EchoStar Corporation (SATS) Q1 2011 Earnings Report, Transcript and Summary

Good afternoon. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation Q1 2011 Earnings Conference Call. [Operator Instructions] Mr. Jason Kiser, you may begin your conference.

All right. Thank you. Well, thanks for joining us. My name is Jason Kiser. I'm the 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; Stanton Dodge, our General Counsel; and Michael Kelly, our newly appointed President of Blockbuster. Before we open it up for some Q&A, we do need to do our Safe Harbor disclosure. So for that, I'll turn it over to Stan.

Thank you, Jason, and good morning, everyone, and thank you for joining us. 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 materially 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 that we make during this call should be understood as being applicable to any forward-looking statements we make where ever 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. As we begin our Q&A session, we'd like to call your attention to the security loss consideration, because we do not intend to provide additional information about the financing transactions announced by the company this morning beyond that contained in the announcement, and we appreciate your cooperation in that regard. Now with that out of the way, I'll turn it back over to Jason.

Thanks, Stan. And, operator, we're going to go straight to the Q&A, so you can open up the phone lines, please.

[Operator Instructions] Our first question comes from the line of Tuna Amobi with Standard & Poor's. Tuna Amobi - S&P Equity Research: It's Tuna Amobi from Standard & Poor's Equity Group. And clearly a lot to talk about here. You guys have been clearly very busy. So if I can start off with the question that's in everyone's mind, Charlie, the Blockbuster deal, if you can perhaps help us here with the strategic vision that you have for Blockbuster, and perhaps how you intend to integrate that with your current plans, would be helpful. And also along the lines of the TiVo settlement announced today, it's my understanding there maybe some promotional elements for Blockbuster that's involved in that settlement. So, A) can you provide some clarity on that? And, B) why do you think that's -- what's the thought process towards reaching the settlement in terms of the timing, the amount involved, et cetera? So those would be very helpful.

Okay. I think, I'll let Mike Kelly take Blockbuster vision first, and then I'll come back and talk about the TiVo settlement and maybe how that relates to Blockbuster as well.

Sure. Thanks, Charlie. We see -- first of all, we've only had Blockbuster for about 5 days, so we're still trying to get our arms around it. Blockbuster is clearly -- we see it as an opportunity to distribute up to 125,000 DVDs. We think that there's many points of presence in sale in the Blockbuster product today. We think that there's an opportunity for us with the by-mail business, an opportunity to break into the Digital business a little bit heavier, and there's a tremendous brand there as well. But as of right now, we're still -- we think there might be synergies back with DISH Network's business. We're not sure yet. We're still going to spend some time looking at that, but it's an opportunity that we think that at the price that we got it for that it could make sense for us in the long term. Tuna Amobi - S&P Equity Research: And by digital, are you referring specifically to streaming or anything else?

Well, we also think that -- we think that there's still a business in the physical presence in the physical market. And we'll have to see what the studios think with that, so we'll be talking to the studios over the next few weeks as well to see if we can -- if there is, in fact, a business there, we're not sure, but we'll continue to look at that.

Okay. This is Charlie. I'll just add a couple things. When you say Blockbuster, really, almost everyone in the world, it means kind of -- first and foremost it means movies almost right off the tip of somebody's tongue they're going to say movies, and probably after that they'll say family. So that fits in to I think where we'd like to be as a company. The second, a lot of where we go with it probably will depend on the studios in the sense of do they want a physical presence? If they want a physical presence, Blockbuster is well positioned to maintain and grow a physical presence. There's still a business out there for physical presence. It's up to the studios to whether they want a physical presence or if they want to go all electronically and so forth. And a lot of that will drive I think some of the strategic decisions of Blockbuster in terms of working with the studios to give them an alternative to some of the avenues they have today. I don't see Blockbuster being a -- necessarily being a competitor to Netflix directly in terms of streaming because Netflix has got formidable lead and probably insurmountable lead in that business. On the other hand, for studios, it may not be the best economic model for studios, and I think Blockbuster can indirectly provide competition out there by presenting a better financial model to where the studios want to go. If I owned a studio and I want to maximize my profit, Blockbuster would be an important element of that, I think. As far as the TiVo settlement, as it relates to Blockbuster, there is -- a part of that is, is that we accepted the contract that Blockbuster had with TiVo, and when you buy a TiVo device, that Blockbuster is a widget on that to order movies, and we think we can expand upon that with them. In regard to your general question about the settlement, I guess I'd say three things: I mean first and foremost was there just wasn't anything to argue about any more once we got the Court of Appeals ruling. We both won a good battle in that ruling. They won on a disablement ruling that failed to challenge the injunction in a timely manner. And we, in all likelihood, we're going to get a new trial on the merits of our workaround. And in fact, I think we won a big battle for innovation in the sense that the law has now changed -- the court has changed the law on contempt of court for design-arounds and what criteria you [technical difficulty] use for that. And I think the Court of Appeals made a pretty solid judgment on what judges should consider for that. So I think it's -- that was a win for innovators for the next century irregardless of our case. As a result of that, it became, I think, clear to both TiVo and DISH that we could at least get our arms around with what the costs and risks were because it wasn't -- obviously, the thing that was most risky to DISH was that, in fact, TiVo would have won on the design-around side of the case, which would've been a knockout blow. And the fact we won a 12 to nothing decision there I think was not unexpected by our side. In fact, 2 judges have voted against us, voted for us the next time around. I just think we had the stronger into that argument, and then a lot of analysts missed that. Having said that, certainty, I'd say, first and foremost, certainty from a DISH perspective was important. It didn't make sense -- we weren't talking about that much money one way or the other even with the new trial, and we'd certainly knew a lot about how our systems works. The second thing would be that we think we can make our product better in some ways using the Time Warp patent. It's a patent that has been -- the patent office looked at many, many times now and it has re-examined it and it survived. The latest re-examine, we think that by utilizing the Time Warp patent, we can add some functionality feature, make our product better and compete against the people who may not be using that technology in the future. So we can make our DVRs, which are already pretty darn good, maybe even better. And third, we think there is a way to continue to work with TiVo in the future. They have, as an example of that, since we wired them, the $300 million this morning, I think they're sitting on perhaps as much as $600-or-more million in cash. They have an ability to grow their business utilizing cash. We have a great understanding of their company and their management. And I can only say that's there's a lot of mutual respect on -- there's a lot of respect from the DISH side for the management of that company and the legal team there and the management team as well, and it was not antagonistic litigation. It was a difference of opinion, strong difference of opinion that the Court of Appeals kind of settled for us. And we both won battles, and I think now we are in a situation where I hope that we go win the war and I hope that TiVo goes and wins the war. And TiVo will do that by continuing to enforce their intellectual property with others and utilizing their cash and their expertise to grow their business. And hopefully, we'll win the war by making our products better and working with them in the future. So it made all this -- that's really how it all came about and that we had this ruling from the District Court a long time ago would have settled a long time ago.

Our next question comes from the line of Jeff Wlodarczak with Pivotal Research Group.

I wanted to focus on sustainability of your first quarter subscriber churn SAC results. How much the churn result was related to the fact that you're adding more and more advanced set-top box customers which tend to churn less versus increased retention spend? And now on SAC, it sounds that the primary drivers, lower equipment costs. So I assume that's sustainable, and then I have one follow-up.

Do you want to take that, Tom?

Okay. On the churn, Jeff, as you know, were slightly higher than first quarter of last year, so there's certainly some seasonality in the churn number. That being said, I don't think we're going to go back -- we certainly hope not to be going back to the numbers that you saw late last year, and as I explained on the last call, some of that was attributable to program interruptions. On the retention spend, however, we have increased retention spending modestly. It's not over historical levels, but it's up over the last 2 previous quarters.

Jeff, this is Robert. On your question on SAC, I think on our last call we talked about the SAC that we had in the fourth quarter being higher than normal due to a couple reasons. One was our marketing expenses were higher. We just weren't as effective as a result of different factors in the fourth quarter. And so about half of the reduction quarter-over-quarter was due to reduced marketing expense. The other part of the reduction was due to the percentage of mix in our new versus remanufactured MPEG-4 receivers. That percentage of new receivers was fairly high in fourth quarter and it was fairly low in first quarter. I think we've talked on previous calls when our gross activations were lower, we tend to have a higher percentage of manufactured receivers. And so that -- those are the 2 big drivers in SAC in the first quarter.

And just as a follow-up, can you provide more color on the experience you're seeing on churn related to the $5 price increase I guess you did throughout February, and how is that going in the second quarter?

This is Charlie. I think that: a, the price increase probably flows through for the most part in the second quarter, some in the first quarter, but probably more in the second quarter. By the time you get -- by the time that price increase flows through and you get your bill and you have to pay bill, then it's probably more an effect in the second quarter than the first quarter, but it has gone, I would say, remarkably smoothly.

Our next question comes from the line of James Ratcliffe with Barclays Capital.

Two if I could. First of all, Charlie, can you talk about the addition of Blockbuster? How Blockbuster and the DBS business and the Spectrum assets both the 700 and the newly acquired DBSD assets stick together? And second of all, clearly, your programming contracts must be compatible with offering -- the sling box offering for anywhere viewing. Do you believe they're compatible with an offering that's entirely without a satellite component? Do you need to deliver the program to the home via DISH? Or could you offer an entirely on-demand delivered program lineup equivalent to what you offer to DBS customers today?

First, in terms of strategy, I'd say what DBSD, Blockbuster, some other things we've done, I would say that we are utilizing what I call the Sienfield strategy, which is if you ever watched a Sienfeld show, there's a lot of things that happen in the first about 28 minutes of that show where you don't know exactly where that show has going, but it seem to all come together in the last couple of minutes. And so I think in terms of where we're going strategically, you'll have to just wait and see where it all comes together. That's a little hard to explain it in this early in the show, so to speak. And then for you skeptics out there, of course, Sienfeld was a show about nothing. So it could be a strategy about nothing, if you're skeptical. But I think that everything we do has a purpose, and we feel like it ultimately fits together. As far as whether we could -- programming contracts each -- I'd say that we just really don't discuss programming contracts on a conference call. And there's a wide variety of programming contracts and right, but I think that from a bigger picture, a bigger picture answer is that I think you are already starting to see in our industry competition for people who don't have either cables, who haven't put the capital investment on cables or satellites, and I think that's a risk factor for our industry. And so I think that regardless of what we are able to do, that, that's going to be competitive threat to our industry and as is in multiple new entrants I think we have to be prepared for multiple new entrants into our business.

Great. And just one quick follow-up on the remanufactured equipment. Do you have any sizable stocks of boxes they you were holding back from redeploying because of concerns about the TiVo case that could now drive -- be deployed and keep that new CapEx down going forward?

No, James. Most of the change from fourth quarter to first quarter with regard to MPEG-4 receivers, which are -- I'll let Stanton talk more to the details of the TiVo case, but really weren't impact there. But, no, the MPEG-4 receivers reinstalled [Audio Gap]

to do that, which we're not looking at that in a short-term basis. As far as -- so we're very pleased with the asset and the spectrum and what we think we can do with it, but we don't think it requires significant capital for a build-out in the near term. In the multichannel development, I just think that we have to be realist that what was a market where there were 3 competitors 5 years ago is a market today where there's at least 5 competitors in the marketplace with the addition of a phone company and the Internet. And in fact, there's probably, because the Internet is relatively ubiquitous, it could be multiple entrants into all our part of our business today. So there are strategic things that we think we can do and compete in that world, but we think the world is changing. And we have to be prepared for change, and we're not scared of change in what we're going to make long-term decisions. And if you're a long-term investor I think you'd like what we do. But we're not managing the business quarter-to-quarter, and we're managing it to compete against the long term. I've always been for ala carte for customers because I always realize Internet is going to be there, and in fact, you're going to be able to buy channels ala carte on the Internet. So it's interesting some of our programming partners make us buy 20 channels from them but they'll sell their own channels ala carte. So that's not a enviable position to be in the MVPD business. So I think it's going change, and we have to be quick on our feet and be ready to adapt to it. And I think some of the things we've done in the past couple of years are positioning ourselves pretty well for what think is going to take place, and there's probably more to be done.

Our next question comes from the line of Doug Mitchelson with Deutsche Bank.

I'm trying to figure out which Seinfeld episode we are in, Charlie, but look I think with some of the comments you made regarding...

What's your favorite one? We can go just about any of them.

I have a couple of questions. You just mentioned that you thought we'd have ala carte online or some of these companies are putting their channels online ala carte. I'm not sure I see that. Is there any specific examples that you can't point? Or that's just your belief on what's going to happen?

There are some examples. Certainly, there's things like some of the ESPN product you can get online. There's an awful lot of online that is perhaps loosely defined as piracy. Or I would -- if you got young children over the age of 5 and you pick out some video and you want to watch to them, I'm sure you they can find it for you for free on the Internet. So we have to be able to compete with that, and if you -- even something like CNN you can get clip, you can get enough of CNN and clips and so forth that you wouldn't have to have the total channel and so forth. So there's a lot of stuff online either because somebody has put it up there for free, maybe without the permission of the actual copyright owner, or the copyright owner himself has put it up there. Who lose out there with stuff maybe 24 hours later, but it's not like people have to be in front of their TV set at 7:00 anymore. So it is a changing landscape. And in that landscape, the question -- if you see what our industry is doing and people are giving away -- again, their spending -- to spend $700 or $800 or $900 on SAC and then give away $700 or $800 for programming is an economic model that is probably not -- may work but it's a much thinner margin than we've historically had in the past. And I think when we look at it we say if we have $700 or $800 to spend or $1500 to spend, there might be a better way to spend it. That's all.

So would you say, even though you're not going to lay out your strategy in detail, that these initiatives, it sort of sounds like it's a mix of offense and defense; right? I mean, typically, you are very tight with spending money. You want to earn a good return. I think Blockbuster deal and the wireless acquisition, you are specifically looking returns on investment and at the same time you talk about the need to be at these other places perhaps in a defensive ways. Are you able to give us a sense of whether these are offensive initiatives or defensive initiatives?

We're all offense. We're all offense. It's just not clear yet. If we make a -- I think we purchased good assets and I think to the extent that -- I don't know that every asset you purchase ends up being one that fits the way it's always going to fit. It's a little bit like being in a NFL draft. You draft a lot of people, they don't all work out and some people you trade. And maybe that happens with some of the assets that we have acquired. But we think they'll fit, we think they're all the things we need for offense, and it's up to us to develop those assets and put them together that work in a cohesive fashion where our product or the product -- our products that we sell to consumers is a better product than it is today, and a product that can compete with where we see the industry going.

I actually have a mundane financial question for all that. Tax rate given the deals that you're doing, can you give us any sense of where tax rate is headed for the year?

Yes, this is Robert. It's in the 38% range.

And the big deferred tax in the first quarter, that's just timing of tax payments?

It is. The estimated tax payments for the first quarter in April 15 are always a big driver in the first quarter.

Our next question comes from the line of Vijay Jayant with Citadel Securities.

Just want to follow up on the Blockbuster cash flow story. I think the last results showed that they lost I think about $50 million to $55 million in EBITDA for the first 2 months of the year. Can you talk about what kind of a drag we could see from that asset through this year as you shut down more stores? And second, can you talk about the MPEG-4 and APSK conversion, where are we across your supplier bass? And now that the TiVo settlement has been done, does that slow that down for any reason?

Okay. I'll take the first part. On Blockbuster, they were running negative EBITDA and probably still are. Obviously, we've owned it 5 days or so, but the good news is we have control of the asset now. So we can start making the right long-term decisions there and to grow that business. One reason they were negative is they were starved for capital, so they didn't have access to all the titles. And, Mike, you may want to jump in a little bit here after I finish on that, but we'll take a -- we'll try to spend money smartly. We have some time on stores to make decisions, and obviously, it has some cash on the balance sheet today. So we bought the company for basically its liquidation value, so -- and got a good international brand with it. So it's not a big risk in terms of total company, but it's got -- but it does have -- if everything fell into place, we'd have obviously a wide upside. The second part of the question was MPEG-4. We were prepared to move pretty fast and we not come to agreement with TiVo. But I think that with the agreement with TiVo, we'll take a slower approach to the conversion as -- we'll do it in a timing that's better for our customers and better for us and doesn't disrupt our operations. So I think that was a positive that came out of that. But, obviously, our customers are going to be -- if you look long term, they're going to be APSK customers. Mike, do you have anything else on...

No, I'll just add, it was constrained for cash, it has very little advertising, very little inventory in the stores, so we'll have to get in to that. I just said, we control the asset now and we'll be looking hard at it and see what how we might be able to turn that around.

Our next question comes from the line of Marci Ryvicker with Wells Fargo.

Two operational questions. The first, in terms of ARPU, can you just talk about how the $5 price increase impact ARPU in the first quarter. Did you implement the price increase throughout the quarter, and therefore, should we see a greater bump in Q2? And then secondly, can you characterize your internal operations? I believe that you said you're in the fifth inning of a 9-inning game last quarter. Any update there?

Yes. So, Marci, this is Robert. I'll take the first question. We first rolled out the price increase on bills going out February 1. And bills, we send out bills throughout the month. Couple with the fact that -- and we've talked about this before, we send out our bills 15 days prior to the service period. So effectively when you start a price increase in February 1, you get about 1 month of the revenue in the first quarter.

This is Bernie. With respect to our operational progress, I think I did say, the fifth inning last quarter. I think what I mean we're a little further along, one quarter along this time around. And bottom line is we still think there's a lot of work ahead of us, a lot of opportunity to improve operations that we haven't yet realized. Over the last 3 years, we've done a lot. The low-hanging fruit in terms of answering our calls better, taking less time to handle calls, trying to drive fewer repeat phone calls, fewer repeat truck rolls. It made some good progress. Some of the more foundational and more fundamental things take a longer period of time to do. I alluded to the fact last time that we've got a big billing conversion happening between now and a year from now. And there will be -- while that introduces some risk, it also introduces a lot of opportunity to clean up our system that we haven't maintained as well as we would've liked in the past. So not only is our billing conversion can happen in next year, a lot of our systems, whether it's the voice systems use that our customers deal with, our website that our customers deal with, our website that our customers use, our agent-customer management tools, our agent order entry tools, our workforce management system, are all going to be cleaned up as part of the billing conversion that's happening over the next year.

Our next question comes from the line of Craig Moffett with Sanford Bernstein. Craig Moffett - Sanford C. Bernstein & Co., Inc.: Charlie, 2 quick questions, if I could. One is given how good the SAC number was and how much lower it was and the improvement in margins, does that change your view of the attractiveness of customer acquisition that you talked about last time around? And then second, in some markets, you're deemphasizing regional sports programming or arguably simply not trying to sign some regional sports contracts. Does that strike you as a potentially attractive strategy for less affluent customers to say, in some markets, you will focus on price rather than sports breadth?

I'll take the second part of that first. On the sports programming, it depends on the willingness of our programming partners to structure a deal that works for us. I guess strategically, I would say it this way, if you got 3 competitors and they all have the sports programming and only 15% of the people actually watch the sports programming, so there's probably a real good path for somebody not -- for one of the 4 not carry sports programming would have a great strategic advantage for certain customers. If everybody carries exactly the same thing, then it doesn't -- there's no advantage except you raise prize. And I think that from a sports perspective, we are not viewed as the leading provider of sports. Having said that, the only markets that we certainly prefer to carry sports and we're able to come to an agreement with Fox, so we carry the vast majority of the regional sports networks. I believe we come into agreement with most of Comcast and so forth. So I think we carry most of it. In New York City, where we don't have -- we've never had Yes Network, and it may not make as much sense, and we have a high degree of international customers where the sports programming is not as important to them. So I don't think you can make a blanket statement that we've exited the Regional Sports Business. In fact, I think of the 27 regional sports, I think we only don't carry 2 or 3 of them, or 30 regional sports, we don't carry but 2 or 3 of them. But there is a strategy potentially out there for one video provider not to carry regional sports. And I think there might be some short short-term pain, but they probably do pretty well long term, if that was the case. But that is not our strategy today with the exception of probably the New York market, where we're just having -- if somebody's got a losing team, it's not doing very well and they want a 50% increase in price, it doesn't make any sense. I mean there's a limit to what we think our customers are willing to pay for that. We have viewer management. We know what they watch. We can very objectively get to a value for our channels in what we think the long-term result is if we take something down versus paying an increased price. So -- and particularly, the Internet coming in and a lot of sports programming being on the Internet, that's one that's ala carte, major league baseball sells there, major league baseball network channel for $99 on the Internet. You can get it for $199 from some of our competitors. Does it make sense to take all that bandwidth and force our customers to pay for something they can get in the Internet for less money? I do know if that makes sense or not. What was the first question? Craig Moffett - Sanford C. Bernstein & Co., Inc.: Customer acquisition attractiveness, given...

Look, if we can get a customer that we can invest $700, $800, $900, $2,000, and if we can get a return on that investment, we're going to do it. I think so -- I don't look so much at the SAC that you're looking at $700, $800 or whatever. I have the programming cost into it. I add the kind of equipment they get. I add what kind of credit worthiness they have. We add in how many times they call us. We add in how long they stay as a customer and see whether we're going to make a return on that. And if we can make a return on that, there's some customers we'd spend $2,000 for and some customers who wouldn't spend $200 for. And we just look at it in more detail than what you're seeing in the roll off on the financial statement. And look, didn't have to spend a lot of time on it 5 years ago. You spent $500 for a customer that was the marketplace that was worth $2,000. That didn't take a lot of financial analysis. Today, when you add in free programming, most people are spending well over $1,000 in SAC for customers that -- some customers aren't worth that and some customers worth materially more than that, and the art is to figure that out. But there's an awful lot of customers out there now that sign up and stay with somebody for 2 years. And then with the cable company they switch to satellite company A and they stay for 2 years and switch to satellite company B for 2 years and they switch to the phone company for 2 years and then they go back to cable company again. And that's not the kind of customer I want to invest $1,200 in. Craig Moffett - Sanford C. Bernstein & Co., Inc.: Very helpful.

Our next question comes from the line of Tom Eagan with Collins Stewart.

Just 2 quick follow-up questions on the Blockbuster strategy. First, on the stores, how many stores you're going to keep again? And will you sell anything in those stores except for rent? Anything plus DVDs? And then I have a follow-up.

Well, with respect to the total number of stores, we don't know. We were still evaluating stores. We're going to try to run stores profitability over time. In the bankruptcy process I think we assumed about 370 profitable stores, so we'll continue to look at that over the next 90 days.

But, I think suffice to say, you're well over that?

Today we're operating 1,700 stores.

1,700 stores today. So with time to evaluate them in the contracts. And again, I think, a lot -- from my perspective, a lot of it depends on studio participation. If studios want a physical presence, I think there's a lot of reasons to keep the store open.

Right. In terms of the contract, is it right to think that, say, for example with Warner and Fox, I thought that those upward deals expired in 2012. Is that roughly right?

Yes, that is roughly right.

Our next question comes from the line of Mike McCormack with Nomura Securities.

Just a couple of quick questions. It just seems like maybe you can try to put together the pieces here between the price increase and the benefit you're getting there versus the commentary on competition, some pretty strong language around promotional offers and discounts. Just trying to get a sense for whether you think there's a risk that the price increases will have an impact down the road on churn? And then secondly, on the TV Everywhere strategy/product, can you just give us a sense for what you're thinking about as far as rights go for that?

Yes, this is Tom. I'm not sure I understand the first part around the risk on the price increase. Obviously, it's been in market now for a few months. We gave some price assurances through February 2013. We'll continue to observe and monitor the churn impacts, but so far so good, as Charlie said. As far as the TV Anywhere product or Everywhere, however you want to -- everybody has a different term for it. We're, like others, securing authentication rights as part of all of our programming renewal. So the DISHonline.com product represent that, and it's a pretty vast library of content. And then we also, as someone indicated earlier, we are also promoting the Sling Adapter, which is a device that connects to the 722 models of ours and that gives the consumer access to their programming that they're paying for on their box.

This is Charles. By the way, I'll just add a follow-up to that. I mean, I think when our price increased, we found out that we have some pricing power. We're materially lower than other people in the marketplace after you get to the discount periods that people discount. And b, we believe that pricing is going to be much tougher next year based on competition, which is why -- which is one of the reasons, not the only reason, that we went to a two-year price guarantee. So we'll have to touch customers again from that perspective. Hopefully, we'll have other products to sell them. So like ARPU, hopefully, we're smart enough to figure out how to sell them additional product, but it won't be in terms of a price increase.

I'm just trying to get a sense whether there are some sort of a lag between the timing instituted and when customers look around and say, there's other alternatives, but suddenly the discount is still pretty significant.

Well, I think -- again, the general thing that I think is not the most logical thing that you prefer see as an industry, you can't turn your TV on without seeing a $29 offer or $19 offer, whatever, from somebody who is probably playing close to $80, $90 to $100 ARPU, so I think everybody is looking around. I think -- and then -- and so you don't -- and you're not going to get return on that customer until they can look around again. So I think we have to be a little bit smarter about it, and I have a better understanding how people got in the subprime business because everybody was doing it; right? And I think it takes a lot of maturity as a CEO to say, if everybody's in the subprime business, maybe that's not where we want to be. That's not the most -- there are other ways to spend our money that's a better return to our shoulders long term. And that's really what we're trying to do, and again, stay tuned for end of the show.

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

So 2 questions on wireless and then just a question about customer quality. I guess first on the wireless side, and if you did end up building a wireless network, is it something you think you would need a cooperation of another operator for in order to make the economics work? Or is it more likely that you can do something alone? And I guess just what's a reasonable expectation as to how long it would take for you to fully explore and evaluate the potential wireless opportunity? And then just another question. When you look at the DVR and HD selling rates that you're getting today, how do they compare to the last couple of quarters? Is that still in a high level which I think has increased over the last couple of quarters? Or has it normalized to maybe rate was more early last year?

This is Charlie. On the wireless opportunity, I think it is unlikely that we would do something to wireless without somebody who is more of an expert in that business than we are. And I think there's any number of people out there that are more expert than we are. And I think we're watching closely what LightSquared does, who is also -- I think our spectrum fits nicely with them in terms of how they go about doing it. But we bought 700 MHz spectrum, we didn't build it out. Day one, we certainly are building out some of that today, and we have about 6.5 more years to build that out I think, and we're certainly experimenting with number of things there. But Qualcomm build it out and couldn't prove the business model. And I think we've got a very -- and therefore, it's still made a good return on that spectrum by selling it to AT&T, but they lost a significant amount of capital in the build-out. So we have to be careful about knowing exactly what we're doing, making sure that there's what we believe to be a good return on the asset. And any number of strategies there but to build it out in the wireless space, if that was the decision to go forward, I would think you would see us work with people who are more expert in that business than we are. And the second part of your question was?

This is Tom Cullen. Credit quality of customers, as Charlie has indicated, we've been much more selective and more targeted in our marketing approach. So from a credit quality standpoint, we are seeing improvement in the incoming customers. The DVR and HD rates remain high. But really not significantly different first quarter over fourth quarter in terms of attach rates on new customers I think.

I think TiVo settlement helps us in the DVR space going forward. Again, we can do something now with their Time Warp patent. The design around that, we did things a little differently, which in some cases weren't better, in some case didn't work as well. We now will take the best of what TiVo does in their Time Warp patent with some of the things that we learned in our engineer -- some of our intellectual property. I think without question, we can put the best DVRs in the business out there going forward. And to the extent that other people don't license from TiVo and don't use that Time Warp technology, I think we'd have a significant advantage.

What about TiVo software? Would you consider using their software in your boxes for user interface?

I guess I'd say it this way. I think the lines of communication are open with TiVo. Tom already owes me dinner. He owes me about a $600 million dinner. That's before the tip. And I think TiVo has a very good operating system. I think that -- I like their viewer management. I like their advertising model they do. And I think that it's up to their management, our management to come up with innovative ways and see if there are ways to work together because, because we've been through -- it was close -- it was close, we actually signed this deal on Saturday, so we actually signed the deal before we captured Bin Laden, which I didn't think was -- it was a good race to see who got there first, us and TiVo or Bin Laden, and we got Bin Laden, so we beat them by day and we're proud of that.

Our next question comes from the line of Ben Swinburne for Morgan Stanley.

It's Ben Swinburne. I wanted to ask about DirecTV strategy to connect boxes to the Internet. Charlie, if you think that's something that make sense for your business if you're doing it today and if you do think that's something you want to do over the next couple of years. Could you size up sort of the financial capacity or financial obligation that it required? How do you get a return on that?

Yes. I mean, I think, DirecTV's overall strategy is obviously excellent. They are the gold standard in terms of this business today. And I think that we share their thoughts that hooking up customers to the Internet to broadband access is important. And we haven't articulated our goals externally to the market yet. But I think you could -- I think we see it the same way that they do as far as the strategy. Tom, do you want to add something to that?

Yes. Ben, this is Tom. About a year ago, we started emphasizing connectivity throughout our service and installation workforce, and we are seeing those numbers rise nicely. Every installation, every service call, every upgrade, when we're in someone's home, we're looking for the opportunity to connect those boxes. Concurrently, we launched IP-delivered movie service late last year. And we're seeing a nice uptick there in terms of not only the number of unique subs who are accessing it every month, but the number of sessions per month is growing rather quickly month-over-month. So still in the early stages of this, but we understand that some IP-delivered content will be necessary to complement the traditional satellite-delivered paid TV service. And that creates more of a stick to your customer as well.

And, Tom, that's helpful. Can you just give us a sense for sort of what fleet of boxes or what percentage of your gross customers are coming on that are being connected, just so we can think about the ramp?

Well, the VIP series boxes, of which there are many million in the field. Unfortunately, Ben, if I could turn back the clock, I would've been connecting these 4 years ago. But we weren't as focused on connecting them even though they were Ethernet capable. So we have that opportunity to catch up. And in terms of percentage of new installations, it correlates with DVR deployments. And so the numbers -- the opportunity is rather large in terms of getting the base connected. But I think it's still -- I don't want to overstate it, we're still a ways from getting to 20% of our base for instance.

This is Charlie. Realize that a lot of our base is more rural, and we don't really have the opportunity to hook them up to broadband yet. The last places that are going to be buildup in broadband are going to be rural America. So on special day, you're not talking about the vast majority of our customers hooked up to Internet for awhile.

Just on the DBSD, I want just a point of clarification and a question. The $1.4 billion is for the equity and then there's another $325 million as part of the support agreement, is that the total cost outlay for DISH?

You're correct that the DBSD was worth at least that or more, but the actual payment is I think -- and I am going to get this wrong a little bit, so somebody correct me. I think it's about $1.1 billion for the debt and about $300 million for the equity. I think maybe $325 million for the equity and something in the neighborhood of $1 billion to $1.1 billion for the debt. And I think there's still an outstanding amount to Sprint. As we go through their conversion cost. They're claiming $100 million, and I think -- we think it's materially less than that.

Looking at Page 9 of the Q. It talks about restructuring support agreement. $325 million in consideration, $290 million will be creditable against amounts payable to ICO. I don't know if that was something that was...

That's the equity. That's the equity. And we own some of the debt ourselves.

Right. And that all is closing -- presumably has not -- none of that has gone out yet, that's all post March 31; right?

Do you know March 31? Some of that had gone up by March 31.

This is Robert, about 200 -- a little bit less than $250 million had gone out as of the balance sheet date on March 31.

Okay. And then, Charlie, just on the investment opportunity. I guess, going back to your Seinfeld point, I mean, there was a script there and they were all planning to tie it up at the end, and I just wanted to get a sense for whether or not there is a broad strategy to bring all these assets together? Or are you looking at this as a portfolio of investments where they could fit together, but even if they don't, the risk reward on these investments still looks pretty attractive to you, and if you end up selling some or parsing them out with partners or just a little more clarity there would be helpful given all the moving pieces.

I think it's the former. I think we know -- as I said in the last call, I think we know where we want ago, and each of these assets is important and each of these assets are going to open other doors for us of opportunity. Having said that, I've also been around long enough to know that every time you acquire something, it doesn't always work out. I remember we got into StarBand, which is a satellite broadband and didn't work out. I think we rolled off $100 million. It didn't work out. And I think the trick is to realize when you've made a mistake and move on. And that I think -- we're not emotional players. So we're not going to fall in love with anything emotionally, but I like the asset portfolio -- I mean the love the 14 million subscribers we have and the satellite assets. But I like the other assets we put together, and I think we definitely have a plan of where we'd like to go. And there is always events that happen, for example, AT&T and T-Mobile totally rearranged that announcement. Totally rearranged the potential strategies across the globe, right, for people. And obviously, when you have major events like that, it could affect your strategy. On the other hand, if one anticipates events that are likely to happen, then you look pretty smart that you anticipated things that might happen and you're there and you're positioned for things that might happen when it actually happen.

It just seems like a lot of the outcome or the opportunity for you with DBSD will depend on the SEC transfer and any conditions around there, you mentioned LightSquared and their waiver. Are there any things on...

Let me speak to that point, and maybe Stan here -- but I don't think there'll be any conditions on the DBSD transfer. They've already perfected their license. So this is acquisition that's out of a company out of bankruptcy that we think we can enhance the product for consumers but it does not require a build-out terrestrially. They already cover every square inch in the United States with the signal. It's up to us to create the product that people are willing to pay for that utilizes their satellite assets today. I mean, we're primarily a satellite company, so I don't want to give an impression that we're this terrestrial company that's going to build out a bunch of terrestrial stuff that we don't understand. So there is -- I don't expect there'll be conditions on that acquisition.

Okay. So either you can make a return on the investment without the threshold component effectively?

That's correct. I could be wrong, but I think we can.

Since we've actually made it to the whole call no one has asked about stock buyback. So I think I have to go down that path, but since stock is 50% this year, is it safe to assume you weren't a buyer at wherever it was $18 you're looking at the stock today versus your opportunity to just raise some more money today as well. Interest rates are low. Any comment on your capital allocation or maybe just capital structure thoughts?

Well, I think the TiVO overhang was important in our thought process. I think to settle that, I think, the way we look at it, again, I've said this about every call for last -- we're looking at opportunities for management. And our first priority is to grow our business, grow our business with the capital. If we can come up with good ways to grow the business, I think stock buybacks probably are a good second choice. And if not that, dividends. If you look at dividends, again, the tax law today is favorable to dividends but that might not be so favorable a year or 2 from now. So we take all those things in consideration. We took some -- we knew our stock was materially undervalued, but we knew there were some assets out there that we wanted, and we didn't -- and we have to have our powder dry to go after those assets. And so we couldn't do both and/or didn't feel like we could do both, and we didn't know exactly which assets will be available to what price. So I think we're pretty happy with the way it turned out. This is really -- obviously, you can grow your stock price by buying your stock back. You can grow your stock price by making smart investments and acquisitions and investments into your business. And I think that's the route we have chosen because I can come up with good ways to spend the money, but time will tell.

It sounds like with TiVo behind you, maybe the thought process may be evolving in.

Well, I think there was -- and I think one of the analysts correctly pointed out, I mean there was a heavy lost, the design around question. And then we would've turned off all of our DVRs and would not have been able to sell any DVR's and that was -- and while we were highly confident that we are on the right side of the law and we got 12 judges to listen to us that they would more than likely get the majority of them to agree we are on the right side of the law, that was the risk, I would say -- that was a pretty risky -- that was a pretty -- there was a low chance that that was a bad outcome. Certainly, something that we weren't prepared to take on. Operator, I think we need to wrap up the call. So we'll be on -- and again, just so you know, I probably am not on the next call in August. That's usually when I have a personal time with my family. So depending on the day, don't be surprised if this wonderful management team carries out on its own. And hopefully Mr. Kelly has a lot to tell us about Blockbuster, so we'll talk to you then.

All right. Thanks, guys.

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