Dish Network 2003 Annual Report Download - page 43

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
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extent we increase the operations at our digital broadcast centers as, among other things, additional satellites are
placed in service and additional local markets and other programming services are launched.
Cost of sales – DTH equipment. “Cost of sales – DTH equipment” totaled $150.6 million during the year ended
December 31, 2003, a decrease of $28.0 million compared to the same period in 2002. This decrease related primarily
to a decrease in sales of digital set-top boxes to Bell ExpressVu. “Cost of sales – DTH equipment” during the years
ended December 31, 2003 and 2002 include non-recurring reductions in the cost of set-top box equipment of
approximately $6.8 million and $6.5 million, respectively. “Cost of sales - DTH equipment” represented 61.7% and
62.0% of “DTH equipment sales”, during the years ended December 31, 2003 and 2002, respectively.
Subscriber acquisition costs. During the year ended December 31, 2003, our subscriber acquisition costs totaled
approximately $1.312 billion, or approximately $453 per new subscriber activation. Comparatively, our subscriber
acquisition costs during the year ended December 31, 2002 totaled approximately $1.169 billion, or approximately
$421 per new subscriber activation. The increase principally resulted from the sale of equipment at little or no cost to
the subscriber, including our promotion in which subscribers are eligible to receive up to three free receivers or a free
digital video recorder, together with a decrease in subscriber equipment leases. The increase also resulted from an
increase in acquisition marketing in 2003 compared to 2002. This increase was partially offset by benefits of
approximately $77.2 million which were recorded in 2003. These benefits include approximately $34.4 million
related to the receipt of a reimbursement payment for previously sold set-top box equipment pursuant to a litigation
settlement and approximately $42.8 million related to a reduction in the cost of set-top box equipment resulting from
a change in estimated royalty obligations. Subscriber acquisition costs during the year ended December 31, 2002
include a non-recurring reduction in the cost of set-top box equipment of approximately $47.7 million as a result of
favorable litigation developments and the completion of royalty arrangements with more favorable terms than
estimated amounts previously accrued. Our subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, may materially increase in the future to the extent that we introduce other more aggressive
promotions if we determine that they are necessary to respond to competition, or for other reasons.
We exclude equipment capitalized under our equipment lease promotion from our calculation of subscriber acquisition
costs. We also exclude payments and certain returned equipment received from disconnecting lease promotion
subscribers from our calculation of subscriber acquisition costs. See further discussion of capitalized subscriber
acquisition costs and payments and certain returned equipment received from disconnecting lease promotion
subscribers included in “Liquidity and Capital Resources – Subscriber acquisition costs.” As a result of recent changes
in our equipment lease promotion, in 2004 we anticipate an increase in the number of subscribers who lease rather than
purchase equipment. The resulting anticipated increase in capitalized costs is expected to more than offset the
corresponding reduction in expensed subscriber acquisition costs, and result in an overall increase in cash used to
acquire subscribers during 2004.
New subscriber promotions. As previously discussed, our Subscriber acquisitions costs include, among other things,
net costs related to our new subscriber promotions. During the year ended December 31, 2003, our significant new
subscriber promotions were as follows:
Free Dish – Effective February 1, 2003, our Free DISH promotion provides new subscribers with a choice of up to two
EchoStar receivers, including one premium model system, and free installation for $49.99. The subscriber receives a
$49.99 credit on their first month’s bill. To be eligible, subscribers must provide a valid major credit card, their social
security number, pass a credit score, and make a one-year commitment to subscribe to a qualified programming
package. Effective August 24, 2003, we expanded the above offer to include up to three EchoStar receivers and require
either a one or two year programming commitment, depending on the set-top box models selected by the subscriber.
Although there can be no assurance as to the ultimate duration of the Free Dish promotion, we expect it to continue
through at least June 30, 2004.
Free for All – Effective February 1, 2003, our Free for All promotion provides new subscribers who purchase up to two
receivers for $149 or more, depending on the models chosen, and subscribe to a qualifying programming package, free
installation, together with credits of $12.50 or $17.00 applied to their programming bill each month for a year.
Effective August 24, 2003, under our Free for All promotion new subscribers who purchase one or two receiver
systems and subscribe to a qualifying programming package receive a monthly credit of $10.00 for 15 or 20 months,