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Dish Network 10-K 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-K
(Mark One)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
FOR THE TRANSITION PERIOD FROM TO .
Commission file number: 0-26176
DISH Network Corporation
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ Noo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2009, the aggregate market value of Class A common stock held by non-affiliates of the Registrant was $3.3 billion based upon the closing price of the
Class A common stock as reported on the Nasdaq Global Select Market as of the close of business on that date.
As of February 12, 2010, the Registrant’s outstanding common stock consisted of 208,159,668 shares of Class A common stock and 238,435,208 shares of Class B common stock,
each $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Portions of the Registrant’s definitive Proxy Statement to be filed in connection with its 2010 Annual Meeting of Shareholders are incorporated by reference in Part III.
TABLE OF CONTENTS
Table of Contents
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995 throughout this report. Whenever you read a statement that is not simply a statement
of historical fact (such as when we describe what we “believe,” “intend,” “plan,” “estimate,”
“expect” or “anticipate” will occur and other similar statements), you must remember that our
expectations may not be achieved, even though we believe they are reasonable. We do not guarantee
that any future transactions or events described herein will happen as described or that they will
happen at all. You should read this report completely and with the understanding that actual
future results may be materially different from what we expect. Whether actual events or results
will conform with our expectations and predictions is subject to a number of risks and
uncertainties. For further discussion see Item 1A. Risk Factors. The risks and uncertainties
include, but are not limited to, the following:
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All cautionary statements made herein should be read as being applicable to all forward-looking
statements wherever they appear. In this connection, investors should consider the risks described
herein and should not place undue reliance on any forward-looking statements. We assume no
responsibility for updating forward-looking information contained or incorporated by reference
herein or in other reports we file with the SEC.
In this report, the words “DISH Network,” the “Company,” “we,” “our” and “us” refer to DISH Network
Corporation and its subsidiaries, unless the context otherwise requires. “EchoStar” refers to
EchoStar Corporation and its subsidiaries. “DDBS” refers to DISH DBS Corporation and its
subsidiaries, a wholly owned, indirect subsidiary of DISH Network.
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PART I
Item 1. BUSINESS
OVERVIEW
DISH Network Corporation is the nation’s third largest pay-TV provider, with approximately 14.100
million customers across the United States as of December 31, 2009. We were organized in 1995 as a
corporation under the laws of the State of Nevada and started offering DISH Network subscription
television services in March 1996.
Our common stock is publicly traded on the Nasdaq Global Select Market under the symbol “DISH.”
Our principal executive offices are located at 9601 South Meridian Boulevard, Englewood, Colorado
80112 and our telephone number is (303) 723-1000.
On January 1, 2008, we completed a tax-free distribution of our technology and set-top box business
and certain infrastructure assets (the “Spin-off”) into a separate publicly-traded company,
EchoStar Corporation (“EchoStar”) which was incorporated in Nevada on October 12, 2007. DISH
Network and EchoStar now operate as separate publicly-traded companies, and neither entity has any
ownership interest in the other. However, a substantial majority of the voting power of the shares
of both companies is owned beneficially by Charles W. Ergen, our Chairman, President and Chief
Executive Officer.
Business Strategy
Our business strategy is to be the best provider of video services in the United States by
providing high-quality products, outstanding customer service, and great value. We promote the
DISH Network programming packages as providing our subscribers with a better “price-to-value”
relationship than those available from other subscription television providers. We believe that
there continues to be unsatisfied demand for high quality, reasonably priced television programming
services.
Products and Services
Programming. We provide programming which includes more than 280 basic video channels, 60 Sirius
Satellite Radio music channels, 30 premium movie channels, 35 regional and specialty sports
channels, 2,500 local channels, 220 Latino and international channels, and 50 channels of
pay-per-view content. Although we distribute over 2,500 local channels, a subscriber typically may
only receive the local channels available in the subscriber’s home market. As of December 31,
2009, we provided local channel coverage in standard definition to markets covering about 97% of
U.S. TV households. In addition, we provided HD local channels to markets representing
approximately 93% of U.S. TV households.
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Receiver Systems. Our subscribers receive programming via in-home equipment that includes a small
satellite dish, digital set-top receivers, and remote controls. Some of our advanced receiver
models feature DVRs, HD capability, and dual-tuners which allow independent viewing on two separate
televisions. Our newest receiver models are Internet-protocol compatible which allows consumers to
view movies and other content on their televisions via the Internet and a broadband connection. We
rely on EchoStar to design and manufacture all of our new receivers and certain related components.
See “Item 1A – Risk Factors.”
Content Delivery
Digital Broadcast Operations Centers. The principal digital broadcast operations centers we use
are EchoStar’s facilities located in Cheyenne, Wyoming and Gilbert, Arizona. We also use eight
regional digital broadcast operations centers owned and operated by EchoStar that allow us to
maximize the use of the spot beam capabilities of certain owned and leased satellites. Programming
content is delivered to these centers by fiber or satellite and processed, compressed, encrypted
and then uplinked to satellites for delivery to consumers.
In connection with the Spin-off, we entered into a broadcast agreement pursuant to which EchoStar
provides us broadcast services, including teleport services such as transmission and downlinking,
channel origination, and channel management services. The term of this agreement expires on
January 1, 2011. However, we have the right, but not the obligation, to extend the broadcast
agreement for one additional year. We may terminate channel origination services and
channel management services for any reason and without any liability upon sixty days written notice
to EchoStar. If we terminate teleport services for a reason other than EchoStar’s breach, we are
obligated to pay EchoStar the aggregate amount of the remainder of the expected cost of providing
the teleport services.
Satellites. Our DISH Network programming is currently delivered to customers using satellites that
operate in the “Ku” band portion of the microwave radio spectrum. The Ku-band is divided into two
spectrum segments. The portion of the Ku-band that allows the use of higher power satellites —
12.2 to 12.7 GHz over the United States — is known as the Broadcast Satellite Service (“BSS”) band,
which is also referred to as the Direct Broadcast Satellite (“DBS”) band. The portion of the
Ku-band that utilizes lower power satellites — 11.7 to 12.2 GHz over the United States — is known
as the Fixed Satellite Service (“FSS”) band.
Most of our programming is currently delivered using DBS satellites. To accommodate the more
bandwidth-intensive HD programming and other needs, we continue to explore opportunities to expand
our satellite capacity through the acquisition of new spectrum, the launching of more
technologically advanced satellites, and the more efficient use of existing spectrum via, among
other things, better modulation and compression technologies.
We own or lease capacity on 11 satellites in geostationary orbit approximately 22,300 miles above
the equator. For further information concerning these satellites and satellite anomalies, please
see the table and discussion under “Satellites” below.
Conditional Access System. Our conditional access system secures our programming content using
encryption so that only paying customers can access our programming. We use microchips embedded in
credit card-sized access cards, called “smart cards,” or security chips in our receiver systems to
control access to authorized programming content (“Security Access Devices”).
Our signal encryption has been compromised in the past and may be compromised in the future even
though we continue to respond with significant investment in security measures, such as Security
Access Device replacement programs and updates in security software, that are intended to make
signal theft more difficult. It has been our prior experience that security measures may only be
effective for short periods of time or not at all and that we remain susceptible to additional
signal theft. During the second quarter of 2009, we completed the replacement of our Security
Access Devices that re-secured our system. However, we expect additional future replacements of
these devices will be necessary to keep our system secure. We cannot ensure that we will be
successful in reducing or controlling theft of our programming content and we may incur additional
costs in the future if our system’s security is compromised.
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Distribution Channels
While we offer receiver systems and programming through direct sales channels, a majority of our
new subscriber acquisitions are generated through independent third parties such as small satellite
retailers, direct marketing groups, local and regional consumer electronics stores, nationwide
retailers, and telecommunications companies. In general, we pay these independent third parties a
mix of upfront and monthly incentives for these sales. In addition, we partner with
telecommunications companies to bundle DISH Network programming with broadband and voice services
on a single bill.
Competition
As of December 31, 2009, our 14.100 million subscribers represent approximately 15% of pay-TV
subscribers in the United States. We face substantial competition from established pay-TV
providers and increasing competition from companies providing/facilitating the delivery of video
content via the Internet, among other things, to computers, televisions, and mobile devices.
Established TV Providers
New and Emerging Technologies
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Acquisition of New Subscribers
We incur significant upfront costs to acquire subscribers, including advertising, retailer
incentives, equipment and installation. In addition, customer promotions to acquire new
subscribers result in less revenue to us over the promotional period. While we attempt to recoup
these upfront costs over the lives of their subscription, there can be no assurance that we will.
We deploy business rules such as credit requirements and contractual commitments, and we strive to
provide outstanding customer service, to increase the likelihood of customers keeping their DISH
Network service over longer periods of time. Our subscriber acquisition costs may vary
significantly from period to period.
Advertising. We use print, radio, television and Internet media, on a local and national basis to
motivate potential subscribers to call DISH Network, visit our website or contact independent third
party retailers.
Retailer Incentives. We pay retailers an upfront incentive for each new subscriber they bring to
DISH Network and, for certain retailers, we pay small monthly incentives for up to 60 months
provided, among other things, the customer continuously subscribes to qualified programming.
Equipment. We incur significant upfront costs to provide our new subscribers with in-home
equipment, including advanced HD and DVR receivers, which most of our new subscribers lease from
us. While we seek to recoup such upfront equipment costs mostly through monthly fees, there can be
no assurance that we will be successful in achieving that objective. In addition, upon
deactivation of a subscriber we may refurbish and redeploy their equipment which lowers future
upfront costs. However, our ability to capitalize on these cost savings may be limited as
technological advances and consumer demand for new features may render the returned equipment
obsolete.
Installation. We incur significant upfront costs to install satellite dishes and receivers in the
homes of our new customers.
New Customer Promotions. We often offer free programming and/or promotional pricing during
introductory periods for new subscribers. While such promotional activities have an economic cost
and reduce our subscriber-related revenue, they are not included in our definitions of subscriber
acquisition costs or the SAC metric.
Customer Retention
We incur significant costs to retain our existing customers, mostly by upgrading their equipment to
HD and DVR receivers. As with our subscriber acquisition costs, our retention spending includes
the cost of equipment and installation. In certain circumstances, we also offer free programming
and/or promotional pricing for limited periods for existing customers in exchange for a contractual
commitment. A component of our retention efforts includes the installation of equipment for
customers who move. Our subscriber retention costs may vary significantly from period to period.
Customer Service
Customer Service Centers. We use both internally-operated and outsourced customer service centers
to handle calls from prospective and existing customers. We strive to answer customer calls
promptly and to resolve issues effectively on the first call. We intend to better use the Internet
and other applications to provide our customers with more self-service capabilities over time.
Installation and Other In-Home Service Operations. High-quality installations, upgrades, and
in-home repairs are critical to providing good customer service. Such in-home service is performed
by both DISH Network employees and a network of independent contractors and includes, among other
things, priority technical support, replacement equipment, cabling and power surge repairs for a
monthly fee (“Service Plan”).
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Subscriber Management. We presently use, and depend on, CSG Systems International, Inc.’s software
system for the majority of DISH Network subscriber billing and related functions.
New Business Opportunities
From time to time we evaluate opportunities for strategic investments or acquisitions that may
complement our current services and products, enhance our technical capabilities, improve or
sustain our competitive position, or otherwise offer growth opportunities. We may make investments
in or partner with others to expand our business into mobile and portable video, data and voice
services.
In 2008, we paid $712 million to acquire certain 700 MHz wireless licenses, which were granted to
us by the FCC in February 2009. To commercialize these licenses and satisfy FCC build-out
requirements, we will be required to make significant additional investments or partner with
others. Depending on the nature and scope of such commercialization and build-out, any such
investment or partnership could vary significantly. Part or all of our licenses may be terminated
for failure to satisfy FCC build-out requirements. We are currently performing a market test to
evaluate different technologies and consumer acceptance.
SATELLITES
Most of our programming is currently delivered using DBS satellites. We continue to explore
opportunities to expand our available satellite capacity through the use of other available
spectrum. Increasing our available spectrum is particularly important as more bandwidth intensive
HD programming is produced and to address new video and data applications consumers may desire in
the future. We utilize satellites in geostationary orbit approximately 22,300 miles above the
equator detailed in the table below.
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Satellite Capacity Leased from/to EchoStar
In connection with the Spin-off and subsequent to the Spin-off, we entered into certain satellite
capacity agreements pursuant to which we lease certain satellite capacity on certain satellites
owned or leased by EchoStar. In December 2009, we entered into a satellite capacity agreement
pursuant to which EchoStar leases satellite capacity on a certain satellite owned by us. The fees
for the services provided under these satellite capacity agreements depend, among other things,
upon the orbital location of the applicable satellite and the frequency on which the applicable
satellite provides services. The term of each of the leases is set forth below:
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Nimiq 5. During September 2009, we entered into a ten-year satellite service agreement with
EchoStar for capacity on the Nimiq 5 satellite. Pursuant to this agreement, we will receive
service from EchoStar on all 32 of the DBS transponders covered by the transponder contract with
Telesat Canada (“Telesat”). We began receiving service on 16 of these DBS transponders upon
service commencement of the satellite and will receive service on the remaining 16 DBS transponders
over a phase-in period that will be completed in 2012.
Satellite Capacity Leased from Other Third Parties
Satellites under Construction
As of December 31, 2009, we had entered into the following contracts to construct new satellites
which are contractually scheduled to be completed within the next year.
In addition, we have agreed to lease capacity on two satellites from EchoStar that are currently
under construction.
Satellite Anomalies
Operation of our programming service requires that we have adequate satellite transmission capacity
for the programming we offer. Moreover, current competitive conditions require that we continue to
expand our offering of new programming, particularly by expanding local HD coverage and offering
more HD national channels. While
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we generally have had in-orbit satellite capacity sufficient to transmit our existing channels and
some backup capacity to recover the transmission of certain critical programming, our backup
capacity is limited.
In the event of a failure or loss of any of our satellites, we may need to acquire or lease
additional satellite capacity or relocate one of our other satellites and use it as a replacement
for the failed or lost satellite. Such a failure could result in a prolonged loss of critical
programming or a significant delay in our plans to expand programming as necessary to remain
competitive and thus may have a material adverse effect on our business, financial condition and
results of operations.
Prior to 2009, certain satellites in our fleet have experienced anomalies, some of which have had a
significant adverse impact on their remaining life and commercial operation. There can be no
assurance that future anomalies will not further impact the remaining life and commercial operation
of any of these satellites. See “Long-Lived Satellite Assets” below for further discussion of
evaluation of impairment and Note 7 in the Notes to the Consolidated Financial Statements in Item
15 of this Annual Report on Form 10-K. There can be no assurance that we can recover critical
transmission capacity in the event one or more of our in-orbit satellites were to fail. We do not
anticipate carrying insurance for any of the in-orbit satellites that we own, and we will bear the
risk associated with any in-orbit satellite failures. Recent developments with respect to our
satellites are discussed below.
Owned Satellites
EchoStar V. EchoStar V was originally designed with a minimum 12-year design life. Momentum wheel
failures in prior years, together with relocation of the satellite between orbital locations,
resulted in increased fuel consumption, as disclosed in previous SEC filings. During 2005, as a
result of this increased fuel consumption, we reduced the remaining estimated useful life of the
satellite and as of October 2008, the satellite was fully depreciated. In late July 2009, it was
determined that the satellite had less fuel remaining than previously estimated, therefore the
satellite was removed from the 148 degree orbital location and retired from commercial service on
August 3, 2009. This retirement did not have a material impact on the DISH Network service.
As a result of the retirement of EchoStar V, we currently do not have any satellites positioned at
the 148 degree orbital location. While we have requested a waiver from the FCC for the continued
use of this orbital location, there can be no assurance that the FCC will determine that our
proposed future use of this orbital location complies fully with all licensing requirements. If
the FCC decides to revoke this license, we may be required to write-off its $68 million carrying
value.
Leased Satellites
EchoStar III. EchoStar III was originally designed to operate a maximum of 32 DBS transponders in
CONUS mode at approximately 120 watts per channel, switchable to 16 transponders operating at over
230 watts per channel, and was equipped with a total of 44 traveling wave tube amplifiers (“TWTAs”)
to provide redundancy. As a result of TWTA failures in previous years and an additional pair of
TWTA failures during August 2009, only 14 transponders are currently available for use. Due to
redundancy switching limitations and specific channel authorizations, we are currently operating on
13 of our FCC authorized frequencies at the 61.5 degree orbital location. While the failures have
not impacted commercial operation of the satellite, it is likely that additional TWTA failures will
occur from time to time in the future and such failures could impact commercial operation of the
satellite.
EchoStar XII. Prior to 2009, EchoStar XII experienced anomalies resulting in the loss of
electrical power available from its solar arrays. During March and May 2009, EchoStar XII
experienced more of these anomalies, which further reduced the electrical power available to
operate EchoStar XII. We currently operate EchoStar XII in CONUS/spot beam hybrid mode. If we
continue to operate the satellite in this mode, as a result of this loss of electrical power, we
would be unable to use the full complement of its available transponders for the remaining useful
life of the satellite. However, since the number of useable transponders on EchoStar XII depends
on, among other things, whether EchoStar XII is operated in CONUS, spot beam, or hybrid CONUS/spot
beam mode, we are unable to determine at this time the actual number of transponders that will be
available at any given time or how many transponders can be used during the remaining estimated
life of the satellite.
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Long-Lived Satellite Assets
We evaluate our satellite fleet for impairment as one asset group and test for recoverability
whenever events or changes in circumstances indicate that its carrying amount may not be
recoverable. While certain of the anomalies discussed above, and previously disclosed, may be
considered to represent a significant adverse change in the physical condition of an individual
satellite, based on the redundancy designed within each satellite and considering the asset
grouping, these anomalies are not considered to be significant events that would require evaluation
for impairment recognition. Unless and until a specific satellite is abandoned or otherwise
determined to have no service potential, the net carrying amount related to the satellite would not
be written off.
GOVERNMENT REGULATIONS
We are subject to comprehensive regulation by the FCC for our domestic operations. We are also
regulated by other federal agencies, state and local authorities, the International
Telecommunication Union (“ITU”) and certain foreign governments. Depending upon the circumstances,
noncompliance with legislation or regulations promulgated by these entities could result in
suspension or revocation of our licenses or authorizations, the termination or loss of contracts or
the imposition of contractual damages, civil fines or criminal penalties.
The following summary of regulatory developments and legislation in the United States is not
intended to describe all present and proposed government regulation and legislation affecting the
satellite and video programming distribution industries. Government regulations that are currently
the subject of judicial or administrative proceedings, legislative hearings or administrative
proposals could change our industry to varying degrees. We cannot predict either the outcome of
these proceedings or any potential impact they might have on the industry or on our operations.
FCC Regulation under the Communications Act
FCC Jurisdiction over our Operations. The Communications Act gives the FCC broad authority to
regulate the operations of satellite companies. Specifically, the Communications Act gives the FCC
regulatory jurisdiction over the following areas relating to communications satellite operations:
To obtain FCC satellite licenses and authorizations, satellite operators must satisfy strict legal,
technical and financial qualification requirements. Once issued, these licenses and authorizations
are subject to a number of conditions including, among other things, satisfaction of ongoing due
diligence obligations, construction milestones, and various reporting requirements.
Overview of Our Satellites and FCC Authorizations. Our satellites are located in orbital
positions, or slots, that are designated by their western longitude. An orbital position describes
both a physical location and an assignment of spectrum in the applicable frequency band. Each DBS
orbital position has 500 MHz of available Ku-band spectrum that is divided into 32 frequency
channels. Through digital compression technology, we can currently transmit between nine and 13
standard definition digital video channels per DBS frequency channel. Several of our satellites
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also include spot-beam technology which enables us to increase the number of markets where we
provide local channels, but reduces the number of video channels that could otherwise be offered
across the entire United States.
The FCC has licensed us to operate a total of 82 DBS frequencies at the following orbital
locations:
We currently do not have any satellites positioned at the 148 degree orbital location as a result
of the retirement of EchoStar V. While we have requested a waiver from the FCC for the continued
use of this orbital location, there can be no assurance that the FCC will determine that our
proposed future use of this orbital location complies fully with all licensing requirements.
In addition, we currently lease or have entered into agreements to lease capacity on satellites
using the following spectrum at the following orbital locations:
We also have occasional-use month-to-month FSS capacity available from EchoStar on satellites
located at the 85, 105 and 121 degree orbital location.
700 MHz Spectrum. In 2008, we paid $712 million to acquire certain 700 MHz wireless licenses,
which were granted to us by the FCC in February 2009. To commercialize these licenses and satisfy
FCC build-out requirements, we will be required to make significant additional investments or
partner with others. Depending on the nature and scope of such commercialization and build-out,
any such investment or partnership could vary significantly. Part or all of our licenses may be
terminated for failure to satisfy FCC build-out requirements. We are currently performing a market
test to evaluate different technologies and consumer acceptance.
Duration of our DBS Satellite Licenses. Generally speaking, all of our satellite licenses are
subject to expiration unless renewed by the FCC. The term of each of our DBS licenses is ten
years. Our licenses are currently set to expire at various times. In addition, our special
temporary authorizations are granted for periods of only 180 days or less, subject again to
possible renewal by the FCC.
Opposition and other Risks to our Licenses. Several third parties have opposed, and we expect them
to continue to oppose, some of our FCC satellite authorizations and pending requests to the FCC for
extensions, modifications, waivers and approvals of our licenses. In addition, we may not have
fully complied with all of the FCC reporting, filing and other requirements in connection with our
satellite authorizations. Consequently, it is possible the FCC could revoke, terminate, condition
or decline to extend or renew certain of our authorizations or licenses.
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FCC Actions Affecting our Licenses and Applications. A number of our other applications have been
denied or dismissed without prejudice by the FCC, or remain pending. We cannot be sure that the
FCC will grant any of our outstanding applications, or that the authorizations, if granted, will
not be subject to onerous conditions. Moreover, the cost of building, launching and insuring a
satellite can be as much as $300 million or more, and we cannot be sure that we will be able to
construct and launch all of the satellites for which we have requested authorizations. The FCC has
also imposed a bond requirement for up to $3 million for each of our fixed satellite services
satellite licenses, all or part of which would be forfeited by a licensee that does not meet its
diligence milestones for a particular satellite.
4.5 Degree Spacing Tweener Satellites. The FCC has proposed to allow so-called “tweener” DBS
operations – DBS satellites operating from orbital locations 4.5 degrees (half of the usual nine
degrees) away from other DBS satellites. The FCC has already granted authorizations to Spectrum
Five and EchoStar for tweener satellites at the 114.5 and 86.5 degree orbital locations,
respectively. Certain tweener operations, as proposed, could cause harmful interference into our
service and constrain our future operations. The FCC has not completed its rulemaking on the
operating and service rules for tweener satellites.
Interference from Other Services Sharing Satellite Spectrum. The FCC has adopted rules that allow
non-geostationary orbit fixed satellite services to operate on a co-primary basis in the same
frequency band as DBS and Ku-band-based fixed satellite services. The FCC has also authorized the
use of terrestrial communication services (“MVDDS”) in the DBS band. MVDDS licenses were auctioned
in 2004. Despite regulatory provisions to protect DBS operations from harmful interference, there
can be no assurance that operations by other satellites or terrestrial communication services in
the DBS band will not interfere with our DBS operations and adversely affect our business.
International Satellite Competition and Interference. DirecTV has obtained FCC authority to
provide service to the United States from a Canadian DBS orbital slot, and EchoStar has obtained
authority to provide service to the United States from both a Mexican and a Canadian DBS orbital
slot. Further, we have also received authority to do the same from a Canadian DBS orbital slot at
129 degrees and a Canadian FSS orbital slot at 118.7 degrees. The possibility that the FCC will
allow service to the U.S. from additional foreign slots may permit additional competition against
us from other satellite providers. It may also provide a means by which to increase our available
satellite capacity in the United States. In addition, a number of administrations, such as Great
Britain and the Netherlands, have requested to add orbital locations serving the U.S. close to our
licensed slots. Such operations could cause harmful interference to our satellites and constrain
our future operations at those slots if such “tweener” operations are approved by the FCC.
Rules Relating to Broadcast Services. The FCC imposes different rules for “subscription” and
“broadcast” services. We believe that because we offer a subscription programming service, we are
not subject to many of the regulatory obligations imposed upon broadcast licensees. However, we
cannot be certain whether the FCC will find in the future that we must comply with regulatory
obligations as a broadcast licensee, and certain parties have requested that we be treated as a
broadcaster. If the FCC determines that we are a broadcast licensee, it could require us to comply
with all regulatory obligations imposed upon broadcast licensees, which are generally subject to
more burdensome regulation than subscription television service providers.
Public Interest Requirements. Under a requirement of the Cable Act, the FCC imposed public
interest requirements on DBS licensees. These rules require us to set aside four percent of our
channel capacity exclusively for noncommercial programming for which we must charge programmers
below-cost rates and for which we may not impose additional charges on subscribers. This could
displace programming for which we could earn commercial rates and could adversely affect our
financial results. We cannot be sure that if the FCC were to review our methodology for processing
public interest carriage requests, computing the channel capacity we must set aside or determining
the rates that we charge public interest programmers, it would find them in compliance with the
public interest requirements.
Plug and Play. The FCC has adopted the so-called “plug and play” standard for compatibility
between digital television sets and cable systems. That standard was developed through
negotiations involving the cable and consumer electronics industries, but not us. The FCC is
considering various proposals to establish two-way digital cable “plug and play” rules. That
proceeding also asks about means to incorporate all pay-TV providers into its
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“plug and play” rules. The cable industry and consumer electronics companies have reached a
tru2way commercial agreement to resolve many of the outstanding issues in this docket. We cannot
predict whether the FCC will impose rules on our DBS operations that are based on cable system
architecture or the private cable/consumer electronics tru2way commercial arrangement. Complying
with the separate security and other “plug and play” requirements would require potentially costly
modifications to our set-top boxes and operations. We cannot predict the timing or outcome of this
FCC proceeding.
Digital HD Must Carry Requirement. We are subject to digital HD “carry-one-carry-all” requirements
that will cause capacity constraints. To provide any full-power local broadcast signal in any
market, we are required to retransmit all qualifying broadcast signals in that market
(“carry-one-carry-all”). The digital transition required all full-power broadcasters to cease
transmission using analog signals and switch over to digital signals by June 12, 2009. The switch
to digital provides broadcasters significantly greater capacity to provide high definition and
multicast programming. In March 2008, the FCC adopted new digital carriage rules that require DBS
providers to phase in carry-one-carry-all obligations with respect to the carriage of full-power
broadcasters’ HD signals by February 2013 in HD local markets. The carriage of additional HD
signals on our DBS system could cause us to experience significant capacity constraints and limit
the number of local markets that we can serve. Certain provisions of the Satellite Home Viewer
Extension and Reauthorization Act (“SHVERA”), which permits a satellite carrier to retransmit
distant television signals to subscribers for private home viewing and to commercial establishments
for a per subscriber fee, were set to expire on December 31, 2009, and are currently pending
reauthorization. We are uncertain about how the pending SHVERA reauthorization legislation may
affect carry-one-carry-all requirements, if at all.
In addition, the FCC is now considering whether to require DBS providers to carry broadcast
stations in both standard definition and high definition starting in 2010, in conjunction with the
phased-in HD “carry-one-carry-all” requirements adopted by the FCC. If we were required to carry
multiple versions of each broadcast station, we would have to dedicate more of our finite satellite
capacity to each broadcast station, which may force us to reduce the number of local markets served
and limit our ability to meet competitive needs. We cannot predict the outcome or timing of that
proceeding. We are also uncertain about how the pending SHVERA reauthorization legislation may
affect this requirement, if at all.
Retransmission Consent. SHVERA generally gives satellite companies a statutory copyright license
to retransmit local broadcast channels by satellite back into the market from which they
originated, subject to obtaining the retransmission consent of the local network station. If we
fail to reach retransmission consent agreements with broadcasters, we cannot carry their signals.
This could have an adverse effect on our strategy to compete with cable and other satellite
companies that provide local signals. While we have been able to reach retransmission consent
agreements with most local network stations in markets where we currently offer local channels by
satellite, roll-out of local channels in additional cities and in high definition will require that
we obtain additional retransmission agreements. We cannot be sure that we will secure these
agreements or that we will secure new agreements upon the expiration of our current retransmission
consent agreements, some of which are short-term. We are also uncertain about how the pending
SHVERA reauthorization legislation may affect these agreements, if at all.
Distant Signals. Due to a court injunction, we are unable to retransmit distant network signals to
otherwise eligible customers under the distant signal license of the Copyright Act of 1976, as
amended. DirecTV is not subject to that injunction and can use the license, which is currently set
to expire on February 28, 2010. This places us at a competitive disadvantage to DirecTV. We are
also uncertain about how the pending SHVERA reauthorization legislation may affect our and
DirecTV’s ability to retransmit distant network signals, if at all.
Dependence on Cable Act for Program Access. We purchase a large percentage of our programming from
cable-affiliated programmers. The provisions of the Cable Act of 1992, as amended, (“Cable Act”)
prohibiting exclusive contracting practices with cable affiliated programmers were extended for
another five-year period in September 2007. Cable companies have appealed the FCC’s decision and
oral argument was held before the United States Court of Appeals for the District of Columbia
Circuit (“D.C. Circuit”) in September 2009. We cannot predict the outcome or timing of that
litigation. Any change in the Cable Act and the FCC’s rules that permit the cable industry or
cable-affiliated programmers to discriminate against competing businesses, such as ours, in the
sale of programming could adversely affect our ability to acquire cable-affiliated programming at
all or to acquire
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programming on a cost-effective basis. As a result, we may be limited in our ability to obtain
access on nondiscriminatory terms to programming from programmers that are affiliated with the
cable system operators.
In addition, affiliates of certain cable providers have denied us access to sports programming they
feed to their cable systems terrestrially, rather than by satellite. The FCC recently held that
new denials of such service are unfair if they have the purpose or effect of significantly
hindering us from providing programming to consumers. However, we cannot be sure that we can make
that showing, prevail in a complaint related to such programming, and gain access to it. Our
continuing failure to access such programming could materially and adversely affect our ability to
compete in regions serviced by these cable providers.
MDU Exclusivity. The FCC has found that cable companies should not be permitted to have exclusive
relationships with multiple dwelling units (e.g., apartment buildings). In May 2009, the D.C.
Circuit upheld the FCC’s decision. The FCC has now asked whether DBS and Private Cable Operators
(“PCOs”) should be prohibited from having similar relationships with multiple dwelling units. If
the cable exclusivity ban were to be extended to DBS providers, our ability to serve these types of
buildings and communities would be adversely affected. We cannot predict the timing or outcome of
the FCC’s consideration of this proposal.
Net Neutrality and the National Broadband Plan. The FCC has initiated a proceeding where it has
proposed certain rules to safeguard the open nature of the Internet, including requirements of
nondiscrimination and transparency with respect to network management practices. The FCC is also
currently developing a national broadband plan to expand availability of broadband and encourage
adoption of that service. We cannot be sure whether these initiatives will result in burdens on us
such as the need to use our satellite capacity to comply with any additional mandates, or
contribution obligations.
Comcast/NBC Universal Transaction. Comcast and General Electric have agreed to join their
programming properties, including NBC, Bravo and many others, in a venture to be controlled by
Comcast. The transaction will require FCC and other governmental approvals before it can be
completed. This transaction may affect us adversely by, among other things, making it more
difficult for us to obtain access to the programming networks on nondiscriminatory and fair terms,
or at all. We cannot predict when or if the transaction will receive the requisite regulatory
approvals or if it will be appropriately conditioned to mitigate potential public interest harms.
The International Telecommunication Union
Our DBS system also must conform to the ITU broadcasting satellite service plan for Region 2 (which
includes the United States). If any of our operations are not consistent with this plan, the ITU
will only provide authorization on a non-interference basis pending successful modification of the
plan or the agreement of all affected administrations to the non-conforming operations.
Accordingly, unless and until the ITU modifies its broadcasting satellite service plan to include
the technical parameters of DBS applicants’ operations, our satellites, along with those of other
DBS operators, must not cause harmful electrical interference with other assignments that are in
conformance with the plan. Further, DBS satellites are not presently entitled to any protection
from other satellites that are in conformance with the plan.
Export Control Regulation
The delivery of satellites and related technical information for the purpose of launch by foreign
launch services providers is subject to strict export control and prior approval requirements.
Broadband Service Regulation
The American Recovery and Reinvestment Act of 2009 (“ARRA”) has allocated $7.2 billion to expand
access to broadband services. Of this amount, $2.5 billion is administered by the Rural Utilities
Service (“RUS”) for deployment of broadband projects in rural, unserved and underserved communities
across the United States and $4.7 billion has been allocated to the National Telecommunications and
Information Administration (“NTIA”) of the United States Department of Commerce to fund broadband
initiatives throughout the U.S, including unserved and underserved areas. Our application for
broadband stimulus funds in the first round was not granted. The agencies have announced a second
round of funding that will total several billion dollars. This will include a set-aside of a
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minimum of $100 million for satellite projects. We are currently evaluating whether to submit an
application for funding and we cannot be sure if any such application will be granted, or that it
will be granted on acceptable terms. If our application is granted and we accept the terms of such
grant, we may become subject to certain regulations promulgated by the agencies.
PATENTS AND TRADEMARKS
Many entities, including some of our competitors, have or may in the future obtain patents and
other intellectual property rights that cover or affect products or services related to those that
we offer. In general, if a court determines that one or more of our products infringes on
intellectual property held by others, we may be required to cease developing or marketing those
products, to obtain licenses from the holders of the intellectual property at a material cost, or
to redesign those products in such a way as to avoid infringing the patent claims. If those
intellectual property rights are held by a competitor, we may be unable to obtain the intellectual
property at any price, which could adversely affect our competitive position.
We may not be aware of all intellectual property rights that our products may potentially infringe.
In addition, patent applications in the United States are confidential until the Patent and
Trademark Office either publishes the application or issues a patent (whichever arises first) and,
accordingly, our products may infringe claims contained in pending patent applications of which we
are not aware. Further, the process of determining definitively whether a claim of infringement is
valid often involves expensive and protracted litigation, even if we are ultimately successful on
the merits.
We cannot estimate the extent to which we may be required in the future to obtain intellectual
property licenses or the availability and cost of any such licenses. Those costs, and their impact
on our results of operations, could be material. Damages in patent infringement cases may also be
trebled in certain circumstances. To the extent that we are required to pay unanticipated
royalties to third parties, these increased costs of doing business could negatively affect our
liquidity and operating results. We are currently defending multiple patent infringement actions.
We cannot be certain the courts will conclude these companies do not own the rights they claim,
that our products do not infringe on these rights, that we would be able to obtain licenses from
these persons on commercially reasonable terms or, if we were unable to obtain such licenses, that
we would be able to redesign our products to avoid infringement. See “Item 3. Legal Proceedings.”
ENVIRONMENTAL REGULATIONS
We are subject to the requirements of federal, state, local and foreign environmental and
occupational safety and health laws and regulations. These include laws regulating air emissions,
water discharge and waste management. We attempt to maintain compliance with all such
requirements. We do not expect capital or other expenditures for environmental compliance to be
material in 2010 or 2011. Environmental requirements are complex, change frequently and have
become more stringent over time. Accordingly, we cannot provide assurance that these requirements
will not change or become more stringent in the future in a manner that could have a material
adverse effect on our business.
SEGMENT REPORTING DATA AND GEOGRAPHIC AREA DATA
For operating segment and principal geographic area data for 2009, 2008 and 2007 see Note 15 in the
Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
EMPLOYEES
We had approximately 24,500 employees at December 31, 2009, most of whom are located in the
United States. We generally consider relations with our employees to be good.
Approximately 170 employees in four of our field offices have voted to have a union represent them
in contract negotiations. While we are not currently a party to any collective bargaining
agreements, we are currently negotiating collective bargaining agreements at these offices.
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act and accordingly file our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements and other information with the SEC. The public may read and copy any materials filed
with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.
Please call the SEC at (800) SEC-0330 for further information on the operation of the Public
Reference Room. As an electronic filer, our public filings are also maintained on the SEC’s
Internet site that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that website is
http://www.sec.gov.
WEBSITE ACCESS
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act also may be accessed free of charge through our website as soon as reasonably practicable after
we have electronically filed such material with, or furnished it to, the SEC. The address of that
website is http://www.dishnetwork.com.
We have adopted a written code of ethics that applies to all of our directors, officers and
employees, including our principal executive officer and senior financial officers, in accordance
with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder.
Our code of ethics is available on our corporate website at http://www.dishnetwork.com.
In the event that we make changes in, or provide waivers of, the provisions of this code of ethics
that the SEC requires us to disclose, we intend to disclose these events on our website.
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EXECUTIVE OFFICERS OF THE REGISTRANT
(furnished in accordance with Item 401 (b) of Regulation S-K, pursuant to General Instruction G(3) of Form 10-K) The following table sets forth the name, age and position with DISH Network of each of our
executive officers, the period during which each executive officer has served as such, and each
executive officer’s business experience during the past five years:
Charles W. Ergen. Mr. Ergen has been Chairman of the Board of Directors and Chief Executive
Officer of DISH Network since its formation and, during the past five years, has held various
executive officer and director positions with DISH Network’s subsidiaries. Mr. Ergen also serves
as Chairman of EchoStar. Mr. Ergen was appointed President of DISH Network in February 2008. Mr.
Ergen, along with his spouse, Cantey Ergen, and James DeFranco, was a co-founder of DISH Network in
1980.
W. Erik Carlson. Mr. Carlson has served as our Executive Vice President, Operations since February
2008 and is responsible for overseeing our residential and commercial installations, customer
billing and equipment retrieval and refurbishment operations. Mr. Carlson previously was Senior
Vice President of Retail Services, a position he held since mid-2006. He joined DISH Network in
1995 and has held progressively larger operating roles over the years.
Thomas
A. Cullen. Mr. Cullen has served as our Executive Vice President, Programming,
Sales and Marketing since April 2009. Mr. Cullen served as our Executive Vice President, Corporate
Development from December 2006 until April 2009. Before joining DISH Network, Mr. Cullen served as
President of TensorComm, a venture-backed wireless technology company. From August 2003 to April
2005, Mr. Cullen was with Charter Communications Inc. (“Charter”), serving as Senior Vice
President, Advanced Services and Business Development from August 2003 until he was promoted to
Executive Vice President in August 2004.
James DeFranco. Mr. DeFranco is one of our Executive Vice Presidents and has been one of
our vice presidents and a member of the Board of Directors since our formation. During the past
five years he has held various executive officer and director positions with our subsidiaries. Mr.
DeFranco co-founded DISH Network with Charles W. Ergen and Mr. Ergen’s spouse, Cantey Ergen, in
1980.
R. Stanton Dodge. Mr. Dodge has served as our Executive Vice President, General Counsel and
Secretary of DISH Network since June 2007 and is responsible for all legal and government affairs
for DISH Network and its subsidiaries. Mr. Dodge also serves as EchoStar’s Executive Vice
President, General Counsel and Secretary and is responsible for all legal and government affairs of
EchoStar and its subsidiaries pursuant to a management services agreement between DISH Network and
EchoStar that was entered into in connection with the Spin-off of EchoStar from DISH Network.
Since joining DISH Network in November 1996, he has held various positions of increasing
responsibility in DISH Network’s legal department, and assumed responsibility for Human Resources
in January 2010.
Bernard L. Han. Mr. Han has served as our Executive Vice President and Chief Operating
Officer since April 2009 and is in charge of operations, information technology, accounting and
finance functions of DISH Network.
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Mr. Han served as Executive Vice President and Chief Financial Officer of DISH Network from September
2006 until April 2009. Mr. Han also serves as EchoStar’s Executive Vice President and Chief
Financial Officer pursuant to a management services agreement between DISH Network and EchoStar
that was entered into in connection with the Spin-off of EchoStar from DISH Network. From October
2002 to May 2005, Mr. Han served as Executive Vice President and Chief Financial Officer of
Northwest Airlines, Inc.
Michael Kelly. Mr. Kelly is currently the Executive Vice President, Commercial and Business
Development. Mr. Kelly served as the Executive Vice President of DISH Network Service L.L.C. and
Customer Service from February 2004 until December 2005.
Roger J. Lynch. Mr. Lynch has served as our Executive Vice President, Advanced Technologies since
November 2009. Mr. Lynch also serves as Executive Vice President, Advanced Technologies at
EchoStar. Prior to joining DISH Network, Mr. Lynch served as Chairman and CEO of Video Networks
International, Ltd., an IPTV technology company in the United Kingdom from 2002 until 2009.
Robert E. Olson. Mr. Olson has served as our Executive Vice President and Chief Financial Officer
since April 2009. Mr. Olson was the Chief Financial Officer of Trane Commercial Systems, the
largest operating division of American Standard, from April 2006 to August 2008. From April 2003
to January 2006 Mr. Olson served as the Chief Financial Officer of AT&T’s Consumer Services
division and later its Business Services division.
Stephen W. Wood. Mr. Wood has served as our Executive Vice President, Human Resources
since May 2006 and is responsible for all human resource functions of DISH Network and its
subsidiaries. Prior to joining DISH Network, Mr. Wood served as an Executive Vice President for
Gate Gourmet International from 2004 to 2006.
There are no arrangements or understandings between any executive officer and any other person
pursuant to which any executive officer was selected as such. Pursuant to the Bylaws of DISH
Network, executive officers serve at the discretion of the Board of Directors.
Item 1A. RISK FACTORS
The risks and uncertainties described below are not the only ones facing us. Additional risks and
uncertainties that we are unaware of or that we currently believe to be immaterial also may become
important factors that affect us.
If any of the following events occur, our business, financial condition or results of operations
could be materially and adversely affected.
Weak economic conditions, including higher unemployment and reduced consumer spending, may
adversely affect our ability to grow or maintain our business.
Our ability to grow or maintain our business may be adversely affected by weak economic conditions,
including the effect of wavering consumer confidence, high unemployment and other factors that may
adversely affect the pay-TV industry. In particular, the weak economic conditions could result in
the following:
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If we do not improve our operational performance and maintain customer satisfaction, our gross
subscriber additions may decrease and our subscriber churn may increase.
If we are unable to improve our operational performance and maintain customer satisfaction or if we
are unable to combat signal theft or other forms of fraud, we may experience a decrease in gross
subscriber additions and an increase in churn, which could have a material adverse effect on our
business, financial condition and results of operations. To address our operational
inefficiencies, we have streamlined our hardware offerings and continue to make significant
investments in staffing, training, information systems, and other initiatives, primarily in our
call center and in-home service operations. These investments are intended to help combat
inefficiencies introduced by the increasing complexity of our business, improve customer
satisfaction, reduce churn, increase productivity, and allow us to scale better over the long run.
We cannot, however, be certain that our increased spending will ultimately be successful in
addressing our operational inefficiencies. In the meantime, we may continue to incur higher costs
as a result of both our operational inefficiencies and increased spending. The adoption of these
measures has contributed to higher expenses and lower margins. While we believe that the increased
costs will be outweighed by longer-term benefits, there can be no assurance when or if we will
realize these benefits at all.
If DISH Network gross subscriber additions decrease, or if subscriber churn, subscriber acquisition
or retention costs increase, our financial performance will be further adversely affected.
We have not always met our own standards for performing high-quality installations, effectively
resolving subscriber issues when they arise, answering subscriber calls in an acceptable timeframe,
effectively communicating with our subscriber base, reducing calls driven by the complexity of our
business, improving the reliability of certain systems and subscriber equipment, and aligning the
interests of certain third party retailers and installers to provide high-quality service.
Most of these factors have affected both gross subscriber additions as well as existing subscriber
churn. Our future gross subscriber additions and subscriber churn may continue to be negatively
impacted by these factors, which could in turn adversely affect our revenue growth and results of
operations.
We may incur increased costs to acquire new and retain existing subscribers. Our subscriber
acquisition costs could increase as a result of increased spending for advertising and the
installation of more HD and DVR receivers, which are generally more expensive than other receivers.
Meanwhile, retention costs may be driven higher by a faster rate of upgrading existing
subscribers’ equipment to HD and DVR receivers. Additionally, certain of our promotions allow
consumers with relatively lower credit scores to become subscribers and these subscribers typically
churn at a higher rate.
Our subscriber acquisition costs and our subscriber retention costs can vary significantly from
period to period and can cause material variability to our net income (loss) and free cash flow.
Any material increase in subscriber acquisition or retention costs from current levels could have a
material adverse effect on our business, financial position and results of operations.
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If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt,
we are not successful in developing and deploying potential new alternative technology and we are
unable to reach a license agreement with Tivo on reasonable terms, we would be subject to
substantial liability and would be prohibited from offering DVR functionality that would result
in a significant loss of subscribers and place us at a significant disadvantage to our
competitors.
In June 2009, the United States District Court granted Tivo’s motion for contempt finding that our
next-generation DVRs continue to infringe Tivo’s intellectual property and awarded Tivo an
additional $103 million dollars in supplemental damages and interest for the period from September
2006 through April 2008. In September 2009, the District Court partially granted Tivo’s motion for
contempt sanctions. In partially granting Tivo’s motion for contempt sanctions, the District Court
awarded $2.25 per DVR subscriber per month for the period from April 2008 to July 2009 (as compared
to the award for supplemental damages for the prior period from September 2006 to April 2008, which
was based on an assumed $1.25 per DVR subscriber per month). By the District Court’s estimation,
the total award for the period from April 2008 to July 2009 is approximately $200 million (the
enforcement of the award has been stayed by the District Court pending DISH Network’s appeal of the
underlying June 2009 contempt order). As previously disclosed, we increased our reserve for the
Tivo litigation to reflect both the supplemental damages award for the period September 2006 to
April 2008 and for the estimated cost of alleged software infringement for the period from April
2008 through June 2009.
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we
are not successful in developing and deploying potential new alternative technology and we are
unable to reach a license agreement with Tivo on reasonable terms, we would be required to
eliminate DVR functionality in all but approximately 192,000 digital set-top boxes in the field and
cease distribution of digital set-top boxes with DVR functionality. In that event we would be at a
significant disadvantage to our competitors who could continue offering DVR functionality, which
would likely result in a significant decrease in new subscriber additions as well as a substantial
loss of current subscribers. Furthermore, the inability to offer DVR functionality could cause
certain of our distribution channels to terminate or significantly decrease their marketing of DISH
Network services. The adverse effect on our financial position and results of operations if the
District Court’s contempt order is upheld is likely to be significant. Additionally, the awards
described above do not include damages, contempt sanctions or interest for the period after June
2009. In the event that we are unsuccessful in our appeal, we could also have to pay substantial
additional damages, contempt sanctions and interest. Depending on the amount of any additional
damage or sanction award or any monetary settlement, we may be required to raise additional capital
at a time and in circumstances in which we would normally not raise capital. Therefore, any
capital we raise may be on terms that are unfavorable to us, which might adversely affect our
financial position and results of operations and might also impair our ability to raise capital on
acceptable terms in the future to fund our own operations and initiatives. We believe the cost of
such capital and its terms and conditions may be substantially less attractive than our previous
financings.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but
unsuccessful in defending against any subsequent claim in a new action that our original
alternative technology or any potential new alternative technology infringes Tivo’s patent, we
could be prohibited from distributing DVRs or could be required to modify or eliminate our
then-current DVR functionality in some or all set-top boxes in the field. In that event we would
be at a significant disadvantage to our competitors who could continue offering DVR functionality
and the adverse effect on our business could be material. We could also have to pay substantial
additional damages.
Because both we and EchoStar are defendants in the Tivo lawsuit, we and EchoStar are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District
Court. We have determined that we are obligated under the agreements entered into in connection
with the Spin-off to indemnify EchoStar for substantially all liability arising from this lawsuit.
EchoStar has agreed with us to contribute an amount equal to its $5 million intellectual property
liability limit under the Receiver Agreement. We and EchoStar have further agreed that EchoStar’s
$5 million contribution would not exhaust EchoStar’s liability to us for other intellectual
property claims that may arise under the Receiver Agreement. We and EchoStar also agreed that we
would each be entitled to joint ownership of, and a cross-license to use, any intellectual property
developed in connection with any potential new alternative technology.
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We face intense and increasing competition from satellite television providers, cable television
providers and telecommunications companies.
Our business is focused on providing pay-TV services and we have traditionally competed against
satellite and cable television providers, some of whom have greater financial, marketing and other
resources than we do. Many of these competitors offer video services bundled with broadband,
telephony services, HD offerings, interactive services and video on demand services that consumers
may find attractive. Moreover, mergers and acquisitions, joint ventures and alliances among cable
television providers, telecommunications companies and others may result in, among other things,
greater financial leverage and increase the availability of offerings from providers capable of
bundling television, broadband and telephone services in competition with our services.
In addition, DirecTV’s satellite receivers and services are offered through a significantly greater
number of consumer electronics stores than ours. As a result of this and other factors, our
services are less known to consumers than those of DirecTV. Due to this relative lack of consumer
awareness and other factors, we are at a competitive marketing disadvantage compared to DirecTV.
DirecTV also offers exclusive programming that may be attractive to prospective subscribers, and
may have access to discounts on programming not available to us.
Competition has intensified in recent quarters with the rapid growth of fiber-based pay-TV services
offered by telecommunications companies such as Verizon and AT&T. These telecommunications
companies are upgrading their older copper wire telephone lines with high-bandwidth fiber optic
lines in larger markets. These fiber optic lines provide significantly greater capacity, enabling
the telecommunications companies to offer substantial HD programming content as well as bundled
services.
In addition, the recent transition from analog to digital delivery has allowed broadcasters to
provide improved signal quality, offer additional channels including content broadcast in HD, and
explore new business opportunities such as mobile video.
This increasingly competitive environment may require us to increase subscriber acquisition and
retention spending or accept lower subscriber acquisitions and higher subscriber churn.
Emerging digital media competition including companies that provide/facilitate the delivery of
video content via the Internet could materially adversely affect us.
Our business is focused on pay-TV services, and we face emerging competition from providers of
digital media including those companies that offer online services distributing movies, television
shows and other video programming. Moreover, new technologies have been, and will likely continue
to be, developed that further increase the number of competitors we face for our video services.
For example, wireless and other emerging mobile technologies that provide for the distribution and
viewing of video programming may offer services and technologies that compete with our pay-TV
services. Some of these companies have greater financial, marketing and other resources than we
do. In particular, programming offered over the Internet has become more prevalent as the speed and
quality of broadband networks have improved. Significant changes in consumer behavior with regard
to the means by which they obtain video entertainment and information in response to this emerging
digital media competition could materially adversely affect our business, results of operations and
financial condition or otherwise disrupt our business.
We depend on others to provide the programming that we offer to our subscribers and, if we lose
access to this programming, our subscriber additions may decline or we may suffer subscriber losses
and subscriber churn may increase.
We depend on third parties to provide us with programming services. Our programming agreements
have remaining terms ranging from less than one to up to several years and contain various renewal
and cancellation provisions. We may not be able to renew these agreements on favorable terms or at
all, and these agreements may be canceled prior to expiration of their original term. If we are
unable to renew any of these agreements or the other parties cancel the agreements, there can be no
assurance that we would be able to obtain substitute programming, or that such substitute
programming would be comparable in quality or cost to our existing programming. In addition, the
loss of programming could increase our subscriber churn. We also expect programming costs to
continue to increase.
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We may be unable to pass programming costs on to our customers, which could have a material adverse
effect on our business, financial condition and results of operations.
We may be required to make substantial additional investments to maintain competitive HD
programming offerings.
We believe that the availability and extent of HD programming has become and will continue to be a
significant factor in consumer’s choice among pay-TV providers. Other pay-TV providers may have
more successfully marketed and promoted their HD programming packages and may also be better
equipped and have greater resources to increase their HD offerings to respond to increasing
consumer demand for this content. We may be required to make substantial additional investments in
infrastructure to respond to competitive pressure to deliver additional HD programming, and there
can be no assurance that we will be able to compete effectively with HD programming offerings from
other pay-TV providers. In particular, in recent quarters, our capital expenditures have increased
because we have made significant efforts to expand our HD capability and provide more of our
subscribers with HD set top boxes.
Technology in our industry changes rapidly and could cause our services and products to become
obsolete.
Our operating results are dependent to a significant extent upon our ability to continue to
introduce new products and services on a timely basis and to reduce costs of our existing products
and services. We may not be able to successfully identify new product or service opportunities or
develop and market these opportunities in a timely or cost-effective manner. The success of new
product development depends on many factors, including proper identification of customer need,
cost, timely completion and introduction, differentiation from offerings of competitors and market
acceptance. New technologies could also create new competitors for us. For instance, we may face
threats from companies who use the Internet to deliver digital video services as the speed and
quality of broadband and wireless services improve.
Technology in the pay-TV industry changes rapidly as new technologies are developed, which could
cause our services and products to become obsolete. We and our suppliers may not be able to keep
pace with technological developments. If the new technologies on which we intend to focus our
research and development investments fail to achieve acceptance in the marketplace, our competitive
position could be negatively impacted causing a reduction in our revenues and earnings. We may
also be at a competitive disadvantage in developing and introducing complex new products and
technologies because of the substantial costs we may incur in making these products or technologies
available across our installed base of over 14 million subscribers. For example, our competitors
could be the first to obtain proprietary technologies that are perceived by the market as being
superior. Further, after we have incurred substantial costs, one or more of the technologies under
our development, or under development by one or more of our strategic partners, could become
obsolete prior to its introduction. In addition, delays in the delivery of components or other
unforeseen problems in our DBS system may occur that could materially and adversely affect our
ability to generate revenue, offer new services and remain competitive.
Technological innovation is important to our success and depends, to a significant degree, on the
work of technically skilled employees. We rely on EchoStar to design and develop set-top boxes
with advanced features and functionality. If EchoStar is unable to attract and retain
appropriately technically skilled employees, our competitive position could be materially and
adversely affected.
We may need additional capital, which may not be available on acceptable terms or at all, to
continue investing in our business and to finance acquisitions and other strategic transactions.
The weak financial markets could make it more difficult for non-investment grade borrowers of high
yield indebtedness to access capital markets at acceptable terms or at all. We may need to raise
additional capital in the future to among other things, continue investing in our business,
construct and launch new satellites, and to pursue acquisitions and other strategic transactions.
Furthermore, weak equity markets could make it difficult for us to raise equity financing without
incurring substantial dilution to our existing shareholders. In addition, weak economic conditions
may limit our ability to generate sufficient internal cash to fund these investments, capital
expenditures, acquisitions and other strategic
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transactions. As a result, these conditions make it difficult for us to accurately forecast and
plan future business activities because we may not have access to funding sources necessary for us
to pursue organic and strategic business development opportunities.
A portion of our investment portfolio is invested in securities that have experienced limited or no
liquidity and may not be immediately accessible to support our financing needs.
A portion of our investment portfolio is invested in auction rate securities, mortgage backed
securities, and strategic investments and as a result a portion of our portfolio has restricted
liquidity. Liquidity in the markets for these investments has been adversely impacted and these
market conditions have adversely affected our liquidity. If the credit ratings of these securities
deteriorate or the lack of liquidity in the marketplace becomes prolonged, we may be required to
record impairment charges. Moreover, the significant volatility of domestic and global financial
markets has greatly affected the volatility and value of our marketable investment securities. To
the extent we require access to funds, we may need to sell these securities under unfavorable
market conditions, record further impairment charges and fall short of our financing needs.
AT&T’s termination of its distribution agreement with us may increase churn.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions in prior years, accounting for approximately 17% of our gross subscriber
additions for the year ended December 31, 2008. This distribution relationship ended January 31,
2009. Consequently, beginning with the second quarter 2009, AT&T no longer contributed to our
gross subscriber additions. In addition, nearly one million of our current subscribers were
acquired through our distribution relationship with AT&T and subscribers acquired through this
channel have historically churned at a higher rate than our overall subscriber base. Although AT&T
is not permitted to target these subscribers for transition to another pay-TV service and we and
AT&T are required to maintain bundled billing and cooperative customer service for these
subscribers, these subscribers may continue to churn at higher than historical rates following
termination of the AT&T distribution relationship.
As technology changes, and to remain competitive, we may have to upgrade or replace subscriber
equipment and make substantial investments in our infrastructure.
Our competitive position depends in part on our ability to offer new subscribers and upgrade
existing subscribers with more advanced equipment, such as receivers with DVR and HD technology and
by otherwise making additional infrastructure investments, such as those related to our information
technology and call centers. Furthermore, the increase in demand for HD programming requires
investments in additional satellite capacity. We may not be able to pass on to our subscribers the
entire cost of these upgrades and infrastructure investments.
We rely on EchoStar to design and develop all of our new set-top boxes and certain related
components, and to provide transponder capacity, digital broadcast operations and other services
for us. Our business would be adversely affected if EchoStar ceases to provide these services to
us and we are unable to obtain suitable replacement services from third parties.
EchoStar is our sole supplier of digital set-top boxes and digital broadcast operations. In
addition, EchoStar is a key supplier of other satellite services to us. Because our digital
set-top box purchases are made and digital broadcast operations are received pursuant to contracts
that generally expire on January 1, 2011, EchoStar will have no obligation to supply digital
set-top boxes or digital broadcast operations to us after that date, however, we have the right to
renew this agreement for an additional year. Equipment, transponder leasing and digital broadcast
operation costs may increase beyond our current expectations. We may be unable to renew agreements
for digital set-top boxes or digital broadcast operations with EchoStar on acceptable terms or at
all. EchoStar’s inability to develop and produce, or our inability to obtain, equipment with the
latest technology, or our inability to obtain transponder capacity and digital broadcast operations
and other services from third parties, could affect our subscriber acquisition and churn and cause
related revenue to decline.
Furthermore, any transition to a new supplier of set-top boxes could result in increased costs,
resources and development and customer qualification time which could affect our subscriber
acquisition and churn and cause
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revenue to decline. Any reduction in our supply of set-top boxes could significantly delay our
ability to ship set-top boxes to our subscribers and potentially damage our relationships with our
subscribers.
We rely on one or a limited number of vendors, and the inability of these key vendors to meet our
needs could have a material adverse effect on our business.
We have contracted with a limited number of vendors to provide certain key products or services to
us such as information technology support, billing systems, and security access devices. Our
dependence on these vendors makes our operations vulnerable to such third parties’ failure to
perform adequately. In addition, we have historically relied on a single source for certain items.
If these vendors are unable to meet our needs because they are no longer in business or because
they discontinue a certain product or service we need, our business, financial position and results
of operations may be adversely affected. Our inability to develop alternative sources quickly and
on a cost-effective basis could materially impair our ability to timely deliver our products to our
subscribers or operate our business. Furthermore, our vendors may request changes in pricing,
payment terms or other contractual obligations between the parties which could cause us to make
substantial additional investments.
Our programming signals are subject to theft, and we are vulnerable to other forms of fraud that
could require us to make significant expenditures to remedy.
Increases in theft of our signal, or our competitors’ signals, could in addition to reducing new
subscriber activations, also cause subscriber churn to increase. We use security access devices in
our receiver systems to control access to authorized programming content.
Our signal encryption has been compromised in the past and may be compromised in the future even
though we continue to respond with significant investment in security measures, such as Security
Access Device replacement programs and updates in security software, that are intended to make
signal theft more difficult. It has been our prior experience that security measures may only be
effective for short periods of time or not at all and that we remain susceptible to additional
signal theft. During the second quarter of 2009, we completed the replacement of our Security
Access Devices that re-secured our system. However, we expect additional future replacements of
these devices will be necessary to keep our system secure. We cannot ensure that we will be
successful in reducing or controlling theft of our programming content and we may incur additional
costs in the future if our system’s security is compromised.
We are also vulnerable to other forms of fraud. While we are addressing certain fraud through a
number of actions, including terminating retailers that we believe were in violation of DISH
Network’s business rules, there can be no assurance that we will not continue to experience fraud
which could impact our subscriber growth and churn. Weak economic conditions may create greater
incentive for signal theft and other forms of fraud, which could lead to higher subscriber churn
and reduced revenue.
We depend on third parties to solicit orders for DISH Network services that represent a significant
percentage of our total gross subscriber acquisitions.
Most of our retailers are not exclusive to us and may favor our competitors’ products and services
over ours based on the relative financial arrangements associated with selling our products and
those of our competitors. Furthermore, some of these retailers are significantly smaller than we
are and may be more susceptible to weak economic conditions that will make it more difficult for
them to operate profitably. Because our retailers receive most of their incentive value at
activation and not over an extended period of time, our interests in obtaining and retaining
subscribers through good customer service may not always be aligned with our retailers. It may be
difficult to better align our interests with our resellers’ because of their capital and liquidity
constraints. Loss of these relationships could have an adverse effect on our subscriber base and
certain of our other key operating metrics because we may not be able to develop comparable
alternative distribution channels.
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Our competitors may be able to leverage their relationships with programmers so that they are able
to reduce their programming costs and offer exclusive content that will place them at a competitive
advantage to us.
The cost of programming represents a large percentage of our overall costs. Certain of our
competitors own directly or are affiliated with companies that own programming content that may
enable them to obtain lower programming costs or offer exclusive programming that may be attractive
to prospective subscribers. Unlike our larger cable and satellite competitors, we have not made
significant investments in programming providers. For example, Comcast and General Electric have
agreed to join their programming properties, including NBC, Bravo and many others that are
available in the majority of our programming packages, in a venture to be controlled by Comcast.
This transaction may affect us adversely by, among other things, making it more difficult for us to
obtain access to their programming networks on nondiscriminatory and fair terms, or at all. We
cannot predict when or if the transaction will receive the requisite regulatory approvals or if it
will be appropriately conditioned to mitigate potential public interest harms.
We depend on the Cable Act for access to programming from cable-affiliate programmers at
cost-effective rates.
We purchase a large percentage of our programming from cable-affiliated programmers. The Cable
Act’s provisions prohibiting exclusive contracting practices with cable affiliated programmers were
extended for another five-year period in September 2007. Cable companies have appealed the FCC’s
decision and oral argument was held before the D.C. Circuit in September 2009. We cannot predict
the outcome or timing of that litigation. Any change in the Cable Act and the FCC’s rules that
permit the cable industry or cable-affiliated programmers to discriminate against competing
businesses, such as ours, in the sale of programming could adversely affect our ability to acquire
cable-affiliated programming at all or to acquire programming on a cost-effective basis. As a
result, we may be limited in our ability to obtain access on nondiscriminatory terms to programming
from programmers that are affiliated with the cable system operators. In the case of certain types
of programming networks affiliated with Comcast and Liberty, access to the programming is subject
to compulsory arbitration if we and the programmer cannot reach agreement on terms, subject to FCC
review. We cannot be sure that this procedure will result in favorable terms for us or that the
FCC conditions that establish this procedure will not sunset.
In addition, affiliates of certain cable providers have denied us access to sports programming they
feed to their cable systems terrestrially, rather than by satellite. The FCC recently held that
new denials of such service are unfair if they have the purpose or effect of significantly
hindering us from providing programming to consumers. But we cannot be sure that we can prevail in
a complaint related to such programming, and gain access to it. Our continuing failure to access
such programming could materially and adversely affect our ability to compete in regions serviced
by these cable providers.
We face increasing competition from other distributors of foreign language programming that may
limit our ability to maintain our foreign language programming subscriber base.
We face increasing competition from other distributors of foreign language programming, including
programming distributed over the Internet. There can be no assurance that we will maintain
subscribers in our foreign-language programming services. In addition, the increasing availability
of foreign language programming from our competitors, which in certain cases has resulted from our
inability to renew programming agreements on an exclusive basis or at all, could contribute to an
increase in our subscriber churn. Our agreements with distributors of foreign language programming
have varying expiration dates, and some agreements are on a month-to-month basis. There can be no
assurance that we will be able to grow or maintain our foreign language programming subscriber
base.
Our local programming strategy faces uncertainty because we may not be able to obtain necessary
retransmission consents from local network stations.
SHVERA generally gives satellite companies a statutory copyright license to retransmit local
broadcast channels by satellite back into the market from which they originated, subject to
obtaining the retransmission consent of the local network station. If we fail to reach
retransmission consent agreements with broadcasters, we cannot carry their
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signals. This could have an adverse effect on our strategy to compete with cable and other
satellite companies which provide local signals. While we have been able to reach retransmission
consent agreements with most local network stations in markets where we currently offer local
channels by satellite, roll-out of local channels in additional cities and in high definition will
require that we obtain additional retransmission agreements. We cannot be sure that we will secure
these agreements or that we will secure new agreements on acceptable terms upon the expiration of
our current retransmission consent agreements, some of which are short-term.
We are subject to significant regulatory oversight and changes in applicable regulatory
requirements could adversely affect our business.
DBS operators are subject to significant government regulation, primarily by the FCC and, to a
certain extent, by Congress, other federal agencies and foreign, state and local authorities.
Depending upon the circumstances, noncompliance with legislation or regulations promulgated by
these entities could result in the suspension or revocation of our licenses or registrations, the
termination or loss of contracts or the imposition of contractual damages, civil fines or criminal
penalties any of which could have a material adverse effect on our business, financial condition
and results of operations. Furthermore, the adoption or modification of laws or regulations
relating to the Internet or other areas of our business could limit or otherwise adversely affect
the manner in which we currently conduct our business. If we are required to comply with new
regulations or legislation or new interpretations of existing regulations or legislation that
govern Internet network neutrality, this compliance could cause us to incur additional expenses or
alter our business model. The manner in which legislation governing Internet network neutrality may be
interpreted and enforced cannot be precisely determined which in turn could have an adverse effect
on our business, financial condition and results of operations. You should review the regulatory
disclosures under the caption “Item 1. Business — Government Regulation — FCC Regulation under the
Communication Act” of this Annual Report on Form 10-K.
We have made a substantial investment in certain 700 MHz wireless licenses and will be required to
make significant additional investments or partner with others to commercialize these licenses and
recoup our investment.
In 2008, we paid $712 million to acquire certain 700 MHz wireless licenses, which were granted to
us by the FCC in February 2009. To commercialize these licenses and satisfy FCC build-out
requirements, we will be required to make significant additional investments or partner with
others. Depending on the nature and scope of such commercialization and build-out, any such
investment or partnership could vary significantly. Part or all of our licenses may be terminated
for failure to satisfy FCC build-out requirements. We are currently performing a market test to
evaluate different technologies and consumer acceptance.
There can be no assurance that we will be able to develop and implement a business model that will
realize a return on these investments and profitably deploy the spectrum represented by the 700 MHz
licenses.
Furthermore, the fair values of wireless licenses may vary significantly in the future. In
particular, valuation swings could occur if:
In addition, the fair value of wireless licenses could decline as a result of the FCC’s pursuit of
policies, including auctions, designed to increase the number of wireless licenses available in
each of our markets. If the fair value of our 700 MHz licenses were to decline significantly, the
value of our 700 MHz licenses could be subject to non-cash impairment charges. We assess potential
impairments to our indefinite-lived intangible assets, including our 700 MHz licenses annually to
determine whether there is evidence that events or changes in circumstances indicate that an
impairment condition may exist.
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We have substantial debt outstanding and may incur additional debt.
As of December 31, 2009, our total debt, including the debt of our subsidiaries, was $6.497
billion. Our debt levels could have significant consequences, including:
In addition, we may incur substantial additional debt in the future. The terms of the indentures
relating to our senior notes permit us to incur additional debt. If new debt is added to our
current debt levels, the risks we now face could intensify.
We have limited owned and leased satellite capacity and satellite failures could adversely affect
our business.
Operation of our programming service requires that we have adequate satellite transmission capacity
for the programming we offer. Moreover, current competitive conditions require that we continue to
expand our offering of new programming, particularly by expanding local HD coverage and offering
more HD national channels. While we generally have had in-orbit satellite capacity sufficient to
transmit our existing channels and some backup capacity to recover the transmission of certain
critical programming, our backup capacity is limited.
In the event of a failure or loss of any of our satellites, we may need to acquire or lease
additional satellite capacity or relocate one of our other satellites and use it as a replacement
for the failed or lost satellite. Such a failure could result in a prolonged loss of critical
programming or a significant delay in our plans to expand programming as necessary to remain
competitive and thus may have a material adverse effect on our business, financial condition and
results of operations.
Our owned and leased satellites under construction are subject to risks related to construction and
launch that could limit our ability to utilize these satellites.
A key component of our business strategy is our ability to expand our offering of new programming
and services, including increased local and HD programming. In order to accomplish this goal, we
need to construct and launch satellites. Satellite construction and launch is subject to
significant risks, including construction and launch delays, launch failure and incorrect orbital
placement. Certain launch vehicles that may be used by us have either unproven track records or
have experienced launch failures in the recent past. The risks of launch delay and failure are
usually greater when the launch vehicle does not have a track record of previous successful
flights. Launch failures result in significant delays in the deployment of satellites because of
the need both to construct replacement satellites, which can take more than three years, and to
obtain other launch opportunities. Significant construction or launch delays could materially and
adversely affect our ability to generate revenues. If we were unable to obtain launch insurance,
or obtain launch insurance at rates we deem commercially reasonable, and a significant launch
failure were to occur, it could have a material adverse effect on our ability to generate revenues
and fund future satellite procurement and launch opportunities.
In addition, the occurrence of future launch failures may materially and adversely affect our
ability to insure the launch of our satellites at commercially reasonable premiums, if at all.
Please see further discussion under the caption “We currently have no commercial insurance coverage
on the satellites we own and could face significant impairment charges if one of our satellites
fails” below.
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Our owned and leased satellites in orbit are subject to significant operational and environmental
risks that could limit our ability to utilize these satellites.
Satellites are subject to significant operational risks while in orbit. These risks include
malfunctions, commonly referred to as anomalies, that have occurred in our satellites and the
satellites of other operators as a result of various factors, such as satellite manufacturers’
errors, problems with the power systems or control systems of the satellites and general failures
resulting from operating satellites in the harsh environment of space.
Although we work closely with the satellite manufacturers to determine and eliminate the cause of
anomalies in new satellites and provide for redundancies of many critical components in the
satellites, we may experience anomalies in the future, whether of the types described above or
arising from the failure of other systems or components.
Any single anomaly or series of anomalies could materially and adversely affect our operations and
revenues and our relationship with current customers, as well as our ability to attract new
customers for our multi-channel video services. In particular, future anomalies may result in the
loss of individual transponders on a satellite, a group of transponders on that satellite or the
entire satellite, depending on the nature of the anomaly. Anomalies may also reduce the expected
useful life of a satellite, thereby reducing the channels that could be offered using that
satellite, or create additional expenses due to the need to provide replacement or back-up
satellites. You should review the disclosures relating to satellite anomalies set forth under Note
7 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on
Form 10-K.
Meteoroid events pose a potential threat to all in-orbit satellites. The probability that
meteoroids will damage those satellites increases significantly when the Earth passes through the
particulate stream left behind by comets. Occasionally, increased solar activity also poses a
potential threat to all in-orbit satellites.
Some decommissioned spacecraft are in uncontrolled orbits which pass through the geostationary belt
at various points, and present hazards to operational spacecraft, including our satellites. We may
be required to perform maneuvers to avoid collisions and these maneuvers may prove unsuccessful or
could reduce the useful life of the satellite through the expenditure of fuel to perform these
maneuvers. The loss, damage or destruction of any of our satellites as a result of an
electrostatic storm, collision with space debris, malfunction or other event could have a material
adverse effect on our business, financial condition and results of operations.
Our owned and leased satellites have minimum design lives ranging from 12 to 15 years, but could
fail or suffer reduced capacity before then.
Our ability to earn revenue depends on the usefulness of our satellites, each of which has a
limited useful life. A number of factors affect the useful lives of the satellites, including,
among other things, the quality of their construction, the durability of their component parts, the
ability to continue to maintain proper orbit and control over the satellite’s functions, the
efficiency of the launch vehicle used, and the remaining on-board fuel following orbit insertion.
Generally, the minimum design life of each of our satellites ranges from 12 to 15 years. We can
provide no assurance, however, as to the actual useful lives of the satellites. Our operating
results could be adversely affected if the useful life of any of our satellites were significantly
shorter than 12 years from the launch date.
In the event of a failure or loss of any of our satellites, we may need to acquire or lease
additional satellite capacity or relocate one of our other satellites and use it as a replacement
for the failed or lost satellite, any of which could have a material adverse effect on our
business, financial condition and results of operations. A relocation would require FCC approval
and, among other things, a showing to the FCC that the replacement satellite would not cause
additional interference compared to the failed or lost satellite. We cannot be certain that we
could obtain such FCC approval. If we choose to use a satellite in this manner, this use could
adversely affect our ability to meet the operation deadlines associated with our authorizations.
Failure to meet those deadlines could result in the loss of such authorizations, which would have
an adverse effect on our ability to generate revenues.
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We currently have no commercial insurance coverage on the satellites we own and could face
significant impairment charges if one of our satellites fails.
Generally, we do not carry launch or in-orbit insurance on the satellites we use. We currently do
not carry in-orbit insurance on any of our satellites and do not use commercial insurance to
mitigate the potential financial impact of launch or in-orbit failures because we believe that the
cost of insurance premiums is uneconomical relative to the risk of such failures. If one or more
of our in-orbit satellites fail, we could be required to record significant impairment charges.
We may have potential conflicts of interest with EchoStar due to our common ownership and
management.
Questions relating to conflicts of interest may arise between EchoStar and us in a number of areas
relating to our past and ongoing relationships. Areas in which conflicts of interest between
EchoStar and us could arise include, but are not limited to, the following:
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We may not be able to resolve any potential conflicts, and, even if we do so, the resolution may be
less favorable to us than if we were dealing with an unaffiliated party.
We also do not have any agreements with EchoStar that would prevent either company from competing
with the other.
We rely on key personnel and the loss of their services may negatively affect our businesses.
We believe that our future success will depend to a significant extent upon the performance of
Charles W. Ergen, our Chairman, President and Chief Executive Officer and certain other executives.
The loss of Mr. Ergen or of certain other key executives could have a material adverse effect on
our business, financial condition and results of operations. Although all of our executives have
executed agreements limiting their ability to work for or consult with competitors if they leave
us, we do not have employment agreements with any of them. Pursuant to a management services
agreement with EchoStar entered into at the time of the Spin-off, we have agreed to make certain of
our key officers available to provide services to EchoStar. In addition, Roger J. Lynch also
serves as Executive Vice President, Advanced Technologies of EchoStar. To the extent Mr. Lynch and
such other officers are performing services for EchoStar, this may divert their time and attention
away from our business and may therefore adversely affect our business.
We are party to various lawsuits which, if adversely decided, could have a significant adverse
impact on our business, particularly lawsuits regarding intellectual property.
We are subject to various legal proceedings and claims which arise in the ordinary course of
business, including among other things, disputes with programmers regarding fees. Many entities,
including some of our competitors, have or may in the future obtain patents and other intellectual
property rights that cover or affect products or services related to those that we offer. In
general, if a court determines that one or more of our products infringes on intellectual property
held by others, we may be required to cease developing or marketing those products, to obtain
licenses from the holders of the intellectual property at a material cost, or to redesign those
products in such a way as to avoid infringing the patent claims. If those intellectual property
rights are held by a competitor, we may be unable to obtain the intellectual property at any price,
which could adversely affect our competitive position. Please see further discussion under Item 1.
Business — Patents and Trademarks of this Annual Report on Form 10-K.
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We may not be aware of all intellectual property rights that our services or the products used in
connection with our services may potentially infringe. In addition, patent applications in the
United States are confidential until the Patent and Trademark Office issues a patent. Therefore,
it is difficult to evaluate the extent to which our services or the products used in connection
with our services may infringe claims contained in pending patent applications. Further, it is
often not possible to determine definitively whether a claim of infringement is valid.
We may pursue acquisitions and other strategic transactions to complement or expand our business
that may not be successful and we may lose up to the entire value of our investment in these
acquisitions and transactions.
Our future success may depend on opportunities to buy other businesses or technologies that could
complement, enhance or expand our current business or products or that might otherwise offer us
growth opportunities. We may not be able to complete such transactions and such transactions, if
executed, pose significant risks and could have a negative effect on our operations. Any
transactions that we are able to identify and complete may involve a number of risks, including:
In addition, we may not be able to successfully or profitably integrate, operate, maintain and
manage our newly acquired operations or employees. We may not be able to maintain uniform
standards, controls, procedures and policies, and this may lead to operational inefficiencies.
New acquisitions, joint ventures and other transactions may require the commitment of significant
capital that would otherwise be directed to investments in our existing businesses or be
distributed to shareholders. Commitment of this capital may cause us to defer or suspend any share
repurchases that we otherwise may have made.
Our business depends on FCC licenses that can expire or be revoked or modified and applications for
FCC licenses that may not be granted.
If the FCC were to cancel, revoke, suspend, or fail to renew any of our licenses or authorizations,
or fail to grant our applications for FCC licenses, it could have a material adverse effect on our
financial condition, profitability and cash flows. Specifically, loss of a frequency authorization
would reduce the amount of spectrum available to us, potentially reducing the amount of programming
and other services available to our subscribers. The materiality of such a loss of authorizations
would vary based upon, among other things, the location of the frequency used or the availability
of replacement spectrum. In addition, Congress often considers and enacts legislation that could
affect us, and FCC proceedings to implement the Communications Act and enforce its regulations are
ongoing. We cannot predict the outcomes of these legislative or regulatory proceedings or their
effect on our business.
We are subject to digital HD “carry-one-carry-all” requirements that cause capacity constraints.
To provide any full-power local broadcast signal in any market, we are required to retransmit all
qualifying broadcast signals in that market (“carry-one-carry-all”). The digital transition
required all full-power broadcasters to cease transmission using analog signals and switch over to
digital signals by June 12, 2009. The switch to digital provides broadcasters significantly
greater capacity to provide high definition and multicast programming. In March 2008, the FCC
adopted new digital carriage rules that require DBS providers to phase in carry-one-carry-all
obligations with respect to the carriage of full-power broadcasters’ HD signals by February 2013 in
HD local markets. The carriage of additional HD signals on our DBS system could cause us to
experience significant capacity constraints and limit the number of local markets that we can
serve. We are also uncertain about how the pending SHVERA reauthorization legislation may affect
this requirement.
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In addition, the FCC is now considering whether to require DBS providers to carry broadcast
stations in both standard definition and high definition starting in 2010, in conjunction with the
phased-in HD “carry-one-carry-all” requirements adopted by the FCC. If we were required to carry
multiple versions of each broadcast station, we would have to dedicate more of our finite satellite
capacity to each broadcast station, which may force us to reduce the number of local markets served
and limit our ability to meet competitive needs. We cannot predict the outcome or timing of that
proceeding. We are also uncertain about how the pending SHVERA reauthorization legislation may
affect this requirement.
It may be difficult for a third party to acquire us, even if doing so may be beneficial to our
shareholders, because of our capital structure.
Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent
a change in control of our company that a shareholder may consider favorable. These provisions
include the following:
In addition, pursuant to our certificate of incorporation we have a significant amount of
authorized and unissued stock which would allow our Board of Directors to issue shares to persons
friendly to current management, thereby protecting the continuity of its management, or which
could be used to dilute the stock ownership of persons seeking to obtain control of us.
We are controlled by one principal stockholder who is also our Chairman, President and Chief
Executive Officer.
Charles W. Ergen, our Chairman, President and Chief Executive Officer, currently beneficially owns
approximately 51.2% of our total equity securities and possesses approximately 83.5% of the total
voting power. Mr. Ergen’s beneficial ownership of shares of Class A Common Stock excludes
22,023,267 shares of Class A Common Stock issuable upon conversion of shares of Class B Common
Stock currently held by certain trusts established by Mr. Ergen for the benefit of his family.
These trusts beneficially own approximately 10.0% of our total equity securities and possess
approximately 8.5% of the total voting power. Through his voting power, Mr. Ergen has the ability
to elect a majority of our directors and to control all other matters requiring the approval of our
stockholders. As a result, DISH Network is a “controlled company” as defined in the Nasdaq listing
rules and is, therefore, not subject to Nasdaq requirements that would otherwise require us to have
(i) a majority of independent directors; (ii) a nominating committee composed solely of
independent directors; (iii) compensation of our executive officers determined by a majority of the
independent directors or a compensation committee composed solely of independent directors; and
(iv) director nominees selected, or recommended for the Board’s selection, either by a majority of
the independent directors or a nominating committee composed solely of independent directors.
There can be no assurance that there will not be deficiencies leading to material weaknesses in our
internal control over financial reporting.
We periodically evaluate and test our internal control over financial reporting to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act. Our management has concluded that our
internal control over financial reporting was effective as of December 31, 2009. If in the future
we are unable to report that our internal control over financial reporting is effective (or if our
auditors do not agree with our assessment of the effectiveness of, or are unable to express an
opinion on, our internal control over financial reporting), investors, customers and business
partners could lose confidence in the accuracy of our financial reports, which could in turn have
a material adverse effect on our business, investor confidence in our financial results may
weaken, and our stock price may suffer.
We may face other risks described from time to time in periodic and current reports we file with
the SEC.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
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Item 2. PROPERTIES
The following table sets forth certain information concerning our principal properties.
In addition to the principal properties listed above, we operate several DISH Network service
centers strategically located in regions throughout the United States. Furthermore, we own or
lease capacity on 11 satellites which are a major component of our DISH Network DBS System. See
further discussion under “Item 1. Business — Satellites” in this Annual Report on Form 10-K.
Item 3. LEGAL PROCEEDINGS
In connection with the Spin-off, we entered into a separation agreement with EchoStar, which
provides among other things for the division of certain liabilities, including liabilities
resulting from litigation. Under the terms of the separation agreement, EchoStar has assumed
certain liabilities that relate to its business including certain designated liabilities for acts
or omissions prior to the Spin-off. Certain specific provisions govern intellectual property
related claims under which, generally, EchoStar will only be liable for its acts or omissions
following the Spin-off and we will indemnify EchoStar for any liabilities or damages resulting from
intellectual property claims relating to the period prior to the Spin-off as well as our acts or
omissions following the Spin-off.
Acacia
During 2004, Acacia Media Technologies (“Acacia”) filed a lawsuit against us and EchoStar in the
United States District Court for the Northern District of California. The suit also named DirecTV,
Comcast, Charter, Cox and a number of smaller cable companies as defendants. Acacia is an entity
that seeks to license an acquired patent portfolio without itself practicing any of the claims
recited therein. The suit alleges infringement of United States Patent Nos. 5,132,992, 5,253,275,
5,550,863, 6,002,720 and 6,144,702, which relate to certain systems and methods for transmission of
digital data. On September 25, 2009, the District Court granted summary judgment to the defendants
on invalidity grounds, and dismissed the action with prejudice. The plaintiffs have
appealed.
We intend to vigorously defend this case. In the event that a court ultimately determines that we
infringe any of the asserted patents, we may be subject to substantial damages, which may include
treble damages, and/or an injunction
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that could require us to materially modify certain
user-friendly features that we currently offer to consumers. We cannot predict with any degree of
certainty the outcome of the suit or determine the extent of any potential liability or damages.
Broadcast Innovation, L.L.C.
During 2001, Broadcast Innovation, L.L.C. (“Broadcast Innovation”) filed a lawsuit against us,
EchoStar, DirecTV, Thomson Consumer Electronics and others in United States District Court in
Denver, Colorado. The suit alleges infringement of United States Patent Nos. 6,076,094 (the ‘094
patent) and 4,992,066 (the ‘066 patent). The ‘094 patent relates to certain methods and devices
for transmitting and receiving data along with specific formatting information for the data. The
‘066 patent relates to certain methods and devices for providing the scrambling circuitry for a pay
television system on removable cards. Subsequently, DirecTV and Thomson settled with Broadcast
Innovation leaving us as the only defendant.
During 2004, the judge issued an order finding the ‘066 patent invalid. Also in 2004, the District
Court found the ‘094 patent invalid in a parallel case filed by Broadcast Innovation against
Charter and Comcast. In 2005, the United States Court of Appeals for the Federal Circuit
overturned the ‘094 patent finding of invalidity and remanded the Charter case back to the District
Court. During June 2006, Charter filed a reexamination request with the United States Patent and
Trademark Office. The Federal Circuit Court has stayed the Charter case pending reexamination, and
our case has been stayed pending resolution of the Charter case.
We intend to vigorously defend this case. In the event that a court ultimately determines that we
infringe any of the asserted patents, we may be subject to substantial damages, which may include
treble damages, and/or an injunction that could require us to materially modify certain
user-friendly features that we currently offer to consumers. We cannot predict with any degree of
certainty the outcome of the suit or determine the extent of any potential liability or damages.
Channel Bundling Class Action
During 2007, a purported class of cable and satellite subscribers filed an antitrust action against
us in the United States District Court for the Central District of California. The suit also names
as defendants DirecTV, Comcast, Cablevision, Cox, Charter, Time Warner, Inc., Time Warner Cable,
NBC Universal, Viacom, Fox Entertainment Group, and Walt Disney Company. The suit alleges, among
other things, that the defendants engaged in a conspiracy to provide customers with access only to
bundled channel offerings as opposed to giving customers the ability to purchase channels on an “a
la carte” basis. On October 16, 2009, the District Court granted defendants’ motion to dismiss
with prejudice. The plaintiffs have appealed. We intend to vigorously defend this case. We
cannot predict with any degree of certainty the outcome of the suit or determine the extent of any
potential liability or damages.
Enron Commercial Paper Investment
During 2001, we received approximately $40 million from the sale of Enron commercial paper to a
third party broker. That commercial paper was ultimately purchased by Enron. During 2003, an
action was commenced in the United States Bankruptcy Court for the Southern District of New York
against approximately 100 defendants, including us, who invested in Enron’s commercial paper. On
April 7, 2009, we settled the litigation for an immaterial amount.
ESPN
During 2008, we filed a lawsuit against ESPN, Inc., ESPN Classic, Inc., ABC Cable Networks Group,
Soapnet L.L.C., and International Family Entertainment (collectively, “ESPN”) for breach of
contract in New York State Supreme Court. Our complaint alleges that ESPN failed to provide us
with certain high-definition feeds of the Disney Channel, ESPN News, Toon, and ABC Family. ESPN
asserted a counterclaim, and then filed a motion for summary judgment, alleging that we owed
approximately $35 million under the applicable affiliation agreements.
We brought a motion to amend our complaint to assert that ESPN was in breach of certain
most-favored-nation provisions under the applicable affiliation agreements. On April 15, 2009, the
trial court granted our motion to
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amend the complaint, and granted, in part, ESPN’s motion on the
counterclaim, finding that we are liable for some of the amount alleged to be owing but that the
actual amount owing is disputed and will have to be determined at a later date. We will appeal the
partial grant of ESPN’s motion. Since the partial grant of ESPN’s motion, ESPN has sought an
additional $30 million under the applicable affiliation agreements. We intend to vigorously
prosecute and defend this case. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
Finisar Corporation
Finisar Corporation (“Finisar”) obtained a $100 million verdict in the United States District Court
for the Eastern District of Texas against DirecTV for patent infringement. Finisar alleged that
DirecTV’s electronic program guide and other elements of its system infringe United States Patent
No. 5,404,505 (the ‘505 patent).
During 2006, we and EchoStar, together with NagraStar LLC, filed a Complaint for Declaratory
Judgment in the United States District Court for the District of Delaware against Finisar that asks
the Court to declare that we do not infringe, and have not infringed, any valid claim of the ‘505
patent. During April 2008, the Federal Circuit reversed the judgment against DirecTV and ordered a
new trial. During January 2010, the Federal Circuit affirmed the District Court’s grant of summary
judgment to DirecTV, and dismissed the action with prejudice. We are evaluating the impact of the
Federal Circuit’s decision.
We intend to vigorously prosecute this case. In the event that a court ultimately determines that
we infringe the asserted patent, we may be subject to substantial damages, which may include treble
damages, and/or an injunction that could require us to modify our system architecture. We cannot
predict with any degree of certainty the outcome of the suit or determine the extent of any
potential liability or damages.
Global Communications
During April 2007, Global Communications, Inc. (“Global”) filed a patent infringement action
against us and EchoStar in the United States District Court for the Eastern District of Texas. The
suit alleges infringement of United States Patent No. 6,947,702 (the ‘702 patent), which relates to
satellite reception. In October 2007, the United States Patent and Trademark Office granted our
request for reexamination of the ‘702 patent and issued an initial Office Action finding that all
of the claims of the ‘702 patent were invalid. At the request of the parties, the District Court
stayed the litigation until the reexamination proceeding is concluded and/or other Global patent
applications issue.
During June 2009, Global filed a patent infringement action against us and EchoStar in the United
States District Court for the Northern District of Florida. The suit alleges infringement of
United States Patent No. 7,542,717 (the ‘717 patent), which relates to satellite reception. In
December 2009, we and EchoStar settled the Texas and Florida actions with Global on terms and
conditions that did not have a material impact on our results of operations.
Guardian Media
During 2008, Guardian Media Technologies LTD (“Guardian”) filed suit against us, EchoStar,
EchoStar Technologies L.L.C., DirecTV and several other defendants in the United States District
Court for the Central District of California alleging infringement of United States Patent Nos.
4,930,158 and 4,930,160. Both patents are expired and relate to certain parental lock features.
On September 9, 2009, Guardian voluntarily dismissed the case against us with prejudice.
Katz Communications
During 2007, Ronald A. Katz Technology Licensing, L.P. (“Katz”) filed a patent infringement action
against us in the United States District Court for the Northern District of California. The suit
alleges infringement of 19 patents owned by Katz. The patents relate to interactive voice
response, or IVR, technology.
We intend to vigorously defend this case. In the event that a court ultimately determines that we
infringe any of the asserted patents, we may be subject to substantial damages, which may include
treble damages and/or an injunction
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that could require us to materially modify certain
user-friendly features that we currently offer to consumers. We cannot predict with any degree of
certainty the outcome of the suit or determine the extent of any potential liability or damages.
Multimedia Patent Trust
On February 13, 2009, Multimedia Patent Trust (“MPT”) filed suit against us, EchoStar, DirecTV and
several other defendants in the United States District Court for the Southern District of
California alleging infringement of United States Patent Nos. 4,958,226, 5,227,878, 5,136,377,
5,500,678 and 5,563,593, which relate to video encoding, decoding and compression technology. MPT
is an entity that seeks to license an acquired patent portfolio without itself practicing any of
the claims recited therein. In December 2009, we and EchoStar reached a settlement with MPT that
did not have a material impact on our results of operations.
NorthPoint Technology
On July 2, 2009, NorthPoint Technology, Ltd. filed suit against us, EchoStar, and DirecTV in the
United States District Court for the Western District of Texas alleging infringement of United
States Patent No. 6,208,636 (the ‘636 patent). The ‘636 patent relates to the use of multiple
low-noise block converter feedhorns, or LNBFs, which are antennas used for satellite reception.
We intend to vigorously defend this case. In the event that a court ultimately determines that we
infringe the asserted patent, we may be subject to substantial damages, which may include treble
damages, and/or an injunction that could require us to materially modify certain features that we
currently offer to consumers. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
Personalized Media Communications
During 2008, Personalized Media Communications, Inc. filed suit against us, EchoStar and
Motorola, Inc. in the United States District Court for the Eastern District of Texas alleging
infringement of United States Patent Nos. 4,694,490, 5,109,414, 4,965,825, 5,233,654, 5,335,277,
and 5,887,243, which relate to satellite signal processing.
We intend to vigorously defend this case. In the event that a court ultimately determines that we
infringe any of the asserted patents, we may be subject to substantial damages, which may include
treble damages, and/or an injunction that could require us to materially modify certain
user-friendly features that we currently offer to consumers. We cannot predict with any degree of
certainty the outcome of the suit or determine the extent of any potential liability or damages.
Retailer Class Actions
During 2000, lawsuits were filed by retailers in Colorado state and federal courts attempting to
certify nationwide classes on behalf of certain of our retailers. The plaintiffs are requesting
the Courts declare certain provisions of, and changes to, alleged agreements between us and the
retailers invalid and unenforceable, and to award damages for lost incentives and payments, charge
backs, and other compensation. We have asserted a variety of counterclaims. The federal court
action has been stayed during the pendency of the state court action. We filed a motion for
summary judgment on all counts and against all plaintiffs. The plaintiffs filed a motion for
additional time to conduct discovery to enable them to respond to our motion. The state court
granted limited discovery which ended during 2004. The plaintiffs claimed we did not provide
adequate disclosure during the discovery process. The state court agreed, and denied our motion
for summary judgment as a result. In April 2008, the state court granted plaintiff’s class
certification motion and in January 2009, the state court entered an order excluding certain
evidence that we can present at trial based on the prior discovery issues. The state court also
denied plaintiffs’ request to dismiss our counterclaims. The final impact of the court’s
evidentiary ruling cannot be fully assessed at this time. In May 2009, plaintiffs filed a motion
for default judgment based on new allegations of discovery misconduct. We intend to vigorously
defend this case. We cannot predict with any degree of certainty the outcome of the lawsuit or
determine the extent of any potential liability or damages.
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Technology Development Licensing
On January 22, 2009, Technology Development and Licensing LLC filed suit against us and EchoStar in
the United States District Court for the Northern District of Illinois alleging infringement of
United States Patent No. 35, 952, which relates to certain favorite channel features. In July
2009, the Court granted our motion to stay the case pending two re-examination petitions before the
Patent and Trademark Office.
We intend to vigorously defend this case. In the event that a court ultimately determines that we
infringe the asserted patent, we may be subject to substantial damages, which may include treble
damages, and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We cannot predict with any degree of certainty the
outcome of the suit or determine the extent of any potential liability or damages.
Tivo Inc.
During January 2008, the United States Court of Appeals for the Federal Circuit affirmed in part
and reversed in part the April 2006 jury verdict concluding that certain of our digital video
recorders, or DVRs, infringed a patent held by Tivo. As of September 2008, we had recorded a total
reserve of $132 million on our Consolidated Balance Sheets to reflect the April 2006 jury verdict,
supplemental damages through September 2006 and pre-judgment interest awarded by the Texas court,
together with the estimated cost of potential further software infringement prior to implementation
of our alternative technology, discussed below, plus interest subsequent to entry of the judgment.
In its January 2008 decision, the Federal Circuit affirmed the jury’s verdict of infringement on
Tivo’s “software claims,” and upheld the award of damages from the District Court. The Federal
Circuit, however, found that we did not literally infringe Tivo’s “hardware claims,” and remanded
such claims back to the District Court for further proceedings. On October 6, 2008, the Supreme
Court denied our petition for certiorari. As a result, approximately $105 million of the total
$132 million reserve was released from an escrow account to Tivo.
We also developed and deployed “next-generation” DVR software. This improved software was
automatically downloaded to our current customers’ DVRs, and is fully operational (our “original
alternative technology”). The download was completed as of April 2007. We received written legal
opinions from outside counsel that concluded our original alternative technology does not infringe,
literally or under the doctrine of equivalents, either the hardware or software claims of Tivo’s
patent. Tivo filed a motion for contempt alleging that we are in violation of the Court’s
injunction. We opposed this motion on the grounds that the injunction did not apply to DVRs that
have received our original alternative technology, that our original alternative technology does
not infringe Tivo’s patent, and that we were in compliance with the injunction.
In June 2009, the United States District Court granted Tivo’s motion for contempt, finding that our
original alternative technology was not more than colorably different than the products found by
the jury to infringe Tivo’s patent, that the original alternative technology still infringed the
software claims, and that even if the original alternative technology was “non-infringing,” the
original injunction by its terms required that we disable DVR functionality in all but
approximately 192,000 digital set-top boxes in the field. The District Court awarded Tivo $103
million in supplemental damages and interest for the period from September 2006 through April 2008,
based on an assumed $1.25 per subscriber per month royalty rate. We posted a bond to secure that
award pending appeal of the contempt order.
On July 1, 2009, the Federal Circuit Court of Appeals granted a permanent stay of the District
Court’s contempt order pending resolution of our appeal. In so doing, the Federal Circuit found,
at a minimum, that we had a substantial case on the merits. Oral argument on our appeal of the
contempt ruling took place on November 2, 2009 before three judges of the Federal Circuit.
The District Court held a hearing on July 28, 2009 on Tivo’s claims for contempt sanctions, but has
ordered that enforcement of any sanctions award will be stayed pending our appeal of the contempt
order. Tivo sought up to $975 million in contempt sanctions for the period from April 2008 to June
2009 based on, among other things, profits Tivo alleges we made from subscribers using DVRs. We
opposed Tivo’s request arguing, among other
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things, that sanctions are inappropriate because we
made good faith efforts to comply with the Court’s injunction. We also challenged Tivo’s
calculation of profits.
On August 3, 2009, the Patent and Trademark Office (the “PTO”) issued an initial office action
rejecting the software claims of United States Patent No. 6,233,389 (the ‘389 patent) as being
invalid in light of two prior patents. These are the same software claims that we were found to
have infringed and which underlie the contempt ruling now pending on appeal. We believe that the
PTO’s conclusions are relevant to the issues on appeal as well as the pending sanctions proceedings
in the District Court. The PTO’s conclusions support our position that our original alternative
technology is more than colorably different than the devices found to infringe by the jury; that
our original alternative technology does not infringe; and that we acted in good faith to design
around Tivo’s patent.
On September 4, 2009, the District Court partially granted Tivo’s motion for contempt sanctions.
In partially granting Tivo’s motion for contempt sanctions, the District Court awarded $2.25 per
DVR subscriber per month for the period from April 2008 to July 2009 (as compared to the award for
supplemental damages for the prior period from September 2006 to April 2008, which was based on an
assumed $1.25 per DVR subscriber per month). By the District Court’s estimation, the total award
for the period from April 2008 to July 2009 is approximately $200 million (the enforcement of the
award has been stayed by the District Court pending DISH Network’s appeal of the underlying June
2009 contempt order). The District Court also awarded Tivo its attorneys’ fees incurred during the
contempt proceedings. On February 8, 2010, we and Tivo submitted a stipulation to the District
Court that the attorneys’ fees and costs, including expert witness fees and costs, that Tivo
incurred during the contempt proceedings amounted to $6 million. During the year ended December
31, 2009, we increased our total reserve by $361 million to reflect the supplemental damages and
interest for the period from implementation of our original alternative technology through April
2008 and for the estimated cost of alleged software infringement (including contempt sanctions for
the period from April 2008 through June 2009) for the period from April 2008 through December 2009
plus interest. Our total reserve at December 31, 2009 was $394 million and is included in “Tivo
litigation accrual” on our Consolidated Balance Sheets.
In light of the District Court’s finding of contempt, and its description of the manner in which it
believes our original alternative technology infringed the ‘389 patent, we are also developing and
testing potential new alternative technology in an engineering environment. As part of EchoStar’s
development process, EchoStar downloaded several of our design-around options to less than 1,000
subscribers for “beta” testing.
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we
are not successful in developing and deploying potential new alternative technology and we are
unable to reach a license agreement with Tivo on reasonable terms, we would be required to
eliminate DVR functionality in all but approximately 192,000 digital set-top boxes in the field and
cease distribution of digital set-top boxes with DVR functionality. In that event we would be at a
significant disadvantage to our competitors who could continue offering DVR functionality, which
would likely result in a significant decrease in new subscriber additions as well as a substantial
loss of current subscribers. Furthermore, the inability to offer DVR functionality could cause
certain of our distribution channels to terminate or significantly decrease their marketing of DISH
Network services. The adverse effect on our financial position and results of operations if the
District Court’s contempt order is upheld is likely to be significant. Additionally, the
supplemental damage award of $103 million and further award of approximately $200 million does not
include damages, contempt sanctions or interest for the period after June 2009. In the event that
we are unsuccessful in our appeal, we could also have to pay substantial additional damages,
contempt sanctions and interest. Depending on the amount of any additional damage or sanction
award or any monetary settlement, we may be required to raise additional capital at a time and in
circumstances in which we would normally not raise capital. Therefore, any capital we raise may be
on terms that are unfavorable to us, which might adversely affect our financial position and
results of operations and might also impair our ability to raise capital on acceptable terms in the
future to fund our own operations and initiatives. We believe the cost of such capital and its
terms and conditions may be substantially less attractive than our previous financings.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but
unsuccessful in defending against any subsequent claim in a new action that our original
alternative technology or any potential new alternative technology infringes Tivo’s patent, we
could be prohibited from distributing DVRs or could be required to modify or eliminate our
then-current DVR functionality in some or all set-top boxes in the field. In that event we
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would
be at a significant disadvantage to our competitors who could continue offering DVR functionality
and the adverse effect on our business could be material. We could also have to pay substantial
additional damages.
Because both we and EchoStar are defendants in the Tivo lawsuit, we and EchoStar are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District
Court. We have determined that we are obligated under the agreements entered into in connection
with the Spin-off to indemnify EchoStar for substantially all liability arising from this lawsuit.
EchoStar has agreed to contribute an amount equal to its $5 million intellectual property liability
limit under the Receiver Agreement. We and EchoStar have further agreed that EchoStar’s $5 million
contribution would not exhaust EchoStar’s liability to us for other intellectual property claims
that may arise under the Receiver Agreement. We and EchoStar also agreed that we would each be
entitled to joint ownership of, and a cross-license to use, any intellectual property developed in
connection with any potential new alternative technology.
Voom
On May 28, 2008, Voom HD Holdings (“Voom”) filed a complaint against us in New York Supreme Court.
The suit alleges breach of contract arising from our termination of the affiliation agreement we
had with Voom for the carriage of certain Voom HD channels on the DISH Network satellite television
service. In January 2008, Voom sought a preliminary injunction to prevent us from terminating the
agreement. The Court denied Voom’s motion, finding, among other things, that Voom was not likely
to prevail on the merits of its case. Voom is claiming over $2.5 billion in damages. We intend to
vigorously defend this case. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims
which arise in the ordinary course of business, including among other things, disputes with
programmers regarding fees. In our opinion, the amount of ultimate liability with respect to any
of these actions is unlikely to materially affect our financial position, results of operations
or liquidity.
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters
Market Information. Our Class A common stock is quoted on the Nasdaq Global Select
Market under the symbol “DISH.” The high and low closing sale prices of our Class A common
stock during 2009 and 2008 on the Nasdaq Global Select Market (as reported by Nasdaq)
are set forth below. The sales prices of our Class A common stock reported below are not
adjusted to reflect the dividend paid on December 2, 2009, discussed below.
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As of February 12, 2010, there were approximately 10,983 holders of record of our Class A
common stock, not including stockholders who beneficially own Class A common stock held in
nominee or street name. As of February 12, 2010, 216,411,941 of the 238,435,208 outstanding
shares of our Class B common stock were held by Charles W. Ergen, our Chairman, President and
Chief Executive Officer and the remaining 22,023,267 were held in trusts established by Mr. Ergen
for the benefit of his family. There is currently no trading market for our Class B common
stock.
Dividend. On December 2, 2009, we paid a cash dividend of $2.00 per share, or approximately $894
million, on our outstanding Class A and Class B common stock to shareholders of record at the close
of business on November 20, 2009.
We currently do not intend to declare additional dividends on our common stock. Payment of any
future dividends will depend upon our earnings and capital requirements, restrictions in our debt
facilities, and other factors the Board of Directors considers appropriate. We currently intend to
retain our earnings, if any, to support future growth and expansion although we expect to
repurchases shares of our common stock from time to time. See further discussion under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity
and Capital Resources” in this Annual Report on Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans. See “Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this
Annual Report on Form 10-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information regarding purchases of our Class A common stock made by us
for the period from October 1, 2009 through December 31, 2009.
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Item 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each of the five years ended December 31,
2009 have been derived from, and are qualified by reference to our Consolidated Financial
Statements. Certain prior year amounts have been reclassified to conform to the current year
presentation. See further discussion under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Explanation of Key Metrics and Other Items” in this
Annual Report on Form 10-K. This data should be read in conjunction with our Consolidated
Financial Statements and related Notes thereto for the three years ended December 31, 2009, and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included
elsewhere in this report.
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of
operations together with the audited consolidated financial statements and notes to the financial
statements included elsewhere in this annual report. This management’s discussion and analysis is
intended to help provide an understanding of our financial condition, changes in financial
condition and results of our operations and contains forward-looking statements that involve risks
and uncertainties. The forward-looking statements are not historical facts, but rather are based
on current expectations, estimates, assumptions and projections about our industry, business and
future financial results. Our actual results could differ materially from the results contemplated
by these forward-looking statements due to a number of factors, including those discussed in this
report, including under the caption “Item 1A. Risk Factors” in this Annual Report on Form 10-K.
EXECUTIVE SUMMARY
Overview
DISH Network added approximately 422,000 net new subscribers during the year ended December 31,
2009 as a result of higher gross subscriber additions and reduced churn. Our increased gross
subscriber additions were primarily a result of our sales and marketing promotions during the last
half of 2009. Churn was positively impacted by, among other things, the completion of our security
access device replacement program, an increase in our new subscriber commitment period and
initiatives to retain subscribers. Historically, we have experienced slightly higher churn in the
months following the expiration of commitments for new subscribers. In February 2008, we extended
the required new subscriber commitment from 18 to 24 months. During the last half of 2009, due to
the change in promotional mix, we had fewer expiring new subscriber commitments. We continue to
focus on addressing operational inefficiencies specific to DISH Network which we believe will
contribute to long-term subscriber growth. ARPU has been negatively impacted by promotional
discounts on programming offered to new subscribers and our initiatives to retain subscribers, both
of which negatively impacted our subscriber-related margins. “Subscriber-related expenses”
continued to be negatively impacted by increased programming costs and initiatives to retain
subscribers, migrate certain subscribers to make more efficient use of transponder capacity, and
improve customer service.
The current overall economic environment has negatively impacted many industries including ours.
In addition, the overall growth rate in the pay-TV industry has slowed in recent years. Within
this maturing industry, competition has intensified with the rapid growth of fiber-based pay-TV
services offered by telecommunications companies. Furthermore, programming offered over the
Internet has become more prevalent as the speed and quality of broadband networks have improved.
Significant changes in consumer behavior with regard to the means by which they obtain video
entertainment and information in response to this emerging digital media competition could
materially adversely affect our business, results of operations and financial condition or
otherwise disrupt our business.
While economic factors have impacted the entire pay-TV industry, our relative performance has been
mostly driven by issues specific to DISH Network. In recent years, DISH Network’s position as the
low cost provider in the pay-TV industry has been eroded by increasingly aggressive promotional
pricing used by our competitors to attract new subscribers and similarly aggressive promotions and
tactics used to retain existing subscribers. Some competitors have been especially aggressive and
effective in marketing their service. Furthermore, our subscriber growth has been adversely
affected by signal theft and other forms of fraud and by operational inefficiencies at DISH
Network. We have not always met our own standards for performing high-quality installations,
effectively resolving subscriber issues when they arise, answering subscriber calls in an
acceptable timeframe, effectively communicating with our subscriber base, reducing calls driven by
the complexity of our business, improving the reliability of certain systems and subscriber
equipment, and aligning the interests of certain third party retailers and installers to provide
high-quality service.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions in prior years, accounting for approximately 17% of our gross subscriber
additions for the year ended December 31, 2008. This distribution relationship ended January 31,
2009. Consequently, beginning with the second quarter 2009, AT&T no longer contributed to our
gross subscriber additions. In addition, nearly one million of our current
subscribers were acquired through our distribution relationship with AT&T and subscribers acquired
through this channel have historically churned at a higher rate than our overall subscriber base.
Although AT&T is not permitted
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
to target these subscribers for transition to another pay-TV service and we and AT&T are required
to maintain bundled billing and cooperative customer service for these subscribers, these
subscribers may continue to churn at higher than historical rates following termination of the AT&T
distribution relationship.
We have been investing more in advanced technology equipment as part of our subscriber acquisition
and retention efforts. Recent initiatives to transmit certain programming only in MPEG-4 and to
activate most new subscribers only with MPEG-4 receivers have accelerated our deployment of MPEG-4
receivers. To meet current demand, we have increased the rate at which we upgrade existing
subscribers to HD and DVR receivers. While these efforts may increase our subscriber acquisition
and retention costs, we believe that they will help reduce subscriber churn and costs over the long
run.
We have also been changing equipment to migrate certain subscribers to make more efficient use of
transponder capacity in support of HD and other initiatives. We expect to continue these
initiatives through 2010. We believe that the benefit from the increase in available transponder
capacity outweighs the short-term cost of these equipment changes.
To combat signal theft and improve the security of our broadcast system, we recently completed the
replacement of our security access devices to re-secure our system. We expect additional future
replacements of these devices to be necessary to keep our system secure. To combat other forms of
fraud, we have taken a wide range of actions including terminating retailers that we believe were
in violation of DISH Network’s business rules. While these initiatives may inconvenience our
subscribers and disrupt our distribution channels in the short-term, we believe that the long-term
benefits will outweigh the costs.
To address our operational inefficiencies, we have streamlined our hardware offerings and continue
to make significant investments in staffing, training, information systems, and other initiatives,
primarily in our call center and in-home service operations. These investments are intended to
help combat inefficiencies introduced by the increasing complexity of our business, improve
customer satisfaction, reduce churn, increase productivity, and allow us to scale better over the
long run. We cannot, however, be certain that our increased spending will ultimately be successful
in yielding such returns. In the meantime, we may continue to incur higher costs as a result of
both our operational inefficiencies and increased spending. The adoption of these measures has
contributed to higher expenses and lower margins. While we believe that the increased costs will
be outweighed by longer-term benefits, there can be no assurance when or if we will realize these
benefits at all.
Programming costs represent a large percentage of our “Subscriber-related expenses.” As a result,
our margins may face further downward pressure from price increases and the renewal of long-term
programming contracts on less favorable pricing terms.
To maintain and enhance our competitiveness over the long term, we plan to promote a suite of
integrated products designed to maximize the convenience and ease of watching TV anytime and
anywhere, which we refer to as, “TV Everywhere.” TV Everywhere utilizes, among other things,
Slingbox “placeshifting” technology.
Liquidity Drivers
Like many companies, we make general investments in property such as satellites, information
technology and facilities that support our overall business. As a subscriber-based company,
however, we also make subscriber-specific investments to acquire new subscribers and retain
existing subscribers. While the general investments may be deferred without impacting the business
in the short-term, the subscriber-specific investments are less discretionary. Our overall
objective is to generate sufficient cash flow over the life of each subscriber to provide an
adequate return against the upfront investment. Once the upfront investment has been made for each
subscriber, the subsequent cash flow is generally positive.
There are a number of factors that impact our future cash flow compared to the cash flow we
generate at a given point in time. The first factor is how successful we are at retaining our
current subscribers. As we lose subscribers from our existing base, the positive cash flow from
that base is correspondingly reduced. The second factor is how successful we are at maintaining
our subscriber-related margins. To the extent our “Subscriber-related expenses” grow faster than
our “Subscriber-related revenue,” the amount of cash flow that is generated per existing subscriber
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is reduced. The third factor is the rate at which we acquire new subscribers. The faster we
acquire new subscribers, the more our positive ongoing cash flow from existing subscribers is
offset by the negative upfront cash flow associated with new subscribers. Finally, our future cash
flow is impacted by the rate at which we make general investments and any cash flow from financing
activities.
Our subscriber-specific investments to acquire new subscribers have a significant impact on our
cash flow. While fewer subscribers might translate into lower ongoing cash flow in the long-term,
cash flow is actually aided in the short-term by the reduction in subscriber-specific investment
spending. As a result, a slow down in our business due to external or internal factors does not
introduce the same level of short-term liquidity risk as it might in other industries.
Availability of Credit and Effect on Liquidity
While the ability to raise capital has generally existed for DISH Network despite the weak economic
conditions, the cost of such capital has not been as attractive as in prior periods. Because of
the cash flow of our company and the absence of any material debt payments over the next year, the
higher cost of capital will not impact our current operational plans. However, we might be less
likely to pursue initiatives which could increase shareholder value over the long run, such as
making strategic investments, prepaying debt, or buying back our own stock. Alternatively, if we
decided to pursue such initiatives, the cost of doing so would be greater. Currently, we have no
existing lines of credit, nor have we historically.
Future Liquidity
Our “Subscriber-related expenses” as a percentage of “Subscriber-related revenue” grew from 51.4%
to 52.2% in 2008 and reached 55.1% during 2009. Our “Subscriber-related expenses” continued to be
negatively impacted by increased programming costs and initiatives to retain subscribers, migrate
certain subscribers to make more efficient use of transponder capacity, and improve customer
service. In addition, our “Subscriber-related revenue” was negatively impacted by our increase in
the use of promotional discounts on programming offered to new subscribers and retention
initiatives offered to existing subscribers. Uncertainties about these trends may impact our cash
flow and results of operations. In addition, although our subscriber base has recently increased,
we continue to be impacted by operational issues specific to DISH Network, as previously discussed.
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we
are not successful in developing and deploying potential new alternative technology and we are
unable to reach a license agreement with Tivo on reasonable terms, we would be required to
eliminate DVR functionality in all but approximately 192,000 digital set-top boxes in the field and
cease distribution of digital set-top boxes with DVR functionality. In that event we would be at a
significant disadvantage to our competitors who could continue offering DVR functionality, which
would likely result in a significant decrease in new subscriber additions as well as a substantial
loss of current subscribers. Furthermore, the inability to offer DVR functionality could cause
certain of our distribution channels to terminate or significantly decrease their marketing of DISH
Network services. The adverse effect on our financial position and results of operations if the
District Court’s contempt order is upheld is likely to be significant. Additionally, the
supplemental damage award of $103 million and further award of approximately $200 million does not
include damages, contempt sanctions or interest for the period after June 2009.
In the event that we are unsuccessful in our appeal, we could also have to pay substantial
additional damages, contempt sanctions and interest. Depending on the amount of any additional
damage or sanction award or any monetary settlement, we may be required to raise additional capital
at a time and in circumstances in which we would normally not raise capital. Therefore, any
capital we raise may be on terms that are unfavorable to us, which might adversely affect our
financial position and results of operations and might also impair our ability to raise capital on
acceptable terms in the future to fund our own operations and initiatives. We believe the cost of
such capital and its terms and conditions may be substantially less attractive than our previous
financings.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but
unsuccessful in defending against any subsequent claim in a new action that our original
alternative technology or any potential new alternative technology infringes Tivo’s patent, we
could be prohibited from distributing DVRs or could be required to modify or eliminate our
then-current DVR functionality in some or all set-top boxes in the field. In that event we
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would be at a significant disadvantage to our competitors who could continue offering DVR
functionality and the adverse effect on our business could be material. We could also have to pay
substantial additional damages.
Because both we and EchoStar are defendants in the Tivo lawsuit, we and EchoStar are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District
Court. We have determined that we are obligated under the agreements entered into in connection
with the Spin-off to indemnify EchoStar for substantially all liability arising from this lawsuit.
EchoStar has agreed to contribute an amount equal to its $5 million intellectual property liability
limit under the Receiver Agreement. We and EchoStar have further agreed that EchoStar’s $5 million
contribution would not exhaust EchoStar’s liability to us for other intellectual property claims
that may arise under the Receiver Agreement. We and EchoStar also agreed that we would each be
entitled to joint ownership of, and a cross-license to use, any intellectual property developed in
connection with any potential new alternative technology.
The Spin-off. Effective January 1, 2008, we completed the separation of the assets and businesses
we owned and operated historically into two companies (the “Spin-off”):
DISH Network and EchoStar now operate as separate public companies, and neither entity has any
ownership interest in the other. However, a majority of the voting power of the shares of both
companies is controlled by our Chairman, President and Chief Executive Officer, Charles W. Ergen.
In connection with the Spin-off, DISH Network entered into certain agreements with EchoStar to
define responsibility for obligations relating to, among other things, set-top box sales,
transition services, taxes, employees and intellectual property, which impact several of our key
operating metrics. We have entered into certain agreements with EchoStar subsequent to the
Spin-off and we may enter into additional agreements with EchoStar in the future.
Prior to the Spin-off, our set-top boxes and other subscriber equipment as well as satellite,
uplink and transmission services were provided internally at cost. Following the Spin-off, we
purchase set-top boxes from EchoStar at its cost plus a fixed margin, which varies depending on a
number of factors including the types of set-top boxes that we purchase. In addition, we now
purchase and/or lease satellite, uplink and transmission services from EchoStar at its cost plus a
fixed margin. The prices that we pay for these services depend upon the nature of the services
that we obtain from EchoStar and the market competition for these services. Furthermore, as part
of the Spin-off, certain real estate was contributed to EchoStar and leased back to us and we now
incur additional costs in the form of rent paid on these leases. These additional costs are not
reflected in our historical consolidated financial statements for periods prior to January 1, 2008.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Subscriber-related revenue. “Subscriber-related revenue” consists principally of revenue from
basic, premium movie, local, pay-per-view, Latino and international subscription television
services, equipment rental fees and other hardware related fees, including fees for DVRs and
additional outlet fees from subscribers with multiple receivers, advertising services, fees earned
from our in-home service operations, equipment upgrade fees, HD programming and other subscriber
revenue. Certain of the amounts included in “Subscriber-related revenue” are not recurring on a
monthly basis.
Equipment sales and other revenue. “Equipment sales and other revenue” principally includes the
non-subsidized sales of DBS accessories to retailers and other third-party distributors of our
equipment domestically and to DISH Network subscribers.
During 2007, this category also included sales of non-DISH Network digital receivers and related
components to international customers and satellite and transmission revenue, which related to the
set-top box business and other assets that were distributed to EchoStar in connection with the
Spin-off.
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Equipment sales, transitional services and other revenue — EchoStar. “Equipment sales,
transitional services and other revenue — EchoStar” includes revenue related to equipment sales,
and transitional services and other agreements with EchoStar associated with the Spin-off.
Subscriber-related expenses. “Subscriber-related expenses” principally include programming
expenses, costs incurred in connection with our in-home service and call center operations, billing
costs, refurbishment and repair costs related to receiver systems, subscriber retention and other
variable subscriber expenses.
Satellite and transmission expenses — EchoStar. “Satellite and transmission expenses — EchoStar”
includes the cost of digital broadcast operations provided to us by EchoStar, including satellite
uplinking/downlinking, signal processing, conditional access management, telemetry, tracking and
control and other professional services. In addition, this category includes the cost of leasing
satellite and transponder capacity on satellites that were distributed to EchoStar, in connection
with the Spin-off.
Satellite and transmission expenses — other. “Satellite and transmission expenses — other”
includes executory costs associated with capital leases and costs associated with transponder
leases and other related services. Prior to the Spin-off, “Satellite and transmission expenses —
other” included costs associated with the operation of our digital broadcast centers, including
satellite uplinking/downlinking, signal processing, conditional access management, telemetry,
tracking and control, satellite and transponder leases, and other related services, which were
previously performed internally.
Equipment, transitional services and other cost of sales. “Equipment, transitional services and
other cost of sales” principally includes the cost of non-subsidized sales of DBS accessories to
retailers and other distributors of our equipment domestically and to DISH Network subscribers. In
addition, this category includes costs related to equipment sales, transitional services and other
agreements with EchoStar associated with the Spin-off.
During 2007, “Equipment, transitional services and other cost of sales” also included costs
associated with non-DISH Network digital receivers and related components sold to international
customers and satellite and transmission expenses, which related to the set-top box business and
other assets that were distributed to EchoStar in connection with the Spin-off.
Subscriber acquisition costs. In addition to leasing receivers, we generally subsidize
installation and all or a portion of the cost of our receiver systems to attract new DISH Network
subscribers. Our “Subscriber acquisition costs”
include the cost of our receiver systems sold to retailers and other distributors of our equipment,
the cost of receiver systems sold directly by us to subscribers, net costs related to our
promotional incentives, and costs related to installation and acquisition advertising. We exclude
the value of equipment capitalized under our lease program for new subscribers from “Subscriber
acquisition costs.”
SAC. Subscriber acquisition cost measures are commonly used by those evaluating companies in the
pay-TV industry. We are not aware of any uniform standards for calculating the “average subscriber
acquisition costs per new subscriber activation,” or SAC, and we believe presentations of SAC may
not be calculated consistently by different companies in the same or similar businesses. Our SAC
is calculated as “Subscriber acquisition costs,” plus the value of equipment capitalized under our
lease program for new subscribers, divided by gross subscriber additions. We include all the costs
of acquiring subscribers (e.g., subsidized and capitalized equipment) as our management believes it
is a more comprehensive measure of how much we are spending to acquire subscribers. We also
include all new DISH Network subscribers in our calculation, including DISH Network subscribers
added with little or no subscriber acquisition costs.
General and administrative expenses. “General and administrative expenses” consists primarily of
employee-related costs associated with administrative services such as legal, information systems,
accounting and finance, including non-cash, stock-based compensation expense. It also includes
outside professional fees (e.g., legal, information systems and accounting services) and other
items associated with facilities and administration. Following the Spin-off, the general and
administrative expenses associated with the business and assets distributed to EchoStar in
connection with the Spin-off are no longer reflected in our “General and administrative expenses.”
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Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized”
primarily includes interest expense, prepayment premiums and amortization of debt issuance costs
associated with our senior debt and convertible subordinated debt securities (net of capitalized
interest) and interest expense associated with our capital lease obligations.
Other, net. The main components of “Other, net” are gains and losses realized on the sale of
investments, impairment of marketable and non-marketable investment securities, unrealized gains
and losses from changes in fair value of non-marketable strategic investments accounted for at fair
value and equity in earnings and losses of our affiliates.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is defined as
“Net income (loss) attributable to DISH Network common shareholders” plus “Interest expense, net of
amounts capitalized” net of “Interest income,” “Taxes” and “Depreciation and amortization.” This
“non-GAAP measure” is reconciled to “Net income (loss) attributable to DISH Network common
shareholders” in our discussion of “Results of Operations” below.
DISH Network subscribers. We include customers obtained through direct sales, third-party
retailers and other distribution relationships in our DISH Network subscriber count. We also
provide DISH Network service to hotels, motels and other commercial accounts. For certain of these
commercial accounts, we divide our total revenue for these commercial accounts by an amount
approximately equal to the retail price of our America’s Top 120 programming package (but taking
into account, periodically, price changes and other factors), and include the resulting number,
which is substantially smaller than the actual number of commercial units served, in our DISH
Network subscriber count.
Average monthly revenue per subscriber (“ARPU”). We are not aware of any uniform standards for
calculating ARPU and believe presentations of ARPU may not be calculated consistently by other
companies in the same or similar businesses. We calculate average monthly revenue per subscriber,
or ARPU, by dividing average monthly “Subscriber-related revenue” for the period (total
“Subscriber-related revenue” during the period divided by the number of months in the period) by
our average DISH Network subscribers for the period. Average DISH Network
subscribers are calculated for the period by adding the average DISH Network subscribers for each
month and dividing by the number of months in the period. Average DISH Network subscribers for
each month are calculated by adding the beginning and ending DISH Network subscribers for the month
and dividing by two.
Average monthly subscriber churn rate. We are not aware of any uniform standards for calculating
subscriber churn rate and believe presentations of subscriber churn rates may not be calculated
consistently by different companies in the same or similar businesses. We calculate subscriber
churn rate for any period by dividing the number of DISH Network subscribers who terminated service
during the period by the average monthly DISH Network subscribers during the period, and further
dividing by the number of months in the period. When calculating subscriber churn, as is the case
when calculating ARPU, the number of subscribers in a given month is based on the average of the
beginning-of-month and the end-of-month subscriber counts.
Free cash flow. We define free cash flow as “Net cash flows from operating activities” less
“Purchases of property and equipment,” as shown on our Consolidated Statements of Cash Flows.
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RESULTS OF OPERATIONS
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008.
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Overview. Revenue totaled $11.664 billion for the year ended December 31, 2009, an increase of $47
million or 0.4% compared to the same period in 2008. “Net income (loss) attributable to DISH
Network common shareholders” totaled $636 million, a decrease of $267 million or 29.6%.
DISH Network added approximately 422,000 net new subscribers during the year ended December 31,
2009 as a result of higher gross subscriber additions and reduced churn. Our increased gross
subscriber additions were primarily a result of our sales and marketing promotions during the last
half of 2009. Churn was positively impacted by, among other things, the completion of our security
access device replacement program, an increase in our new subscriber commitment period and
initiatives to retain subscribers. Historically, we have experienced slightly higher churn in the
months following the expiration of commitments for new subscribers. In February 2008, we extended
the required new subscriber commitment from 18 to 24 months. During the last half of 2009, due to
the change in promotional mix, we had fewer expiring new subscriber commitments. We continue to
focus on addressing operational inefficiencies specific to DISH Network which we believe will
contribute to long-term subscriber growth. ARPU has been negatively impacted by promotional
discounts on programming offered to new subscribers and our initiatives to retain subscribers, both
of which negatively impacted our subscriber-related margins. “Subscriber-related expenses”
continued to be negatively impacted by increased programming costs and initiatives to retain
subscribers, migrate certain subscribers to make more efficient use of transponder capacity, and
improve customer service.
DISH Network subscribers. As of December 31, 2009, we had approximately 14.100 million DISH
Network subscribers compared to approximately 13.678 million subscribers at December 31, 2008, an
increase of 3.1%. DISH Network added approximately 3.118 million gross new subscribers for the
year ended December 31, 2009, compared to approximately 2.966 million during the same period in
2008, an increase of 5.1%.
DISH Network added approximately 422,000 net new subscribers during the year ended December 31,
2009, compared to a loss of approximately 102,000 net new subscribers during the same period in
2008. Our average monthly subscriber churn rate for the year ended December 31, 2009 was 1.64%,
compared to 1.86% for the same period in 2008. We believe this increase in net new subscribers and
the decrease in churn primarily resulted from the factors discussed in the “Overview” above.
Although churn declined during the year, given the increasingly competitive nature of our industry
and the current economic conditions, we may not be able to maintain or continue to reduce churn
without increasing our spending on customer retention incentives, which would have a negative
effect on our results of operations and free cash flow.
We have not always met our own standards for performing high-quality installations, effectively
resolving subscriber issues when they arise, answering subscriber calls in an acceptable timeframe,
effectively communicating with our subscriber base, reducing calls driven by the complexity of our
business, improving the reliability of certain systems and subscriber equipment, and aligning the
interests of certain third party retailers and installers to provide high-quality service. Most of
these factors have affected both gross new subscriber additions as well as existing subscriber
churn. Our future gross subscriber additions and subscriber churn may continue to be negatively
impacted by these factors, which could in turn adversely affect our revenue growth.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions in prior years, accounting for approximately 17% of our gross subscriber
additions for the year ended December 31, 2008. This distribution relationship ended January 31,
2009. Consequently, beginning with the second quarter 2009, AT&T no longer contributed to our
gross subscriber additions. In addition, nearly one million of our current subscribers were
acquired through our distribution relationship with AT&T and subscribers acquired through this
channel have historically churned at a higher rate than our overall subscriber base. Although AT&T
is not permitted to target these subscribers for transition to another pay-TV service and we and
AT&T are required to maintain bundled billing and cooperative customer service for these
subscribers, these subscribers may continue to churn at higher than historical rates following
termination of the AT&T distribution relationship.
Subscriber-related revenue. DISH Network “Subscriber-related revenue” totaled $11.539 billion for
the year ended December 31, 2009, an increase of $83 million or 0.7% compared to the same period in
2008. This change was
primarily related to the increase in “ARPU” discussed below, partially offset by the decline in our
subscriber base from second quarter 2008 through first quarter 2009.
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ARPU. “Average monthly revenue per subscriber” was $70.04 during the year ended December 31, 2009
versus $69.27 during the same period in 2008. The $0.77 or 1.1% increase in ARPU was primarily
attributable to price increases in February 2009 and 2008 on some of our most popular programming
packages and changes in the sales mix toward HD programming packages and advanced hardware
offerings. As a result of our current promotions, which provide an incentive for advanced hardware
offerings, we continue to see increased hardware related fees, which include fees earned from our
in-home service operations, rental fees and fees for DVRs. These increases were partially offset
by increases in the amount of promotional discounts on programming offered to our new subscribers
and retention initiatives offered to existing subscribers, and by decreases in premium movie
revenue and pay-per-view buys.
Equipment sales and other revenue. “Equipment sales and other revenue” totaled $98 million during
the year ended December 31, 2009, a decrease of $26 million or 21.2% compared to the same period
during 2008. The decrease in “Equipment sales and other revenue” primarily resulted from a
decrease in sales of non-subsidized DBS accessories.
Subscriber-related expenses. “Subscriber-related expenses” totaled $6.359 billion during the year
ended December 31, 2009, an increase of $382 million or 6.4% compared to the same period 2008. The
increase in “Subscriber-related expenses” was primarily attributable to higher costs for
programming content and call center operations. The increase in programming content costs was
primarily related to price increases in certain of our programming contracts and the renewal of
certain contracts at higher rates. The increases related to call center operations were driven in
part by our investments in staffing, training, information systems, and other initiatives. These
investments are intended to help combat inefficiencies introduced by the increasing complexity of
our business and technology, improve customer satisfaction, reduce churn, increase productivity,
and allow us to better scale our business over the long run. We cannot, however, be certain that
our increased spending will ultimately yield these benefits. In the meantime, we may continue to
incur higher costs as a result of both our operational inefficiencies and increased spending.
“Subscriber-related expenses” represented 55.1% and 52.2% of “Subscriber-related revenue” during
the years ended December 31, 2009 and 2008, respectively.
In the normal course of business, we enter into contracts to purchase programming content in which
our payment obligations are fully contingent on the number of subscribers to whom we provide the
respective content. Our programming expenses will continue to increase to the extent we are
successful in growing our subscriber base. In addition, our “Subscriber-related expenses” may face
further upward pressure from price increases and the renewal of long-term programming contracts on
less favorable pricing terms.
Satellite and transmission expenses — EchoStar. “Satellite and transmission expenses — EchoStar”
totaled $320 million during the year ended December 31, 2009, an increase of $14 million or 4.7%
compared to 2008. The increase in “Satellite and transmission
expenses — EchoStar” is primarily
related to higher uplink center costs, partially offset by fewer transponders leased during the
year ended December 31, 2009 compared to the same period in 2008. The higher uplink center costs
were primarily associated with an increase in the charges from EchoStar related to infrastructure
costs for new ground equipment to support our new satellites and the routine replacement of
existing uplink equipment. The decline in transponder lease expense primarily relates to a
reduction in the number of transponders leased as a result of the launch of an owned satellite.
This decrease was partially offset by the increase in expense related to the Nimiq 5 satellite,
which was placed in service in October 2009. “Satellite and transmission expenses — EchoStar” as a
percentage of “Subscriber-related revenue” increased to 2.8% in 2009 from 2.7% in 2008.
During September 2009, we entered into a ten-year satellite service agreement with EchoStar for
capacity on the Nimiq 5 satellite. Pursuant to this agreement, we will receive service from
EchoStar on all 32 of the DBS transponders covered by our transponder contract with Telesat. We
began receiving service on 16 of these DBS transponders upon service commencement of the satellite
on October 10, 2009 and will receive service on the remaining 16 DBS transponders over a phase-in
period that will be completed in 2012. We expect “Satellite and
transmission expenses — EchoStar” to continue to increase in 2010 as a result of our Nimiq 5
agreement and our other new satellites to be placed in service.
Equipment, transitional services and other cost of sales. “Equipment, transitional services and
other cost of sales” totaled $121 million during the year ended December 31, 2009, a decrease of
$49 million or 28.6% compared to the same period in 2008. This decrease in “Equipment,
transitional services and other cost of sales” primarily resulted
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from lower non-subsidized sales of DBS accessories, a decline in charges for slow moving and
obsolete inventory and a decrease in services provided to EchoStar under our transitional services
agreement with EchoStar.
Subscriber acquisition costs. “Subscriber acquisition costs” totaled $1.540 billion for the year
ended December 31, 2009, an increase of $8 million or 0.5% compared to the same period in 2008.
This increase was primarily attributable to the increase in gross new subscribers discussed
previously, partially offset by lower SAC discussed below.
SAC. SAC was $697 during the year ended December 31, 2009 compared to $720 during the same period
in 2008, a decrease of $23, or 3.2%. This decrease was primarily attributable to a change in sales
channel mix and a decrease in hardware costs per activation, partially offset by an increase in
advertising costs. The decrease in hardware cost per activation was driven by a reduction in
manufacturing costs for new receivers and due to more cost-effective deployment of set-top boxes,
requiring less equipment per subscriber. These decreases in hardware costs were partially offset
by an increase in deployment of more advanced set-top boxes, such as HD receivers and HD DVRs.
During the years ended December 31, 2009 and 2008, the amount of equipment capitalized under our
lease program for new subscribers totaled $634 million and $604 million, respectively. This
increase in capital expenditures under our lease program for new subscribers resulted primarily
from the increase in gross new subscribers.
Capital expenditures resulting from our equipment lease program for new subscribers were partially
mitigated by the redeployment of equipment returned by disconnecting lease program subscribers.
However, to remain competitive we upgrade or replace subscriber equipment periodically as
technology changes, and the costs associated with these upgrades may be substantial. To the extent
technological changes render a portion of our existing equipment obsolete, we would be unable to
redeploy all returned equipment and consequently would realize less benefit from the SAC reduction
associated with redeployment of that returned lease equipment.
Our SAC calculation does not reflect any benefit from payments we received in connection with
equipment not returned to us from disconnecting lease subscribers and returned equipment that is
made available for sale or used in our existing customer lease program rather than being redeployed
through our new lease program. During the years ended December 31, 2009 and 2008, these amounts
totaled $94 million and $128 million, respectively.
Several years ago, we began deploying receivers that utilize 8PSK modulation technology and
receivers that utilize MPEG-4 compression technology. These technologies, when fully deployed,
will allow more programming channels to be carried over our existing satellites. A majority of our
customers today, however, do not have receivers that use MPEG-4 compression and a smaller but still
significant percentage do not have receivers that use 8PSK modulation. We may choose to invest
significant capital to accelerate the conversion of customers to MPEG-4 and/or 8PSK to realize the
bandwidth benefits sooner. In addition, given that all of our HD content is broadcast in MPEG-4,
any growth in HD penetration will naturally accelerate our transition to these newer technologies
and may increase our subscriber acquisition and retention costs. All new receivers that we
purchase from EchoStar now have MPEG-4 technology. Although we continue to refurbish and redeploy
MPEG-2 receivers, as a result of our HD initiatives and current promotions, we currently activate
most new customers with higher priced MPEG-4 technology. This limits our ability to redeploy
MPEG-2 receivers and, to the extent that our promotions are successful, will accelerate the
transition to MPEG-4 technology, resulting in an adverse effect on our SAC.
Our “Subscriber acquisition costs” and “SAC” may materially increase in the future to the extent
that we transition to newer technologies, introduce more aggressive promotions, or provide greater
equipment subsidies. See further discussion under “Liquidity
and Capital Resources — Subscriber
Acquisition and Retention Costs.”
General and administrative expenses. “General and administrative expenses” totaled $603 million
during the year ended December 31, 2009, an increase of $59 million or 10.8% compared to the same
period in 2008. This increase was primarily attributable to additional costs to support the DISH
Network television service including personnel costs and professional fees. “General and
administrative expenses” represented 5.2% and 4.7% of “Total revenue” during the years ended
December 31, 2009 and 2008, respectively. The increase in the ratio of the expenses to “Total
revenue” was primarily attributable to the increase in expenses discussed above.
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RESULTS OF OPERATIONS — Continued
Tivo litigation expense. We recorded $361 million of “Tivo litigation expense” during the year
ended December 31, 2009 for supplemental damages, contempt sanctions and interest. See Note 14 in
the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K
for further discussion.
Depreciation and amortization. “Depreciation and amortization” expense totaled $940 million during
the year ended December 31, 2009, a $60 million or 6.0% decrease compared to the same period in
2008. The decrease in “Depreciation and amortization” expense was primarily due to the declines in
depreciation expense related to set-top boxes used in our lease programs and the abandonment of a
software development project during 2008 that was designed to support our IT systems. The decrease
related to set-top-boxes was primarily attributable to capitalization of a higher mix of new
advanced equipment in 2009 compared to the same period in 2008, which has a longer estimated useful
life. In addition, the satellite depreciation expense declined due to the retirements of certain
satellites from commercial service, almost entirely offset by depreciation expense associated with
satellites placed in service in 2008.
Interest income. “Interest income” totaled $30 million during the year ended December 31, 2009, a
decrease of $21 million or 41.4% compared to the same period in 2008. This decrease principally
resulted from lower percentage returns earned on our cash and marketable investment securities,
partially offset by higher average cash and marketable investment securities balances during the
year ended December 31, 2009.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized”
totaled $388 million during the year ended December 31, 2009, an increase of $19 million or 5.0%
compared to the same period in 2008. This change primarily resulted from an increase in interest
expense related to the issuance of debt during 2009 and 2008 and the Ciel II capital lease,
partially offset by a decrease in interest expense associated with 2008 debt redemptions.
Other, net. “Other, net” expense totaled $16 million during the year ended December 31, 2009
compared to $169 million in 2008, a decrease of $153 million. This decrease primarily resulted
from $178 million less in impairment charges on marketable and other investment securities,
partially offset by $33 million less in net gains on the sale and exchanges of investments in 2009
compared to 2008.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $2.311 billion during
the year ended December 31, 2009, a decrease of $576 million or 20.0% compared to the same period
in 2008. EBITDA for the year ended December 31, 2009 was negatively impacted by the $361 million
“Tivo litigation expense.” The following table reconciles EBITDA to the accompanying financial
statements.
EBITDA is not a measure determined in accordance with accounting principles generally accepted
in the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. EBITDA is used as a measurement of
operating efficiency and overall financial performance and we believe it to be a helpful measure
for those evaluating companies in the pay-TV industry. Conceptually, EBITDA measures the amount of
income generated each period that could be used to service debt, pay taxes and fund capital
expenditures. EBITDA should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with GAAP.
Income tax (provision) benefit, net. Our income tax provision was $377 million during the year
ended December 31, 2009, a decrease of $288 million compared to the same period in 2008. The
decrease in the provision was primarily related to the decrease in “Income (loss) before income
taxes” and a decrease in our effective tax rate.
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RESULTS OF OPERATIONS — Continued
During the year ended December 31, 2008, our effective tax rate was negatively impacted by the
establishment of an $80 million valuation allowance against deferred tax assets, which are capital
in nature.
Net income (loss) attributable to DISH Network common shareholders. “Net income (loss)
attributable to DISH Network common shareholders” was $636 million during the year ended December
31, 2009, a decrease of $267 million compared to $903 million for the same period in 2008. The
decrease was primarily attributable to the changes in revenue and expenses discussed above.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007.
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RESULTS OF OPERATIONS — Continued
DISH Network subscribers. As of December 31, 2008, we had approximately 13.678 million DISH
Network subscribers compared to approximately 13.780 million subscribers at December 31, 2007, a
decrease of 102,000 or 0.7%. DISH Network added approximately 2.966 million gross new subscribers
for the year ended December 31, 2008, compared to approximately 3.434 million gross new subscribers
during 2007, a decrease of approximately 468,000 gross new subscribers.
DISH Network lost approximately 102,000 net subscribers for the year ended December 31, 2008,
compared to adding approximately 675,000 net new subscribers during the same period in 2007. This
decrease primarily resulted from lower gross new subscribers discussed above, an increase in our
subscriber churn rate, and churn on a larger average subscriber base for the year. Our average
monthly subscriber churn for the year ended December 31, 2008 was 1.86%, compared to 1.70% for the
same period in 2007.
We believe our gross and net subscriber additions as well as our subscriber churn were negatively
impacted by weak economic conditions, aggressive promotional and retention offerings by our
competition, our relative discipline in our own promotional and retention activities including the
amount of discounted programming or equipment we have offered, the heavy marketing of HD service by
our competition, the growth of fiber-based and Internet-based pay TV providers, signal theft and
other forms of fraud, and operational inefficiencies at DISH Network. Most of these factors have
affected both gross new subscriber additions as well as existing subscriber churn.
Subscriber-related revenue. DISH Network “Subscriber-related revenue” totaled $11.456 billion for
the year ended December 31, 2008, an increase of $765 million or 7.2% compared to 2007. This
increase was primarily related to the increase in “ARPU” discussed below and a higher average
subscriber base in 2008 compared to 2007.
ARPU. Average monthly revenue per subscriber was $69.27 during the year ended December 31, 2008
versus $65.83 during the same period in 2007. The $3.44 or 5.2% increase in ARPU was primarily
attributable to (i) price increases in February 2008 and 2007 on some of our most popular
programming packages, (ii) an increase in hardware related fees, including rental fees and fees for
DVRs, (iii) increased penetration of HD programming driven in part by the availability of HD local
channels, (iv) an increase in fees earned from our in-home service operations, and (v) increased
advertising revenue. This increase was partially offset by a decrease in revenue from our original
agreement with AT&T.
Equipment sales and other revenue. “Equipment sales and other revenue” totaled $124 million during
the year ended December 31, 2008, a decrease of $275 million or 68.9% compared to the same period
during 2007. The decrease in “Equipment sales and other revenue” primarily resulted from the
distribution of our set-top box business and certain other revenue-generating assets to EchoStar in
connection with the Spin-off, partially offset by increases in other revenue. During the year
ended December 31, 2007, our set-top box business that was distributed to EchoStar accounted for
$282 million of our “Equipment sales and other revenue.”
Equipment
sales, transitional services and other revenue — EchoStar. “Equipment sales,
transitional services and other revenue — EchoStar” totaled $37 million during the year ended
December 31, 2008 as a result of the Spin-off.
Subscriber-related expenses. “Subscriber-related expenses” totaled $5.977 billion during the year
ended December 31, 2008, an increase of $481 million or 8.7% compared to the same period in 2007.
The increase in “Subscriber-related expenses” was primarily attributable to higher costs for: (i)
programming content, (ii) customer retention, (iii) call center operations, (iv) in-home service
operations, (v) the refurbishment and repair of receiver systems used in our equipment lease
programs, partially offset by a decrease in costs associated with our original agreement with AT&T.
The increase in customer retention expense was primarily driven by more upgrading of existing
customers to HD and DVR receivers and the changing of equipment for certain subscribers to make
more efficient use of satellite bandwidth in support of HD and other initiatives. We believe that
the benefit from the increase in available satellite bandwidth outweighs the short-term cost of
these equipment changes. The increases related to call center and in-home service operations were
driven in part by our investments in staffing, training, information systems, and other
initiatives. These investments are intended to help combat inefficiencies introduced by the
increasing
complexity of our business and technology, improve customer satisfaction, reduce churn, increase
productivity, and allow us to better scale our business over the long run. We cannot, however, be
certain that our increased spending will ultimately yield these benefits. In the meantime, we may
continue to incur higher costs as a result of both our operational inefficiencies and increased
spending. “Subscriber-related expenses” represented 52.2% and 51.4% of
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RESULTS OF OPERATIONS -Continued
“Subscriber-related revenue” during the years ended December 31, 2008 and 2007, respectively. The
increase in this expense to revenue ratio primarily resulted from the increase in
“Subscriber-related expenses,” partially offset by an increase in ARPU.
Satellite and transmission expenses — EchoStar. “Satellite and transmission expenses — EchoStar”
totaled $305 million during the year ended December 31, 2008. As previously discussed, “Satellite
and transmission expenses — EchoStar” resulted from costs associated with the services provided to
us by EchoStar, including the satellite and transponder capacity leases on satellites that were
distributed to EchoStar in connection with the Spin-off, and digital broadcast operations
previously provided internally at cost.
Satellite and transmission expenses — other. “Satellite and transmission expenses — other” totaled
$32 million during the year ended December 31, 2008, a decrease of $148 million or 82.1% compared
to the same period in 2007. As previously discussed, prior to the Spin-off, “Satellite and
transmission expenses — other” included costs associated with the operation of our digital
broadcast centers, including satellite uplinking/downlinking, signal processing, conditional access
management, telemetry, tracking and control, satellite and transponder leases, and other related
services. Following the Spin-off, these digital broadcast operation services have been provided to
us by EchoStar and are included in “Satellite and transmission expenses — EchoStar.”
Equipment, transitional services and other cost of sales. “Equipment, transitional services and
other cost of sales” totaled $170 million during the year ended December 31, 2008, a decrease of
$112 million or 39.7% compared to the same period in 2007. The decrease primarily resulted from
the elimination of the cost of sales related to the distribution of our set-top box business to
EchoStar in connection with the Spin-off, partially offset by costs related to our transitional
services and other agreements with EchoStar, charges for obsolete inventory, and an increase in
other cost of sales. During the year ended December 31, 2007, the costs associated with our
set-top box business that was distributed to EchoStar accounted for $163 million of our “Equipment,
transitional services and other cost of sales.”
Subscriber acquisition costs. “Subscriber acquisition costs” totaled $1.532 billion for the year
ended December 31, 2008, a decrease of $39 million or 2.5% compared to the same period in 2007.
This decrease was primarily attributable to the decline in gross new subscribers, partially offset
by an increase in SAC discussed below.
SAC. SAC was $720 during the year ended December 31, 2008 compared to $656 during the same period
in 2007, an increase of $64, or 9.8%. This increase was primarily attributable to an increase in
equipment costs, as well as higher acquisition advertising expense and an increase in promotional
incentives paid to our independent retailer network. Our equipment costs were higher during 2008
as a result of an increase in the number of new DISH Network subscribers selecting more advanced
equipment, such as HD receivers, DVRs and receivers with multiple tuners and as a result of the
Spin-off of our set-top box business to EchoStar. Set-top boxes were historically designed
in-house and procured at our cost. We now acquire this equipment from EchoStar at its cost plus an
agreed-upon margin. These increases were partially offset by the increase in the redeployment
benefits of our equipment lease program for new subscribers.
During the years ended December 31, 2008 and 2007, the amount of equipment capitalized under our
lease program for new subscribers totaled $604 million and $682 million, respectively. This
decrease in capital expenditures under our lease program for new subscribers resulted primarily
from lower subscriber growth and an increase in redeployment of equipment returned by disconnecting
lease program subscribers, partially offset by higher equipment costs resulting from higher priced
advanced products and the mark-up on set-top boxes as a result of the Spin-off, discussed above.
Our SAC calculation does not reflect any benefit from payments we received in connection with
equipment not returned to us from disconnecting lease subscribers and returned equipment that is
made available for sale or used in our existing customer lease program rather than being redeployed
through our new lease program. During the years ended December 31, 2008 and 2007, these amounts
totaled $128 million and $87 million, respectively.
General and administrative expenses. “General and administrative expenses” totaled $544 million
during the year ended December 31, 2008, a decrease of $80 million or 12.8% compared to the same
period in 2007. This decrease was primarily attributable to the reduction in headcount and
administrative costs resulting from the Spin-off and a reduction in outside professional fees,
partially offset by an increase in costs related to transitional services and
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RESULTS OF OPERATIONS — Continued
commercial agreements with EchoStar as a result of the Spin-off. In addition, the 2007 amount
included $22 million of in-process research and development costs associated with the acquisition
of Sling Media in the fourth quarter 2007. “General and administrative expenses” represented 4.7%
and 5.6% of “Total revenue” during the years ended December 31, 2008 and 2007, respectively. The
decrease in the ratio of the expenses to “Total revenue” was primarily attributable to the changes
in expenses discussed above.
Tivo litigation expense. The 2007 “Litigation expense” of $34 million related to the Tivo
litigation and represents the estimated cost of any software infringement prior to the
implementation of the alternative technology, plus interest subsequent to the jury verdict.
Depreciation and amortization. “Depreciation and amortization” expense totaled $1.000 billion
during the year ended December 31, 2008, a decrease of $329 million or 24.8% compared to the same
period in 2007. This decrease was primarily a result of our contribution of several satellites,
uplink and satellite transmission assets, real estate and other assets to EchoStar in connection
with the Spin-off. In addition, the 2007 expense included the write-off of costs associated with
discontinued software development projects.
Interest income. “Interest income” totaled $51 million during the year ended December 31, 2008, a
decrease of $87 million or 62.9% compared to the same period in 2007. This decrease principally
resulted from lower average carrying balances, as well as rate of return, of our cash and
marketable investment securities during 2008 compared to the same period in 2007.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized”
totaled $370 million during the year ended December 31, 2008, a decrease of $35 million or 8.7%
compared to the same period in 2007. This decrease primarily resulted from the reduction in
interest expense associated with 2007 and 2008 debt redemptions and the contribution of satellite
capital leases to EchoStar in connection with the Spin-off, partially offset by an increase in
interest expense related to the issuance of debt during 2008.
Other, net. “Other, net” expense totaled $169 million during the year ended December 31, 2008, an
increase of $113 million compared to the same period in 2007. This change primarily resulted from
an increase of $191 million related to impairments of marketable investment securities, partially
offset by a gain of $53 million on the sale of a non-marketable investment and a $33 million
decline in unrealized losses and impairments on our other investment securities.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $2.888 billion during
the year ended December 31, 2008, an increase of $41 million or 1.4% compared to the same period in
2007. EBITDA for the year ended December 31, 2008 was negatively impacted by changes in revenue
and expenses discussed above, including the $113 million increase in “Other” expense. The
following table reconciles EBITDA to the accompanying financial statements.
EBITDA is not a measure determined in accordance with accounting principles generally accepted
in the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. EBITDA is used as a measurement of
operating efficiency and overall financial performance and we believe it to be a helpful measure
for those evaluating companies in the pay-TV industry. Conceptually, EBITDA measures the amount of
income generated each period that could be used to
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RESULTS OF OPERATIONS — Continued
service debt, pay taxes and fund capital expenditures. EBITDA should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with GAAP.
Income tax (provision) benefit, net. Our income tax provision was $666 million during the year
ended December 31, 2008, an increase of $172 million compared to the same period in 2007. The
increase was primarily due to the increase in “Income (loss) before income taxes” and in our
effective tax rate during the period. The increase in our effective tax rate was primarily due to
the establishment of an $80 million valuation allowance against deferred tax assets, which are
capital in nature, related to the impairment of marketable and non-marketable investment securities
in 2008.
Net income (loss) attributable to DISH Network common shareholders. Net income attributable to
DISH Network common shareholders was $903 million during the year ended December 31, 2008, an
increase of $147 million compared to $756 million for the same period in 2007. The increase was
primarily attributable to the changes in revenue and expenses discussed above.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Current Marketable Investment Securities
We consider all liquid investments purchased within 90 days of their maturity to be cash
equivalents. See “Item 7A. — Quantitative and Qualitative Disclosures About Market Risk” for
further discussion regarding our marketable investment securities. As of December 31, 2009, our
cash, cash equivalents and current marketable investment securities totaled $2.139 billion
compared to $559 million as of December 31, 2008, an increase of $1.580 billion. This increase
in cash, cash equivalents and current marketable investment securities was primarily related to
cash generated from operations of $2.195 billion and the net proceeds of $1.377 billion related
to our 7 3/8% Senior Notes due 2019 issued in 2009, partially offset by capital expenditures of
$1.037 billion and the $894 million dividend paid on our Class A and Class B common stock.
We have investments in various debt and equity instruments including corporate bonds, corporate
equity securities, government bonds, and variable rate demand notes (“VRDNs”). VRDNs are long-term
floating rate municipal bonds with embedded put options that allow the bondholder to sell the
security at par plus accrued interest. All of the put options are secured by a pledged liquidity
source. Our VRDN portfolio is comprised of investments in many municipalities, which are backed by
financial institutions or other highly rated companies that serve as the pledged liquidity source.
While they are classified as marketable investment securities, the put option allows VRDNs to be
liquidated on a same day or on a five business day settlement basis. As of December 31, 2009 and
2008, we held VRDNs with fair values of $1.054 billion and $240 million, respectively.
The following discussion highlights our cash flow activities during the years ended December 31,
2009, 2008 and 2007.
Free Cash Flow
We define free cash flow as “Net cash flows from operating activities” less “Purchases of property
and equipment,” as shown on our Consolidated Statements of Cash Flows. We believe free cash flow
is an important liquidity metric because it measures, during a given period, the amount of cash
generated that is available to repay debt obligations, make investments, fund acquisitions and for
certain other activities. Free cash flow is not a measure determined in accordance with GAAP and
should not be considered a substitute for “Operating income,” “Net income,” “Net cash flows from
operating activities” or any other measure determined in accordance with GAAP. Since free cash
flow includes investments in operating assets, we believe this non-GAAP liquidity measure is useful
in addition to the most directly comparable GAAP measure “Net cash flows from operating
activities.”
During the years ended December 31, 2009, 2008 and 2007, free cash flow was significantly impacted
by changes in operating assets and liabilities as shown in the “Net cash flows from operating
activities” section of our Consolidated Statements of Cash Flows included herein. Operating asset
and liability balances can fluctuate significantly from period to period and there can be no
assurance that free cash flow will not be negatively impacted by material changes in operating
assets and liabilities in future periods, since these changes depend upon, among other things,
management’s timing of payments and control of inventory levels, and cash receipts. In addition to
fluctuations resulting from changes in operating assets and liabilities, free cash flow can vary
significantly from period to period depending upon, among other things, subscriber growth,
subscriber revenue, subscriber churn, subscriber acquisition costs including amounts capitalized
under our equipment lease programs, operating efficiencies, increases or decreases in purchases of
property and equipment and other factors.
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RESULTS OF OPERATIONS — Continued
The following table reconciles free cash flow to “Net cash flows from operating activities.”
The increase in free cash flow from 2008 to 2009 of $99 million resulted from an increase in
“Net cash flows from operating activities” of $6 million or 0.3% and a decrease in “Purchases of
property and equipment” of $93 million or 8.2%. The increase in “Net cash flows from operating
activities” was primarily attributable to an $877 million increase in cash resulting from changes
in operating assets and liabilities, partially offset by a $871 million decrease in net income,
adjusted to exclude non-cash changes in “Depreciation and amortization” expense, “Realized and
unrealized losses (gains) on investments,” and “Deferred income tax expense (benefit).” The
increase in cash resulting from changes in operating assets and liabilities primarily relates to
timing differences between book expense and cash payments, including a $361 million increase in the
Tivo litigation accrual and a $386 million increase in cash flow related to working capital changes
and other long-term operating assets. The decrease in “Purchases of property and equipment” in
2009 was primarily attributable to a decline in expenditures for satellite construction, and
equipment under our lease program for existing subscribers, partially offset by increased spending
for equipment under our lease program for new subscribers.
The decline in free cash flow from 2007 to 2008 of $114 million resulted from a decrease in “Net
cash flows from operating activities” of $429 million, or 16.4%, partially offset by a decrease in
“Purchases of property and equipment” of $315 million, or 21.8%. The decrease in “Net cash flows
from operating activities” was primarily attributable to a $351 million decrease in cash resulting
from changes in operating assets and liabilities and a $59 million decrease in net income, adjusted
to exclude non-cash changes in “Depreciation and amortization” expense and “Realized and unrealized
losses (gains) on investments.” The decrease in cash resulting from changes in operating assets
and liabilities primarily relates to increases in cash outflows of $619 million resulting from
changes in accounts payable, accounts receivable, income tax receivable, deferred revenue and
inventories, partially offset by a $277 million increase in net amounts payable to EchoStar. The
decrease in “Purchases of property and equipment” in 2008 was primarily attributable to a decline
in expenditures for satellite construction, corporate capital expenditures, and equipment under our
lease program for new subscribers, partially offset by increased spending for equipment under our
lease program for existing subscribers.
Cash flows from operating activities. We typically reinvest the cash flow from operating
activities in our business primarily to grow our subscriber base and to expand our infrastructure.
For the years ended December 31, 2009, 2008 and 2007, we reported net cash flows from operating
activities of $2.195 billion, $2.188 billion, and $2.617 billion, respectively. See discussion of
changes in net cash flows from operating activities included in “Free cash flow” above.
Cash flows from investing activities. Our investing activities generally include purchases and
sales of marketable investment securities, strategic investments and cash used to grow our
subscriber base and expand our infrastructure. For the years ended December 31, 2009, 2008 and
2007, we reported net cash outflows from investing activities of $2.606 billion, $1.597 billion and
$2.471 billion, respectively. During the years ended December 31, 2009, 2008 and 2007, capital
expenditures for new and existing customer equipment totaled $876 million, $920 million and $928
million, respectively.
The increase in net cash outflows from investing activities from 2008 to 2009 of $1.008 billion
primarily resulted from a net increase in purchases of marketable investment securities, a decrease
in proceeds from the sale of investments and
an increase in cash used for the purchases of strategic investments. The overall net increases
were partially offset by cash used for purchases of FCC licenses during 2008 and a decrease in cash
used for purchases of property and equipment during 2009 compared to 2008.
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RESULTS OF OPERATIONS — Continued
The decrease in net cash outflows from investing activities from 2007 to 2008 of $873 million
primarily resulted from a net decrease in purchases of marketable investment securities, a decrease
in cash used for purchases of property and equipment, a decrease in cash used for the purchases of
strategic investments, including Sling Media, and an increase in proceeds from the sale of
investments. The overall net decreases were partially offset by an increase in cash used for
purchases of FCC licenses during 2008 compared to 2007.
Cash flows from financing activities. Our financing activities generally include net proceeds
related to the issuance of long-term debt, cash used for the repurchase, redemption or payment of
long-term-debt and capital lease obligations, dividends paid on our Class A and Class B common
stock and repurchases of our Class A common stock. For the year ended December 31, 2009, we
reported net cash inflows from financing activities of $418 million. For the years ended December
31, 2008 and 2007, we reported net cash outflows from financing activities of $1.412 billion and
$976 million, respectively.
The increase in net cash inflows from 2008 to 2009 primarily resulted from a decrease in the
repayment of long-term debt and capital lease obligations, an increase in the net proceeds related
to the issuance of long-term debt and a decline in stock repurchases. This increase in net cash
inflows was partially offset by the dividend payment of $894 million during 2009. In addition, the
2008 cash outflows were negatively impacted by the distribution to EchoStar related to the
Spin-off.
The increase in net cash outflows from 2007 to 2008 includes an increase in cash outflows for debt
redemptions, distributions related to the Spin-off and stock repurchases. This increase in net cash
outflows was partially offset by an increase in cash inflows related to issuance of new debt during
2008.
Other Liquidity Items
700 MHz Spectrum
In 2008, we paid $712 million to acquire certain 700 MHz wireless licenses, which were granted to
us by the FCC in February 2009. To commercialize these licenses and satisfy FCC build-out
requirements, we will be required to make significant additional investments or partner with
others. Depending on the nature and scope of such commercialization and build-out, any such
investment or partnership could vary significantly. Part or all of our licenses may be terminated
for failure to satisfy FCC build-out requirements. We are currently performing a market test to
evaluate different technologies and consumer acceptance.
Subscriber Churn
DISH Network added approximately 422,000 net new subscribers for the year ended December 31, 2009,
compared to losing approximately 102,000 net subscribers during the same period in 2008. This
increase primarily resulted from an increase in gross new subscribers and a decrease in our
subscriber churn rate to 1.64% compared to 1.86% for the same period in 2008. See “Results of
Operations” above for further discussion.
Our distribution relationship with AT&T was a substantial contributor to our gross and net
subscriber additions in prior years, accounting for approximately 17% of our gross subscriber
additions for the year ended December 31, 2008. This distribution relationship ended January 31,
2009. Consequently, beginning with the second quarter 2009, AT&T no longer contributed to our
gross subscriber additions. In addition, nearly one million of our current subscribers were
acquired through our distribution relationship with AT&T and subscribers acquired through this
channel have historically churned at a higher rate than our overall subscriber base. Although AT&T
is not permitted to target these subscribers for transition to another pay-TV service and we and
AT&T are required to maintain
bundled billing and cooperative customer service for these subscribers, these subscribers may
continue to churn at higher than historical rates following termination of the AT&T distribution
relationship.
Satellites
Operation of our subscription television service requires that we have adequate satellite
transmission capacity for the programming we offer. Moreover, current competitive conditions
require that we continue to expand our offering of new programming, particularly by expanding local
HD coverage and offering more HD national channels. While
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RESULTS OF OPERATIONS — Continued
we generally have had in-orbit satellite capacity sufficient to transmit our existing channels and
some backup capacity to recover the transmission of certain critical programming, our backup
capacity is limited. In the event of a failure or loss of any of our satellites, we may need to
acquire or lease additional satellite capacity or relocate one of our other satellites and use it
as a replacement for the failed or lost satellite. Such a failure could result in a prolonged loss
of critical programming or a significant delay in our plans to expand programming as necessary to
remain competitive and cause us to expend a significant portion of our cash to acquire or lease
additional satellite capacity.
Security Systems
Increases in theft of our signal, or our competitors’ signals, could in addition to reducing new
subscriber activations, also cause subscriber churn to increase. We use microchips embedded in
credit card-sized access cards, called “smart cards,” or security chips in our receiver systems to
control access to authorized programming content (“Security Access Devices”). Our signal
encryption has been compromised in the past and may be compromised in the future even though we
continue to respond with significant investment in security measures, such as Security Access
Device replacement programs and updates in security software, that are intended to make signal
theft more difficult. It has been our prior experience that security measures may only be
effective for short periods of time or not at all and that we remain susceptible to additional
signal theft. During the second quarter of 2009, we completed the replacement of our Security
Access Devices that re-secured our system. However, we expect additional future replacements of
these devices will be necessary to keep our system secure. We cannot ensure that we will be
successful in reducing or controlling theft of our programming content and we may incur additional
costs in the future if our system’s security is compromised.
Stock Repurchases
Our Board of Directors previously authorized stock repurchases of up to $1.0 billion of our Class A
common stock. During the year ended December 31, 2009, we repurchased 1.9 million shares of our
common stock for $19 million. On November 3, 2009, our Board of Directors extended the plan and
authorized an increase in the maximum dollar value of shares that may be repurchased under the
plan, such that we are currently authorized to repurchase up to $1.0 billion of our outstanding
shares through and including December 31, 2010.
Subscriber Acquisition and Retention Costs
We incur significant upfront costs to acquire subscribers, including advertising, retailer
incentives, equipment, installation, and new customer promotions. While we attempt to recoup these
upfront costs over the lives of their subscription, there can be no assurance that we will. We
deploy business rules such as credit requirements and commitments to receive service for a minimum
term, and we strive to provide outstanding customer service, to increase the likelihood of
customers keeping their DISH Network service over longer periods of time. Our subscriber
acquisition costs may vary significantly from period to period.
We incur significant costs to retain our existing customers, mostly by upgrading their equipment to
HD and DVR receivers. As with our subscriber acquisition costs, our retention spending includes
the cost of equipment and installation. In certain circumstances, we also offer free programming
and/or promotional pricing for limited
periods for existing customers in exchange for a contractual commitment. A component of our
retention efforts includes the installation of equipment for customers who move. Our subscriber
retention costs may vary significantly from period to period.
Other
We are also vulnerable to fraud, particularly in the acquisition of new subscribers. While we are
addressing the impact of subscriber fraud through a number of actions, including eliminating
certain payment options for subscribers, there can be no assurance that we will not continue to
experience fraud which could impact our subscriber growth and churn. The weak economic conditions
may create greater incentive for signal theft and subscriber fraud, which could lead to higher
subscriber churn and reduced revenue.
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
Obligations and Future Capital Requirements
Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2009, future maturities of our debt and contractual obligations are summarized
as follows:
The table above does not include $240 million of liabilities associated with unrecognized tax
benefits which were accrued, as discussed in Note 10 in the Notes to the Consolidated Financial
Statements in Item 15 of this Annual Report on Form 10-K, and are included on our Consolidated
Balance Sheets as of December 31, 2009. We do not expect any portion of this amount to be paid or
settled within the next twelve months.
In certain circumstances the dates on which we are obligated to make these payments could be
delayed. These amounts will increase to the extent we procure insurance for our satellites or
contract for the construction, launch or lease of additional satellites.
We have semi-annual cash interest requirements for our outstanding long-term debt securities, which
are included in the table above. See Note 9 in the Notes to the Consolidated Financial Statements
in Item 15 of this Annual Report on Form 10-K for details.
Other than the “Guarantees” disclosed in Note 14 to our Consolidated Financial Statements in Item
15 of this Annual Report on Form 10-K., we generally do not engage in off-balance sheet financing
activities.
Satellite-Related Obligations
Satellites Under Construction. As of December 31, 2009, we had entered into the following
contracts to construct new satellites which are contractually scheduled to be completed within the
next year. Future commitments related to these satellites are included in the table above under
“Satellite-related obligations” except where noted below.
In addition, we have agreed to lease capacity on two satellites from EchoStar that are currently
under construction. Future commitments related to these satellites are included in the table above
under “Satellite-related obligations.”
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
Satellite Insurance
We currently have no commercial insurance coverage on the satellites we own. We do not use
commercial insurance to mitigate the potential financial impact of in-orbit failures because we
believe that the premium costs are uneconomical relative to the risk of satellite failure. While
we generally have had in-orbit satellite capacity sufficient to transmit our existing channels and
some backup capacity to recover the transmission of certain critical programming, our backup
capacity is limited. In the event of a failure or loss of any of our satellites, we may need to
acquire or lease additional satellite capacity or relocate one of our other satellites and use it
as a replacement for the failed or lost satellite.
Purchase Obligations
Our 2010 purchase obligations primarily consist of binding purchase orders for receiver systems and
related equipment, digital broadcast operations, satellite and transponder leases, engineering and
for products and services related to the operation of our DISH Network. Our purchase obligations
also include certain guaranteed fixed contractual commitments to purchase programming content. Our
purchase obligations can fluctuate significantly from period to period due to, among other things,
management’s control of inventory levels, and can materially impact our future operating asset and
liability balances, and our future working capital requirements.
Programming Contracts
In the normal course of business, we enter into contracts to purchase programming content in which
our payment obligations are fully contingent on the number of subscribers to whom we provide the
respective content. These programming commitments are not included in the “Contractual obligations
and off-balance sheet arrangements” table above. The terms of our contracts typically range from
one to ten years with annual rate increases. Our programming expenses will continue to increase to
the extent we are successful growing in our subscriber base. In addition, our margins may face
further downward pressure from price increases and the renewal of long term programming contracts
on less favorable pricing terms.
Future Capital Requirements
We expect to fund our future working capital, capital expenditure and debt service requirements
from cash generated from operations, existing cash and marketable investment securities balances,
and cash generated through new additional capital. The amount of capital required to fund our
future working capital and capital expenditure needs varies, depending on, among other things, the
rate at which we acquire new subscribers and the cost of subscriber acquisition and retention,
including capitalized costs associated with our new and existing subscriber equipment lease
programs. The majority of our capital expenditures for 2010 are driven by the costs associated
with subscriber premises equipment, included in our firm purchase obligations, as well as capital
expenditures for our satellite-related obligations. These expenditures are necessary to operate
and maintain the DISH Network television service. Consequently, we consider them to be
non-discretionary. The amount of capital required will also depend on the levels of investment
necessary to support potential strategic initiatives, including our plans to expand our national
and local HD offerings and other strategic opportunities that may arise from time to time. Our
capital expenditures vary depending on the number of satellites leased or under construction at any
point in time, and could increase materially as a result of increased competition, significant
satellite failures, or continued weak economic conditions. These factors could require that we
raise additional capital in the future.
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we
are not successful in developing and deploying potential new alternative technology and we are
unable to reach a license agreement with Tivo on reasonable terms, we would be required to
eliminate DVR functionality in all but approximately 192,000 digital set-top boxes in the field and
cease distribution of digital set-top boxes with DVR functionality. In that event we would be at a
significant disadvantage to our competitors who could continue offering DVR functionality, which
would likely result in a significant decrease in new subscriber additions as well as a substantial
loss of current subscribers. Furthermore, the inability to offer DVR functionality could cause
certain
of our distribution channels to terminate or significantly decrease their marketing of DISH Network
services. The adverse effect on our financial position and results of operations if the District
Court’s contempt order is upheld is
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
likely to be significant. Additionally, the supplemental damage award of $103 million and further
award of approximately $200 million does not include damages, contempt sanctions or interest for
the period after June 2009. In the event that we are unsuccessful in our appeal, we could also
have to pay substantial additional damages, contempt sanctions and interest. Depending on the
amount of any additional damage or sanction award or any monetary settlement, we may be required to
raise additional capital at a time and in circumstances in which we would normally not raise
capital. Therefore, any capital we raise may be on terms that are unfavorable to us, which might
adversely affect our financial position and results of operations and might also impair our ability
to raise capital on acceptable terms in the future to fund our own operations and initiatives. We
believe the cost of such capital and its terms and conditions may be substantially less attractive
than our previous financings.
If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but
unsuccessful in defending against any subsequent claim in a new action that our original
alternative technology or any potential new alternative technology infringes Tivo’s patent, we
could be prohibited from distributing DVRs or could be required to modify or eliminate our
then-current DVR functionality in some or all set-top boxes in the field. In that event we would
be at a significant disadvantage to our competitors who could continue offering DVR functionality
and the adverse effect on our business could be material. We could also have to pay substantial
additional damages.
Because both we and EchoStar are defendants in the Tivo lawsuit, we and EchoStar are jointly and
severally liable to Tivo for any final damages and sanctions that may be awarded by the District
Court. We have determined that we are obligated under the agreements entered into in connection
with the Spin-off to indemnify EchoStar for substantially all liability arising from this lawsuit.
EchoStar has agreed to contribute an amount equal to its $5 million intellectual property liability
limit under the Receiver Agreement. We and EchoStar have further agreed that EchoStar’s $5 million
contribution would not exhaust EchoStar’s liability to us for other intellectual property claims
that may arise under the Receiver Agreement. We and EchoStar also agreed that we would each be
entitled to joint ownership of, and a cross-license to use, any intellectual property developed in
connection with any potential new alternative technology.
From time to time we evaluate opportunities for strategic investments or acquisitions that may
complement our current services and products, enhance our technical capabilities, improve or
sustain our competitive position, or otherwise offer growth opportunities. We may make investments
in or partner with others to expand our business into mobile and portable video, IPTV, data and
voice services. Future material investments or acquisitions may require that we obtain additional
capital, assume third party debt or incur other long-term obligations.
In 2008, we paid $712 million to acquire certain 700 MHz wireless licenses, which were granted to
us by the FCC in February 2009. To commercialize these licenses and satisfy FCC build-out
requirements, we will be required to make significant additional investments or partner with
others. Depending on the nature and scope of such commercialization and build-out, any such
investment or partnership could vary significantly. Part or all of our licenses may be terminated
for failure to satisfy FCC build-out requirements. We are currently performing a market test to
evaluate different technologies and consumer acceptance.
Recent developments in the financial markets have made it more difficult for issuers of high-yield
indebtedness, such as us, to access capital markets at acceptable terms. These developments may
have a significant effect on our cost of financing and our liquidity position.
A portion of our investment portfolio is invested in auction rate securities, mortgage backed
securities, and strategic investments and as a result a portion of our portfolio has restricted
liquidity. Liquidity in the markets for these investments has been impacted in the past year and
these market conditions have adversely affected our liquidity. In addition, certain of these
securities have defaulted or have been materially downgraded, causing us to record impairment
charges. If the credit ratings of these securities further deteriorate or the lack of liquidity in
the
marketplace becomes prolonged, we may be required to record further impairment charges. Moreover,
the current significant volatility of domestic and global financial markets has greatly affected
the volatility and value of our marketable investment securities. To the extent we require access
to funds, we may need to sell these securities under unfavorable market conditions, record further
impairment charges and fall short of our financing needs.
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
Credit Ratings
Our current credit ratings are Ba3 and BB- on our long-term senior notes as rated by Moody’s
Investor Service (“Moody’s”) and Standard and Poor’s (“S&P”) Rating Service, respectively. Debt
ratings by the various rating agencies reflect each agency’s opinion of the ability of issuers to
repay debt obligations as they come due.
According to Moody’s, a Ba3 rating indicates that the obligations are judged to have speculative
elements and are subject to substantial credit risk. According to S&P, a BB- rating indicates the
issuer is less vulnerable to nonpayment of interest and principal obligations than other
speculative issues. However, the issuer faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity
to meet its financial commitment on the obligation.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires
management to make estimates, judgments and assumptions that affect amounts reported therein.
Management bases its estimates, judgments and assumptions on historical experience and on various
other factors that are believed to be reasonable under the circumstances. Due to the inherent
uncertainty involved in making estimates, actual results reported in future periods may be affected
by changes in those estimates. The following represent what we believe are the critical accounting
policies that may involve a high degree of estimation, judgment and complexity. For a summary of
our significant accounting policies, including those discussed below, see Note 2 in the Notes to
the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS — Continued
New Accounting Pronouncements
Revenue
Recognition — Multiple-Deliverable Arrangements
In October 2009, the Financial Accounting Standards Board issued Accounting Standards Update
2009-13 (“ASU 2009-13”), Revenue Recognition — Multiple-Deliverable Revenue Arrangements. ASU
2009-13 changes the requirements for establishing separate units of accounting in a multiple
element arrangement and requires the allocation of arrangement consideration to each deliverable to
be based on the relative selling price. We are currently evaluating the impact, if any, ASU
2009-13 will have on our consolidated financial statements, when adopted, as required, on January
1, 2011.
Seasonality
Historically, the first half of the year generally produces fewer new subscribers than the second
half of the year, as is typical in the pay-TV service industry. However, we can not provide
assurance that this will continue in the future.
Inflation
Inflation has not materially affected our operations during the past three years. We believe that
our ability to increase the prices charged for our products and services in future periods will
depend primarily on competitive pressures.
Backlog
We do not have any material backlog of our products.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks Associated With Financial Instruments
Our investments and debt are exposed to market risks, discussed below.
Cash, Cash Equivalents and Current Marketable Investment Securities
As of December 31, 2009, our cash, cash equivalents and current marketable investment securities
had a fair value of $2.139 billion. Of that amount, a total of $1.975 billion was invested in:
(a) cash; (b) VRDNs convertible into cash at par value plus accrued interest in five business days
or less; (c) debt instruments of the United States Government and its agencies; (d) commercial
paper and corporate notes with an overall average maturity of less
than one year and rated in one of the four highest rating categories by at least two nationally
recognized statistical rating organizations; and (e) instruments with similar risk, duration and
credit quality characteristics to the commercial paper and corporate obligations described above.
The primary purpose of these investing activities has been to preserve principal until the cash is
required to, among other things, fund operations, make strategic investments and expand the
business. Consequently, the size of this portfolio fluctuates significantly as cash is received
and used in our business. The value of this portfolio is negatively impacted by credit losses;
however, this risk is mitigated through diversification that limits our exposure to any one issuer.
Interest Rate Risk
A change in interest rates would affect the fair value of our cash, cash equivalents and current
marketable investment securities portfolio. Based on our December 31, 2009 current non-strategic
investment portfolio of $1.975 billion, a hypothetical 10% increase in average interest rates would
result in a decrease of approximately $33
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Continued
million in fair value of this portfolio. We normally hold these investments to maturity; however,
the hypothetical loss in fair value would be realized if we sold the investments prior to maturity.
Our cash, cash equivalents and current marketable investment securities had an average annual rate
of return for the year ended December 31, 2009 of 0.8%. A change in interest rates would affect
our future annual interest income from this portfolio, since funds would be re-invested at
different rates as the instruments mature. A hypothetical 10% decrease in average interest rates
during 2009 would result in a decrease of approximately $1 million in annual interest income.
Strategic Marketable Investment Securities
As of December 31, 2009, we held strategic and financial debt and equity investments of public
companies with a fair value of $164 million. These investments, which are held for strategic and
financial purposes, are concentrated in a small number of companies, are highly speculative and
have experienced and continue to experience volatility. The fair value of our strategic and
financial debt and equity investments can be significantly impacted by the risk of adverse changes
in securities markets generally, as well as risks related to the performance of the companies whose
securities we have invested in, risks associated with specific industries, and other factors.
These investments are subject to significant fluctuations in fair value due to the volatility of
the securities markets and of the underlying businesses. In general, the debt instruments held in
our strategic marketable investment securities portfolio are not significantly impacted by interest
rate fluctuations as their value is more closely related to factors specific to the underlying
business. A hypothetical 10% adverse change in the price of our public strategic debt and equity
investments would result in a decrease of approximately $16 million in the fair value of these
investments.
Restricted Cash and Marketable Investment Securities and Noncurrent Marketable and Other Investment
Securities
Restricted Cash and Marketable Investment Securities
As of December 31, 2009, we had $141 million of restricted cash and marketable investment
securities invested in: (a) cash; (b) debt instruments of the United States Government and its
agencies; (c) commercial paper and corporate notes with an overall average maturity of less than
one year and rated in one of the four highest rating categories by at least two nationally
recognized statistical rating organizations; and (d) instruments with similar risk, duration and
credit quality characteristics to the commercial paper described above. Based on our December 31,
2009 investment portfolio, a hypothetical 10% increase in average interest rates would not have a
material impact in the fair value of our restricted cash and marketable investment securities.
Noncurrent Auction Rate and Mortgage Backed Securities
As of December 31, 2009, we held investments in auction rate securities (“ARS”) and mortgage backed
securities (“MBS”) of $121 million, which are reported at fair value. Events in the credit markets
have reduced or eliminated current liquidity for certain of our ARS and MBS investments. As a
result, we classify these investments as noncurrent assets as we intend to hold these investments
until they recover or mature, and therefore interest rate risk associated with these securities is
mitigated. A hypothetical 10% adverse change in the price of these investments would result in a
decrease of approximately $12 million in the fair value of these investments.
Other Investment Securities
As of December 31, 2009, we had $50 million of nonpublic debt and equity instruments that we hold
for strategic business purposes. We account for these investments under the cost, equity and fair
value methods of accounting.
Our ability to realize value from our strategic investments in companies that are not publicly
traded depends on the success of those companies’ businesses and their ability to obtain sufficient
capital to execute their business plans. Because private markets are not as liquid as public
markets, there is also increased risk that we will not be able to sell these investments, or that
when we desire to sell them we will not be able to obtain fair value for them. A hypothetical 10%
adverse change in the price of these nonpublic debt and equity instruments would result in a
decrease of approximately $5 million in the fair value of these investments.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Continued
Fixed Rate Debt, Mortgages and Other Notes Payable
As of December 31, 2009, we had fixed-rate debt, mortgages and other notes payable of $6.192
billion on our Consolidated Balance Sheets. We estimated the fair value of this debt to be
approximately $6.407 billion using quoted market prices for our publicly traded debt, which
constitutes approximately 99% of our debt. The fair value of our debt is affected by fluctuations
in interest rates. A hypothetical 10% decrease in assumed interest rates would increase the fair
value of our debt by approximately $192 million. To the extent interest rates increase, our costs
of financing would increase at such time as we are required to refinance our debt. As of December
31, 2009, a hypothetical 10% increase in assumed interest rates would increase our annual interest
expense by approximately $44 million.
Derivative Financial Instruments
In general, we do not use derivative financial instruments for hedging or speculative purposes, but
we may do so in the future.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report beginning on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this report.
There has been no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Our internal control over financial reporting includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become
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inadequate because of changes in conditions, or that
the degree of compliance with policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management
concluded that our internal control over financial reporting was effective as of December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has been
audited by KPMG LLP, an independent registered public accounting firm, as stated in their report
which appears in Item 15(a) of this Annual Report on Form 10-K.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
The information required by this Item with respect to the identity and business experience of our
directors will be set forth in our Proxy Statement for the 2010 Annual Meeting of Shareholders
under the caption “Election of Directors,” which information is hereby incorporated herein by
reference.
The information required by this Item with respect to the identity and business experience of our
executive officers is set forth on page 16 of this report under the caption “Executive Officers of
the Registrant.”
Item 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in our Proxy Statement for the 2010 Annual
Meeting of Shareholders under the caption “Executive Compensation and Other Information,” which
information is hereby incorporated herein by reference.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item will be set forth in our Proxy Statement for the 2010 Annual
Meeting of Shareholders under the captions “Election of Directors,” “Equity Security Ownership” and
“Equity Compensation Plan Information,” which information is hereby incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be set forth in our Proxy Statement for the 2010
Annual Meeting of Shareholders under the caption “Certain Relationships and Related
Transactions,” which information is hereby incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be set forth in our Proxy Statement for the 2010
Annual Meeting of Shareholders under the caption “Principal Accounting Fees and Services,” which
information is hereby incorporated herein by reference.
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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: March 1, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
DISH Network Corporation: We have audited the accompanying consolidated balance sheets of DISH Network Corporation and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations and comprehensive income (loss), changes in stockholders’ equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 2009. We also have audited
DISH Network Corporation’s internal control over financial reporting as of December 31, 2009, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). DISH Network Corporation’s management
is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated
financial statements and an opinion on DISH Network Corporation’s internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of DISH Network Corporation and subsidiaries as of
December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, DISH Network Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control — Integrated Framework issued by the COSO.
/s/ KPMG LLP
Denver, Colorado
March 1, 2010 F-3
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DISH NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
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DISH NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
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DISH NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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The accompanying notes are an integral part of these consolidated financial statements.
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1. Organization and Business Activities
Principal Business
DISH Network Corporation is a holding company. Its subsidiaries (which together with DISH Network
Corporation are referred to as “DISH Network,” the “Company,” “we,” “us” and/or “our”) operate the
DISH Network® direct broadcast satellite (“DBS”) subscription television service in the United
States which had 14.100 million subscribers as of December 31, 2009. We have deployed substantial
resources to develop the “DISH Network DBS System.” The DISH Network DBS System consists of our
licensed Federal Communications Commission (“FCC”) authorized DBS and Fixed Satellite Service
(“FSS”) spectrum, our owned and leased satellites, receiver systems, third-party broadcast
operations, customer service facilities, in-home service and call center operations and certain
other assets utilized in our operations.
Spin-off of Technology and Certain Infrastructure Assets
On January 1, 2008, we completed a tax-free distribution of our technology and set-top box
business and certain infrastructure assets (the “Spin-off”) into a separate publicly-traded
company, EchoStar Corporation (“EchoStar”). DISH Network and EchoStar now operate as separate
publicly-traded companies, and neither entity has any ownership interest in the other. However,
a substantial majority of the voting power of the shares of both companies is owned beneficially
by Charles W. Ergen, our Chairman, President and Chief Executive Officer or by certain trusts
established by Mr. Ergen for the benefit of his family. The two entities consist of the
following:
The Spin-off of EchoStar did not result in the discontinuance of any of our ongoing operations
as the cash flows related to, among others things, purchases of set-top boxes, transponder
leasing and digital broadcasting services that we purchase from EchoStar continue to be included
in our operations.
Our shareholders of record on December 27, 2007 received one share of EchoStar common stock for
every five shares of each class of DISH Network common stock they held as of the record date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued The table below summarizes the assets and liabilities that were distributed to EchoStar in
connection with the Spin-off. The distribution was accounted for at historical cost given the
nature of the distribution.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
We consolidate all majority owned subsidiaries, investments in entities in which we have
controlling influence and variable interest entities where we have been determined to be the
primary beneficiary. Non-majority owned investments are accounted for using the equity method when
we have the ability to significantly influence the operating decisions of the investee. When we do
not have the ability to significantly influence the operating decisions of an investee, the cost
method is used. All significant intercompany accounts and transactions have been eliminated in
consolidation. Further, in connection with the preparation of the consolidated financial
statements, we have evaluated subsequent events through the issuance of these financial statements
on March 1, 2010.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States (“GAAP”) requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expense for each
reporting period. Estimates are used in accounting for, among other things, allowances for
doubtful accounts, self-insurance obligations, deferred taxes and related valuation allowances,
uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of
options granted under our stock-based compensation plans, fair value of assets and liabilities
acquired in business combinations, capital leases, asset impairments, useful lives of property,
equipment and intangible assets, retailer incentives, programming expenses, subscriber lives and
royalty obligations. Illiquid credit markets and general weak economic conditions have increased
the inherent uncertainty in the estimates and assumptions indicated above. Actual results may
differ from previously estimated amounts, and such differences may be material to the Consolidated
Financial Statements. Estimates and assumptions are reviewed periodically, and the effects of
revisions are reflected prospectively in the period they occur.
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162” (“SFAS 168”).
SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the single
source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in conformity with GAAP. The
Codification does not change current GAAP, but is intended to simplify user access to all
authoritative GAAP by providing all the authoritative literature in one place related to a
particular topic. The Codification did not have any impact on our consolidated financial position
or results of operations. However, it affects the way we reference authoritative accounting
literature in our Consolidated Financial Statements. Accordingly, this Annual Report on Form 10-K
and all subsequent applicable public filings will reference the Codification as the source of
authoritative literature.
Foreign Currency Translation
The functional currency of the majority of our foreign subsidiaries is the U.S. dollar because
their sales and purchases are predominantly denominated in that currency. However, for our
subsidiaries where the functional currency is the local currency, we translate assets and
liabilities into U.S. dollars at the period-end exchange rate and revenues and expenses based on
the exchange rates at the time such transactions arise, if known, or at the average rate for the
period. The difference is recorded to equity as a component of other comprehensive income (loss).
Financial assets and liabilities denominated in currencies other than the functional currency are
recorded at the exchange rate at the time of the transaction and subsequent gains and losses
related to changes in the foreign currency are included in “Other, net” income or expense in our
Consolidated Statements of Operations and Comprehensive Income (Loss). Net transaction gains
(losses) during 2009, 2008 and 2007 were not significant.
Cash and Cash Equivalents
We consider all liquid investments purchased with an original maturity of 90 days or less to be
cash equivalents. Cash equivalents as of December 31, 2009 and 2008 may consist of money market
funds, government bonds, corporate notes and commercial paper. The cost of these investments
approximates their fair value.
Marketable Investment Securities
We currently classify all marketable investment securities as available-for-sale. We adjust the
carrying value of our available-for-sale securities to fair value and report the related temporary
unrealized gains and losses as a separate component of “Accumulated other comprehensive income
(loss)” within “Total stockholders’ equity (deficit),” net of related deferred income tax.
Declines in the fair value of a marketable investment security which are determined to be
“other-than-temporary” are recognized in the Consolidated Statements of Operations and
Comprehensive Income (Loss), thus establishing a new cost basis for such investment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued We evaluate our marketable investment securities portfolio on a quarterly basis to determine
whether declines in the fair value of these securities are other-than-temporary. This quarterly
evaluation consists of reviewing, among other things:
Declines in the fair value of investments below cost basis are generally accounted for as follows:
In situations where the fair value of a debt security is below its carrying amount, we consider the
decline to be other-than-temporary and record a charge to earnings if any of the following factors
apply:
In general, we use the first in, first out method to determine the cost basis on sales of
marketable investment securities.
Accounts Receivable
Management estimates the amount of required allowances for the potential non-collectability of
accounts receivable based upon past collection experience and consideration of other relevant
factors. However, past experience may not be indicative of future collections and therefore
additional charges could be incurred in the future to reflect differences between estimated and
actual collections.
Inventory
Inventory is stated at the lower of cost or market value. Cost is determined using the first-in,
first-out method. We depend on EchoStar for the production of our receivers and many components of
our receiver systems. Manufactured inventory includes materials, labor, freight-in, royalties and
manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost. The costs of satellites under construction, including
certain amounts prepaid under our satellite service agreements, are capitalized during the
construction phase, assuming the eventual successful launch and in-orbit operation of the
satellite. If a satellite were to fail during launch or while in-orbit, the resultant loss would
be charged to expense in the period such loss was incurred. The amount of any such loss would be
reduced to the extent of insurance proceeds estimated to be received, if any. Depreciation is
recorded on a straight-line basis over useful lives ranging from one to forty years. Repair and
maintenance costs are charged to expense when incurred. Renewals and improvements that add value
or extend the asset’s useful life are capitalized.
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DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued Long-Lived Assets
We review our long-lived assets and identifiable finite lived intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. We evaluate our satellite fleet for recoverability as one asset group. For assets
which are held and used in operations, the asset would be impaired if the carrying value of the
asset (or asset group) exceeded its undiscounted future net cash flows. Once an impairment is
determined, the actual impairment is reported as the difference between the carrying value and the
fair value as estimated using discounted cash flows. Assets which are to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell. We consider
relevant cash flow, estimated future operating results, trends and other available information in
assessing whether the carrying value of assets are recoverable.
Other Intangible Assets
We do not amortize indefinite lived intangible assets, but test these assets for impairment
annually or whenever indicators of impairments arise. Intangible assets that have finite lives are
amortized over their estimated useful lives and tested for impairment as described above for
long-lived assets. Our intangible assets with indefinite lives primarily consist of FCC licenses.
Generally, we have determined that our FCC licenses have indefinite useful lives due to the
following:
We combine all our indefinite lived FCC licenses into a single unit of accounting, except for 700
MHz wireless licenses (see Note 8). The analysis encompasses future cash flows from satellites
transmitting from such licensed orbital locations, including revenue attributable to programming
offerings from such satellites, the direct operating and subscriber acquisition costs related to
such programming, and future capital costs for replacement satellites. Projected revenue and cost
amounts include current and projected subscribers. In conducting our annual impairment test in
2009, we determined that the estimated fair value of the FCC licenses, calculated using a
discounted cash flow analysis, exceeded their carrying amounts.
Other Investment Securities
Generally, we account for our unconsolidated equity investments under either the equity method or
cost method of accounting. Because these equity securities are generally not publicly traded, it
is not practical to regularly estimate the fair value of the investments; however, these
investments are subject to an evaluation for other-than-temporary impairment on a quarterly basis.
This quarterly evaluation consists of reviewing, among other things, company business plans and
current financial statements, if available, for factors that may indicate an impairment of our
investment. Such factors may include, but are not limited to, cash flow concerns, material
litigation, violations of debt covenants and changes in business strategy. The fair value of these
equity investments is not estimated unless there are identified changes in circumstances that may
indicate an impairment exists and these changes are likely to have a significant adverse effect on
the fair value of the investment. When impairments occur related to our foreign investments, any
“Cumulative translation adjustment” associated with these investments will remain in “Accumulated
other comprehensive income (loss)” within “Total stockholders’ equity (deficit)” on our
Consolidated Balance Sheets
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued until the investments are sold or otherwise liquidated; at which time,
they will be released into our Consolidated Statements of Operations and Comprehensive Income
(Loss).
Long-Term Deferred Revenue, Distribution and Carriage Payments
Certain programmers provide us up-front payments. Such amounts are deferred and recognized as
reductions to “Subscriber-related expenses” on a straight-line basis over the relevant remaining
contract term (up to 10 years). The current and long-term portions of these deferred credits are
recorded in the Consolidated Balance Sheets in “Deferred revenue and other” and “Long-term deferred
revenue, distribution and carriage payments and other long-term liabilities,” respectively.
Sales Taxes
We account for sales taxes imposed on our goods and services on a net basis in our “Consolidated
Statements of Operations and Comprehensive Income (Loss).” Since we primarily act as an agent for
the governmental authorities, the amount charged to the customer is collected and remitted directly
to the appropriate jurisdictional entity.
Income Taxes
We establish a provision for income taxes currently payable or receivable and for income tax
amounts deferred to future periods. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of differences that exist between the book and tax basis of assets and
liabilities. Deferred tax assets are offset by valuation allowances when we believe it is more
likely than not that such net deferred tax assets will not be realized.
Accounting for Uncertainty in Income Taxes
From time to time, we engage in transactions where the tax consequences may be subject to
uncertainty. We record a liability when, in management’s judgment, a tax filing position does not
meet the more likely than not threshold. For tax positions that meet the more likely than not
threshold, we may record a liability depending on management’s assessment of how the tax position
will ultimately be settled. We adjust our estimates periodically for ongoing examinations by and
settlements with various taxing authorities, as well as changes in tax laws, regulations and
precedent. We classify interest and penalties, if any, associated with our uncertain tax positions
as a component of “Interest expense, net of amounts capitalized” and “Other, net,” respectively.
Fair Value of Financial Instruments
The carrying value for cash and cash equivalents, marketable investment securities, trade accounts
receivable, net of allowance for doubtful accounts, and current liabilities is equal to or
approximates fair value due to their short-term nature.
Fair values for our publicly traded debt securities are based on quoted market prices. The fair
values of our private debt is estimated based on an analysis in which we evaluate market
conditions, related securities, various public and private offerings, and other publicly available
information. In performing this analysis, we make various assumptions, among other things,
regarding credit spreads, and the impact of these factors on the value of the notes. See Note 9
for the fair value of our long-term debt.
Deferred Debt Issuance Costs
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