EchoStar Corporation (SATS) Q4 2007 Earnings Report, Transcript and Summary

At this time, I would like to welcome everyone to the DISH Network Corporation 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions) Thank you. Mr. Kiser, you may begin your conference.

Thanks, Cheyenne. Thanks you for joining us. My name is Jason Kiser. I am the Treasurer here at DISH Network. I am joined today by Charlie Ergen, Chairman and CEO; Carl Vogel, our Vice Chairman; Bernie Han, our CFO; and Stanton Dodge, our General Counsel. Before we open it up for some Q&A, we do need to do our Safe Harbor disclosures. So, for that; I will turn it over to Stanton.

Thanks, Jason, Good morning, everyone. Thank you for joining us. As you know, we do invite media to participate in a listen-only mode on the call, so we ask that media not identify participants and their firms in the reports. We also do not allow audio taping of the conference call and we ask you to respect that. All statements we make during this call that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such 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 such forward-looking statements. While I'm 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, I'd ask you instead to take a look at the front of our 10-Q for a list of those factors. In addition, we may face other risks described, from time to time, in other reports we file with the SEC. 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 described in our reports and should not place undue reliance on any forward-looking statements that we make. We assume no responsibility for updating any forward-looking statements that we make. With that out of the way, I will turn it back over to Jason.

Thanks Stanton. And I think we're going straight to Q&A, operator. So you can put through the first question.

(Operator Instructions) Your first question comes from the line of Jeff Wlodarczak with Wachovia.

Hi, guys. How much of your Q4 gross addition result was purposely driven by your decision to reduce retail commissions, increase customer contract lengths, tighten credit and your outlook for the economy? And do you think you are starting to turn the corner on some of the operational issues that probably drove the second half gross add numbers? Thanks.

This is Charlie. I would try to answer your question pretty broadly. I think that from a sales perspective, I'd say that this quarter was disappointing due to $790,000 in our gross additions. I would say factor one is probably the economic conditions and fewer housing starts, and the second factor would be competition. Also, because of the delays of satellite launches that were originally scheduled to be in 2007, they will now be in 2008. We just didn't have as many local markets for high-definition television to go out and advertise in terms of the local channels, which are obviously important, probably more important than national channels, which were in pretty good shape. So, those two factors are the main thing. We did tighten credit some, but I don't think that had a material impact, as much as the other few things.

And then, do you feel like you started to turn the corner on some of the operational issues you talked about in the third quarter?

I wouldn't say that. I would say that I'm a perfectionist, so start with that. We do something a little different than most people in the industry. We typically answer our own phones and we typically service our own customers with our people. So we don't execute at as a high level. Your inefficiencies are amplified. On the other hand, when you really operate efficiently, of course, you get the benefit of that. And I think that there is a lot of room for improvement there. It really shows up in our variable cost, every month we could be more efficient there, and then it ultimately shows up in churn because when you're not doing your job right and customers call you, the best you can do is save that customer, right, and you have a chance to lose. If they're on the phone too long, or you don't answer the question correctly, or a person is rude to him, or you didn't install it right the first time, or they don't understand how the equipment works, they don't understand how you're billing them. And I think that it takes a while for those inefficiencies to really, really be resolved. Many of them are resolved like rebate and things like that, where we give away free programming for 10 months, but all kinds of things drive tremendous inefficiencies throughout your business, even though they're positive for your sales. So those things we cleaned up. But in terms of answering our phone to the standards that we set, we're not doing that yet, to the effect of installing our systems correctly the first time at the level that we think we should be doing that, we're not doing that yet. So we've still got things to do there. We've changed management around a little bit in the operational areas and we have some work to do there.

Thank you.

Your next question comes from the line of Gerard Hallaren with JRPG.

Yes. Hello. My questions relate to some of the things that you are looking in the future and I was wondering if you could update us on some of what's going on with Clearwire and your efforts to bring additional services to customers and how the partnership with AT&T is going?

Well, obviously, our main product is video, but there is increasing competition from customers who want not only your video, but a broadband and perhaps a telephony product, right. And both cable and phone companies are better positioned to do that. So, obviously, one of the things we can do is partner with people who already have broadband connections, as opposed to build that network ourselves. At this point, that's really the strategy we've have chosen. And so, people like WildBlue from a satellite delivery method or Clearwire, from a terrestrial method, or AT&T, which is a partner for DSL path to our customers, are all avenues that we are pursuing and continue to pursue. Obviously, on the AT&T front, we've announced that starting in April that they would no longer be selling DirecTV in the old BellSouth territories and they'll be selling DISH Network. So obviously, that's a positive, to increase the presence on AT&T footprint and also a positive in terms of it adding additional people that we can partner with AT&T to deliver broadband and telephony products. I think the big picture question is that, at this point, as we believe, that from a broadband perspective, it's going to be better to partner with people than trying to develop our own network.

Sure. Can you put some quantification around what customer responses have been with WildBlue and Clearwire?

I'd say this way. WildBlue is a product that, if a customer has a choice of a cable product or a DSL product, simply WildBlue is their choice in that equation.

Okay.

And so, it skews more rural and it skews where people have less of an alternative. Now there are a large number of our customers who don't have an alternative. So in that sense, it's a good product for us. Clearwire is little different. It has shown at a certain price point it can compete with a phone or a cable alternative. But they are not in enough places for us to really get a handle on how that product is going to be viewed. And clearly, at a certain level of service, perhaps customers prefer a phone or cable if they really, really want high speeds. It's a different niche that Clearwire goes after. WildBlue, on the other hand, goes after a premium customer who just doesn't have access to anything else.

Yeah. I just was wondering, are there enough markets out there where Clearwire is; and you've now been added for four or five months, so you must have some costumer response?

I don't think we have rolled out a lot with Clearwire yet, primarily from an IT integration issue, not from anything else. And the product is not a standard item product across the board. Clearwire has the right guys to ask, but obviously the next-generating Clearwire product that's standardized, has much more potential then perhaps the current offerings.

Yeah, absolutely. Well, good luck and I appreciate your efforts on all shareholders behalf.

Your next question comes from the line of Ingrid Chung with Goldman Sachs.

Hi. Good afternoon. Thank you. My first question is, since competition was named as a big factor, do you feel that the telcos, cable or DTV were the biggest factors in terms of competition? And then, secondly, have you had to increase marketing dollars in those areas where U-verse is launched?

I guess as you look at the general landscape, I think that in the video space it's clear that the two people that did really well in the fourth quarter were DirecTV, who still had fairly good gross additions and very good net additions, and FiOS, who continues to have a fair number of those. I think those two companies deserve a lot of credit. Obviously, AT&T is starting to get some legs up with U-verse, but hasn't been quite as big of an impact as FiOS has been in the market. And then, we did well with positive subscribers vis-à-vis probably the cable industry came in, I think, again for negative numbers. So it appears that we were more in the middle of the pack, and we certainly like to be farther up the food chain there. I like the competition and I like the fact that there are things that are coming such as HD, where we have some built-in advantages as we get our new satellites up and can do more local markets. DirecTV has shown that satellite has a clear advantage there. So we just didn't do as well maybe from our marketing or execution point of view, and we also have some satellite issues that will be resolved once we get new ones up. There is a marketplace out there that's going to shift. Strategies will shift a little bit. Where we get new customers will shift a little bit. We have a good, solid base, particularly in rural America; that's not going to go away. And as long as we go out and execute the way we know we can, I think that satellite is going to do just fine, we're going to do just fine. We have a chance to grow because we think the advanced services are things that satellite has an advantage in.

Okay. Fair enough. And then, on U-verse, in markets where it's launched, have you had to increase your marketing dollars there?

We haven't specifically gone to increase marketing dollar where U-verse, it's a little bit of a catch 22. Obviously, AT&T is selling their product there. So we still do well in the U-verse markets. And we just have to see how that all goes. And to the extent that U-verse was to take the vast majority of the customers and pick a marketplace, you might have to do something different. But today, there's a pretty nice equilibrium there. And I think, with the BellSouth territories, that was an issue because there was U-Verse, and AT&T wasn't selling our product, they were selling a competitor's products. So that is a favorable shift starting in April.

Okay. Great. Thank you.

Your next question comes from the line of Vijay Jayant with Lehman Brothers.

Hello, it's James Ratcliffe for Vijay. I had a couple of question. First of all, on churn trends, can you just talk about how voluntary and involuntary churn have been evolving and have you seen churn, as a whole, trending upward and whether are you going to see a turnaround of that? Secondly; as the DirecTV BellSouth contract rolls off and you become the satellite provider for all the AT&T, what sort of integration are you going to have to do in the BellSouth territories? And two housekeeping questions. Where within the fat DISH split did the Frontier Wireless entity end up and what was total CPE CapEx for the quarter, both retention and acquisition? Thanks.

I think it was three or four questions. I will try and see if I can remember. First one was churn and voluntary and involuntary. Obviously, we did a little better in churn, but there are a number of factors driving churn for us in the industry. But let's talk about us in particular. First and foremost, probably first on the list is the economy. Obviously, if people can't pay their housing mortgages or they are losing their houses, and have to move back into an apartment or something, there's going to be some churn driven by that, beyond what we saw in 2006. Second part is operational inefficiencies. When we drive customers to call when they don't need to, right, or we don't handle the customer properly when they do call us we have a chance to lose customers. We're driving too many calls to our centers for things we're not executing on. We can do a better job there. That one is totally in our control. The first one is not really in our control, or as much in our control. Third thing is that we still have some degree of piracy and fraud in our systems, and we will be sending out, starting a new SmartCard swap later this year. And so that one is in our control, and we can make an impact kind of there. And the third thing probably then is, we may lose some customers where perhaps they wanted local HDTV and we just didn't have it in cable or satellite competitor or phone competitor that did have it. So we've got to do a better job there. And again, that's in our control with launch of additional satellites. So we kind of focus on the bottom three there and say those are things we can all improve. They all happen in different timeframes. Obviously, efficiencies are something we can work on day-in, day-out. Satellites have set launches and piracy takes a lot of SIM cards out. But you send out cards on the more vulnerable channels. So you got first right. So, all those things should have a positive impact. Final thing is we continue to spend quite a bit less in retention marketing for an obvious reason that we don't want to upgrade customers until we have the right product form. We don't want to upgrade them today, then go back six months later and upgrade them again. So, we're less aggressive in retention marketing than we otherwise might want to be in some markets where we know, for example, the local HDTV is coming later this year, and then we'll be more aggressive in those markets to upgrade those customers. So, a variety of factors there, but the only one we really don't control is the economy. But DirecTV has shown that churn was pretty low, even in a slow economy. The potential is there to improve from where we are today, let's put it that way.

Okay.

BellSouth integration, I think that integration, again, they probably will be the one to ask a question to, but from a DISH perspective, that integration is on track for early April cutover. Obviously, at that point there is a cutover, so there will be a little bit of lag as people learn to sell something different than they were selling before, and you start with zero customers in the queue. So, there will be some lag in that, but for the most part, my understanding is that the integration is going pretty smoothly. Certainly from a DISH perspective it is, and we should be ready in all fronts in April. And then on Frontier Wireless, that our footnote in the DISH 10-Q talks about that being in DISH, whether it ultimately remains there remains to be seen, but at the moment, Frontier Wireless is an entity of DISH Network and still participating. So that's about all we can say. That's what in the footnote.

Okay. And on total loss CPE CapEx?

CPE CapEx number you're looking for is $221 million in the fourth quarter.

221? Thank you.

221.

Thanks.

Your next question comes from the line of Tuna Amobi with Standard & Poor's. Tuna Amobi - Standard & Poor's: Thank you. It's Tuna Amobi. My first question, Charlie, perhaps you can provide some general comments on your outlook for this year, maybe directional commentary on gross adds as well as SAC. I know you spoke a little bit about retention marketing, but on a year-to-year basis as you transition to MPEG-4, how you expect that item to end up this year compared to 2007?

Yeah. I don't give those specific outlooks. I can give you a general outlook. I think that 2008 could be an interesting year. It's one that we're pretty excited about because you're going to have to be pretty good. I think it's interesting from a economic point of view because, obviously, growth is going to be slower perhaps than it has in the past and many believe we're in a recession or going to be in a recession. So that's going to be interesting. A lot of things you would do as a company in economic environments, and I think the faster you can move and the more flexible you are, the better-off you are going to be. And I like that part of our company. It's an election year, it's an historic election, and that's going to be interesting. And from that perspective, there are opportunities throughout that as well. So I think it's going to be an interesting year. I think companies that are well managed and have good foundations will be better than those companies that aren't. And our focus will be to make sure that we strengthen our foundation. Tuna Amobi - Standard & Poor's: Okay, let me see if I can reframe the question. So, based on all these factors that you just mentioned, do you expect gross adds to be flat, up or down this year?

My crystal ball is not that good. Tuna Amobi - Standard & Poor's: Okay.

We expect your gross additions to be prudent and economical for us, and we have a lot of control over that. Nobody knows what the economy is going to do, but it will have some impact on this, positive or negative depending on what it does.

I think as Charlie outlined, we see gross adds certainly as important, but we see free cash flow as more important and we're running our business in a way that we think is most prudent for us in the long run. You asked the question about MPEG-4, we've begun a transition this year. We will accelerate that transition next year. But lot of that is tied to successful satellite launches and how we shake out competitively in those markets after those satellites are up and we've got product to sell. I think we're trying to have an appropriate mix of gross and net adds, coupled with disciplined financial structure that generates adequate free cash flow, so we can continue to grow and invest in our business. That's how we're going about things day-to-day. Tuna Amobi - Standard & Poor's: So in that context, do you have any visibility on SAC?

I have the same crystal ball that Charlie does. And I don't think we're prepared to go into that in any detail. But certainly with MPEG-4 and HD, you can figure out that math on your own. Tuna Amobi - Standard & Poor's: Okay. Let me switch gears to HD, any color on where you expect to end the year on HD programming in terms of national and local?

Yeah. I think we expect to be competitive with the 100 channels that anybody else might have and the 100 local markets anybody else might have. Of course, it's conditioned on satellite launches, but we expect to be very, very competitive in the HD field with satellite, cable and phone companies. Tuna Amobi - Standard & Poor's: Can you update us where you ended last year on those channels now?

I think we're in the 70 range.

Right. I think we said, at CES, we were at approximately 70 national channels and I believe we said we were around 35.

30 to 34 markets.

34 local markets. And as Charlie indicated, we don't think we're going to be lagging at all, in terms of content or market subsequent to our satellite launches. Tuna Amobi - Standard & Poor's: Okay. That's helpful. And lastly, I was wondering if there is any commentary that you can share on the 700 megahertz auction, and it seem like you're going alone this time. Just kind of trying to get a sense on any strategic plans that you have or how this auction is shaking out? Do you have any specific business plan on the 700 megahertz auction that you might deploy should you be successful?

Pursuant to the rules that we're governed under by FCC, we can't say anything more then that's already in our financial statements and footnote. Tuna Amobi - Standard & Poor's: Thank you. Thank you very much.

By the way, those are all good questions. We don't mean to dodge them, but it's just that rule. We don't give guidance and the rules are the rules in FCC.

The one thing we can say about SAC and it is talked about in our 10-K is, given that if we are going to buy our customer equipments from a third-party, who is going to be marking it up with the margin, our SAC all of equal will go up somewhat in '08 versus '07 in all our depot. Tuna Amobi - Standard & Poor's: All right, thanks.

Next question comes from the line of Doug Mitchelson with Deutsche Bank Securities.

Thanks, guys. A couple of questions. First, this offer you issued for PVRs, kind of what in general is the confidence that this software isn't going to be proven to be in violation of any patents?

It's a good question, maybe I don't know if legal counsel wants to jump in here. But in general, the TiVo case, at least the appeals court ruled for us in hardware and against us in software, but the net result of that was, I think, that decision, as it is today, in which we've appealed and have an embark hearings later. But I believe we're about $120 million something with interest from the past award which we've reserved for TiVo. That's kind of the bad news. The good news is, is that we have designed around that patent. We have filed for that patent, although its not been published yet. And we have top side legal opinions that the patent does not violate the TiVo patent, nor a doctrine of equivalence for that patent. So we're in a situation as a company, buying our plot and we downloaded that software to our DVR. So, as a company, we are confident we are not in violation of the patent in question to trial. And I'm not sure everybody could say that in the industry. And so, there's probably other ways for people to design around as well, but we came up with one way to do it. Others may do it other ways or they may enter into agreement or they may not feel the need to, they may do things differently today. It's the kind of good news, bad news, we'd like. We believe we should have won on the software side, but the software is clearly explained to the court and we now do it a different way.

That's helpful. I was curious. You've been a leader in international language subscribers. How are the kind of the gross add and churn trends for that group, is it similar to your overall trend or better or worse?

It varies between international language groups. I think we've got about 35 different language groups and some are materially better from a churn perspective and some are not as good. To give you an example, Hispanic churn probably skews higher than non-Hispanic churn, as a general example, but there are other cases where we have very little churn in international programming. So all in all, I would say international customers are our strategic core, are material in terms of what we do. It's a strategist's work and hopefully we'll continue to.

Okay. And then, a last question, Charlie. It’s a bit hard to peek under the hood right now, versus normal for you guys. I mean, all the deterioration in the last couple of quarters in sub-growth has been pretty severe. One way to take that would to be to suggest that the value positioning you've historically had in the market is not as effective a marketing strategy today as it has been historically. But again, the answers you've been giving on this call say that you are still pretty confident of the business and you think there are unusual trends that will reverse in the future. I mean, if that is accurate, then why not use your balance sheet to take advantage of evaluation in that, the Street's currently discounting expectations that the softness continues?

Yeah. I think what you are really asking is why don't we do some share buyback?

Well, yeah. I mean the question is if your outlook for 2008 is that you are going to be pretty competitive and you're pretty excited about some of other things that are coming, then why not be out there taking advantage of a period when the market is not valuing your shares?

Let me start with your first premise, the deterioration of our value message. I don't particularly think that that's happened. I still think we have the best overall value message. Certainly, our competitors have continued to come at this with substantial discount to attempt to minimize our value message. And you have seen us react by focusing more on a DVR message as well. So, I don't think we have lost our positioning in the market. I think you'll see us expand that positioning not only to talk about value, but to talk about features and technology that we have that are superior to our competitors that we're beginning to get those kinds of messages through the market. So, I don't think it's as simple as it may have been two to three years ago on lowest price all the time, just because other people have met that price point. But that being said, I think we have got still strong messages in the market. We still remain the low cost provider with the greatest number of services, and we will continue to drive that message. In terms of what we do from a balance sheet standpoint, we will look at all options to increase shareholder value and we continue to look at those. But we are not prepared on this call, to talk about any significant share buyback program other than to say that we recognize where our strengths and weaknesses are. We recognize that we have opportunities in our balance sheet to do some things, but we also recognize that the markets are a bit skiddish, certainly from a debt standpoint and we are not going to get ourselves too far ahead of our skews in terms of what we do in our balance sheet until we see some trends, get some satellite launches behind us and see how our '08 plan unfolds.

This is Charlie. From a general perspective, in the last three or four years, we saw a lot of opportunities in the marketplace. We got outbid on everything we bid for and, of course, a lot of things would have required a lot of leverage to do it. And we were conservative in the marketplace. We believe that risk wasn't priced exactly right. The reverse of that, is really happening now in the sense that a lot of the people that just went and bought companies and leveraged things up, those marketplaces are somewhat closed. And so, somebody who's got cash in the balance sheet, somebody who has got the ability to generate cash is in a better position today and valuations have come back to earth, so to speak. And so I think we have different set of opportunities than we may have had in the past. But again, as Carl said, we kind of evaluate that everyday and say what opportunities do we have and where do we think we are going to enhance shareholder value? And hence, in the past, sometimes that's been to buyback stock, some cases, it has been to go out and deliver, sometimes it's been to go out and make an acquisition. We feel very comfortable we can make those kinds of decisions efficiently.

Great. Thank you.

Your next question comes from the line of Jonathan Chaplin with JP Morgan Securities.

Thanks. Sorry to drill down on the question that's been asked already to some extent, but looking out through 2008, it seems like the economy certainly isn't getting better and competition is just going to escalate. And I understand that you guys are going to do things differently which will improve your competitive position. But it just seems like over the course, you are going to have more competition in more markets. Is there anything that I am not thinking about that would cause gross adds to improve in that environment or is this the new sort of gross add reality do you think for the company? I guess, if you can just add a little bit of color in terms of what you are seeing in the early part of the first quarter on the gross add front? That would be helpful.

Yeah. I mean I think that's an interesting question. As a general statement you've got another competitor in most markets who are just the phone company who wasn't there two or three years ago, right. So the general thing is you've got an extra competitor, right? That obviously makes things more difficult. On the positive side, you have a couple of things, those competitors, you're not going out to certain market constituents, they don't build that fiber-to-the-home or fiber-to-the-curve for middleclass American, it's upper class America, right. And they don't go to rural America by any means. So satellite doesn't face increased competition there perhaps. The second thing is that consumers are showing they want more advanced services, let's just call it DVR and HDs. There is nobody who makes a better DVR than or sells a better DVR today in DISH network. There are countless reviews of product where the 722 is pretty universally considered the best total overall DVR business. Secondly, the HD offerings while we're behind a little bit in local markets today that's something that we're able to get back up as industry leader in 2008. So that is an opportunity and I think you saw some of that from DirecTV, where it did very well with that even with the increased competition. So the third thing is, probably there is more opportunity now, for example in MDU market than there was before. Congress has passed a law or the FCC has passed a law that the outlaws cable exclusives. So many MDUs really walked out, because there was a cable exclusive for 10 more years. We just didn't have a chance to go and compete. That environment has changed somewhat. And the fourth thing, I think as Stanton announced here, that is initiating paradigm shift and it is the digital conversion. So that means there is 13 to 15 main homes out there who don't pay for TV today, signals are going to be go black unless they put a digital converter in. Well, not all of them are able to actually install an outdoor antenna and put a digital converter in, right. And so, we now have an installation network. Our spawn company manufactures a product that could be used there. So we have an opportunity perhaps in the digital conversion to play a role. They can enhance our relationship with consumers of DISH Network and perhaps increase our subscriber role. So an awful lot of things going on out there. So yes, we have an overall economy, overall competition that's tougher. It's not tougher than in 1986 when we were competing against AT&T and Comcast and CCI, and they scrambled all the signals and the sky went dark overnight, and we were selling thin foot dishes for $5000, it's not that tough. And so, I think we have a degree of confidence that we can execute in that kind of plan. And like I said, what I like about it is you got to be good. And as we talk this time next year, we'll probably see how we stack up versus everybody else in the business. Unfortunately, I don't think we stacked up as well as we like to in the fourth quarter.

Thanks, Charlie.

Your next question comes from the line of Kit Spring with Stifel Nicolaus.

Okay. I don't know if this is in the K or not. But can you detail what your satellite launch plans are for this year the number and cost, and just clarify that those are refunded by DISH not SACs? And then, secondly, can you give us any color as to where you are as far as your uptake of DVR HD, are you kind of in line with the industry or behind or above? And then, third, any comments on your plans for video on demand, do you think that's really a differentiator for cable and what you plan to do about it? Thanks.

Good questions. I think its page 7. So we're not going to go through the detail, but the general premise is that the satellites that are in the kind of full corners, BSSR for inside DISH and the satellites that are outside that are resident in FAS. And we got some satellites under construction as it says on page 7, EchoStar 11, as we retain, that will go at one of our full corner BSF slot. EchoStar 14, late 2009, again to support our HD launches. And then the CL2 which is a 129 over the flat that we leased from somebody else, again to support our HD and increase local in the locals as shown there on page 7.

But our next launch is next month in March.

Okay.

At AMC-14, that is a fast satellite and being leased by DISH and targeted to go to 61.5 degree slot which is where we have a fair number of local to local HD and international channels. So that's going in March, and then we have another one in summer. So midyear this year Echo 11, as Carl said, and that one is a DISH satellite going in through our main orbit arc and allows us to increase our capacity both in HD and local HD. And then CL2 which is a DISH satellite goes up later this year which again allows us to increase local to local HD in the same market.

Okay.

Those are the three that reflected DISH this year.

Okay.

One we lease from SAC and two we own.

Okay.

And again, that's on page 7 of the 10-K and then I believe back in the footnotes we talk about on F33, we talk about various commitments that we've made and satellite issues as well.

Okay.

33 and 4.

And on the DVR and HD penetration and VOD?

We don't give that out, on terms of penetration. But I think we are very competitive there as I said, I believe it's fairly objectively that we consider to have the best HD DVRs out there. Again now we have our own intellectual property there. On pay-per-view, the satellite has an advantage in us, we put the biggest hard drive, our DVRs still have more storage capacity, so we have a lot of ability to do a lot of video-on-demand resident in the box where it is instant and you are not dependant on anybody else. But we are disadvantaged against cable who can put big servers and put more in a central location. Having said that we are advantaged in the sense, as you go to broadband, right, essentially video-on-demand is going to be a broadband product and not necessarily a central server in the cable head end, but central servers at Amazon.com or Apple.com or to the web or perhaps the box.com, right? And all our VIP products that we buy from sats are broadband compatible. So we are starting to get customers now who install DISH network and then put, hook up a DSL connection and are able to go and get video-on-demand on the net. That is something that we will continue to improve. The operating systems have to get a little better, so your remote control is a little easier to navigate. The menus have to get a little bit better, your graphics have to get a little bit better and those are all changes that our vendors are making for us to make that a better product. But that's…

A follow up on that.

But that's definitely an opportunity. So I think if you look at the total landscape, satellite can stack up pretty well on a video-on-demand basis.

Thank you.

I think if you look at video-on-demand and you look at the gross and net adds with cable relative to the gross of net adds for satellite, certainly the HD and the DVR message is carrying the day from an acquisition standpoint and I really believe that VOD is much more of a retention product for cable rather than a marketing message and as Charlie pointed out, I think that with the connectivity that we are building into our next generation of boxes, it will obviously position VOD play as well.

I mean, we actually have unlimited VOD play. Cable doesn't, if cable is going to go to head in strategy, they will never have an unlimited VOD play. I shouldn’t say never, but it is going to be very expensive to have to compete with what the internet is going to be able to provide for you.

Thank you.

Your next question comes from the line of Benjamin Swinburne with Morgan Stanley.

Thanks. Good afternoon, guys. A couple of questions, maybe you could about talk about, Charlie or Carl, the lack of HD locals in a lot of markets. How much of that do you think drove the gross adds decline if you want to maybe put a percentage around how much of the gross adds drop came from a lack of HD locals and then just putting a little more meat on the satellite launches. You are at 34 markets today. Does AMC-14 get you to 75 to 80, or is it going to take all the way through to CL2 next year before you are at that 100 market count. And any channel in particular in the fourth quarter that was weaker than 3Q? Just trying to get a sense if it was Telco, or Independents, or direct sales that might have been particularly weak on a sequential basis. And then lastly, just an administrative question. You talked about an IP R&D write off in the fourth quarter in the G&A line, which was in the consolidated DISH numbers ready to Sling Media if you could give us that that would be helpful as well?

Yeah, I will let Bernie take that last part first.

Yeah. That R&D write-off was related to the Sling acquisition, which took place in the fourth quarter. I think that's talked about in our 10-K something like $22 million of the acquisition was written off immediately because there was R&D that was in progress and that's the right accounting for such an acquisition. The other question --

Yeah. On the HD stuff, I am just going to give you a general answer, but when the satellite launches, sometime you get it over into proper plays. AMC-14 will allow us to start adding about ten local markets a month till the end of the year, to the last half of the year, right? So that's you get some 30 to 100, right?

Got you.

And obviously, anything you get up before September, or before December actually, is pretty good. HD was bigger in 2007 than it was in 2006. It will be bigger in 2008 than 2007, probably bigger in 2009 than it will be in 2008. And obviously almost everybody who wants HD, wants their local channels in HD, so you are competitively challenged in markets where you don't have it. And so I think that both cable and satellite competitors and phone company competitors had some advantages there from that perspective. And secondly, I think DirecTV is to be commended. I think they had brilliant marketing campaigns. I think they did a great job in execution, and I think they were able to go out, at least in the public eye, to be seen as the HD leader and I think that that speaks, too, highly of their ability to execute and it shows you that we’ve got to do a better job and it shows you, that it also shows…

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference, please hold and the conference will resume momentarily. Thank you for your patience. Mr. Kiser you are on the main conference, sir.

All right, Great. Thanks, sorry, everybody we lost power on our end, and we were right in the middle of Ben's questions.

So I don't know if people have heard the answer right.

If Ben's still on the line, Charles, or anybody, can tell us if they got those answers through.

Okay. Ben your line is open.

Yeah. I'm still on the line. You got there mostly, and I think the only outstanding was the channel question in the quarter, if anything was particularly weak Telco, Direct, or independent, or if you saw that weakness across the broad?

Yeah, I know, I don’t know if you heard the answer. But most channels are about the same, and Telco, we have been very strong in Telco, there are four big channels, there is Quest, Verizon, and there was 2AT&T, BellSouth and AT&T, so we've only been on the AT&T side. So DirecTV, that's been a pretty good growth area for DirecTV, obviously. And that's been a steady area for us, but it hasn't been a huge part of our business. That will be a bigger part of our business going forward as we pick up the BellSouth territory. So everything has been about the same, except from a channel perspective, there are few changes in and out of that. But phone will probably logically be a bigger piece going forward this year.

Thanks, guys.

That had been our last question.

We'll take one more question.

In terms of the power outage, we'll get a bonus.

Your next question comes from the line of Jason Bazinet with Citi.

Thanks so much. I think you guys have alluded to the fact that churns stepped up most significantly in the third and in the fourth quarter. And I was just looking at the bad debt expense in 2005, 2006 and 2007 as disclosed in the 10-K, and I guess the sequential increase in bad debt is around $37million. It seems, and just to be back of the envelope, virtually all of this step up and churn could be explained by just a bad debt expense, would you agree with that hypothesis?

I think it's a big factor, but I don't think it's all there. I think obviously somebody decides, what happens when somebody decides to churn, they may just not pay their bill. And so they cannot, they are correlated together. Okay. But obviously, and I think look, the problem with churn is that whatever we do today isn't going to show up for churn until next year, right. So some of our churn was self inflicted from, perhaps for example, if you do a promotion where you give $10 off for 10 months. I can guarantee your churns is going to go up at the 11th month, when the $10 quits happening. Your customer also is going to see two or three price increases during the year, that's going to drive calls, it is going to drive churn. I have said it many times, because I hate free programming right? I hated the way we've done that, and I think that it just ends up long term not being the right thing for our business. So I think we've improved, and I think now we are a little more disciplined in what we are doing there, and I think that as we do things today I think that we have a better foundation in place for churn, but in good times or bad times and the economic perspective. So I think you have to, and some of the stuff we did in 2006 probably showed up in churn in 2007.

Okay.

We were pretty excited about our sub growth in 2006, and we probably didn't put on as good of customers, and we were sure that we had policies like free programming for a certain period of time and ended, and it just always comes back to bite you a little bit and the good news is, most people seems to be on the same page here now.

Okay. Understood. And then one last question on the buyback I know you guys haven't bought shares for quite some time, but you did step up the share buyback authorization by another, I think it was another 300 and some odd million?

And because our crystal ball is not that good in terms of what stock market is going to do and how we'll be judged and what the other opportunities for us are in the marketplace.

Okay, thank you

We like the preparation is where we want to be. We're prepared to do any number of things.

Okay, thank you very much.

I think it's our last question, so we'll be back again. Thanks for joining us today. Sorry about the power outage and we will be back. For those of you who want to listen to us, sat call is coming up in five minutes and we'll be back in May. Al right. Okay thanks.