Dish Network 1998 Annual Report Download - page 29

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the sale of DTH equipment and integration services in international markets depends largely on the success of these
DTH operators and continued demand for our digital set-top boxes. Due to an expected decrease in demand combined
with a decrease in the sales price of digital set-top boxes attributable to increased competition, we expect that our DTH
equipment and integration services revenue will decline during 1999 as compared to 1998. Such revenue may decline
in 1999 by as much as 50% as compared to 1998.
During July 1998, Telefonica, one of the two DTH service providers described above, announced its intention
to merge with Sogecable (Canal Plus Satellite), one of its primary competitors. In October 1998, Telefonica announced
that the merger negotiations had been suspended. Subsequently, negotiations between Telefonica and Canal Plus
Satellite have resumed. Although we have binding purchase orders from Telefonica for 1999 deliveries of DTH
equipment, we cannot yet predict what impact, if any, consummation of this merger might have on our future sales to
Telefonica. As part of the 110 acquisition, we received a minimum order from a subsidiary of News Corporation for
500,000 set-top boxes. Although we continue to actively pursue additional distribution and integration service
opportunities internationally, no assurance can be given that any such additional negotiations will be successful.
Satellite services revenue totaled $22 million during 1998, an increase of $11 million as compared to 1997.
These revenues principally include fees charged to content providers for signal carriage and revenues earned from
business television, or BTV customers. The increase in satellite services revenue was primarily attributable to
increased BTV revenue due to the addition of new full-time BTV customers. Satellite services revenue is expected to
increase during 1999 to the extent we are successful in increasing the number of our BTV customers and developing
and implementing new services.
DISH Network Operating Expenses. DISH Network operating expenses totaled $395 million during 1998, an
increase of $202 million or 105%, compared to 1997. The increase in DISH Network operating expenses was
consistent with, and primarily attributable to, the increase in the number of DISH Network subscribers. DISH Network
operating expenses represented 59% and 65% of subscription television services revenue during 1998 and 1997,
respectively. Although we expect DISH Network operating expenses as a percentage of subscription television
services revenue to decline modestly from 1998 levels in future periods, this expense to revenue ratio could increase.
Subscriber-related expenses totaled $297 million during 1998, an increase of $153 million compared to 1997.
Such expenses, which include programming expenses, copyright royalties, residuals payable to retailers and
distributors, and billing, lockbox and other variable subscriber expenses, represented 44% of subscription television
services revenues during 1998 compared to 48% during 1997. The decrease in subscriber-related expenses as a
percentage of subscription television services revenue resulted primarily from a decrease in programming expenses on
a per subscriber basis, which resulted from a change in product mix combined with price discounts received from
certain content providers.
Customer service center and other expenses principally consist of costs incurred in the operation of our DISH
Network customer service centers, such as personnel and telephone expenses, as well as subscriber equipment
installation and other operating expenses. Customer service center and other expenses totaled $72 million during 1998,
an increase of $37 million as compared to 1997. The increase in customer service center and other expenses resulted
from increased personnel and telephone expenses to support the growth of the DISH Network. Customer service center
and other expenses totaled 11% of subscription television services revenue during 1998 compared to 12% of
subscription television services revenue during 1997. Although we expect customer service center and other expenses
as a percentage of subscription television services revenue to remain near 1998 levels in the future, this expense to
revenue ratio could increase.
Satellite and transmission expenses include expenses associated with the operation of our digital broadcast
center, contracted satellite telemetry, tracking and control services, and satellite in-orbit insurance. Satellite and
transmission expenses totaled $26 million during 1998, an $11 million increase compared to 1997. This increase
resulted from higher satellite and other digital broadcast center operating expenses due to an increase in the number of
operational satellites. We expect satellite and transmission expenses to continue to increase in the future as additional
satellites are placed in service.
Cost of sales – DTH equipment and Integration Services. Cost of sales – DTH equipment and integration
services totaled $173 million during 1998, an increase of $111 million compared to 1997. This increase is consistent