EchoStar Corporation (SATS) Q4 2006 Earnings Report, Transcript and Summary

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar Communications fourth quarter 2006 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Jason Kiser, Treasurer of EchoStar Communications. Please go ahead, sir.

Thank you, Operator. Thanks for joining us. I am joined today by Charlie Ergen, our Chairman and CEO; Carl Vogel, our President; David Moskowitz, our Executive Vice President and General Counsel; and Bernie Han, our CFO. I think what we are going to do today, we still need to do our Safe Harbor disclosure and I am going to turn that over to David, and then we are just going to go straight into Q&A. I will let David cover the Safe Harbor.

Good morning, everyone. Let me add my thanks to you all for joining us. As you know, we invite media to participate listen-only on the call, so we ask that media not identify participants and their firms in your reports, and also remind you we do not allow audio taping of the conference call and ask that you please respect that. All statements we make during the call that are not statements of historic fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results or from any future results expressed or implied by the forward-looking statements. I am not going to go through a list of all the factors that could cause our actual results to differ from our historical results or forward-looking statements, but I would ask you to take a look at the front of our 10-K for a list of these factors. In addition, we may face other risks described from time to time in other reports we file with the SEC. All cautionary statements we make during the call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements we make. We assume no responsibility for updating any forward-looking statements we make. Also note that during the call, we will refer to certain non-GAAP measures which are reconciled in our 10-K or on our Investor Relations website. With that, Operator, we are going to open the floor up for questions.

(Operator Instructions) Your first question comes from Anthony Noto.

I was wondering if you could provide us an update on your view of an investment in a broadband strategy and if you are seeing any type of impact in any markets from the efforts of the telcos as they roll out FiOS. Thank you.

In terms of our broadband efforts, they are essentially consistent with what we have talked about in prior quarters. We continue to look at ways to offer a broadband alternative to our customers. We have not found anything that we see particularly compelling at this point. As you can tell from our results, we are pretty pleased with our core business but we do understand that we probably need to get further along in broadband going forward. With respect to FiOS, I do not think we have seen anymore competitive push in those markets than we see with our cable competitors in other markets, so I would not suggest that FiOS has had a significant impact on us in any particular market.

You have seen an acceleration in a number of key trends; gross adds, net adds, a reduction in churn, an acceleration in ARPU growth. I was wondering if you could provide any commentary behind what you think has driven that acceleration and improvement in churn.

I will start. I’m sure Charlie has some thoughts as well. I think in terms of acceleration of ARPU, we are still substantially below our closest comp in terms of DirecTV, but I think our ARPU acceleration has been principally driven by the rate increases that we have taken on some of our higher-end AT packages, a movement of our customer base around the MPEG-4 platform and purchasing more high-definition content, which comes with a higher ARPU and generally, those customers buy more premium services as well, existing customers upgrading again from some of their AT packages into HD packages as well. I think we have got a product that is appropriately priced and packaged for our segment of the market, which has helped us from a churn perspective. We have been able to increase ARPU effectively by adding new services. We had the only HD DVR in the market, for example, for a good portion of 2006 and we have been able to move our ARPUs up. As a result, we have been able to mitigate churn as we make these new products available to our existing base. The one thing that we have not done is we have not scaled our business as we would like. We have talked in prior quarters about the investments we have made in call centers and human resources to staff up our call centers, our service centers, as well as our installation group, and that has compressed our margin a little bit but it is investments that we though made sense for us in the long run. We hope to see some improvement as we move into 2007 but I think our success has been the consistency of our package, the fact that we have products that people like and use, the phenomenon in HD has been very helpful for us. I think we also had a strong fourth quarter because we had the NFL network in a number of markets where others didn’t and we had it at a price point that was very attractive. I think overall for the fourth quarter, we are pleased with the revenue trend. We have work to do on the cost side.

Your next question comes from Doug Mitchelson.

A few questions, maybe we will just take them one at a time. Charlie, would you talk a little bit about the capitalization of the company? To me it seems dramatically under-leveraged, especially in light of the strong operating execution this year and many of your peers are at higher leverage levels, which should give you some breathing room to take your financial leverage up as well. What is stopping you from pursuing such an option, or what are your latest thoughts on that?

Well, it does not make sense to borrow money unless we have a place to put it to use. Of course, during the first quarter this year, we bought back about 24 million of our shares by taking our convert out, which is $1 billion. So we are putting money to use where we think it makes sense. We made a couple of international investments in terms of a satellite for China and putting in a project that hopefully we are a small part of a very, very big market for mobile television. A small investment in Korea for mobile television and audio/video. It is a question of putting money to work and we do not want to leverage just for leverage’s sake. We have always said we think we should be around $500 to $1,000 per subscriber. We are obviously below that on a net basis, so we are obviously under-levered from where we think we could operate the business, but it makes sense to leverage when we think it -- we ended the year with $3 billion in cash, so we are not sure exactly why we would do that. We look at our capital structure every day and try to make the right decisions long-term for our shareholders. As we see other people leverage up, then it opens up opportunities strategically for us versus high-leveraged companies when if we are not, particularly if the marketplaces were to change rapidly. When you can have the stock market go down 400 points in one day, who knows what can happen in the marketplace, and then everybody is going to say those guys had a good strong financial capital structure and weren’t they smart?

The fourth quarter sub number was pretty terrific. Have there been any changes in your credit standards or any other part of the filtering process related to acquiring subs?

No.

Third question, when you think back to your decision to transition to a lease model and what you were hoping to see in terms of benefits related to cost-savings, being able to get the set-top boxes back, could you tell us, has that been tracking as you have expected? Are you getting the SAC savings that you had hoped for? Has that reached the point of maximum benefit for SAC costs, or is there more to come in 2007/2008?

I think leasing made all the sense in the world and I wish we would have done it sooner because every box you get back does reduce your SAC going forward. I do not know whether you could pull it out exactly in the financials but it has obviously been growing each and every quarter in terms of saving us actual cash dollars. The way we account for SAC and the way SEC requires us to account for SAC is probably a little misleading. I look at it from a net basis -- I look at it from a cash basis in terms of what it cost us, which obviously is a little bit lower number than the SEC reported SAC. I think strategically, it was one of the smartest things we have done and it also has another benefit in piracy in the sense when we are leasing boxes, we own the box. There is a different set of rules and regulations from a legal perspective and we are able to control piracy a little bit better on a leased product than if we sold the product. It also has helped us get into customers for a lower cost by giving them a free box. Now, you have to balance that by the fact that obviously, we have DVRs and HD DVRs, so we have some set-top boxes that we lease today that are more expensive than perhaps some of the stuff in the past. So you have a balancing act between retention marketing and upgrades and new customers who are going to be higher ARPU customers but because they are buying HD services or DVR services, but the cost of the box is more. I think the leased product probably pays even more dividends for you in that environment, particularly as we have been shipping MPEG-4 boxes throughout 2006. They are going to have a pretty long shelf life because we do not a new technology replacing them.

Given that commentary, do you think SAC costs then will be up, flat or down in 2007, on average?

I don’t think we make projections, do we?

I had to try.

I think we are going to manage the business. We are economic animals, so we try to make decisions where we actually get a return, not because Wall Street wants us to do it or somebody writes a report or we see somebody else do it. I have this real selfish interest like I own a bunch of shares and I really would like to maximize that return someday. That is why we try to make longer-term decisions. I am selfish because I am a shareholder.

Your next question comes from Jeff Wlodarczak.

Thanks, and by the way, thanks for doing the call, Charlie. Congrats on another strong quarter.

I don’t know if I can make the quarterly ones, but the annual ones just seem to be the right thing to do.

Well, it is much appreciated. Can you talk about your decision to swap to an independent provider for your distant network signals? How is that going? Do you still expect to see material churn from a dish and network shut-off in December in the first-half of ’07? Then, maybe a little bit more granularity on the subscriber related expense line. Carl kind of touched on it but no one is more focused on costs than you are. Do you think it has peaked as a percent of revenue? How much do you think you can drive out of that expense line?

On the distant signal, I think it is a real feather in our cap. In the fourth quarter, we had 900,000 customers that lost their network signals. You saw the kind of trauma that it caused Mediacom when they lost just one Sinclair station and you can imagine customers who lost all their network stations. It obviously -- and our churn actually went down year over year, so it was -- obviously all that affect, I think to your question, all that affect of the dish and network signal litigation probably didn’t all hit in December, but probably the majority of it hit in December, but some people obviously had to make other arrangements and probably grew into the first quarter. Some of the negative effects will probably go into the first quarter a little bit. Having said that, and one of the things that we did was we obviously upgraded a lot of customers, rolled a lot of trucks, did a lot of retention marketing, put out a lot of offer incentives to save a lot of customers. The other thing that happened, of course, was an independent company leased a transponder from us. As part of that transponder lease, they put up distant network signals. Again, I have read this publicly that they said there is somewhere around 100,000 subscribers who subscribe from them, so obviously the vast majority of those 900,000 customers were able to get local signals from us. Some of those customers were not and continued to get distant signals from a third party, and some customers obviously switched to our competition, whether it be in the satellite or cable side of the business, but it did not end up being a catastrophic event for us, and it could have been without a lot of focus and a lot of hard work on people’s part. There is one advantage in the sense that that third party, if people buy the DISH Network platform, that third party can sell a distant network signal to anybody in the United States, whereas under law, as a satellite provide of local signals, we cannot sell a distant signal where we do a local signal and we do local signals in 96% of the homes in the United States. So to some degree, we took a lot of pain in the fourth quarter but there are some residual benefits for people who have our equipment because they can buy religious programming from Dominion, which is a completely independent company and they can buy distant network signals, even if we provide local signals, from a completely independent party. That is a possible positive for choice for customers that they did not have before. We are really pleased in how we managed that process. When it comes to expenses and sub-related expenses, I am not happy where we are. I think that one of the things that is great about the way we have built the company is that we are very -- we do most things. We have our own call centers, for the most part. For the most part, it is our own installers, it is our own design teams to manufacture our product, and one of the things that we really have to do a better job of is have those teams work together so that we minimize the calls and the costs to begin with. If we do not manufacture it right or design it right, then we get calls and service calls. If we don’t install it right, then we get calls and service calls. If we don’t take care of the customer, we get customer service calls and that is the part of our business that has gotten more complex when you realize we have two tuners in the box, you realize we have dished looking at three satellite locations now instead of one in the old days. We have HD product. We have standard-def product. We have local signals. We have distant signals that they have to talk to somebody else, religious programming from somebody else -- all those things have complicated our business probably by 3X or 4X. So we have to make sure that all that complication then gets communicated in a much simpler way to our customers and because we control most parts of our business, we actually make that, even though behind the curtain it is very complex, we make it seem very simple to a customer. We have a lot of work to do there and I do not -- we do not make projections. We have a focus on that. We did not make the kind of progress in 2006 that we would have like to, and it remains to be seen if we will make that kind of progress in 2007, but it is certainly a focus for our management team. We have strengthened our management team as a result of our focus there. We have some new people in positions that we think can help us and bring us some new ideas. We will see how we do.

Your next question comes from Tuna Amobi. Tuna Amobi - Standard & Poor's: I have a few questions as well. I guess I will take them one at a time. Still on the distant network issue, Charlie, have you had any indication from Fox Newscorp, perhaps if they might soften their opposition as a result of the Liberty transaction with DirecTV? Is that something that -- I know they had a vested interest in that due to their ownership of DirecTV. Now that that deal has happened, is that likely to change anything that might happen during the appeals process?

It is really a non-issue now because the courts have ruled that we do not have a distant network license. I have always been a bit confused as to why they were so opposed to that, given they were still in the company and given that we are a customer of theirs for other product, but they always have a method to their madness. While disappointing, I never really totally understood what they were trying to gain there. Having said that, it is a non-issue now because we do not have a license but there is a third part who does have a license and that company continues, that company now -- there was a situation where broadcasters, we could only sell distant network signals to 4% of the homes, and of those, just the ones that qualify. They have now created a situation where any third party could go sell to -- it could be multiple third parties in this industry can go sell to 100% of the homes for those people who qualify in that population. So I never understood the logic of the broadcasters, particularly since we are going to pay them $100 million. It is one of the great things I love about business. We can try to make rational decisions and not get emotional about things and other people may do things that just do not make any sense. At the end of the day, we will try to grow our business but we saved $100 million. Tuna Amobi - Standard & Poor's: Next, on the fixed satellite services, it seems like you are finally ramping up that area. I see that you just did the ARTEL deal. The question is beside the defence market, what other markets potentially are you targeting for that service and how do you quantify the revenue opportunity from that over the next couple of years?

In keeping with the EchoStar theme, we do not provide guidance going forward but we have a group inside of our organization led by Mike Telly, who has been with us a long time, that is going out to various users of FSS capacity. We think there is an opportunity there. We think that given what is going on in the launch of the satellite market that our inventory is valuable. For competitive reasons, I am not going to talk about specific clients but we see opportunities in numerous verticals and we have a sales force to do that. ARTEL is a good example in the government space, but we are pretty open to talking about making capacity available to anybody who wants it in very I think attractive orbital slots at very attractive prices. We will continue to talk about those opportunities as they present themselves, but we have a full-time team that is responsible for marketing our excess capacity. We are reasonably pleased where we are so far, but there is a lot more opportunity there, especially given what we see as a market that could become constrained here shortly, given KU capacity in the market. Tuna Amobi - Standard & Poor's: Final question, Charlie, this might sound like a far-fetched question. On the issue of Tivo, is there anything that you see in terms of the intellectual property of Tivo that might make the company a potential candidate of interest in acquisition, probably as a way to resolve this litigation issue? Is there any additional property that you think Tivo brings to your table that could be of interest to EchoStar?

Well, I cannot speak to EchoStar's interests, but I think Tivo has done a good job with their branding and so forth. I am very familiar with the intellectual property that they litigated with DISH Network. Again, we remain confident that that is the case we ultimately win. We have reserved on the balance sheet $94 million based on the jury awards primarily against us, but obviously that number does not -- Tuna Amobi - Standard & Poor's: If I could just --

-- should tell you a little bit about where we think our legal position there is and I guess that depending on how that all comes out, we would probably -- of course, we do things different with our set-top boxes than others, so I just do not know how they relate to other people. But obviously from a DVR perspective, not only did we make the first DVRs and we think ours work and operate better and are easier to use. The big difference is that we are a distribution company so at the heart of our company is hundreds of channels, thousands of channels coming into our box, and Tivo is a hardware manufacturer and they have to rely on somebody else’s distribution path. I think the marketplace has moved on. Many of the feature sets of -- in fact, I think all of the feature sets of DVR functionality are now in chipsets, so fast-forward, rewind, pause, there is nothing really unique about that anymore. Tuna Amobi - Standard & Poor's: So you do not think acquiring Tivo improves your competitive position against cable operators in any way?

I haven’t really thought about it. The way I think about it is that our DVR, which works quite a bit better than the cable operators’ DVRs, where we control the software and we control -- we have quite a bit of intellectual property ourselves in the DVR space. We think that gives us a distinct advantage vis-à-vis the cable industry in terms of how they do it. I do not think we have done a good enough job in exploiting that advantage and we need to do better at that, but I think in the DVR space, we are positioned as well as anybody. In HD space, we are positioned as well as anybody. In the best value for the buck for TV, we are positioned as well as anybody. In the broadband business, we are not positioned as well as perhaps some major cable companies, but we have good partners in the phone companies and a customer can work with us and AT&T and get broadband and video from us and phone from them and cellular from them, so we think we can go a long way to limiting that disadvantage. For the really rural areas, we are starting to ramp up to sell the Wild Blue system. Again, that gives us a broadband product that is attractive to some of our rural customers, and we have a lot of rural customers. We are well-positioned in the marketplace but obviously there is always obviously competitive threats to keep an eye on, but to just put it in perspective, we had a record year for gross activations last year, so we are 13 years into the DVS business and from a gross activation perspective, at least from a DISH Network EchoStar perspective, we have not peaked yet. And yet the industry has gotten competitive and lots of new services for people and lots of new choices for people and yet, for whatever reason, 3.5 million people chose to come to DISH Network last year. We just need to do a better job of keeping the ones we have, and we did a better job last year than we did the year before, despite some adversity. Hopefully we continue that trend.

Your next question comes from Benjamin Swinburne.

Thanks for the question. I will just ask two. Maybe I could start out on the high-def point. You guys are a clear leader today in HD. You are seeing it in the numbers. DirecTV has got some big plans this year. You are using some of your satellite capacity to do FSS and looking at some other options and I think actually in the 10-K you even say you do not have firm plans for all the capacity. You have either agreed to build or lease. How should we think about your HD position relative to DirecTV, who seems to be moving to a leadership role in ’07, on the national side? Also, locals, I think you said you would go to 50 markets by the end of ’07. Where do you think you go ultimately long-term and before the economics start to not make sense? Then I have one follow-up.

I think we kind of talk about actuals versus about what we are going to do. We recognize that DirecTV has an aggressive plan with respect to HD. We have done extremely well with HD. I still think our price points are going to remain much more attractive than DirecTV, with or without discounts. I think our system is considerably simpler than the DirecTV KA band system, which will allow us to hopefully improve our variable costs and still be pretty attractive to the rest of the market. In terms of additional local market launches, we will talk about those as they come to fruition throughout the year but suffice it to say that we are pleased with where we stand with HD. We do not plan on backing away from HD. We think we have an advantage with our HD DVR product and we think we have an advantage with our HD pricing. In terms of additional content and additional markets, we can add to that as we move throughout ’07. I don’t know if you want to add to that.

I think we have always said strategically we are not going to take a backseat to anybody in HD. I think the disadvantage for satellite guys has been -- the advantage we have always had as an industry is we can do national signals much, much more efficiently in the cable industry because we use the bandwidth once, not multiple times, so we clearly have an advantage there. In the local side, we have had a disadvantage but because of new generations of satellites and so forth and local spot beaming, we are able to eliminate that disadvantage where markets are large enough and the economics make sense. Suffice it to say, we believe we have the capacity to go to HD markets where the economics make sense. There is a fairly large cost of back-haul and satellite cost to go to market. It is obviously much greater than the analog space, so you really cannot get down as far as analog space. Part of how deep we will go and I think part of how deep DirecTV will go will be can we share some of those back-haul costs and share some of those costs going forward. It is interesting. We do HD in the spectrum that we have today and the same size dish that we have today, so a small dish and DBS spectrum. DirecTV has gone a route where they have invested in KA band, primarily because they got the satellites and the acquisition that were designed for data. It is an unholy alliance to some degree to turn those into video. The new satellites as they get launched, we will do a better job but it is a fairly large dish and it is fairly complex in terms of the switching that is required. When you talk about controlling costs, you have to realize how complex your system is. I think we are very well positioned in HD to have a cost advantage, a material cost advantage over cable companies, particularly because of our national presence, and perhaps DirecTV because of the way they have architected their system in KA band. That remains to be seen. I could probably argue their side of the equation as well but we will have to wait and see, but I like where we are in HD. The unknown really is what is the adoption of HD going to be. It clearly was more in 2006 and gained a lot of momentum. It is certainly not at frothy levels yet to make hugely material impacts to anybody in the industry yet. It is still single digit, maybe slightly double-digit kind of product. But there will be a day when everybody buys -- there will be a day when any TV set sold will be an HD TV set. That may be 10 years from now but I think -- I think it is positive for the satellite industry, let’s put it that way.

If I could just go back to the margin question on the quarter; Carl, you mentioned call center investments. It would seem to me there would be some seasonality to the subscriber-related expense as well in the fourth quarter. I would assume there is some labor costs running through on retention marketing, which would be higher in 4Q if you go buying HD sets, asking for DVRs, along those lines. Maybe you could just correct me if I am wrong. Any comments you guys might have on Extra Innings going over to DirecTV, if you think that impacts your business at all?

With respect to seasonality, your point is well taken. I think certainly the buying season for high-definition sets is well recognized as third and fourth quarter activity, and a little spillage into the first as well. Given the activity around the NFL and the Super Bowl, et cetera, we did see an up-tick in that. Charlie also alluded to the fact that the distant phenomenon, with 900,000 customers at risk, I think our DISH Network services guys, led by our CFO, Dave Reiner, did a great job in getting techs to take their trucks and live in motels and do whatever we could to swing dishes and add off-air antennas and that obviously came at a cost. So yes, there is some seasonality there. Also, as we have mentioned numerous times on this call, we see a great opportunity in HD and we are spending retention dollars to upgrade customers as they see that opportunity in return for a commitment and generally for higher ARPU, so it is not just giving away the store, but there was some seasonality. With respect to MLB, it is funny. I have some history here since I was the Chairman and CEO of Primestar -- some of you may remember that company -- who had the exclusive rights to MLB through a relationship with Fox. Our view on MLB and sports content in general is that if a customer on any platform has enjoyed that product, it should not be taken away from them. We generally do not like exclusives. We think that for the consumer, it is best to have as much product available from as many sources as possible and let those sources then battle it out in the marketplace with their pricing and their packaging and the features of their hardware, their bundle or something else along those lines. With respect to exclusive on products that have been widely distributed, we do not think that is particularly consumer-friendly. We have made out points known to Congress and we will continue to make our points known. But we like a world where content is available to as many sources as possible. Some people have asked me how I feel about the NFL. I think the NFL is a little bit different but it is something that we ought to keep an eye on. I give DirecTV credit for actually going out and creating the NFL Sunday Ticket, which did not exist before DirecTV existed, which was very difficult to deliver except on a satellite platform. I think that is a little bit different discussion than taking away a product that has been available to not only EchoStar but cable companies as well and I do not think that is particularly consumer-friendly. By the way, it is not sour grapes, either because we bid it and we bid it with an opportunity to sub-distribute it because we believe in exactly what I just described.

The other thing on margins is obviously the other thing to keep in mind is our price increase essentially goes into effect around the first of March every year, last year, and then our programming costs, depending on the contract, those programming costs continue to rise during the year, so you historically have always seen a little bit of slippage in margin through the year and of course, that trend continued in 2006. I think one thing great about management is no matter what happens in the marketplace, you deal with it and any kind of programming, particularly exclusive, comes with cost and that tends to raise cost, your cost, to all your customers and so while you could lose on the one hand a customer who has a specific need for something you gained, on the other where everybody does not want to pay those costs. We have had enough experience where we have lost some programming contracts because of contract disputes. We just could not get to a deal where we have lost some customers who wanted that product, and yet we have gained customers because we did not have to charge everybody for a channel that nobody wants to watch, or most people do not want to watch. It has pluses and minuses and we will -- we start from the perspective of a consumer and say why not do the right thing for consumers, but if Congress and everything else do not do the right thing for consumers, then we will deal with it.

Your next question comes from Vijay Jayant. Vijay Jayant – Lehman Brothers: Charlie, DirecTV had made some comments that once their arrangement with BellSouth ends, I think it is one year after the merger with AT&T, that they will try to get into the whole AT&T platform, and also that they have probably more subscribers, given BellSouth is more aggressive. Any thoughts on how you would characterize your relationship with AT&T and the prospects of EchoStar maintaining that relationship post the one year after the merger closed that DirecTV has the rights in BellSouth directly?

I think our relationship with AT&T is as good as it has ever been and we continue to -- I think one advantage is the things that we have is that we actually have a manufacturing design team, engineering team, and I think that a lot of -- AT&T has a couple of different business plans and it might make some sense. They do put a dish in when they cannot put in their Lightspeed. They have a plan for Lightspeed, which they do not really need our help particularly on. And then they have what I call hybrid customers who perhaps want a satellite system for the mass video but want a broadband connection for video clips and video-on-demand and those kinds of things, and that is an area where we are working with them through the home zone product and products in the future that will allow them to seamlessly put that product out for their customers. We have a contract with AT&T and we know what those rights are. So any questions about what AT&T might do with BellSouth customers are probably better addressed by AT&T than by us. Vijay Jayant – Lehman Brothers: Just following up on that, any update on how the home zone product is getting traction? Any issues with the technology right now and when do we get the HD DVR version of it?

I think the technology works. Again, I am only speaking from a personal perspective. I have used it. The technology works. I think AT&T would be the right people to ask in terms of the deployment. I know that they are testing it. I do not think they have gone full deployment, but they would be the right guys to ask about that. They do want an HD version of that and because we -- we kind of threw them a curveball in a sense because we moved the HD and MPEG-4 because it was the right long-term thing to do, and so we have to make an MPEG-4 version of the home zone, and obviously that is in the works and we will be in the marketplace this year.

From my perspective, we do spend a fair amount of time with AT&T, we are continuing to work out the kinks in the installation side of that business and the provisioning side of the DSL, but again you can talk to them, but the feedback that we get from our technicians that are involved in that is even though there is a greater level of complexity, the product seems to get better every day. The more installations you do the better you get at them and we are pretty pleased with that relationship and very, very interested in supporting it.

It is not just AT&T. We have other telco providers and we have another half-a-dozen telco partners we work with. It is a material part of our business. We are probably not as reliant on it as DirecTV is with May Quest and BellSouth and Verizon, but it is still a material part of our business. We see a -- we have a common enemy in cable. We are not trying to get in their broadband space or voice space, so there is a common goal of putting together essentially a triple play of quadruple play for customers in a way that gives them the benefit of choice and one bill if they want it, and two bills if they want it. I think those are things that we can work to our advantage going forward. Having said all that, our core business irrespective of all that remains very strong, just in our core video business going to customers and blocking and tackling and making sure that they want the best video product out there, that we get our fair share. It is unclear at this point -- it is clear that some people want triple plays and quadruple plays and bundles. It is clear that some people want that. It is not clear that the vast majority of people are moving in that direction yet. The cable industries, most have reported. I think that total industry, their video subscribers is probably flat to slightly negative in terms of video subscribers. They may have moved between analog and digital but the number of subscribers is flat to down. Satellite industry had perhaps a record or certainly a very strong fourth quarter on gross adds and churn I think was improved on everybody’s part. In EchoStar, we had a record year in terms of gross adds. It means that some people want a triple play or whatever and perhaps those people, cable is getting their fair share of those, but an awful lot of people are pretty happy to have a cell phone from one provider and the best video from somebody else and maybe a broadband connection from somebody else. We are getting our fair share of those customers. It certainly has not moved to the kind of bundles as fast as perhaps a lot of the analyst reports might have predicted last year or the year before. It does not mean it will not happen in the future. It does not mean the market will not change but if anything, the momentum is probably -- is a fair -- I do not know if it swung but certainly the fourth quarter was a good satellite quarter.

Your next question comes from Kathy Styponias.

I was wondering if either Carl and/or Charlie could talk about your experiences in the old Los Angeles market. How important of a market is it for EchoStar? How have gross subscriber additions been in that market and what do you expect them to look like as Time-Warner cable starts to rollout triple play later this year?

We love L.A. L.A. has been a good market for us for a long period of time. I think Time-Warner will be a formidable competitor but I would not discount Adelphia Charter in those markets either, or Comcast, while they were there. I think there certainly will be come economies of scale on the cost side but I still think we are extremely well-positioned with our price point. We are extremely well-positioned with the depth of product that we have in terms of our DVR, et cetera. We do extremely well there in the ethnic market, specifically Latino. We again off that at a very attractive price point. We have excellent distribution there and we know DirecTV does well there as well as we do, certainly with having their base there for now. I think that we will continue to focus on L.A. because it is a good market for us. Time-Warner will be a formidable competitor. I am not going to talk about what our expectations are in 2007 but I think we did pretty well this year because of the way we positioned the NFL against Time-Warner and others, and may have gotten a little bit of lift there that we may not be able to sustain. But overall, as I said, we love the L.A. market. We have great distribution there and we will continue to focus on that opportunity.

Basically, we like any market. There isn’t a market that we do not like, whether it be Alaska, Hawaii, Puerto Rico to the 48 states. The signal goes everywhere. I do not believe you can drive down the street anywhere in America and not see one of our dishes today. You might see a few more in L.A. than you see in Boston per capita, but I think one of the great things about satellite is that we do go everywhere. Our only incremental cost is if a customer actually wants our service, so we do not have to run a line by everybody’s house whether they want our service or not.

Your next question comes from Tom Eagan. Tom Eagan - Oppenheimer & Co.: I was wondering, I guess this is for Carl, if you saw any particular source of subscribers say from Mediacom because of the Sinclair dispute, or any of the former Adelphia systems as they transition to Time-Warner and Comcast? Secondly, I was wondering if in Q4 and for the year, what percentage of gross adds took the HD DVR? Thanks.

I don’t know the HD DVR question and Jason is telling me we do not disclose that anyway. In terms of, as Charlie aptly pointed out in an answer to a previous question, we like all markets, and where we think we have an opportunity to increase our subscribers, we go into those markets and have done so with Mediacom and will do so going forward. Interestingly enough, we see our friends at the cable industry doing the same thing to us when we do things like Court TV and Lifetime, so it is fair game for everybody. But in terms of did we have a significantly higher percentage of our growth out of Mediacom versus the transitioning Adelphia markets, I do not have that data in front of me. Again, we focus our marketing and our messaging pretty much to a national audience. We may gear up or gear down in terms of certain promotions based on what is going on in the marketplace but I think as Charlie indicated, we had a pretty good year across the board in terms of gross and net adds, and we do well in some markets based on the activities in those markets, but I do not have the specifics.

I think we know from Mediacom, didn’t they publicly disclose they lost 30,000? We know for sure those customers did not go to a cable company, so therefore we know those customers in theory went to probably a satellite company or to an off-air antenna. I think the broader question is that the satellite industry has always paid for retrans. So we pay for what we think is a very important product for us and we are very happy to have the networks and local affiliates as partners and as programming partners and we pay them a fair price for a product. We have always done that. Our company fought hard for the right for them to be able to do that and us to do it and everything else years ago. Cable historically has not paid for that product and yet they will pay a lot of money for ESPN but nothing for ABC, and ABC gets higher ratings than ESPN. I think the broadcasters have though that might be a weird situation. I believe that as a company we will help any broadcaster who is in a retransmission situation where they might lose a distributor. We certainly will be there with our trucks and our advertising and our people to help them make sure the customers are not disenfranchised. But what is probably going to happen is that for the first time, cable operators as their retransmission deals come up will start to pay the kind of money that we do as DVS companies to broadcasters. As they do that, our costs do not go up but our competitors’ costs go up for programming. Today they are getting a free ride and I think that, while we have had a lot of disputes with broadcasters over the years, there is certainly one thing that the broadcasters and EchoStar are on the same page for. I think we have very good relations with local affiliates and broadcasters and we obviously -- it is a factor where we see our competitors’ costs going up more so than ours for programming, for some of the most important programming. In fact, programming that people watch about 50% of the time. So the cable industry is in a tenuous situation and they can be very aggressive like Mediacom and say they are not going to pay to the extent that people have the kind of guts that the people at Sinclair do, I think that obviously Sinclair’s is closed. They are going to get a lot of retrans money. I think CBS’ just closed. They are going to get retrans money. I think there are some other companies next to -- some others are just closing retrans. That is starting to be real numbers and that is not all going to come from satellite. So an interesting dynamic that is going to happen as we move forward. My understanding is most phone companies are paying for retrans today as well. So it levels the playing field in an area where we have had a disadvantage and perhaps an opportunity for those, if a cable operator wants to not pay, then it is an opportunity for the satellite industry.

Your next question comes from Jason Bazinet.

You guys have obviously created a lot of economic value in the U.S. market. If you look at some of the other satellite players, they have made more aggressive forays internationally. I was just wondering, as you think about deploying your capital for the maximum return, what is it historically or prospectively about the international opportunity that makes you think it is less attractive than what you can do in the U.S.? Thanks.

I think it depends on what you are talking about. We look at every investment and say where would you put a dollar, can you get more -- where can you get a return? And today, again the model has not changed in 13 years. Every time we go pay $600 for a subscriber, we think we get a very, very good return on that. Our current rate of returns are certainly at the very high end of the video industry. We continue to put money there. We also look around the world at places we can put money and where we can get returns. The problem that you run into is that most of the international projects that we see, we cannot get the same kind of return as we would get in the United States. Having said that, obviously a project in China, we do not know what the returns might be but we know that for mobile video, we know they have 400 million cell phones today, which is probably three to one over the United States. We know they have a population of 1.2 billion people. We know they are going to make pretty cheap handsets, so we think perhaps there is an opportunity there. The returns could be zero or negative or they could be the kind of returns or better than we see in the United States. The second thing, internationally you typically as an American company cannot really control the operation and therefore, it is less attractive to us to not be involved in the actual operation of what is going on because we think we have a lot of value-add to give there. Of course, the spectrum and so forth typically go to companies inside the countries and so forth. Then, in some cases, the companies we probably could get a plan, Newscorp is already well-positioned there, in the U.K. and Italy and so forth and so on. We continue to evaluate those opportunities and where we think -- I mean, we think the international part of our business is one we would like to grow but whether we can grow it or not depends on what kind of deals make sense for us. For some strange reason, we just do not do deals to do deals. We kind of like to do deals that we think have a high likelihood of success. Unfortunately, those are harder to find. If you do find them, the private equity guys typically outbid you. We will see what happens.

Your next question comes from Steve Mather.

Charlie, your customer acquisition strategy seems a bit focused on high-growth via low price offer. I was just wondering if you think you may be leaving a little money on the table, considering how low your monthly is relative to some competitors? I was wondering if you could give us a little perspective on that balance act right there.

I don’t know. You know, we had -- I do not think all the cable industry and the -- I do not think all of our competitors together had got 350,000 net video subscribers in the fourth quarter, so the question could be that our strategy needs to change or it could be that maybe their strategy needs to change. Right now, we are going to -- if it is not broke, don’t fix it. We are not really getting low-end subscribers. We are averaging $63 of ARPU per subscriber. I do think that there are lower entry points and there are some people that we obviously get some customers that are not that economical for us who come in at low prices, but the fact of the matter is, once you have seen our service and you see all our channels, we find that on average, that we get our -- I think the average customer has at this point about $60 to spend on video, if you look at what they spend for cable and us, it is around $60. So they have about $700 a year to spend for video and it does not vary all that much. We just try to give them the best bang for the buck for $700. Around the edges, our strategy probably maybe should change and there are things we experiment with all the time, but quite frankly, as I sit in the strategic meetings with our guys, I do not know how to tell them how to improved based on how they are doing it right now.

Our business model is not necessarily driven by rate increases, as you can see from our ’07 plan, where we didn’t adjust rates at all in our AT-100 package. We bumped them a bit in our AT-200 and 250 package, but we took some of the sting out of that by making product available on a package basis with our DVR Advantage, for example, at $49.95 and with an opportunity for a customer to upgrade into a premium service or multiple premium services. I think our strategy to move ARPU is to continue to focus on HD and give the customer the incremental value rather than just ratcheting up rates for the same fundamental content. I think that strategy is the strategy we put in place in our original business plan in 1994 and one that has worked pretty well so far. As Charlie said, we may be leaving a little bit of money on the table. We continue to talk to our distributors and our marketing folks and our customers to see how we can sell more product, but our model is not rate-increase driven, per se, and I think you will see us continue to try and maintain our position as the best value in digital television, which we are.

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

Thank you, sir. Your next question comes from Craig Moffett.

A couple of questions, if I could. First, at the CES a couple of months ago you talked about how you are all about DVR. I wonder if you could just update us on DVR penetration rates. I think a caller earlier asked about HD TV penetration rates, but I did not pick up an answer. Second, if you could just comment, I may have missed it but I could not find in the K the amounts capitalized under the digital home plan for retention instead of SAC. And then a last question about C-band, if I could. The rate of acceleration in the decline of C-band would suggest that it is getting close to the point where it almost gets shut down entirely. I wonder if you could just comment on that as a closing remarks.

I will start and I am sure Charlie will have some pointed closing remarks. In terms of DVR penetration, the reason you did not hear the HD penetration is we do not give out that number, and we do not give out the DVR penetration either. But suffice it to say, our current marketing plan is definitely geared to putting more DVRs into our home, into our base. We are pleased with that product. We continue to focus on that product. It has high customer retention value. In terms of the mix of our sales, we do not disclose that number. With respect to retention, capitalized risk expense, my finance guys are telling me that is not in the K and that is not anything that we have ever disclosed in the past, but I can tell you our primary retention plan is for customers that have been good customers for us, we look to upgrade them with additional equipment. There is often a charge for that equipment. Where appropriate, pursuant to the accounting rules, we recognize that charge as revenue and we recognize the associated expenses with the install. So I think our disclosure is relatively complete in that regard. In terms of C-band, I will defer to Charlie and let him close up with any other additional comments.

Again, I think we go in a marketplace where we have advantages and DVR we think is an advantage for satellite and for our company. C-band, the last thing I saw, I think the business has been declining. I think the major declines when we started, there was about a million C-band paying subscribers. We acquired the company. We transitioned the vast majority of that. I think the last thing I saw there was something well short of 100,000 C-band customers left, so it is probably not a material impact on our business going forward. I think that probably was not a big factor in our growth the last couple of years, quite frankly. There is not a lot left there but yes, I imagine the C-band analog business for sure is probably not around this time next year when we talk about it because most of the programmers are -- it is not economical for them to leave their signals up there and they are going to go digital. On the margin, I think that is probably good for cable guys and satellite guys, because we will each get a little bit of that business, but it is again less than 100,000 customers spread around all the video providers. New home construction is more of a factor, where you get 3 million new homes or something. So that is it. I think we are back early May. We appreciate you joining us today.

Thank you. This concludes today’s EchoStar communications fourth quarter 2006 earnings conference call. You may now disconnect.