Dish Network 2013 Annual Report Download - page 183

DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
F-73
Application Development Agreement. During the fourth quarter 2012, we and EchoStar entered into a set-top box
application development agreement (the “Application Development Agreement”) pursuant to which EchoStar
provides us with certain services relating to the development of web-based applications for set-top boxes for a
period ending on February 1, 2015. The Application Development Agreement renews automatically for successive
one-year periods thereafter, unless terminated earlier by us or EchoStar at any time upon at least 90 days notice.
The fees for services provided under the Application Development Agreement are calculated at EchoStar’s cost of
providing the relevant service plus a fixed margin, which will depend on the nature of the services provided.
XiP Encryption Agreement. During the third quarter 2012, we entered into an encryption agreement with EchoStar
for our whole-home HD DVR line of set-top boxes (the “XiP Encryption Agreement”) pursuant to which EchoStar
provides certain security measures on our whole-home HD DVR line of set-top boxes to encrypt the content
delivered to the set-top box via a smart card and secure the content between set-top boxes. The term of the XiP
Encryption Agreement is for a period until December 31, 2014. Under the XiP Encryption Agreement, we have the
option, but not the obligation, to extend the XiP Encryption Agreement for one additional year upon 180 days notice
prior to the end of the term. We and EchoStar each have the right to terminate the XiP Encryption Agreement for
any reason upon at least 30 days notice and 180 days notice, respectively. The fees for the services provided under
the XiP Encryption Agreement are calculated on a monthly basis based on the number of receivers utilizing such
security measures each month.
Other Agreements – EchoStar
Receiver Agreement. EchoStar is currently our sole supplier of set-top box receivers. In connection with the Spin-
off, we and EchoStar entered into a receiver agreement pursuant to which we had the right, but not the obligation, to
purchase digital set-top boxes and related accessories, and other equipment from EchoStar for a period ending on
January 1, 2012 (the “Prior Receiver Agreement”). The Prior Receiver Agreement allowed us to purchase digital
set-top boxes, related accessories and other equipment from EchoStar at cost plus a fixed percentage margin, which
varied depending on the nature of the equipment purchased. Additionally, EchoStar provided us with standard
manufacturer warranties for the goods sold under the Prior Receiver Agreement. We were able to terminate the
Prior Receiver Agreement for any reason upon at least 60 days notice to EchoStar. EchoStar was able to terminate
the Prior Receiver Agreement if certain entities were to acquire us. The Prior Receiver Agreement also included an
indemnification provision, whereby the parties indemnified each other for certain intellectual property matters.
Effective January 1, 2012, we and EchoStar entered into a new agreement (the “2012 Receiver Agreement”)
pursuant to which we have the right, but not the obligation, to purchase digital set-top boxes, related accessories,
and other equipment from EchoStar for the period from January 1, 2012 to December 31, 2014. We have an option,
but not the obligation, to extend the 2012 Receiver Agreement for one additional year upon 180 days notice prior to
the end of the term. The material terms of the 2012 Receiver Agreement are substantially the same as the material
terms of the Prior Receiver Agreement, except that the 2012 Receiver Agreement allows us to purchase digital set-
top boxes, related accessories and other equipment from EchoStar either: (i) at a cost (decreasing as EchoStar
reduces costs and increasing as costs increase) plus a dollar mark-up which will depend upon the cost of the product
subject to a collar on EchoStar’s mark-up; or (ii) at cost plus a fixed margin, which will depend on the nature of the
equipment purchased. Under the 2012 Receiver Agreement, EchoStar’s margins will be increased if they are able to
reduce the costs of their digital set-top boxes and their margins will be reduced if these costs increase.
For the years ended December 31, 2013, 2012 and 2011, we purchased set-top boxes and other equipment from
EchoStar of $1.242 billion, $1.005 billion and $1.158 billion, respectively. Included in these amounts for 2012 and
2013 are purchases of certain broadband equipment from EchoStar under the 2012 Receiver Agreement. These
amounts are initially included in “Inventory” and are subsequently capitalized as “Property and equipment, net” on
our Consolidated Balance Sheets or expensed as “Subscriber acquisition costs” on our Consolidated Statements of
Operations and Comprehensive Income (Loss) when the equipment is deployed.
Tax Sharing Agreement. In connection with the Spin-off, we entered into a tax sharing agreement with EchoStar
which governs our respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the
periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as
a result of restructuring activities undertaken to implement the Spin-off, are borne by us, and we will indemnify