DIRECTV 2005 Annual Report Download - page 54

THE DIRECTV GROUP, INC.
General and Administrative Expenses. General and administrative expenses include departmental
costs for legal, administrative services, finance, marketing and information technology. These costs also
include expenses for bad debt and other operating expenses, such as legal settlements, and gains or
losses from the sale or disposal of fixed assets.
Average Monthly Revenue Per Subscriber. We calculate ARPU by dividing average monthly
revenues for the period (total revenues during the period divided by the number of months in the
period) by average DIRECTV subscribers for the period. We calculate average DIRECTV subscribers
for the year by adding the number of DIRECTV subscribers as of the beginning of the year and for
each quarter end in the current year or period and dividing by the sum of the number of quarters in
the period plus one. DIRECTV U.S. excluded from its calculation of ARPU the subscribers of the
former NRTC members and affiliates prior to the purchase of those subscribers in the second and third
quarters of 2004, which we discuss in more detail above in ‘‘Strategic Developments.’’ For 2004,
average DIRECTV U.S. subscribers include the subscribers in the former NRTC and Pegasus
territories using a daily weighted average from the dates DIRECTV U.S. acquired the subscribers
through December 31, 2004.
Average Monthly Subscriber Churn. Average monthly subscriber churn represents the number of
DIRECTV subscribers whose service is disconnected, expressed as a percentage of the average total
number of DIRECTV subscribers. DIRECTV U.S. calculates average monthly subscriber churn by
dividing the average monthly number of disconnected DIRECTV subscribers for the period (total
subscribers disconnected during the period divided by the number of months in the period) by average
DIRECTV subscribers for the period. Average monthly churn includes the results from the former
NRTC and Pegasus subscribers subsequent to the purchase of those subscribers in 2004.
Subscriber Count. The total number of DIRECTV subscribers represents the total number of
subscribers actively subscribing to the DIRECTV service, including seasonal subscribers and subscribers
who are in the process of relocating. DIRECTV U.S. also includes for all periods presented the
subscribers of the NRTC’s members and affiliates, including Pegasus, prior to the purchase of those
subscribers in 2004.
RESULTS OF OPERATIONS
Executive Overview and Outlook
The following discussion relates primarily to DIRECTV U.S., which generates over 90% of our
revenues and is the source of most of our revenue growth.
Lease Program. On March 1, 2006, DIRECTV U.S. introduced a set-top receiver lease program
that will result in a significant change in reported operating costs and expenses in future periods.
Currently, under DIRECTV U.S.’ sales model, all subscriber acquisition, upgrade and retention costs
(including the cost of set-top receivers) are expensed immediately upon subscriber activation. Under
the lease program, DIRECTV U.S. will retain ownership of most new set-top receivers provided to new
and existing subscribers, and accordingly, will capitalize the cost of new leased set-top receivers as a
fixed asset. Other subscriber acquisition costs will continue to be expensed immediately upon subscriber
activation. Beginning in March 2006, we expect most of the set-top receivers provided to subscribers to
be leased, which will result in a significant reduction to subscriber acquisition, upgrade and retention
costs, partially offset by increasing depreciation expense as set-top receivers are depreciated over their
average estimated useful lives. By retaining ownership of the set-top-receivers, we will be able to
recover and reuse the recovered set-top receivers for acquisition, upgrade and retention activities,
which we expect will reduce our overall costs over time. DIRECTV U.S.’ revenues are not expected to
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