Dish Network 1999 Annual Report Download - page 31

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in future periods as we continue to develop our customer service centers to provide additional customer support and
help us better accommodate anticipated subscriber growth.
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 $43 million during 1999, a $17 million increase compared to the same period in 1998.
This increase resulted from higher satellite and other digital broadcast center operating expenses due to an increase in
the number of operational satellites, and non-cash compensation expense from significant post-grant appreciation of
stock options granted to certain key digital broadcast operations center employees during 1999. We expect satellite and
transmission expenses to continue to increase in the future as additional satellites or digital broadcast centers are placed
in service. Satellite and transmission expenses totaled 3% and 4% of subscription television services revenue during
the year ended December 31, 1999 and 1998, respectively. While we can provide no assurance, we expect this expense
to revenue ratio to decline to the extent we are successful in increasing the number of DISH Network subscribers and
maintaining or increasing revenue per subscriber.
Cost of sales – DTH equipment and Integration Services. Cost of sales - DTH equipment and integration
services totaled $148 million during 1999, a decrease of $25 million compared to the same period in 1998. Cost of
sales - DTH equipment and integration services principally includes costs associated with digital set-top boxes and
related components sold to international DTH operators and DBS accessories. Cost of sales - DTH equipment and
integration services represented 81% and 68% of DTH equipment revenue, during the years ended December 31, 1999
and 1998, respectively. The lower margin was principally attributable to a $16.6 million loss provision primarily for
component parts and purchase commitments related to our first generation model 7100 set-top boxes, for which
production has been suspended in favor of our second generation model 7200 set-top boxes. The write-off partially
offset the expected decrease in cost of sales - DTH equipment and integration services attributable to a decrease in
demand combined with increased competition. We expect that cost of sales - DTH equipment and integration services
may increase as a percentage of DTH equipment revenue in the future, due to price pressure resulting from increased
competition from other providers of DTH equipment.
Marketing Expenses. Marketing expenses totaled $727 million during 1999, an increase of $406 million
compared to the same period in 1998. The increase in marketing expenses was primarily attributable to an increase in
subscriber promotion subsidies. Subscriber promotion subsidies include the excess of transaction costs over transaction
proceeds at the time of sale of EchoStar receiver systems, activation allowances paid to retailers, and other promotional
incentives. Advertising and other expenses totaled $65 million and $48 million during the years ended
December 31, 1999 and 1998, respectively.
During 1999, our total subscriber acquisition costs, inclusive of acquisition marketing expenses, totaled
approximately $729 million, or approximately $385 per new subscriber activation. Comparatively, our subscriber
acquisition costs during the year ended December 31, 1998, inclusive of acquisition marketing expenses and deferred
subscriber acquisition costs, totaled $314 million, or approximately $285 per new subscriber activation. The increase
in our subscriber acquisition costs, on a per new subscriber activation basis, principally resulted from the introduction
of several aggressive marketing promotions to acquire new subscribers.
During 1999, our marketing promotions included our DISH Network One-Rate Plan, C-band bounty
program, Great Rewards program (PrimeStar bounty), cable bounty and a free installation program. Our subscriber
acquisition costs under these programs are significantly higher than those under our marketing programs historically.
Under the DISH Network One-Rate Plan, consumers are eligible to receive a rebate that ranges from $100 up
to $299 on the purchase of certain EchoStar receiver systems. To be eligible for this rebate, a subscriber must make a
one-year commitment to subscribe to our America’s Top 100 CD programming package plus additional channels. The
amount of the monthly programming commitment determines the amount of the rebate. Although subscriber
acquisition costs are materially higher under this plan compared to previous promotions, DISH Network One-Rate Plan
customers generally provide materially greater average revenue per subscriber than a typical DISH Network subscriber.
In addition, we believe that these customers represent lower credit risk and therefore may be marginally less likely to
disconnect their service than other DISH Network subscribers. To the extent that actual consumer participation levels
exceed present expectations, subscriber acquisition costs may materially increase. Although there can be no
assurance as to the ultimate duration of the DISH Network One-Rate Plan, it will continue through at least April 2000.