EchoStar Corporation (SATS) Q3 2010 Earnings Report, Transcript and Summary

Good afternoon. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation Third Quarter 2010 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Treasurer, Jason Kiser, you may begin your conference.

Thanks, Tracy. And thanks for joining us. This is Jason Kiser, Treasurer here at DISH Network. I'm joined today by Charlie Ergen, Chairman and CEO; Tom Cullen, Executive Vice President; Bernie Han, COO; Robert Olson, our CFO; Paul Orban, our Controller; and Stanton Dodge, our General Counsel. Before we open up to Q&A, we do need to do our Safe Harbor disclosure. So for that, we will turn it over.

Good morning, everyone, and thanks, Jason. We invite media to participate in listen-only mode on the call and ask that you not identify participants or their firms in your reports. We also do not allow audio taping and ask that you respect that. All statements we make during this call that are not statements of historical fact constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be marginally different from historical results and from any future results expressed or implied by such forward-looking statements. For a list of those factors, please refer to the front of our 10-Q. All cautionary statements 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. We assume no responsibility for updating any forward-looking statements. And with that out of the way, I'll turn it back over to Jason.

Thanks. And so, Tracy, we're just going to go straight into the Q&A. So if you would to open up the line, we're ready to go.

[Operator Instructions] You're first question comes the line of James Ratcliffe, Barclays Capital.

First of all, pretty strong ARPU growth in the quarter. I'm wondering, can you talk a little bit more color about how much of that was driven by more advanced services subs versus the flow-through from price increases? And it sounds like a little less willingness to concede to customers if they were threatening to churn? And secondly, Charlie, can you give us an overview on what you're thinking about capital allocation at this point? Because several other companies in this space have made a lot of efforts lately to clarify their capital allocation strategy and increase the return to capital to shareholders? I mean, last year, you did a big onetime dividend. And are you seeing anything similar this year? Your leverage is well below the rest of the space. And you're at the point you could probably take it private and be 1 to 3x levered. So I'm just wondering what's driving the choice to have that kind of a leveraged profile? And is it looking for security or is there some other use for the cash that you're preparing for?

I'll take the part of the question directed at me and maybe, Robert, you want to -- maybe you talk about ARPU after I finish. Well, capital allocation, A, is one thing we do think about a fair amount. So even though we haven't really articulated a lot of what we're thinking in terms of actual action, I think we've articulated on these calls our thought process. And a couple of factors that we would say. One is that when you look at the overall economy and kind of where we think that's going to go and kind of factor that in our plans, and obviously, the economic outlook is still not real optimistic at this point. Second, we need to know what tax policy is going to be. Tax policy, if the tax rates are going to go up, a dividend gets more attractive. If tax rates are going to up, leverage could make some sense. If tax rates aren't going to go up, then it's probably a better economic climate from a strategic investment point of view. We have our own -- and also, in an economic environment that doesn't look that optimistic to us, at the same time, I would say that there appears to be an awful lot of opportunity out there as well. And then our overall business is changing a little bit from just putting in video products to whatever the next thing that the trends are. And certainly, you may have questions ultimately on things like over-the-top video and things like that. So we look at all those factors. Then what's the price of our stock, right? So do we think that price is fairly valued, overvalued, undervalued? So we look at all those factors and we try to make some decisions. And we also have a TiVo case, which has a material impact on our business one way or the other, which isn't resolved yet. So all those factors are things that make us, I guess, fairly conservative in terms of what we're doing. We don't think we're missing a particular decision or a particular investment. And when we do think that last year, we were concerned that tax rates might go up even before they were supposed to, and so we did that onetime return to shareholders. So those are the factors we look at. And if you can tell me what the tax policy is going to be, if you can tell me what interest rates are going to do, if you can tell me what the resolution on TiVo case is going to be, if you could tell me what the -- then I think we can make rational decisions. But the only thing that might run away from us would be tax -- at this point, the thing we're probably keeping our biggest eye on is tax policy. Because that could drive us one way or the other. That could be resolved as early as three weeks from now or it could be three months from now, but we're probably going to get some indication from the government as to what that's going to be. And Robert, you want to take the...

Yes. Sure, Charlie. James, this is Robert. Regarding your question on ARPU, the bulk of the increase in ARPU is driven by the price increases. We took a price increase in February related to receiver pricing. We took a price increase on June for certain programming packages. I believe I've outlined in our previous call that because of the timing of our billing cycle, if we take a price increase in June, you'll see most of the benefit of that price increase in July and going forward. So you didn't really see much of the benefit of that June price increase in the second quarter. With regard to customers taking more advanced set-top box and programming features, that does contribute to ARPU. Probably the bigger impact it has on our business, though, in the long term is we get a higher quality customer or higher credit score customer. And over the long term, that should help us in churn. It doesn't have a lot of impact in the short term.

Your next question comes from the line of Stefan Anninger, Credit Suisse. Stefan Anninger - Crédit Suisse AG: Your churn has been somewhat elevated now for two quarters. But over the last two years, you've been making a lot of efforts to reduce your churn. You've improved customer service, installed Nagravision 3, moved subs on to AutoPay, improved communication with the dealers, et cetera. Can you discuss your optimism that these factors can push churn down again after two quarters of slightly elevated churn?

Tom, you want to take that one?

Yes, sure. As Robert mentioned, obviously, we would expect third quarter to be a bit of an aberration because of the mounting or accretive effect of the multiple price changes as well as, as I mentioned on the last call, we significantly tightened many of our retention policies at the same time in early June, and we want to be more targeted in how we apply retention practices. And I think in summer or early fall of 2009, the industry fell into a mode of applying pretty generous credits and adjustments to customers across the board when they threatened to switch. And we're looking at it in a much more economically rational way, saying it's costing us a fair amount, in fact, as you've seen to acquire a new customer, and we have to be very selective in understanding the long-term profitability of individual customers as we apply retention going forward. That being said, I think most of those issues are behind us. And it's hard to predict what the future is going to hold, but we do think the 198 number for this quarter is a bit of an aberration.

This is Charlie. I might just add that I think that that is a normal business, I might agree with that. But I think that the -- and there may be the question about this later, but I'll just jump in. The thinking on the Fox Channel is they're certainly not going to have a positive impact in the short run when it comes to churn because you have customers who can get those channels from other sources. And because the length, I think it was over a month, 30 -- I think it was at least just about 30 days, I think, yes. And you might want to talk about that, Tom, just in terms of what the Takedown, the takedown and why we would go to Takedown and so forth.

Yes, you're right. My comments about churn were more reflective of a steady state. Clearly, the Fox dispute in the short term is going to have an impact where the subscribers, when they lose -- during a programming interruption, you are going to lose subscribers. And the effect of that continues even after the programming comes back up because you have to re-engage on both the activation and churn front. So we're not in a position to quantify what the impact of that will be on Q4. On the other hand, we're pleased to have reached, though, a multiyear, long-term deal with Fox. These negotiations are more complicated, obviously, now than they used to be as industry dynamics and consumer consumption trends change. You get into other areas such as dedication [ph] and other elements, which, again, we're not going to discuss details of the agreement. But we're pleased to move forward with Fox as a partner, and the October results will clearly be impacted because of the programming interruption that impacted not only the RSNs, but also a couple of their other cable networks.

Yes. And I guess, I would just add to that. But while you take some short-term pain, I think the fact that we have a long-term solid relationship with Fox and a lot better understanding on our side of where they want to go, and I think they have a better understanding of where we want to go, that partnership now is very solid and long term. And the long-term results of that, hopefully, will outweigh the short-term impact that will have in probably the fourth quarter.

Your next question comes from the line of Marci Ryvicker, Wells Fargo.

Charlie, I was just hoping if you can talk about your long-term strategy given the economy and the competition. Are you looking to move upmarket in terms of subs? And at what point does it make more sense to buy yourself versus buying a sub? It feels like maybe the 800 market is your limit. And then also, do you feel disadvantaged without a broadband offering given the viability of over-the-top today?

First of all, strategically, I'm actually spending a bit more time on strategy. I haven't, unfortunately, got to spend a lot of time on strategy up until the last few months. And so I don't think that I can give you a coherent strategic plan other than we have for a long period of time been trying to put building blocks in place for the things that we think are going to happen. And for the most part, things are happening pretty much the way that we thought they would happen, other than maybe the economy suffered a lot more in the last two years than we would have hoped. But other than that, things are happening strategically about the way we thought. So we're putting a lot of building blocks in place, and they're not always visible to people outside the company. And usually, when you put building blocks in place from a strategic point of view, you put a solid foundation in there. And then when certain things happen, you're able to take advantage of those. One of those things is over-the-top kind of video where we don't really have a broadband offering per se. And obviously, net neutrality is an important piece of that so we know that our customers won't be discriminated against, and it's unclear what's going to happen there. But certainly, if you look strategically, it's not a business that we can't get into. We have, again, a lot of programming partners. You need that for that kind of -- we have a lot of technology. We have a lot of a call center's installation. We have most of the building blocks you need to do that if that's a business that could be profitable. From a site perspective, it's not -- the way I look at it is a little bit different than people looking at it. It's not just almost $300 in SAC, but it's also the free programming you give away. But you have to add into your SACs. So we're almost -- we're really close to $1000 of SAC when it comes to -- and we have to continue to evaluate whether we're gaining a customer for $1000 if we're going to -- and that's before you upgrade the customer or give them credits and so forth. So we had to look at the customer and say, are we going to make money or can we spend $1,000 somewhere else? And in the old days, that was never a problem because you were spending $400 or $500 to get somebody who was worth $15,000. Today that gap has narrowed and it maybe means there's other things we could do.

Your next question comes from the line of Bryan Kraft from Evercore Partners.

One, on the last call, you made mention of your prepaid offer and how that was having a factor on some of the subscriber trends. I was just wondering if you could elaborate on what you're doing in the prepaid space and how it's flowing through the results in the current quarter or the third quarter, I should say. And then also, Charlie, in response to the first question about capital allocation, you mentioned being in a position to invest in the next thing. And you mentioned over-the-top. Is that specifically what you mean by the next thing or do you think a multitude of potential options for being the next thing that you might be deploying capital into?

I'll take the second part directed at me. And Tom, you can talk about prepaid. Again, I wouldn't say that over-the-top would be the next thing that we would potentially invest in. I think over-the-top is interesting. If you look at a Netflix, which has a higher market cap than we do, obviously, they never launched a satellite, they didn't have to put the CapEx. That's an interesting business. And if done properly, they've certainly proven that there's the marketplace with a high valuation. Now whether we could do things there or not is something we have to continue to look at and see whether it could make some sense. Obviously, most of the receivers that we've been doing for the last three or four years are capable of receiving video and data through the Internet. I think the first step you've kind of seen us -- we're not afraid of technology, so the first thing -- one of the things you've seen us do is to get involved with Google TV. And that again is the epitome of over-the-top video because you really, on the one hand, could search the web for a lot of TV, and a lot of it, which is free, which takes away from obviously the Pay-TV provider out there potentially. But on the other hand, it's a technology that might be very appealing to those people who are hybrid customers who want both what they can get on the internet for free and what they can get on a linear basis. So Tom might also want to jump in there as well. But I feel -- I don't want to leave the impression, I see a lot of opportunity. I think over-the-top is something worth looking at, and every Pay-TV provider has to look at it. But I think there's a lot more opportunity beyond that as well. Some would take a little bit of money, some of it would take a lot of money. And we just have to -- in the marketplace, yes, you could probably borrow money today in the marketplace. But if you spend money today and the markets turn against you and you couldn't borrow money, then you'll miss the other opportunities. And I'm by nature a very conservative person. So I try not to have to make decisions unless something's running away from me. The cap allocation is not running away from us. If we were to buy back our stock, that's something we could do tomorrow, that's something we could do next year. That's not something we have to do tomorrow. On the other hand, some of the business opportunities that we look at might be gone six months from now or might be or not be available. So we have to be ready for those kind of things, and that's just the way we look at it. And again, I think when we see what the government's tax policy is, when we get some resolution to the TiVo case, I think we're in a better position to make long-term decisions. Tom, did you want to talk maybe about Google TV and the other question?

Yes, Brian. First of all, back to the prepaid offering, as I mentioned on the last call, we continue to tweak it. As we gain more experience in the category, we've made some changes, most significantly towards the end of the quarter where we tightened the credit qualification with stricter measures. And we're seeing the benefit of that now, but most of that is going to be fourth quarter. Again, we don't break out prepaid churn separately at this point. But I can tell you that we're making changes to the product, and now it's much more in line with what we had in the planning model. Just to dovetail off of what Charlie said on over-the-top, clearly, the world is changing and we're going to adjust accordingly. And I view it as -- you said notwithstanding the forecasted growth of the out-of-home consumption. We're really in a battle for share of the living room hours, if you will. And first, it was all broadcast and then that evolved to multichannel. And then game consoles came along, and now you're seeing streaming services and Internet applications and other forms of long-deal consumption. And some cord cutting is inevitable, but if you read many of the reports, you would view these as binary. That is, the assumption is if I consume some content over-the-top, I therefore cut the cord. And we don't really see that way. We see it as multiple forms of delivery coexisting in the household for the most part. And that's why we are pursuing things like greater focus on connectivity of our boxes with Ethernet where we're delivering more movie services, why we're doing things with Google TV and so forth. So nobody can predict the future perfectly, but we see it as not as binary as most people are projecting it to be.

I'd just ask two follow-up questions, one for Tom. What percentage of your receivers today are connected to the Internet?

We haven't disclosed that. But to be honest, we've had Ethernet connectivity capability on the boxes for many years. The focus on connectivity has only really been instituted in the last nine months or so. But as you know, we're in 20000-plus homes a day either for activation, service calls or upgrades. And so on every chance we get now, we're attempting to connect the box and provide the customer with additional service capability.

And this is Charlie. I mean, I think that, first item, broadband connectivity, you have to have a product and we don't really have as good a product from a broadband perspective. We've been playing around some beta stuff today, and we do have a wide variety of movies that our customers can get if they’re connected. But you also have to have an operating system where it's easy to get to those movies and we still have a lot of work to do there where customers would say that's worth the hassle actually to hook up my DISH box to broadband connectivity. Second thing is, but strategically, what I focus on is that we have the ability to -- that we're training our people so they have the ability to go on and hook up people and service people for broadband connectivity, that our hardware is such that it's fairly easy to do that and it's got the right software and hardware to do it and that your operating system that a customer needs is being developed or in our box and with a remote control that needs you to do it. Then if you do those things, then you can get connectivity rates up. Second thing that's happened is sometimes, the connectivity is happening in spite of us. If you get someone who buys a TV or a video game product, he's already hooking up to broadband that way as well. So we have to figure out how to make sure we're tieing into those people who are already hooked up broadband connectivity-wise but not through their set-top box. So we're fairly well strategically positioned there. We're not quite there operationally.

And then other follow-up I have for Charlie was when you talked about keeping PowerDrive basically for investment opportunities. Are you talking about things that are sort of a cohesive strategy that complements the core business, or do you mean opportunistic-type investments like you explored with SIRIUS, for example, last year?

Well, I mean, I would say most of the things we looked at, and even SIRIUS would have fallen in this category, would be things that we have core competencies that we can then take one and one and put one and one together and make three. So most of what we look at is somehow consumer related, somehow revenue or ongoing revenue related, typically technology related such as satellite, such as having time to do the satellite. So that's why SIRIUS was interesting, because it was a satellite platform, had a recurring income model. Something that would need some of the fundamentals that we have such as the customer service and call centers such as in-home installation, such as encryption, things that we have fundamental skills in, and then we just build on those skills. That would be the primary place we'd look. Having said that, world changes and an extreme example would be you have national healthcare where the government is going to be a bigger part of that. In my mind, that may open up some opportunities in a completely different industry that may only peripherally need satellite or in-home installation or something like that. You'd look at healthcare and say, well, it needs to be a bigger part of the economy. It's going to be something subsidized by the government. Maybe that's a place that we ought to be looking. So that would be an extreme example that we probably don't spend as much time on, but we look at that kind of stuff.

Your next question comes from the line of Craig Moffett from Sanford Bernstein.

Hi, Charlie. A follow-on from where you've just been talking about a little bit. Can you enlighten us a little bit on what you're thinking about TerreStar and where that might fit in to your plans and, I'd add to that, I guess, your 700 MHz spectrum?

I'll start with TerreStar. First of all, that's an investment that EchoStar has made. So since this is a DISH conference call, I'll probably give you the answer you're probably going to get on the next call. I'll just probably go ahead and give you the answer, which is we're an investor in that company, and unfortunately, I guess, I'd say that the company is currently in bankruptcy. And it just wouldn't be appropriate for us to comment on TerreStar because they're going through a bankruptcy process. And we're not the management team there, and I think they probably hold conference calls, and I think probably ask them any questions about their business is more appropriate at this point. As far as the 700 MHz spectrum, that is a DISH investment. And again, I would say it's just a building block, that there was an option, and if we wanted to play in that building block, we had to make a decision several years ago. We didn't want to -- the timing was not good because we didn't think the technology was ready to take advantage of the best take or spectrum yet. It may still not be. But it's a building block, potentially strategically, for things we might want to do in the future. It is, as it turns out, a pretty good inflation hedge, and they're not making any more of that spectrum. If we're not able to strategically do something with that spectrum, then there's probably other people who are able to do that. I think the smart thing -- I think one of the better things that we did was that we resisted the temptation to go out and try to build it out and spend more money on the buildout for it without really knowing where we want to go. And so we have -- while we've got a high cost of client in that spectrum, we haven't added to our cost base just by trying a business plan that we're just not ready to try yet. So we've been very conservative there. And my experience has been that you end up with building blocks, and what happens is something happens where owning that building block ends up putting you in a place that you otherwise wouldn't have been and doing something in a positive way. Sometimes, what you think happened doesn't happen. And at that point, you just need to exit gracefully and admit you made a mistake. We've won some, we've lost some. I mean, mistakes I tend to remember a little bit more than success. But we got into the broadband-via-satellite business very early on with gluts [ph]. And when we lost a lot of money, not that, that ultimately wasn't going to be a good business. We were just too early. And the satellites weren't efficient enough and the hardware was too expensive. So we had to write that off, and we exited that gracefully. We took our lumps and went home. And it was the right thing to do. But that's turned out to be a good business now for other people, but our timing just wasn't right. So I don't know whether our timing's right or not on 700 MHz. At some point, that will be a valuable spectrum to somebody. And if we can figure out a way to use it, that's good. If we can't, then somebody else will own it.

But technologically, because it's not Terre's spectrum, do you feel like you can use it for two-way or do you still think of it as it may have to be a one-way application for that spectrum?

Today, I think it has to be a one-way application. I mean, that's really -- again, but as a building block, if you can tell me what the government is going to do with white spaces, what the TerreStar broadcasters are going to do, what the SEC might do -- and this is an SEC that's looking very -- it's a good thing for the country. They're looking very hard at how you can efficiently use spectrum for the benefit of consumers and the benefit of competition. And when you do that, people can come up with pretty innovative ideas of how spectrum can be used in a different way than the SEC originally thought of. And they've been pretty open to experimentation. And as long as the government can take an entrepreneurial approach to the way spectrum is going to be used, maybe we can catch up with some of these countries who -- the big blocks around the world where people are able to do a lot better things with spectrum than we do in the United States. We're so chopped up around here that it's not the way that you'd want to do spectrum allocation, but it has happened over a period of 30 years. And so someday, you're going to see those things. You're going to see companies and the SEC and everything else come together and use a spectrum more efficiently in a better way. And that's going to be reallocations, it could change the rules and those kind of things. And if they do that, then maybe that 700 MHz could be used a different way than is allocated today. But today, it's clearly a one-way spectrum, which limits its use.

Your next question comes from the line of John Hodulik from UBS.

Yes, on the call they tried -- we talked a lot about a lot of different things on the strategic side. And it sounds like you're spending some more time there. I mean, is your view of the video business whether it's because of the economy or over-the-top or increased competition, has it changed fundamentally? And as you look out, there could be some issues with 4Q. As we look out to 2011, is there a scenario where you think that you could return to growth in a scenario that makes economic sense or is that -- I'm just trying to get a sense of whether that's something we should expect or not.

I would say that potentially, my view has changed a bit about video. And video distribution in terms of its overall chance for -- as we do it today, as most of the MPD players do today, I think it's under some -- it's added risk than I would have said a year ago or two years ago, and there are several reasons why. One is, as you've heard me say, I hate the fact that all of us in this industry are discounting our programming. So we're giving away our product and trying to make it up on things that aren't really our product. And I hate that because, strategically, you can give away anything, but you don't ever want to give away your product, your core product. So you can give away the razor, but don't give way the razor blade, don't give away the shaving cream, right? So we give away the razor and the razor blades today as an industry. And that's why I say that our SAC as an industry is really much higher than analysts look at because the free programming has to be considered an opportunity cost that you're giving away. Second thing that's happened is we have four competitors in every market now. So we have the addition of a phone company in the marketplace that wasn't there several years ago. And they can't really be economical on their investment without getting a certain market share percentage, which is very difficult for them to do. So that's a bit of a problem. And then we have another competitor that's in the marketplace that we alluded to, which is over-the-top in Internet. You can go to Hulu and watch the TV shows that we're charging you for. You can go to Netflix and get all the movies on Starz Encore that we as an industry charge you more for a linear version. And you can get all the movies basically on demand for a less expensive cost and that. So that's a pretty big competitor. While you might not lose somebody's subscriber, you lose ARPU from the customer as a result of that. And the programmers, it's unclear to me what the programmers, the people in the programming business are going to do. Are they going to put their product out there for free for customers who aren't paying for it? They're going to go down a slippery slope where they're going to find their revenue models at risk as well because the Internet allows you to do so many tricky things to get things for free that's going to be awfully careful for. My kids think I'm crazy for being in the Pay-TV business because they don't pay for TV. They don't pay for movies. But they watch an awful lot of TV and movies. So that's going to be an interesting dynamic. So I think those dynamics are putting pressure on the margins in the industry as we know it per se. Having said that, there's opportunities that still or other ancient high-definition television is something that satellite providers have an advantage on because we're a much more efficient distribution model for high-definition television than cable companies are, and we're much more efficient, for the most part, than the Internet is because the bandwidth consumption is very high. So that's a real positive kind of thing. The second thing is that the over-the-top model is not necessarily -- can become complementary to many customers who want the experience of linear TV but also want to have the added feature of video-on-demand and other things of that product. And it also requires you to -- it also gives you the ability to take TV with you anywhere in any device. And we're well positioned there as a company particularly since we've licensed Sling and most people have not licensed Sling as we've got a technology that allows us to do that kind of stuff. So there's some opportunity there. But would it make sense to -- I mean, I only give you the example. If you started today and the choice was to launch 10 satellites like us and DirecTV have done, which are going to cost you $3 billion to launch a satellite or you're better off starting Netflix, I mean, the answer might be given where the marketplace is, that you're better off starting Netflix and saving your $3 billion for servers and programming contracts. So I think the world is changing. And my focus and, well, our challenge to our management team is we have to adapt to that. And I guess the final thing is that we're not -- DirecTV has done a fabulous job of kind of the brand, the premium brand in this marketplace even over phone companies, cable companies and certainly us. Mike has come on -- Chase left that in very good shape and Mike has continued the great management that they have there. So those guys are doing a fabulous job growing in a marketplace where everybody else is not growing, and they're the premium brand. And their customers are suffering a lot less in the recession than probably, as a generalization, probably our customers. So we have a very tough competitor who is doing a fabulous job. And so we have to figure out how we can do things differently and how we can compete. And I think that really boils down to strategy, and I have a lot of confidence in our ability as a company to strategically adapt to what's going on long term. We're fortunate we don't have to worry about some of the short-term implications of that as much as some companies do, and we can make those strategic choices, build those building blocks and turn that and strategically adapt our company to where we think the environment goes. And you've got a big, the economic challenge in the United States, and we have a technology challenge as the way people consume video changes and data. So that's a long-winded answer that yes, I think the model's changed a bit.

Your next question comes from the line of the Jason Bazinet from Citigroup.

I have a question for Mr. Ergen. Most of the investors I speak with on the street believe that the mobile video offer or opportunity is a fairly limited one, either because of Qualcomm's MediaFLO product or international analogs. And my question is do you share that sort of dose of skepticism that the buy side has and investor community has about mobile video?

I guess the short answer is yes, I'm a bit skeptical. But I think, like anything else, it's timing. And probably, MediaFLO is too early in the marketplace. Second, the model, I think, is perhaps not one where people will pay a lot of money to watch video on their phones particularly if they're paying for it already. So I think there's a lot of strategic discussions that would have to take place from programmers just to find that model that might work. In MediaFLO, I think one of the big challenges they had was that their programming costs were so high that the product is priced out of the marketplace for consumers because the phone is not the ideal place to watch TV. Having said that, though, I think that the next 10 years, we're going to see more and more people watching TV that's available on their phones around the world. I think the answer to that is yes. Whether you can make any money on it, I'm skeptical unless you get a lot of industry participants working together to prove the model. And that's really a timing question. And right now, I'd be pessimistic about that.

Your next question comes from the line of Paul Sweeney [ph] from Bloomberg Research.

Earlier this week, Time Warner Cable talked about potentially introducing a lower-cost video package. And to the extent this occurs and is embraced by other MSOs, I'm wondering kind of what your thoughts would be on the impact on you guys given your low-cost provider status. And then second, just on your sub-related expenses down again as you make improvements in income service operations and so on and so forth. So just wondered if you could give us a sense of kind of where you are in that process and perhaps how much farther you can go on that expense line?

Bernie, are you there?

Yes, I am.

Bernie, you might want to take the kind of operation expense side of the question. And Tom, you want to take the programming question?

Yes, on the programming question, obviously, we don't have visibility into what Time Warner is intending to launch, and I don't think they disclosed timing. But we would, A, expect to be able to work with programmers to achieve something similar, and B, we do have some lighter packages that we have not aggressively promoted in the past, which is an option for us. But I guess until we understand more as to where the competitive landscape is moving, I can't really comment much beyond that.

And with respect to the subscriber-related expense related to operations, the efforts to try to improve our operations, to try to simplify our business, they are ongoing. While we realize it's a very long-term effort, we've made a lot of good progress, I think. In the last year, I think we've got a lot of low-hanging fruit picked. I think there's still a lot of opportunity moving forward. But getting some of those benefits may be a little bit harder. And also, our business is changing. So part of running a good, efficient operation is about, obviously, cleaning out to what we have today and making that more efficient. But part of it is trying to react to the changing marketplace and things that we're going to be doing differently and try to do those efficiently from the get-go rather than on a reactive basis. So there are still a lot of work being done. We're not anywhere closing our minds to feeling like we're done fixing our operations. But at the same time, we have made some good progress over the last few quarters.

Your next question comes the line of Todd Mitchell from Kaufman Bros.

I was wondering if you could talk a little bit about some of the vagrancies or differences you're seeing in some of your end markets? More specifically, are you seeing sort of from a 10,000-mile level on differences happening in some of the Spanish-language market versus the overall market and how you're sort of responding to that?

Tom, it's probably yours.

Yes, we actually, Todd, have had a pretty good recent run in the Latino market. So we've doubled down in some of our marketing efforts there and built a new team around Latino leaderships. So that's one that we're pretty optimistic about going forward. As far as end markets, were you referring to local geographies?

And local geographies are sort of subsegments of the market. I'd also kind of add, can you tell me, you were fairly aggressive during the analog-to-digital transition. Did that turn out to be sort of a good investment in effort and capital?

Oh, yes. I think we did benefit from the transition. And, as you know and I think we covered in the last call, we since have launched locals in all 210 local markets. And so we used that as an opportunity to more surgically market in those individual geographies. And we do that selectively even in larger markets where we see competitive opportunities. Our marketing weight is clearly not spread evenly across the country. Even though we are a national brand and we have national promotions and packages, we will emphasize local markets heavier with some tactics.

And so you've you been able to increase your share? Do you feel like you've been able to increase your share of the Spanish-language markets because of your efforts? Because it seems like a lot of people have gone after that market.

Yes, I guess I don't have a perfect score card as to how to measure overall share and our piece of it. But we are seeing an uptick and our message is being well received. And we're seeing call volumes and response rates for our marketing improve. But I don't have a means of comparing specifically versus other cable competitors or telco competitors.

Your next question comes from the line of Tuna Amobi, Standard & Poor's. Tuna Amobi - S&P Equity Research: So within the context of capital allocation, Charlie, I know you talked about some potential constraints that might kind of limit your visibility there. But within the international front, which is maybe a far-fetched question for you, but given that your peers are actually having a lot of success in Latin America, et cetera, do you kind of feel that if you had another shot, that you might have moved more vigorously in the international opportunities way back? And is that something today that you might actually be willing to maybe look for some potential, the complementary opportunities for capital allocation given the saturation clearly in the domestic markets here? I would presume it's also a lot easier for you to perhaps expand internationally than perhaps a cable company. So what's kind of your thinking there in terms of strategically?

Well, I'll say a couple of things. From a big picture, certainly, as I travel around the world, there are emerging economies that are absolutely doing fabulous. You're probably looking at pretty much guaranteed, almost double-digit growth in China, India, Brazil is still and all of Latin America continues to grow disproportionately to, say, Europe and the United States. And even emerging markets, small emerging markets like Vietnam and Indonesia and places are really on a pretty good long-term -- they don't have a subprime debt problem. They didn't spend beyond their means for 20 years. So they're going to benefit from that. Having said that, most of our international focus has actually again been on the EchoStar side where we have an International Division. And they've looked at those opportunities in DISH Mexico as really an international -- but it kind of goes to EchoStar and really DISH's total focus is on the domestic United States. It's not to say that DISH wouldn't enter some international business. It's just that their focus really is to make sure we're the best domestic company in the video side of the space that we can be in than the international side. But EchoStar spends a lot of time traveling around the world looking for opportunity. It's difficult to get in the video side of the business internationally because here's your government restrictions. And then our place is where you could get in. Like in the U.K., Sky is already there and the dominant factor. It wouldn't make sense for us to try to enter that market. And you have to have a good partner and so forth. So it's a difficult business. But strategically, it could make sense because of the world economies and where they're likely to go over the next five or 10 years. But it's probably on the EchoStar side. So if you're an international investor, you're probably not a DISH guy. Tuna Amobi - S&P Equity Research: Switching gears to the regulatory environment. I know you spoke about the spectrum reallocation issue. But I wanted to get a sense of how you view the regulatory climate particularly coming off the midterm election where there's a lot of other issues since you be in the flux whether it's Title II program access, threshold loophole and online video, net neutrality and whatnot. So the question is, do you feel better today than you might have felt a few months ago? And where would you like to see the most traction in the regulatory front in -- from your vantage point now, where would you -- what issue would you consider that you're most passionate about? And how confident are you that the regulators can get it right, so to speak?

Well, I'd say that having spent a fair amount of time in Washington, I think we have a very competent SEC. And it's an SEC that's not only very bright, but it's an SEC that is very curious and has taken time to really -- they have a great team and they analyze things. Normally, the SEC, you kind of know what the right thing to do is. In fact, they analyze things. And obviously, spectrum allocation and things such as net neutrality are important issues. I feel a little worse today than I would have a month ago because I think that once you figure out what you should do, you have the politics of -- you can't make those decisions in a vacuum. There are politics, how it affects jobs, how it affects re-elections, those kinds of things that are real-world, practical things you have to take into consideration. So it's not going to be as easy for the SEC from a political point of view, in my opinion, to make the right policy choices with a divided government. And there's quite a difference of opinion philosophically between the Republicans and Democrats in general. So I think it's going to be difficult, more difficult, but it's a very, very competent staff and members, hard-working members on both sides of the aisle at the SEC. Well, what will be our important issues? I think net neutrality is probably our biggest issue because if you don't have some kind of power to avoid discrimination on the bits that go to a pipe, you're only going to have the guy that owns the pipe and all these businesses would be home security video. There wouldn't be a Netflix. If Comcast could make their movies go through really fast and they could slow down the Netflix, maybe Netflix wouldn't be in business. And you're not going to get innovation unless -- it's similar with Apple. You have applications. If only Apple can write the applications, you're going to have less innovation than if you're Android where everybody can write applications. And so now, you've even seen Apple open up their applications a little bit to other people because they realize that the innovation is all happening on the Android side. And we as a country have to have innovation on broadband. You can't leave all innovation up to Comcast or AT&T. I mean, you're going to have to have the power of entrepreneurship open those applications up. And the Netflix of the world are great companies that have been innovators. So that would be my number one issue. My number two issue would be take all this bandwidth that's out there that's chopped up and try to get some kind of -- do two things. One is try to get some more rationality in that bandwidth allocation. And second, try to bring in some new entrants into the marketplace so you get some real competition and again you get more innovation and competition will drive incumbents. Really, from a bandwidth perspective today or plus the point of you get AT&T and Verizon, and you don't have much in between. So I think that's going to be a critical factor. Otherwise, you're just going to continue to -- when you see what happens around the world, it just gets very depressing to say that as a country, we don't innovate as much. There's obstacles to our innovation, or usually in the world. So those would be the factors. But again, that's tougher today probably than a week ago. Tuna Amobi - S&P Equity Research: And lastly, just on the FSS switch, it seemed like you guys have kind of stepped up efforts about a year or so ago. We haven't heard much about that. Is that kind of cooled off a little bit? How much of an incremental revenue have you been generating from that? Is this something you're looking at to ramp up or you don't feel the environment is kind of conducive to that at the moment? What's you're thinking?

By FSS, you're talking about our satellite? Tuna Amobi - S&P Equity Research: Your [indiscernible] satellite, yes.

That's on the EchoStar side. So you can probably more properly address that. I mean, having said that, I think that again, we're not really -- we don't really have scale there. And we made an offer for SatMAX to try to get scale, but that wasn't successful. So we really don't have scale yet, so we really have to look at either can get to a place where we have scale or is that business have been better in somebody else's hands, better properly belongs to somebody who does have scale. But again, that's not a decision we have to make anytime soon. It's just that it's something we continue to look at.

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

One comment in the 10-Q was recent developments in the financial markets have made it more difficult for issuers of high-yield indebtedness such as us to access capital markets on acceptable terms. I thought the high-yield market was actually pretty terrific right now. Is that a carryover line or is that something unique to DISH?

Robert or guys, do you want to say...

I think that that's reflecting maybe over the broader period of time that we've seen over the last several, couple of years. So yes, if you look to just the last couple of months, it has gotten -- the environment's better.

There was another comment in there. Low-end price increase -- as of September 30, inventory balance was $723 million, the increase due to less gross subscriber additions than anticipated in 2010. But then you've got another disclosure that says the set-top boxes and equipment you were purchasing from EchoStar in 3Q was up quite a bit year-over-year. So I'm sort of trying to figure out why is the inventory balance up $300 million year-to-date and gross additions are below? I would think you'd be buying less equipment from EchoStar and the margin up for the quarter.

Yes, Doug, this is Robert again. I think we've talked about this before, is that our orders with EchoStar really stretched out sort of nine months. So we had an expectation that the HD Free For Life would do two things. It would drive a lot of activations far more than we've experienced, and also that we have a very high level of upgrades for our existing SD customers. We have some of that, but not as much as we had forecast. So as a result, we lost MPEG-4 receivers than we had forecast six, nine months ago. I think I mentioned in the last call that we're going to work that inventory down. We think, clearly, $500 million of inventory is well above where we think this business will run. But it's going to take a couple of quarters to get that back down to the level that we think it should be at. And as I said, it's all tied to the forecast on the HD Free For Life.

And then I'm looking at the website and I think this is accurate, but does the new Fox deal allow you to keep the RS spends off the base 80-, 100-programming tier? I know that gives you a little bit of a promotional price advantage versus some peers.

Yes, they're currently at 200, and they're staying there.

And then, Charlie, I mean, it seems to me -- I'm sort of curious if this thesis is correct. You spent a lot of the last year and a half, two years improving operating execution and indicating that, that was a big reason behind some of the subscriber declines. It seems that the operation execution is now fixed and that some of the clients you've had the last two quarters is more about marketing, getting the marketing right and then just some unusual items like churn from the prepaid subs and a little bit less [indiscernible] promotion than you used to have, that sort of thing. Does that make sense to you?

I wouldn't say quite -- well, I think the operations still have a long way to go. I mean, we're probably in the second year of a four-year project. But it's certainly stabilized. I mean, a couple of years ago, it was actually getting worse and now we're getting better every day. As far as marketing, I think we have a long way to go in marketing. That's really a question for Tom. But if had to -- then again, I'll take my share of the blame constructively. I just don't think from a marketing perspective we've found our identity yet. But sometimes, I feel like there's -- sometimes, you've got to admit you've got a problem before you can fix it, and I think we're having a hard time admitting we've got a problem there. And just that's myself reflecting on it. And I think from a marketing perspective, it's really the world has changed, and how we go about marketing and where are the opportunities for us from a marketing perspective, it might not be the same as some of our competitors. I'm not a big believer and I'm just trying to emulate what somebody else does. And I think there's lots of opportunity there to do a better job, and that's something we'll certainly going to work on going forward. And finally, I think -- the only other thing that I would -- so this is our last question probably. I think the other thing that -- I think TiVo has certainly been a big driver overhang for us in terms of management time than anything else. There have been a couple of developments there that as an investor people should look at. One is we do have our en banc hearing in front of the full Court of Appeals next week. I think it's Tuesday. That's an important -- that's much, much more important than just whether just about -- it's not really that much about TiVo and DISH. That's very important whether you -- whether the law is going to encourage innovation or is the law going to err, but move more towards protecting patent holders and stifle innovation. And a couple of things, just an example. Stan, you may want to jump, give a little more detail, but we were just issued, I think, yesterday or the day before, or we just got our patent, our design around for the TiVo – our design around, we just were issued a patent by the United States Patent Office. We've clearly looked at the '389 patent at TiVo and decided that we had a very novel approach. And it actually worked in some cases better than the TiVo approach. But if you can be found in contempt of court, as TiVo alleges, we never would have gotten that patent. So now we have a more novel way of doing DVRs, and we can license other companies and create competition. You wouldn't be able to do that, and contempt of court could be peoples [indiscernible]. Now, obviously, we had to materially change -- to get a patent, you would have to be materially different. And the second thing that's happened is that TiVo's patent had been invalidated by the patent office. And to get that patent reinstated, they had to make statements that narrowed their patent. And in fact, in narrowing that patent and the way that they now say their patent works, which is different than what they told the judge in Texas and different from what they told the Court of Appeals, but the way their patent now works was materially different than what we were found to have infringed. So it's a very important case, and it's one really one that I don't think anybody has really taken the time to totally understand. And it will be our biggest contribution to innovation one way or the other, however that turns out. I don't know, Stanton, do you have comments on that?

I guess the only thing I would add is when TiVo narrowed their claims in front of the PTO, I mean, we just looked at it and said it would be pretty darn unfair to continue to and enforce an injunction against us when we haven't been found to infringe those narrower claims.

But the patent laws are very strange. A lot of catch-22 situations in it, and it's very complex. And it's going to be -- I'm glad that we're getting the rare chance to have full hearing in front of the Appeals Court so that at least going forward, both patent holders and innovators will know what the rules are. And we think we know what the rules are, and we think we followed those rules. But at least everybody's going to know going moving forward. And of court is going to have to decide which is more important, innovation or non-innovation. And that's a big question and something that is super important for all high-tech companies going forward. I think with that, we're done. All right, thanks, everybody. Appreciate it. We'll be back in about five months, I guess.

And that now concludes today's conference call. You may now disconnect.