Dish Network 2008 Annual Report Download - page 57

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
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Equipment, transitional services and other cost of sales. “Equipment, transitional services and other cost of sales”
totaled $170 million during the year ended December 31, 2008, a decrease of $112 million or 39.7% compared to the
same period in 2007. The decrease primarily resulted from the elimination of the cost of sales related to the distribution
of our set-top box business to EchoStar in connection with the Spin-off, partially offset by costs related to our
transitional services and other agreements with EchoStar, charges for obsolete inventory, and an increase in other cost
of sales. During the year ended December 31, 2007, the costs associated with our set-top box business that was
distributed to EchoStar accounted for $163 million of our “Equipment, transitional services and other cost of sales.”
Subscriber acquisition costs. “Subscriber acquisition costs” totaled $1.532 billion for the year ended December 31,
2008, a decrease of $39 million or 2.5% compared to the same period in 2007. This decrease was primarily attributable
to the decline in gross new subscribers, partially offset by an increase in SAC discussed below.
SAC. SAC was $720 during the year ended December 31, 2008 compared to $656 during the same period in 2007,
an increase of $64, or 9.8%. This increase was primarily attributable to an increase in equipment costs, as well as
higher acquisition advertising expense and an increase in promotional incentives paid to our independent retailer
network. Our equipment costs were higher during 2008 as a result of an increase in the number of new DISH Network
subscribers selecting more advanced equipment, such as HD receivers, DVRs and receivers with multiple tuners and as
a result of the Spin-off of our set-top box business to EchoStar. Set-top boxes were historically designed in-house and
procured at our cost. We now acquire this equipment from EchoStar at its cost plus an agreed-upon margin. These
increases were partially offset by the increase in the redeployment benefits of our equipment lease program for new
subscribers. During the three months ended December 31, 2008, SAC was $737.
During the years ended December 31, 2008 and 2007, the amount of equipment capitalized under our lease program
for new subscribers totaled $604 million and $682 million, respectively. This decrease in capital expenditures under
our lease program for new subscribers resulted primarily from lower subscriber growth and an increase in
redeployment of equipment returned by disconnecting lease program subscribers, partially offset by higher equipment
costs resulting from higher priced advanced products and the mark-up on set-top boxes as a result of the Spin-off,
discussed above.
Capital expenditures resulting from our equipment lease program for new subscribers have been, and are expected to
continue to be, partially mitigated by, among other things, the redeployment of equipment returned by disconnecting
lease program subscribers. However, to remain competitive we upgrade or replace subscriber equipment
periodically as technology changes, and the costs associated with these upgrades 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 consequently would realize less benefit from the SAC reduction associated with
redeployment of that returned lease equipment.
Our SAC calculation does not reflect any benefit from payments we received in connection with equipment not
returned to us from disconnecting lease subscribers and returned equipment that is made available for sale rather
than being redeployed through our lease program. During the years ended December 31, 2008 and 2007, these
amounts totaled $128 million and $87 million, respectively.