Dish Network 2013 Annual Report Download - page 80

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
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Subscriber-related expenses. “Subscriber-related expenses” totaled $7.818 billion during the year ended December
31, 2013, an increase of $564 million or 7.8% compared to the same period in 2012. The increase in “Subscriber-
related expenses” was primarily attributable to higher pay-TV programming costs and higher Broadband subscriber-
related expenses due to the increase in our Broadband subscriber base. The increase in programming costs was driven
by rate increases in certain of our programming contracts, including the renewal of certain contracts at higher rates.
Included in “Subscriber-related expenses” was $143 million and $51 million of expense related to our broadband
services for the years ended December 31, 2013 and 2012, respectively. “Subscriber-related expenses” represented
56.8% and 55.5% of “Subscriber-related revenue” during the years ended December 31, 2013 and 2012, respectively.
The change in this expense to revenue ratio primarily resulted from higher pay-TV programming costs, discussed
above.
In the normal course of business, we enter into contracts to purchase programming content in which our payment
obligations are generally contingent on the number of Pay-TV subscribers to whom we provide the respective content.
Our programming expenses will continue to increase to the extent we are successful in growing our Pay-TV subscriber
base. In addition, our “Subscriber-related expenses” may face further upward pressure from price increases and the
renewal of long-term pay-TV programming contracts on less favorable pricing terms.
Satellite and transmission expenses – EchoStar. “Satellite and transmission expenses – EchoStar” totaled $494
million during the year ended December 31, 2013, an increase of $70 million or 16.4% compared to the same period in
2012. The increase in “Satellite and transmission expenses – EchoStar” is primarily related to an increase in
transponder capacity leased from EchoStar primarily related to the EchoStar XVI satellite, which was launched in
November 2012 and QuetzSat-1, which commenced commercial operation at the 77 degree orbital slot in February
2013. This increase was partially offset by a decrease in transponder capacity leased from EchoStar primarily related
to the expiration of the EchoStar VI lease in the first quarter 2013.
Subscriber acquisition costs. “Subscriber acquisition costs” totaled $1.843 billion for the year ended December 31,
2013, an increase of $156 million or 9.2% compared to the same period in 2012. This change was primarily
attributable to an increase in expense related to our Broadband subscriber activations and an increase in Pay-TV SAC
described below, partially offset by a decrease in gross new Pay-TV subscriber activations. Included in “Subscriber
acquisition costs” was $154 million and $46 million of expenses related to our broadband services for the years ended
December 31, 2013 and 2012, respectively.
Pay-TV SAC. Pay-TV SAC was $866 during the year ended December 31, 2013 compared to $784 during the same
period in 2012, an increase of $82 or 10.5%. This increase was primarily attributable to increased equipment and
advertising costs. Capitalized equipment costs increased primarily due to an increase in the percentage of new
subscriber activations with new Hopper and Hopper with Sling receiver systems. In addition, the Hopper with Sling
set-top box cost per unit is currently higher than the original Hopper set-top box. Advertising costs increased due to
brand spending related to the launch of our new Hopper with Sling set-top box in February 2013.
During the years ended December 31, 2013 and 2012, the amount of equipment capitalized under our lease program
for new Pay-TV subscribers totaled $621 million and $506 million, respectively. This increase in capital expenditures
under our lease program for new Pay-TV subscribers resulted primarily from the factors described above.
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 Pay-TV SAC reduction associated with redeployment of that returned lease equipment.
Our Pay-TV 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 or
used in our existing customer lease program rather than being redeployed through our new customer lease program.
During the years ended December 31, 2013 and 2012, these amounts totaled $135 million and $140 million,
respectively.