Dish Network 2005 Annual Report Download - page 66

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS – Continued
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The improvement from 2004 to 2005 was partially offset by the following financing sources of cash:
• During 2004, we sold $1.0 billion principal amount of our 6 5/8% Senior Notes due 2014 and $25.0 million
3% Convertible Subordinated Note due 2011 to CenturyTel Service Group L.L.C.
Other Liquidity Items
Subscriber turnover. Our percentage monthly subscriber churn for the year ended December 31, 2006 was 1.64%,
compared to percentage subscriber churn for 2005 of 1.65%. Our future subscriber churn may be negatively
impacted by a number of factors, including but not limited to, an increase in competition from existing competitors
and new entrants offering more compelling promotions, as well as new advanced products and services. Competitor
bundling of video services with 2-way high speed Internet access and telephone services may also contribute more
significantly to churn over time. There can be no assurance that these and other factors will not contribute to
relatively higher churn than we have experienced historically. Additionally, certain of our promotions allow
consumers with relatively lower credit scores to become subscribers, and these subscribers typically churn at a
higher rate. However, these subscribers are also acquired at a lower cost resulting in a smaller economic loss upon
disconnect.
Additionally, as the size of our subscriber base increases, even if our churn percentage remains constant or declines,
increasing numbers of gross new DISH Network subscribers are required to sustain net subscriber growth.
Increases in theft of our signal, or our competitors’ signals, also could cause subscriber churn to increase in future
periods. We use microchips embedded in credit card-sized access cards, called “smart cards,” or in security chips in
our EchoStar receiver systems to control access to authorized programming content. Our signal encryption has
been compromised by theft of service and could be further compromised in the future. We continue to respond to
compromises of our encryption system with security measures intended to make signal theft of our programming
more difficult. During 2005, we completed the replacement of our smart cards. While the smart card replacement
did not fully secure our system, we continue to implement software patches and other security measures to help
protect our service. There can be no assurance that our security measures will be effective in reducing theft of our
programming signals. If we are required to replace existing smart cards, the cost could exceed $100.0 million.
Subscriber acquisition and retention costs. Our subscriber acquisition and retention costs can vary significantly
from period to period which can in turn cause significant variability to our net income (loss) and free cash flow
between periods. Our “Subscriber acquisition costs,” SAC and “Subscriber-related expenses” may materially
increase to the extent that we introduce more aggressive promotions in the future if we determine they are necessary
to respond to competition, or for other reasons.
Capital expenditures resulting from our equipment lease program for new subscribers have been, and we expect will
continue to be, partially mitigated by, among other things, the redeployment of equipment returned by disconnecting
lease program subscribers. However, to remain competitive we will have to upgrade or replace subscriber
equipment periodically as technology changes, and the associated costs may be substantial. To the extent
technological changes render existing equipment obsolete, we would cease to benefit from the SAC reduction
associated with redeployment of that returned lease equipment.
Several years ago, we began deploying satellite receivers capable of exploiting 8PSK modulation technology. Since
that technology is now standard in all of our new satellite receivers, our cost to migrate programming channels to
that technology in the future will be substantially lower than if it were necessary to replace all existing consumer
equipment. As we continue to implement 8PSK technology, bandwidth efficiency will improve, significantly
increasing the number of programming channels we can transmit over our existing satellites as an alternative or
supplement to the acquisition of additional spectrum or the construction of additional satellites. New channels we
add to our service using only that technology may allow us to further reduce conversion costs and create additional
revenue opportunities. We have also implemented MPEG-4 technology in all satellite receivers for new customers
who subscribe to our HD programming packages. This technology should result in further bandwidth efficiencies
over time. We have not yet determined the extent to which we will convert the EchoStar DBS System to these new
technologies, or the period of time over which the conversions will occur. Since EchoStar X commenced