spent time and read those filings and looked at it, I think objectively most of the things I've read I think 100% of them have come to conclusion that we have in fact cured. But, obviously, FCC is the one that needs to make that decision.

So, it would be helpful. It would be helpful to get a decision, whatever that decision might be, so that we have certainty and we can move on with some of our planning, because we would love to have more meaningful conversations about how we can utilize that spectrum. And most of the time today has been spent on – management time on our side has been kind of in litigation, which is not productive.

Brett Feldman - Goldman Sachs & Co. LLC

Just to be clear, it is fair to say that if you have a favorable outcome, what you ultimately would want is you'd want to have those licenses return to the affiliates?

W. Erik Carlson - DISH Network Corp.

Yeah, I mean, I think, obviously, to the extent – look. I think to the extent that – I mean, I believe this was probably in the papers that were filed, so nothing nonpublic here. But I think to the extent that had the DEs been given the opportunity to cure as every other DE has throughout history, that there never would have been a return to spectrum. There wouldn't have been a need to return spectrum. They would have been able to figure out a way to qualify as DEs and there wouldn't have been a return to spectrum.

And so, the policy has been that you go back to the point – that when that happens, you go back to the point in time as to when you had the dispute which would be that they weren't allowed to have a conversation.

They still haven't been allowed to have a conversation. It's all been through paper. So that's a bit unusual. I mean, it feels like we're in the dog house, right. And, again, I think that we'd like to be out of the dog house, and we'd like to do whatever it takes to get out of the dog house, but that's kind of where it is.

And then, on HBO, I forget the question now.

Brett Feldman - Goldman Sachs & Co. LLC

Yes. Any financial impact or fundamental impacts so far.

W. Erik Carlson - DISH Network Corp.

Oh, well, yes. Yeah, so – it's essential programming and we'll lose customers. But we – given what contraction they wanted us to do, we won't – it will be interesting to see if we lose money or not because how much money we lose because we'll lose customers. But the actual cost of HBO we won't take a loss on that as we might have under the contract, but we'll lose customers that, obviously, and particularly rural America we know those customers. The only alternative for them is to go to DIRECTV. So, it will have a negative impact. We just don't know how much yet, but it will be a negative impact for sure.

Brett Feldman - Goldman Sachs & Co. LLC

Thank you.

Operator

We'll take our next question from John Hodulik with UBS.

John C. Hodulik - UBS Securities LLC

Okay. Thanks. Maybe for Charlie, just a quick follow up to that question. It looks like you're seeking arbitration under the rules AT&T agreed to as part of the Time Warner deal. What does that process look like? And what's the timing of it? And does HBO come back up during it? And then maybe a second one for Warren. Anything you can tell us about the cadence of the sub growth on Sling? Some reports that you may have reestablished some momentum towards the end of the quarter. And do you expect to continue to grow that business even through this sort of aggressively-competitive phase? Thanks.

Charles William Ergen - DISH Network Corp.

Yeah, on the HBO arbitration, unfortunately, in the trial that AT&T did not ever consent to HBO arbitration. So, obviously, you can see why, because they're able to use it as a weapon against people like DISH. That's why you could take what they say and you can take what I say and you can take all of it with a grain of salt. The way to cure the issue is to go through – is we will go through arbitration. We voluntarily would go to arbitration. It would look like baseball arbitration, which means that they would issue a contract, they can include a guarantee and everything that they want to have in it. We would say here is what we will pay. And an arbitrator has to pick one of those two contracts, right?

And then you have to live with that contract. And that would be the fair way to handle this particular dispute. Consumers are not harmed at all, and whoever has the best economic argument wins the day. And that's the way it should be. And so they're not required to go to arbitration because they want a trial.

Turner Broadcasting does have to go through arbitration but not HBO. So you can see why AT&T would have the position that they have because they can use it as an economic weapon, and they can gain market share. Just like they – look, they gained market share with Univision. I mean, they got some of our customers in the third quarter for Univision, so. But I will say, some people say we've been in a lot of disputes.

First of all, we've done a lot of deals without being in disputes. And we've done massively more, and two other people are going to be in disputes because people just, when the financial guy started looking at deals, when they started realizing that the more customers they get the more they lose or in some cases if you do lose customers you lose more, even more money. It's not going to be business as usual, and you're going to see a lot of disputes in this industry. And we probably have fewer than most people when people really start looking at the math. Because linear TV is going to be challenged and the model's changing and our industry is not doing enough to keep up with it and working together enough to stave off the other new entrants.

W. Erik Carlson - DISH Network Corp.

And then just on the cadence of the sub growth, the cadence is more or less the Pay-TV cadence and just think, at least in these early days – and it is very early in this business – the volatility is higher, so you see larger swings. Then with respect to growing, we absolutely expect to continue to grow, even in the face of competition. Our bet is, obviously, that rationality returns at some stage. I think we've seen a little bit more fiscal conservatism from DIRECTV NOW; probably a couple more that could afford to get financial religion there. So, yes, we expect to continue to grow, and we think we're in this for the long haul. And we're hopeful that rationality returns to some of our competitors.

John C. Hodulik - UBS Securities LLC

Okay. Thanks.

Operator

We'll take our next question from Jonathan Chaplin with New Street Research.

Jonathan Chaplin - New Street Research LLP (US)

Thanks. Charlie, a question for you on the FCC request for information on the specifics of the IoT network, are you expecting a response from them from that and if so, in what sort of timeframe? And if they don't respond in a reasonable timeframe, is that tacit approval that the network plans that you've submitted meet the requirements under the rules, under the build-out rules?

Charles William Ergen - DISH Network Corp.

Well, I'd say a couple of things. One is we filed our plans 20 months ago. So we're past the point of no return. We've ordered all the equipment and entered into leases and we're down the road with our network. So there's not an opportunity for us to change it today. We're happy to have whatever dialogue with the FCC and the staff in terms of what our plans are. And we probably should do more of that so that they understand what it is to do. But the terms of our build-out were set four or five years ago with our license. And it's the license that – you just have to read the license. Again, you've got read – but it's a license that has what's called flexible use, which means you basically have to have a service. And, look, we'd love to have a more robust service with full broadband but with only 5 megahertz of uplink spectrum, that is not a practical thing you can do.

So rather than – again, this is another tough concept for you guys. But when we build a network that's 10 times more efficient than the current networks, that means we're going to use spectrum more efficiently. That means we're – that's the opposite of hoarding. That's using spectrum more efficiently. When you're virtualized, you can use your network 24 hours a day, 7 days a week at a much better capacity than current. That's less hoarding.

The fact that we went to more downlink than uplink, we all know on this call that consumers – that people use more downlink spectrum than uplink spectrum, but most people's networks are synchronous, they're same amount of uplink as downlink. So, that means people are hoarding uplink spectrum.

We took a long-term view of it and said let's do more downlink spectrum because that will be a more efficient use and so forth. We know that, as an example, T-Mobile, if they're successful with their acquisition of Sprint, has said they're going to decommission Sprint, which means that spectrum is not going to be used while they're decommissioned, which means they'll be hoarding spectrum.

So, we've never missed a final build-out deadline, and we're not going to miss this one, and we have competitors who would love to have our spectrum. We know that people in this business know the power of a standalone 5G network and that obviously competitors would prefer to see that that doesn't happen. And one of the ways you do that is you try to pass laws, you try to attack, and you try to use regulation to stop that, right?

And so, don't be sidetracked by that. We're going to stay focused on making sure we meet the terms of our license. And as we sit here several years from now, we'll be talking about why our network is different than everybody else.

And, look, we're hopefully going to make the FCC proud. We're going to make the Administration proud and the Congress proud of what we're going to do. We did it with direct satellite, where the paradigm shift was analog to digital, right? And people were just as skeptical back then of us at the point in time. I will say that the FCC was very skeptical of us, but they were a bit more of a cheerleader than the FCC is today. So, we wish we had a little bit more cheerleading going on. But if we have to be our own cheerleaders, we'll be our own cheerleaders.

Jonathan Chaplin - New Street Research LLP (US)

Thanks, Charlie.

Charles William Ergen - DISH Network Corp.

Okay. Operator, I think we have time for one more from the analysts.

Operator

Thank you, sir. We will now take our final question from the analyst community. Our final analyst question comes from Jason Bazinet with Citi.

Jason Boisvert Bazinet - Citigroup Global Markets, Inc.

Thanks so much. So one of the cable companies during their earnings season made an oblique reference to low-band spectrum that's available, not being used within their footprint this quarter without mentioning DISH by name. And I think you mentioned cable, I think, for the first time on this call. Would you consider that one of the options in your panoply of options to operationalize your spectrum, to essentially partner with your erstwhile enemy, the cable firms?

Charles William Ergen - DISH Network Corp.

Well, specifically on low-band spectrum, it's not cleared on a nationwide basis today. So, much of our 600 – our low-band spectrum, of course, is in big cities, and it's not cleared. And it's not – statutorily, it doesn't have to be cleared until I think the summer of 2020. So, I'm not really in a position to – nor would anybody – nor would they be able to build that.

T-Mobile has been able to build out some segments of theirs, but they built that out in a 4G way. And since we want to build out on a national basis and we don't have a customer base, it makes more sense to wait for the 5G spec and for that spectrum to be cleared. So, that doesn't mean that we don't – look, if you look at the list of people that are interested in what we're doing, is cable as a gross generalization interested? Yes, they are.

Jason Boisvert Bazinet - Citigroup Global Markets, Inc.

Thank you very much.

Operator

We will now take questions from members of the media. Our first question comes from Scott Moritz with Bloomberg.

Scott Moritz - Bloomberg LP

Hey, guys. Can you hear me?

Charles William Ergen - DISH Network Corp.

Yeah.

Scott Moritz - Bloomberg LP

Great. Charlie, maybe you can speak to the OTT industry at this stage. It seems you guys are 3.5 years in. Growth kind of took off for a while, but now it seems to be sputtering, not just for you guys, but for others. You see customers coming in and out on their contracts or lack of contracts, but you also see a lot of people still going to Netflix. Is OTT – has it reached a post-peak in terms of growth trajectory or is it something that will be around in a niche form for the time being? How do you see this playing out?

Charles William Ergen - DISH Network Corp.

Well, it depends on how we as an industry back it. I don't think it's sputtered as much as many people are writing, because I think that – I don't know that everybody releases their numbers. So, there may be some growth that we're not seeing with some of the other players. But OTT has a lot of potential, but you've got to give customers what they want, and so we've got a couple of problems.

One is, as an example, it's much more prone to piracy. So, a lot of the programmers think they put it on and they don't realize that once they get there that a lot of people under the age of 40 know how to pirate stuff and never paid for TV in their life, and they've made it really pretty easy for them to do it. And so, it can be as simple as sharing passwords, but there are certainly other ways to do it that people can do it, and we're one of the few companies that actually has a full-time staff to attack piracy.

People don't like commercials, and they like bench viewing, but yet no OTT provider is really able to do that in an efficient manner today, because contractually we're not really allowed to. So, you end up with a product that people continue to watch less of the traditional linear programming including broadcasting. Those numbers continue to go down and things like Netflix and things continue to go up. So, there has to be a fundamental shift on the thinking of the linear programmers, and I'm hopeful that that process has started and some people are thinking about it a different way.

Certainly, Disney is thinking about it a different way, and I think their product will look probably different than their linear product. And, hopefully, some other people will try that as well. If not, then, yeah, it will sputter out and not be a huge impact. But if done correctly, OTT will be a big factor. It will be as big a factor as cable or satellite have been to the business. It just has to – we have to go through some evolutionary changes to do it. And our philosophy has been to the extent that content owners want to work to try to achieve some of those things, we're willing to work with them.

Scott Moritz - Bloomberg LP

Great. Thanks.

Operator

We'll take our next question from Mike Dano with FierceWireless.

Mike Dano - FierceMarkets, Inc.

Yes. Thank you for taking my question. I appreciate it. And I just wanted to ask about the timeline for the Phase 2 build-out considering that there's a so-called race to 5G with China and other operators are moving ahead with their 5G build-outs. What is the sort of timeline that DISH would give in terms of building out a standalone 5G network?

W. Erik Carlson - DISH Network Corp.

Yeah. Well, thanks, Mike, for the question. Everything kind of comes together for us in 2020. Our spectrum – our low-band spectrum will be cleared and hopefully the DE situation will be cleared up one way or the other by then. We will obviously have built out our first network in nationwide on the narrowband IoT network.

And the 5G spec, the 5G spec Release 16, which allows you to really do what unleashes the power of 5G with ultra-broadband, ultra-connectivity and ultra-low latency. Those three things combined with the software and virtualization all come together in 2020. And so, that's when we'll – that's when you'll start seeing DISH 5G. I don't know how long it will take to build the entire nation out yet, but obviously the more that we can plan between now and then, the faster we'll be able to get that done, so...

And then, you'll see – I think you'll see kind of legacy networks that will do some of the things we can do. They won't do all the things that we can do, and they'll be a little bit – they'll efficient in certain things and not efficient in other things. And their primary focus is going to be consumers, and our primary focus is going to be digitizing the physical space. That's a big concept and it's maybe hard for you to understand, but you'll hear more and more about what I just said. You'll hear a lot of people talking about that, because that has way bigger impacts than the phone in your pocket.

Operator

We'll take our next question from Sheila Dang with Reuters.

Sheila Dang - Thomson Reuters Corp.

Hi. Thanks for taking our question. You mentioned with the Univision situation that there were ways that you can still go after Hispanic viewers, such as providing antennas. And while HBO is dark, I was wondering if there's anything similar that you can do to stem losses from that HBO blackout.

Charles William Ergen - DISH Network Corp.

Yeah, not really. Some of our customers that have broadband connections may be able to go directly to HBO, but that's a different situation. You can't put an antenna up and provide HBO. So that's why it's so anticompetitive, because AT&T knows full well that for many of our customers the only place they can go is to DIRECTV, and they own HBO and they own DIRECTV. So they're willing to make that trade-off.

Sheila Dang - Thomson Reuters Corp.

Thank you.

Charles William Ergen - DISH Network Corp.

One more question?

Operator

And that concludes the question-and-answer portion. I'd like to turn the call back over to Jason Kiser for any additional or closing remarks.

Jason Kiser - DISH Network Corp.

Thanks, everybody, for joining us. And we'll see you at the next call.

Operator

And that concludes today's presentation. Thank you for your participation, and you may now disconnect.