Dish Network 2011 Annual Report Download - page 60

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
50
50
Blockbuster primarily offers movies and video games for sale and rental through multiple distribution channels such
as retail stores, by-mail, digital devices, the blockbuster.com website and the BLOCKBUSTER On Demand service.
The Blockbuster Acquisition complements our core business of delivering high-quality video entertainment to
consumers. We are promoting our new Blockbuster offerings including Blockbuster@Home which provides
movies, games and TV shows through Internet streaming, mail and in-store exchanges and online. This offering is
only available to DISH subscribers.
From the acquisition date of April 26, 2011 through December 31, 2011, Blockbuster operations contributed $975
million in revenue and $4 million in net income to our consolidated results of operations. As of December 31, 2011,
Blockbuster operated over 1,500 retail stores in the United States. We expect to close over 500 domestic stores during
the first half of 2012 as a result of weak store-level financial performance. Over 900 of our retail store leases,
including the leases for the majority of the stores we expect to close, include favorable early termination rights for
us. We continue to evaluate the impact of certain factors, including, among other things, competitive pressures, the
scale of our Blockbuster retail operations and other issues impacting the store-level financial performance of our
Blockbuster retail stores. These factors, or other reasons, could lead us to close additional Blockbuster retail stores.
The following discussion and analysis of our consolidated results of operations, financial condition and liquidity are
presented on a historical basis. Our Consolidated Statements of Operations and Comprehensive Income (Loss) for the
year ended December 31, 2011 includes the results of operations for Blockbuster from the acquisition date of April 26,
2011 to December 31, 2011. Therefore, our results of operations for the year ended December 31, 2011 are not
comparable to our results of operations for the same periods in 2010 and 2009.
Operational Liquidity
Like many companies, we make general investments in property such as satellites, set-top boxes, information
technology and facilities that support our overall business. As a subscriber-based company, however, we also make
subscriber-specific investments to acquire new subscribers and retain existing subscribers. While the general
investments may be deferred without impacting the business in the short-term, the subscriber-specific investments
are less discretionary. Our overall objective is to generate sufficient cash flow over the life of each subscriber to
provide an adequate return against the upfront investment. Once the upfront investment has been made for each
subscriber, the subsequent cash flow is generally positive.
There are a number of factors that impact our future cash flow compared to the cash flow we generate at a given
point in time. The first factor is how successful we are at retaining our current subscribers. As we lose subscribers
from our existing base, the positive cash flow from that base is correspondingly reduced. The second factor is how
successful we are at maintaining our subscriber-related margins. To the extent our “Subscriber-related expenses”
grow faster than our “Subscriber-related revenue,” the amount of cash flow that is generated per existing subscriber
is reduced. The third factor is the rate at which we acquire new subscribers. The faster we acquire new subscribers,
the more our positive ongoing cash flow from existing subscribers is offset by the negative upfront cash flow
associated with new subscribers. Finally, our future cash flow is impacted by the rate at which we make general
investments and any cash flow from financing activities.
Our subscriber-specific investments to acquire new subscribers have a significant impact on our cash flow. While
fewer subscribers might translate into lower ongoing cash flow in the long-term, cash flow is actually aided, in the
short-term, by the reduction in subscriber-specific investment spending. As a result, a slow down in our business
due to external or internal factors does not introduce the same level of short-term liquidity risk as it might in other
industries.
Availability of Credit and Effect on Liquidity
The ability to raise capital has generally existed for DISH Network despite the weak economic conditions. Modest
fluctuations in the cost of capital will not likely impact our current operational plans.