Dish Network 2007 Annual Report Download - page 55

Table of Contents
“Subscriber-related expenses” as a percentage of “Subscriber-related revenue” could materially increase absent corresponding price increases
in our DISH Network programming packages.
Satellite and transmission expenses
. “Satellite and transmission expenses” totaled $147.5 million during the year ended December 31, 2006,
an increase of $12.9 million or 9.6% compared to 2005. This increase primarily resulted from higher operational costs associated with our
capital leases of AMC-15 and AMC-16. “Satellite and transmission expenses” totaled 1.6% and 1.7% of “Subscriber-related revenue” during
the years ended December 31, 2006 and 2005, respectively. These expenses will increase further in the future as we increase the size of our
satellite fleet, if we obtain in-orbit satellite insurance, as we increase the number and operations of our digital broadcast centers and as
additional local markets and other programming services are launched.
Cost of sales – equipment. “Cost of sales – equipment” totaled $282.4 million during the year ended December 31, 2006, an increase of
$10.7 million or 3.9% compared to 2005. This increase primarily resulted from an increase in charges for defective, slow moving and obsolete
inventory. “Cost of sales – equipment” represented 78.0% and 73.8% of “Equipment sales,” during the years ended December 31, 2006 and
2005, respectively. The increase in the expense to revenue ratio principally related to higher charges for defective, slow moving and obsolete
inventory in 2006.
Subscriber acquisition costs.
“Subscriber acquisition costs” totaled $1.596 billion for the year ended December 31, 2006, an increase of
$103.7 million or 6.9% compared to 2005. The increase in “Subscriber acquisition costs” was primarily attributable to an increase in gross new
subscribers and a decline in the number of co-branded subscribers acquired under our original AT&T agreement, for which we did not incur
subscriber acquisition costs. This increase was also attributable to higher installation and acquisition advertising costs, partially offset by a
higher number of DISH Network subscribers participating in our equipment lease program for new subscribers. The introduction of new
equipment resulted in a decrease in our cost per installation during 2006 compared to 2005; however, as a result of increased volume, our
overall installation expense increased.
SAC.
SAC was $686 during the year ended December 31, 2006 compared to $693 during 2005, a decrease of $7, or 1.0%. This decrease was
primarily attributable to the equipment redeployment benefits of our equipment lease programs, discussed below, and lower average equipment
and installation costs, partially offset by a decline in the number of co-branded subscribers acquired under our original AT&T agreement and
higher acquisition advertising costs. As previously discussed, the calculation of SAC for prior periods has been revised to conform to the
current year presentation.
Our principal method for reducing the cost of subscriber equipment, which is included in SAC, is to lease our receiver systems to new
subscribers rather than selling systems to them at little or no cost. Upon termination of service, lease subscribers are required to return the
leased equipment to us or be charged for the equipment. Leased equipment that is returned to us which we redeploy to new lease customers,
results in reduced capital expenditures, and thus reduced SAC.
The percentage of our new subscribers choosing to lease rather than purchase equipment continued to increase for the year ended December 31,
2006 compared to 2005. During the years ended December 31, 2006 and 2005, the amount of equipment capitalized under our lease program
for new subscribers totaled $816.5 million and $861.5 million, respectively. This decrease in capital expenditures under our lease program for
new subscribers resulted primarily from lower hardware costs per receiver, fewer receivers per installation as the number of dual tuner
receivers we install continues to increase, increased redeployment of equipment returned by disconnecting lease program subscribers, and a
reduction in accessory costs related to the introduction of less costly installation technology and our migration away from relatively expensive
and complex subscriber equipment installations. 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 a portion of our existing equipment obsolete,
we would be unable to redeploy all returned equipment and would realize less benefit from the SAC reduction associated with redeployment of
that returned lease equipment.
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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —
Continued