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Edited Transcript of DISH earnings conference call or presentation 7-Nov-18 5:00pm GMT

Q3 2018 DISH Network Corp Earnings Call

Englewood Dec 4, 2018 (Thomson StreetEvents) -- Edited Transcript of DISH Network Corp earnings conference call or presentation Wednesday, November 7, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles W. Ergen

DISH Network Corporation - Co-founder & Chairman of the Board

* Jason Kiser

DISH Network Corporation - IR Contact & Treasurer

* Paul W. Orban

DISH Network Corporation - Senior VP, CAO & Principal Financial Officer

* Thomas A. Cullen

DISH Network Corporation - EVP of Corporate Development

* Timothy A. Messner

DISH Network Corporation - Executive VP & General Counsel

* W. Erik Carlson

DISH Network Corporation - President & CEO

* Warren W. Schlichting

DISH Network Corporation - Executive VP of Programming & Media Sales and President of Sling TV

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Conference Call Participants

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* Brett Joseph Feldman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* James Maxwell Ratcliffe

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* Jason B Bazinet

Citigroup Inc, Research Division - MD and U.S. Cable and Satellite Analyst

* John Christopher Hodulik

UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group, and Telco and Pay TV Analyst

* Jonathan Chaplin

New Street Research LLP - US Team Head

* Kannan Venkateshwar

Barclays Bank PLC, Research Division - Director & Senior Research Analyst

* Marci Lynn Ryvicker

Wolfe Research, LLC - MD

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Walter Paul Piecyk

BTIG, LLC, Research Division - Co-Head of Research and MD

* Mike Dano

* Scott Moritz

* Sheila Dang

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the DISH Network Corporation's Third Quarter 2018 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jason Kiser. Please go ahead, sir.

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Jason Kiser, DISH Network Corporation - IR Contact & Treasurer [2]

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Thanks, Lisa. Thanks for joining us, everybody. I'm joined today by Charlie Ergen, our Chairman; Tom Cullen, who runs Corporate Development; Erik Carlson, our CEO. We've got Brian Neylon, the President of DISH; Warren Schlichting, the President of Sling; Paul Orban, our Chief Accounting Officer; and Tim Messner, our General Counsel.

Before we get into Erik's prepared remarks, I think Tim has to do the safe harbor disclosures.

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Timothy A. Messner, DISH Network Corporation - Executive VP & General Counsel [3]

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I do. Thank you, Jason. Good morning, everyone. Thanks for joining us.

All right. We ask that media representatives not identify participants or their firms in your reports. We also do not allow audio taping of this call, and we ask that you respect that.

Statements that we make during the call that are not statements of historical fact constitute forward-looking statements that are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results and/or our forecasts. For more information, please refer to the risks, uncertainties and other factors discussed in our SEC filings.

All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks, uncertainties and other factors discussed in our SEC filings and should not place undue reliance on forward-looking statements, which we assume no responsibility for updating.

As part of the process for FCC Auction 101, we filed an application to potentially participate as a bidder for the spectrum assets. Because of the FCC's anti-collusion rules, we are not able to discuss what, if any, spectrum resources we may intend to bid on, and we will not be answering any questions about that auction during today's call.

With that, I'd like to turn it over to our CEO, Erik Carlson.

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W. Erik Carlson, DISH Network Corporation - President & CEO [4]

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Well, thank you, Tim. If you tuned into our earnings calls during Joe Clayton's years as CEO, you know he had his own special way of greeting participants. And as you may have read, we lost Joe last Saturday, far too early. He was a giant in our industry and passionate leader who left an indelible mark on our company. And so in honor of Joe, I'm going to open with, good afternoon to our East Coast participants, and good morning to those of you on the West Coast. Thanks for the memories, Joe.

I've got a few remarks on our 3 primary lines: DISH TV, our legacy business; Sling TV; and of course, our wireless business, our future business.

So let me start with wireless first. You may have seen the news the last 24 hours. We've announced that Ericsson is serving as a key partner for us in our NB-IoT build-out. Ericsson's assignment is to deliver radio access and core networks and has delivered our national RF plan. Charlie and Tom are both here to take any questions you may have on that front.

Turning to DISH. Over the past several quarters, I've had the opportunity to highlight recognition our companies earned for its excellent customer service. And once again, I can congratulate our team. Late in the third quarter, DISH earned J.D. Power's top award in our industry, #1 in overall customer satisfaction among national TV providers. The award really recognizes our focus in delivering a top-quality customer experience as a premium TV brand. This is an ongoing theme at DISH in its disciplined effort to identify and address our weaknesses while we continue to build upon our strengths. Service, most certainly, is one of those many strengths. So I'd like to congratulate everyone who's worked so hard for that honor, especially our frontline team.

Now while we've enjoyed positive churn trends over the past several quarters, churn is a bit more complex this quarter. Our overall churn rate was 2.11% for the third quarter compared to 1.46% last quarter and 1.83% in a year-ago quarter.

While service fundamentals remain in place, we can point to the Univision situation as having contributed to roughly half of the net sub loss in the quarter. Now loss attribution is not a perfect science, and lots of factors go into that data, but that will put you in the ballpark as you work to understand our trending.

Also last week, AT&T pulled HBO from DISH for the first time in HBO's more than 40-year history. First, let me apologize to our customers for that inconvenience. I want to be clear on what's behind this. There's not a disagreement over rate for an a la carte premium service. This is about HBO requiring DISH to sign up for a guaranteed number of subscribers and that's really regardless of whether another DISH customer ever chooses HBO. We don't think that's the right deal for our customers. It's definitely not the right deal for us nor is it likely good for the industry, and we welcome any questions on that situation.

I'd like to conclude with Sling. Sling continues to maintain its leadership position in live, over-the-top, Internet-delivered Pay-TV. The power of live continues to prove itself on Sling as customers increasingly embrace it for sports, including college and pro football, and we remain dedicated to continuous improvement in reliability and streaming performance. We long ago learned how crucial performance is on live TV.

We continue to focus on delivering our uniquely flexible, relationship-based style experience regardless of what side of the pay wall a customer happens to be on in any given moment. We're offering great content, great experiences regardless of the subscriber status. And Sling users, including former subscribers and those we call occasionals, are welcoming the extra reasons to choose and engage with Sling.

Another reason to choose Sling will be the arrival of Discovery's content on the platform later this month. That content will come without any impact on price, and Discovery has been an excellent partner for us. So we think Sling customers will love having Discovery in the service. And we're still finalizing our launch plan, so look forward to more news from us on that launch.

With that, many of you will recognize Paul Orban's name. As our Chief Accounting Officer, he's been with us for every customer we serve, both at Sling and DISH. With Steve's departure in August, Paul now serves as our Principal Financial Officer.

Paul's going to make a few brief remarks on the quarter before we open it up to Q&A. Paul, take it away.

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Paul W. Orban, DISH Network Corporation - Senior VP, CAO & Principal Financial Officer [5]

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Thank you, Erik. First off, I appreciate the opportunity to share with you the highlights of our third quarter performance. As someone who was here for the launch of DISH Network, I've seen us transform in the industry before, and I'm excited for the next part of our journey.

In reviewing some of the highlights for the third quarter, both operating income and EBITDA were up from the prior year. Operating income was $563 million, $114 million or 25% increase over the prior year. EBITDA was $743 million, a $62 million or 9% increase. As we have done in prior quarters, it's important to note the positive impact of the new revenue recognition standard, which was implemented back on January 1. This had a $41 million positive impact to both operating income and EBITDA. The benefit from this new standard will decrease over time as the deferred costs begin to build up.

With respect to operating revenue and expense, revenue was down 5.3%. This is largely due to a lower subscriber base and a decrease in Pay-TV ARPU. Our operating expenses decreased 9.6%, primarily due to a lower subscriber base, lower subscriber acquisition cost, operational efficiencies and decreased programming costs related to Univision. As Erik mentioned, while the Univision situation is having a negative impact on our churn rate, it's having a positive impact on our subscriber-related expenses. The lower subscriber acquisition costs were partially helped by the adoption of the new revenue standard.

Continue to keep in mind, while we are building our wireless network, we capitalize nearly all of our interest expense. Also, our effective tax rate is lower in 2018 due to the federal Tax Reform Act.

And looking at our metrics, Pay-TV ARPU is down due to a higher percentage of Sling subscribers in the Pay-TV subscriber base and a decrease in revenue related to pay-per-view boxing events. This decrease was partially offset by DISH TV programming price increases in February and increases in revenue per subscriber related to Sling TV. The Sling increase was mainly driven by the mix of customers taking higher-priced packages and add-on revenue, such as ad sales and Cloud DVRs. In addition, the impact of the $5 increase on our Orange package began this quarter and will be fully realized starting in the fourth quarter.

Our DISH TV churn rate increased due to Univision, and our DISH TV stack was lower, largely due to lower advertising expense per activation.

Free cash flow generation continues to be strong, with $968 million in free cash flow during the first 9 months.

With that, I'll turn it over for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Walter Piecyk with BTIG.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [2]

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Charlie or Tom, can you talk about how you expect CapEx to ramp before the NB-IoT now you have these things signed with Ericsson? I think SBAC also talked about you signing the leases. I haven't really seen much in the CapEx line. How much does it go up in Q4? And how do we expect that to ramp throughout 2019?

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Thomas A. Cullen, DISH Network Corporation - EVP of Corporate Development [3]

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Walt, this is Tom. We've -- you saw the Ericsson press release. We're bringing up towers now as we speak, and that'll continue through the fourth quarter. It's more than just SBA. We've signed lease agreements, master lease agreements with all the major tower companies as well as a bunch of regional ones. We also have site acquisition and construction firms under contract throughout the country. So things are beginning to ramp. The CapEx guidance hasn't changed since what we've given previously, which is we expect the total wireless spend between now and the end of 2020 to be between $500 million and $1 billion.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [4]

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Got it. So you don't -- so as far as the cadence of that, it sounds like it's not really going to hit that hard in the fourth quarter. It's probably more of a 2019 event. I mean, are you actually going to be hanging antennas on towers in 2018?

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Thomas A. Cullen, DISH Network Corporation - EVP of Corporate Development [5]

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We are. We're doing that right now. But to your point, I think the bulk of the activity will be in 2019, but we've got a pretty good backlog scheduled for the next 60 days.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [6]

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Got it. And the maturity that's for next year on the debt, I think it's 7 7/8%, is the plan just to pay that with the cash that you obviously have available on the balance sheet? Or are you looking to do some type of additional debt issuance to keep cash at a higher level?

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Jason Kiser, DISH Network Corporation - IR Contact & Treasurer [7]

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Yes, Walt, it's Jason. Right now, the plan is to pay it off.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [8]

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Got it.

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Jason Kiser, DISH Network Corporation - IR Contact & Treasurer [9]

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Walt, as you're on the line, do you want to ask?

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [10]

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I am. I just had a quick -- I have a couple of quick follow-ups. I just want to make sure conceptually, based on the subscriber number that you talked about for Univision, it looks like you're probably losing at your average margin, you're losing $45 million a year of EBITDA from the subscribers that you lost, and you're picking up $150 million. Even if Univision only wanted $1 a month, and I'm sure they want more than $1 a month, you're picking up multiples of that in EBITDA. So it looks like a fantastic trade in terms of dropping Univision and only losing that many subscribers as a result. I just want to make sure I'm not doing anything wrong in the math there. And then as a follow-up, more of a conceptual question for Charlie. You're dropping Univision, and it looks like it's never coming back, but yet, you're taking a channel like Discovery and actually expanding its distribution to Sling. Maybe just walk us through like, what's the difference between a Univision? Is it that they're available direct-to-consumer and that there's no way to get something like Discovery without being part of a cable bundle? Just wondering like how you're thinking about some of these broadcast channels versus some of the cable networks because I think people generally didn't think you would need a channel like Discovery longer term, and so just trying to understand how you think about the puts and takes of those negotiations going forward.

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [11]

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Yes, this is Charlie. I'll try to -- I'll start maybe with conceptually. We would love to do business deals with anybody and everybody as long as those business deals make sense for us. And we try to make sure that any business deal that we also try to make sense for our partner because if business deals don't make sense for both parties, then there's frustration and -- on one side or the other. So Discovery is at a point where we're able to actually extend our contract and to do a new contract with them before it was even up because we were able to sit down and work as teams that -- where we found new places we could work together that might be beneficial to both companies, might not. We might not be successful but working together to try to improve the linear TV model as it is today and to expand on the streaming model. So it works when the parties are engaged in that regard. With Univision, a little bit of bad luck, and this is not in a sense that there's a management change in Univision. At the time that our contract was up, and there was probably -- and the way we've always dealt with Univision is we're the leader and we've always been the leader in Latino programming in this industry, so we've always been structured a little bit differently. It took a little bit of time for Univision management to really come to understand that and what the puts and takes were. We had long voiced our frustration of their most valuable product of soccer being available on Facebook to their customers for free, even though we don't believe that was allowed per our contract. We -- didn't make sense for us that they were selling the product for $7.99 to pay something materially north of that for our customers. We had real data on their ratings. And while they were saying they were the #1 Hispanic channel, we knew that, that wasn't true with our customers. We knew that the #1 channel or distribution is actually Netflix, right? And Telemundo had previously usurped and passed Univision in many of the day and night time. So -- and then so all those things, when you put all of them together, I think there was an unrealistic expectation. In fact, the previous management, it was kind of like, well, why do you want that number? It doesn't make any sense. And it was like, that's what we need -- that's the number we need for budget purposes. So that's not a really strong argument. You might need it for budget purposes, but the consumers won't pay that. So we have to fight for our customers. The customers expect us to fight for them. We expect our customers are not telling us that they want more programming; they're telling us that they're not seeing the value in linear TV today, and it's up to our industry to try to make it more value. So Univision, it's a good company, a good product. It's a valuable product, but -- and if both sides knew what they knew today 4 months ago, that probably would have been an easier task. But -- and so now we're in a weird position where, because we've given our customers discounts and many of our customers have gone to get Univision for free with an off-air antenna, or perhaps from one of the streaming services online that's free, or perhaps from Univision directly, or perhaps from one of our competitors, we actually would face backlash if we put Univision back up again. So it -- the problem is compounded. And so that's -- it's not that both management teams haven't tried to figure something out, they just haven't been successful at it.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [12]

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It looks like a financial -- a phenomenal financial trade for you at this point.

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [13]

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Well, it's not. In the short term, the answer to that is yes. The problem is, is that -- and I think that -- our challenge to Erik and his management team is to continue that. But what happens is, it's not that you -- we continue to lose customers, right, over a period of time, so it eventually tails out, right? And obviously, the worst pain is the first 4 months. But secondly, for new customers, if you don't have the product, you get less new customers, right? So the challenge which I think we can meet here is -- so it's not as -- it's not quite as profitable as maybe you laid out, but it's certainly at least initially more profitable than doing a bad deal. The...

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [14]

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No, and the flipside of that is like you look at -- Discovery will help you get customers on Sling, so that's the other side of this.

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [15]

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Well, no, the real thing is -- the challenge for us is we believe we can actually increase our market share next year on -- in Latino because we're going to be able to go after customers and give them Univision. Just a simple example, but with an off-air antenna to give them Univision product without them having to pay for it and our competitors are charging for that, so we're going to be more competitive with those people who are willing to get Univision another way. And even if that's directly from Univision, it will be cheaper than what we would have to charge them. So we actually become more competitive for, in the bell curve, the 40% of the people who are willing to get Univision with an off-air antenna for free, right? And so we actually will be stronger in that category as opposed to being strong against the whole category where we're all charging for it. So there's a different dynamic there. It's a long-term play. We take half a step backward by taking Univision down, we'll take a step forward in 2019. So that's the gist of it. But it's maybe not -- it's not quite as rosy as -- I know you're giving me a softball question there, it's not quite as rosy as you say.

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Operator [16]

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We'll take our next question from Philip Cusick with JPMorgan.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [17]

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One for Charlie. Can you talk about where you are in building an ecosystem of customers for the NB-IoT ecosystem? I know you need a certain number of customers in every market in 1.5 years. And then for Erik, you said that Univision was about half of the losses. That helps a lot. How should we think about these losses coming in through the third quarter and then tailing in through the fourth?

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W. Erik Carlson, DISH Network Corporation - President & CEO [18]

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Yes. So Phil, that's correct. We -- as I indicated upfront, it's not a perfect science, but our best data tells us that Univision, that situation accounted for about half of our net subscriber loss that we had for the third quarter. Obviously, as that continues to increase in tenure, right, so we're in month 4 -- actually, month 5 right now, the losses will continue to tail off, although we will continue to have losses in the fourth quarter. Charlie?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [19]

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Yes. So for us, it's how do you turn -- how do you make lemonade out of lemons, and we believe we have plans to do that. We believe there's a -- we know -- we now have been able to track our customers that leave with Univision, and we've discovered a new market for ourselves that we previously -- we prefer not to play on it. We prefer to keep everything in the ecosystem. We prefer that our customers pay for Univision, but to the extent that we can't -- that they don't -- want to have a contract with us, we're going to find -- we're going to be able to put an off-air antenna for our customers to get it for free. And we know that in the urban markets where most of our customers -- Latino customers are, that is a very attractive alternative for our customers, and we've ramped that capability up and we'll continue to ramp that up. As far as the IoT, we will build -- we're building basically a neutral host IoT network, a narrowband IoT network. We obviously have to get it built before we can get customers. So it's one thing to talk about what you're doing, it's another thing to actually show them and let people get on your network. So we don't have lots of customers to talk about today, and I don't think we'll have lots of customers to talk about until we get our network built. But it's something that we think is -- it will be a very functional narrowband IoT network that will work. It will have lots of competition. When we first announced it 20 months ago, there was nobody else that had announced narrowband IoT programs. But obviously, today, the major carriers all have narrowband IoT programs in place, including T-Mobile, on a nationwide basis. So we'll have a lot more competition than we anticipated, but that's -- we like competition, and we'll do the best we can.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [20]

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Erik, if I can follow up, how should we think about the remaining base of customers split between urban homes where you compete with cable versus rural where it's just satellite?

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W. Erik Carlson, DISH Network Corporation - President & CEO [21]

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Well, I mean, on the DBS side and we've talked about this in the past, is, I mean, obviously, we're -- we have traditionally been focused on rural. That's where, obviously, the business grew from and our distribution grew. And on the DISH TV side, we continue to be focused on identifying profitable subscribers that can be with us long term, and that points us to a less connected house and points us more towards a rural profile. And since our distribution is there, that's where the majority of our customers are coming from today. And then on the Sling side, obviously, it needs broadband to work. So obviously, from a Sling perspective, we're focused more on the urban customers, somebody who has high-speed broadband. And the nice thing about that is you don't see a lot of cannibalization and it allows us to focus on really if we execute at the highest level, providing the Pay-TV service to 100% of the customers who want Pay-TV.

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [22]

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And so just as far as our Latino -- this is Charlie. But our Latino customers are mainly -- are a paradox of that. They're mostly in urban areas, which allows an off-air antenna to work for them. Our normal DBS customers, that's not the case. They live mostly in rural, and obviously, most -- our local channels are delivered via satellite there as long as we can get a retransmission consent deal with somebody, which we have historically been able to get.

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Operator [23]

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Our next question comes from Marci Ryvicker with Wolfe Research.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD [24]

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A question on wireless and then one on Sling. So in terms of wireless, I think we get the $500 million to $1 billion build for Phase 1. When do we need to start worrying about the $10 million for Phase 2? Does that come right away like in 2021?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [25]

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This is Charlie. Yes, it will come in 2020 and 2021 and 2022. And it'll -- we will certainly be a lot more open about how we're going to do that as we get further along in that business plan. For us, we have to focus -- fortunately, or unfortunately, obviously, we're focused on the initial build-out because we have to get that done to get to Phase 2. And so we have the capital to do Phase 1, we don't have all the capital we need to do Phase 2. But that capital could come in many shapes and forms. And like anything else, when you have a really good business plan, you can find partnerships and/or capital to make those things happen. If you don't have good business plan, you can't do that. So when we did -- when we launched DBS, we had a much bigger issue. We weren't a proven -- we had never done something of that magnitude and scale before, but we had a good business plan and we were able to find partnerships. Where what would have normally cost us capital didn't cost us capital because if people partner with us, and then we raise capital to use for things like a launch or something like that, that we actually had -- or a satellite, that we actually had to pay for. So I think you'll probably see some kind of combinations like that. But we've got to get there -- look, the elephant in the room is, obviously, we have to get to -- there's certainly skepticism on the marketplace that we somehow don't meet our -- or don't qualify for the build-out schedule in Phase 1. And again, we're confident that our narrowband IoT, with our flexible -- with the way our -- the terms -- meets the terms of our licenses, and we're working really hard to make sure we make the March deadline.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD [26]

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Got it. And then my question on Sling, I don't think anyone is surprised by the sub numbers. I mean, they are lower than what we had seen. Is it more an issue of a gross add or a churn? And if people are churning off, do you know where they're going?

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Warren W. Schlichting, DISH Network Corporation - Executive VP of Programming & Media Sales and President of Sling TV [27]

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Marci, it's Warren. So it's a good question. We continue to march forward with our focus on customer experience. We do see folks that come and go, and so I think as we've talked in the past, we're embracing that behavior with no contract and this easy, low switching cost. We see a lot of people returning to Sling. And so where we're focused is how do we give folks just an awesome customer experience so that this new behavior that we're seeing is rewarded when the customers actually come back to us. That's -- a lot of that has to do with just the way our -- we've got this unique structure. But just we like to think we're pretty good at video and we've focused on the basics, and folks seem to be coming back.

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [28]

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This is Charlie. I mean, I think one of the phenomenons you're seeing is -- I don't think that OTT business is slowing down. I think it's probably accelerating, but you're seeing a lot more players in the marketplace than just DISH and Sony, now with DIRECTV Now and now with YouTube and others and Hulu. You're seeing major players that are all gaining subscribers and their -- I think everybody has a little different offering, a little bit different slew of channels, a little different interface. Obviously, Disney has talked about going direct to the consumer. So you're going to see an awful lot of people in the category, and at some point, there'll be too many, and at some point, there'll be a consolidation. But -- so it's probably more that the category is growing and the competition is just tougher and most people probably aren't making money in the business today based on their programming cost. And so at some point, somebody's going to get profitable and kind of lead the pack. And so -- and we think that Sling, we could be a -- we think we have a lot of advantages and have some really, really good technology, and we think we can be a long-term player there.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD [29]

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Are you profitable now, Charlie, in Sling?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [30]

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It depends on how you look at it. But under Charlie Ergen's definition of profitability, I think I'd like to make a little more money than what we're making today.

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Operator [31]

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We'll take our next question from Kan Venkateshwar with Barclays.

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Kannan Venkateshwar, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [32]

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Charlie, you've spoken a couple of things about partnerships for your wireless plan, and you've mentioned this in the past as well. And some of the cable companies are starting to talk about potentially using third-party spectrum to reduce their MVNO costs. If you would just share your thoughts on what kind of partners you're looking at and whether some of the opportunities on the cable side might look interesting in the future. So that's the first one. And secondly, on the virtual MVPD side, is there an opportunity for Sling to essentially sell itself on a wholesale basis instead of a retail basis?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [33]

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Well, I would contend that we already sell Sling on a wholesale basis to the consumer given the low cost and their cost of programming there. But let's talk with the partnership kind of question. So the broad answer is we don't talk about individual conversations we're having with people, but we will say that we certainly have a lot of interest in what we're doing. The thing that's different about what we're doing is we're building a 5G network with a completely clean sheet of paper from the ground floor up without the legacy of the incumbent networks, which were built -- which have 2G and 3G and were built for voice. And we're transforming to -- and this isn't 5G marketing. This is real 5G. What I mean by that is we're transforming -- what's happening, instead of building a network primarily for voice, we're building a network primarily for digitizing the physical world. And I'll give you just a simple example of that because this would take -- this would blow your brains out if you try to really totally understand it. But Uber is a good example of transforming digitization to the physical world. When you pull your phone out and push the Uber button, 5 miles away, a car starts turning immediately towards you, right? So you transform something in the physical world. The future is going to be that not only are you going to -- not only is that car going to move towards you, there's not going to be a driver, right? And so there's no network today in the United States that can do that at the level that you need to do it, right? They don't have the latency. They don't have the throughput and so forth and so on. So anybody that's in -- so the kind of people that are interested in what we're doing in terms of -- and by the way, China is doing the same thing. So if we want to lead in 5G, I will guarantee, you're going to have to have a stand-alone network because it's the only way you're going to compete with other people in the world who are doing stand-alone networks. So car companies are going to be real interested in what we do. People like Uber are going to be very interested in what we do. If you're in robotics, in manufacturing, and you have to synchronize all your sensors, and now your robotics are on cables and you want to make those things wireless so that robots can move, you're going to like what we're doing. If you're in health care and you want to operate on somebody in a rural part of the country with a trained surgeon, you're going to be able to do that with our network, right? So if you want to do virtual reality and you want to have a headset on that's wireless with tons of capacity, you're going to like what we do in our network. And so you not only have to have really efficient use of spectrum in terms of how you architect your network, you also have to virtualize your network. And by that, I just mean you take in all the -- a lot of hardware that's in the marketplace today and you're going to turn it into software, which is going to lower your OpEx, CapEx, but it's going to make your network more flexible so you can change your network at a moment's notice. And so all that's -- and so cable companies, to your point, would they want to start -- would cable companies want to start with the old technology? Or do they want to move to the new so they can leapfrog what the incumbents do? If I was the CEO of a cable company, I would want to leapfrog, right? So because our network is fundamentally a neutral host, it means that any of the people we talk about could be part of our network. Think of us as wireless AWS, right? With AWS, you can just add more capacity to the AWS. You could use your own data. It's secure and it scales. It's very -- think about that in a wireless space. That starts to make some sense to an awful lot of people that are looking at it. So not the analysts and not the -- maybe even the FCC hasn't caught up with what we're trying to do because maybe we haven't articulated it well yet. But we're going to be a big factor in where this country goes, and we're really pleased to see the executive order where 5G is a national priority. And we will be part of that. And if it's a national priority, you have to have a ground floor up network because the legacy is -- it just eliminates a lot of things you can do in 5G.

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Kannan Venkateshwar, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [34]

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Can I just follow up? I mean, I think in the filing with the SEC, objecting to the T-Mobile Sprint deal, I think there was a suggestion, if I'm not wrong, of potentially partnering with T-Mobile and Sprint but somehow participating in that network. Is that a way to accelerate some of your build-out? Is that something that you would consider?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [35]

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I don't -- I think our objections to T-Mobile Sprint are just really fundamental on a competitive nature that consumer prices are going to go on, there's too much concentration in the network. Maybe on point to your question, in other countries where 4 has gone to 3, as part of those deals, the incumbent -- the 2 incumbents going to 3 had to -- part of their conditions were to facilitate a fourth provider. And that could have been in build-out or spectrum or MVNO deals or things like that. So -- but I think there's some historical precedent in other countries for that kind of thing, but I don't know that, that was a material part of our opposition.

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Operator [36]

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Our next question comes from Vijay Jayant with Evercore.

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [37]

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It's James Ratcliffe for Vijay. Two, if I could. First of all, in the Q, you mentioned there's a new long-term incentive plan with 4.5 million options or so that's based on -- that vest based on performance metrics. Can you talk about what those are and what metrics you're using to judge the performance of the business and if any are related to wireless? And secondly, on the HBO front, I know you mentioned earlier that a key issue here is the minimum subscriber level. Did the prior deal have a level? And if so, what is it about the new proposal that isn't acceptable? Is it that's higher or the term? Any more color would be helpful.

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [38]

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I'll take the second part of the question, and Erik will probably the first part of the question. On HBO, the key point is that they would require us to have a minimum number of customers that we pay on. The problem with that is, that that wouldn't be maybe unusual in an environment 20 years ago, but the environment today is you could -- if you run the math on that, you could be in a situation where your competition, AT&T DIRECTV, which owns HBO now, right, and they're already doing this. They're giving HBO away free for life. So why would a customer pay DISH when they can get it from DIRECTV free for life, right -- or from AT&T free for life? So therefore, you're paying them customers that you don't have, and they're giving it away for free, but they're still getting paid on customers, right? So that would be -- there's no -- that would be malpractice. There's no company that would sign up to a deal like that. And then additionally, HBO sells direct to consumers, right? And you don't know what price they're going to have and what they're going to sell that and there's -- unless you get contractual guarantees and things like that, that, of course, we haven't been offered. So this is -- so it makes sense -- if you're AT&T, what they're doing makes sense, right? In other words, they will lose some money from DISH in terms of the subscribers that we're paying on, but they will get subscribers from DISH in rural America because they're the only other alternative for the customer. So they'll -- this is purely an anticompetitive play that we tried to warn about. They said they weren't going to do it at trial. They said they were never going to take HBO down. It had never been down before. We've always been able to reach agreement with HBO. The first time in 40 years. The only difference is AT&T and DIRECTV now own it. You guys are smart guys. You guys are analysts. You guys can figure it out. That it just doesn't take a rocket science to figure out what's going on here. But we can't sign a deal that we would lose -- that we would actually pay for their customers. It doesn't make -- and that's what it would be. So that's the gist of that. And Erik, do you want to take the incentive?

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W. Erik Carlson, DISH Network Corporation - President & CEO [39]

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Yes, sure. So I think one of the things that we pride ourselves at DISH about, and we have for quite some time, is that we take a long-term approach to business. And so we have long-term incentives as management from time to time. The incentives should really help us focus on things that can not only impact the business today, but help prepare us for the future. And generally speaking, I mean, we're focused obviously on growing customer relationships and our capabilities, definitely improving the customer experience, having a good balance between acquiring profitable customers and having cash on the balance sheet and then really focused on fielding the best team we can. So our incentives, generally, are focused in on those 4 areas.

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Operator [40]

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Our next question comes from Brett Feldman with Goldman Sachs.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [41]

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And just a quick follow-up on the HBO question since it does appear as a blackout. Can you give us any color into maybe what fundamental impacts we could see in the fourth quarter, whether it's churn or financial? And then a second question on spectrum. Can you give us an update on the conversations between SNR and Northstar with the FCC regarding their status as designated entities? And then if we just assume that your argument prevails and they are, indeed, designated entities, what would you expect to happen then? Do you anticipate that the spectrum would be returned? Or are there other things in play at that point in time?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [42]

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I'll take the second part of that first because -- I guess it's one of the frustrating things in terms of the DE structure with the 2 DEs. Obviously, according to the courts, who are the third-party arbitrator, that we didn't qualify as a DE. But we weren't given the chance to cure. And we still -- and so now we're been given the chance to cure, but it wasn't the normal chance. Look, usually, we'd go in and talk about things. And I've always found when you talk about things, you probably could come to more common ground about it than if you're just filing paper. But we're in a situation where the process, at least so far, has just been to file paper. So that's been complete. I think in late October, all those filings were in. So the FCC has all the information they need now to make a decision. And at the core of it is the discounts of about $2.5 billion on the spectrum. And there's other side issues with return spectrum and penalties and other things, but the core issue is still that. There were 30 -- I think there were 36 things that the FCC found lacking in our applications, and we took that seriously. And we said, if that's the case, we're going to make it right. And with the DEs, we've gone in and changed all 36 things. I think people that have objectively spent time and read those filings and looked at it, I think, objectively, most of the things I've read, I think 100% of them have come to conclusion that we have, in fact, cured. But obviously, the FCC is the one that needs to make that decision. So it would be helpful to get a decision, whatever that decision might be, so that we have certainty and we can move on with some more planning because we would love to make -- we'd love to have more meaningful conversations about how we can utilize that spectrum. And most of the time, today's been spent on -- management time on our side has been kind of in litigation, which is not productive.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [43]

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So just to be clear, it is fair to say that if you have a favorable outcome, you ultimately would want -- that you'd want to have those licenses return to the affiliates?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [44]

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Yes. I mean, I think that would -- obviously, to the extent -- look, I think to the extent that -- and I believe this is probably in the papers that are filed, so nothing that's nonpublic here, but I think to the extent that had the DEs been given the opportunity to cure as every other DE has throughout history, that they never would have been returned to spectrum. There wouldn't have been a need to be returned to spectrum; they would have been able to figure out a way to qualify as DEs, and there wouldn't have been a return to spectrum. And so the policy has been that you go back to the point -- that when that happens, you go back to the point in time as to when you had the dispute, which would be that they weren't allowed to have a conversation. They still haven't been able to have a conversation; it's all been through paper. So that's a bit unusual. And I mean, it feels like we're in the doghouse, right? And again, I think that we'd like to be out of the doghouse, and we'd like to do whatever it takes to get out of the doghouse. But that's kind of where it is. And then on HBO was -- I forget the question now.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [45]

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Just any financial impact or fundamental impacts so far?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [46]

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Well, yes. Well, look, it's essential programming. And it -- we'll lose customers and -- but we -- given what contractually they wanted us to do, we won't -- it'll be interesting to see if we lose money or not because we'll -- how much money we lose because we'll lose customers. But the actual cost of HBO, we won't take a loss on that as we might have under the contract, but we'll lose customers that obviously -- and particularly, rural America, we know those customers. The only alternative for them is to go to DIRECTV. So it will have a negative impact, we just don't know how much yet. But it will be a negative impact for sure.

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Operator [47]

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We'll take our next question from John Hodulik with UBS.

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John Christopher Hodulik, UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group, and Telco and Pay TV Analyst [48]

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Maybe for Charlie, just a quick follow-up to that question. It looks like you're seeking arbitration under the rules AT&T agreed to as part of the Time Warner deal. What does that process look like? And what's the timing of it? And does HBO come back up during it? And then maybe a second one for Warren. The -- anything you can tell us about the cadence of the sub growth on Sling? Some reports that you may have reestablished some momentum towards the end of the quarter. And do you expect to continue to grow that business even through this sort of aggressively competitive phase?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [49]

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Yes. On the HBO arbitration, unfortunately, the -- in the trial that AT&T did not ever consent to HBO arbitration. So -- and obviously, you can see why because they're able to use it as a weapon against people like DISH. That's why you can take what they say and you can take what I say and you can take it with a grain -- take it all with a grain of salt. The way to cure the issue is to go to -- is we will go through arbitration, we voluntarily would go to arbitration. It would look like baseball arbitration, which means that they would issue a contract, that can include a guarantee and everything that they want to have in it. We would say, here's what we will pay. And an arbitrator has to pick one of those 2 contracts, right? And then you have to live with that contract. And that would be the fair way to handle this particular dispute. Consumers are not harmed at all, and whoever has the best economic argument wins the day. And that's the way it should be. And so they are not required to go to arbitration because they want a trial. And that -- so -- Turner Broadcasting does have to go through arbitration but not HBO. So you can see why AT&T would have the position that they have because they can use it as an economic weapon. And they can gain market share, just like they -- look, they gained market share with Univision and the -- I mean, they got some of our customers in the third quarter for Univision. So -- but I will say, some people say we've been in a lot of disputes. First of all, we've done a lot of deals without being in disputes. And we've done massively more and 2 -- other people are going to be in disputes because people just -- when the financial guys start looking at deals and they start realizing that the more customers they get, the more they lose, our -- in our -- some cases, if you do lose customers, you lose more -- even more money. They're not going to -- it's not going to be business as usual, and you're going to see a lot of disputes in this industry. And we probably have fewer than most people when people really start looking at the math because linear TV is going to be challenged and the model is changing. And our industry is not doing enough to keep up with it and working together enough to stave off the other new entrants.

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Warren W. Schlichting, DISH Network Corporation - Executive VP of Programming & Media Sales and President of Sling TV [50]

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And then just on the cadence of the sub growth. The cadence is more or less the Pay-TV cadence. I just think at least in these early days, and it is very early in this business, the volatility is higher, so you see larger swings. Then with respect to growing, we absolutely expect to continue to grow even in the face of competition. Our bet is obviously that rationality returns at some stage. I think we've seen a little bit more fiscal conservatism from DIRECTV Now, probably a couple more that could afford to get financial religion there. So yes, we expect it to continue to grow, and we think we're in this for the long haul and we're hopeful that rationality returns to some of our competitors.

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Operator [51]

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We'll take our next question from Jonathan Chaplin with New Street Research.

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Jonathan Chaplin, New Street Research LLP - US Team Head [52]

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Charlie, a question for you. On the FCC request for information on the specifics of the IoT network, are you expecting a response from them from that? And if so, in what sort of time frame? And if they don't respond in a reasonable time frame, is that tacit approval that the network plans that you've submitted meet the requirements under the rules -- under the build-out rules?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [53]

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Well look, I'd say a couple things. One is we filed our plans 20 months ago, so we're long -- we're past the point of no return. We've ordered all the equipment and entered into leases, and we're down the road with our networks. So there's not an opportunity for us to change it today. We're happy to have whatever dialogue with the FCC and the staff in terms of what our plans are, and we probably should do more of that so that they understand what it is to do. But the terms of our build-out were set 4 or 5 years ago with our license. And it's the license -- you just have to read the license. Again, you read -- but it's a license that has flexible -- let's call it, flexible use, which means you basically have to have a service. And look, we'd love to have a more robust service with full broadband but with only 5 megahertz of uplink spectrum, that is not just -- that is not a practical thing you can do. So rather than -- again, this is another tough concept for you guys, but when we build a network that's 10x more efficient than the current networks, that means we're going to use spectrum more efficiently. That means that's the opposite of hoarding. That's using spectrum more efficiently. When you virtualize, you can use your network 24 hours a day, 7 days a week, at a much better capacity than current. That's less hoarding. The fact that we went to more downlink than uplink, we all know on this call that consumers -- that people use more downlink spectrum than uplink spectrum, but most people's networks are synchronous, they're same amount of uplink as downlink. So that means people are hoarding uplink spectrum. We took a long-term view of it and said, let's don't -- let's do more downlink spectrum because that will be a more efficient use and so forth. We know that -- as an example, T-Mobile, if they're successful with their acquisition of Sprint, has said they're going to decommission Sprint, which means that spectrum is not going to be used while they're decommissioning, which means they'll be hoarding spectrum. So it -- we've never missed a final build-out deadline, and we're not going to miss this one. And we have competitors who would love to have our spectrum. We know that people in this business know the power of a stand-alone 5G network and that, obviously, competitors would prefer to see that, that doesn't happen. And one of the ways you do that is you try to pass laws, you try to tax and you try to use regulation to stop that, right. And so don't be sidetracked by that. We're going to stay focused on making sure we meet the terms of our license. And as we sit here several years from now, we'll be talking about why our network is different than everybody else. And look, we're going to -- we're hopefully going to make the FCC proud. We're going to make the administration proud and the Congress proud of what we're going to do. We did it with direct satellite where the paradigm shift was analog-to-digital, right? And people were just as skeptical back then of us at the point in time. I will say that the FCC was very skeptical of us, but they were a bit more of a cheerleader than the FCC is today. So we wish we had a little more cheerleading going on. But if we have to be our own cheerleaders, we'll be our own cheerleaders. Okay, operator, I think we have time for one more from the analysts.

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Operator [54]

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We will now take our final question from the analyst community. (Operator Instructions) We will begin the media portion of this call following the answer for this final analyst question. Our final analyst question comes from Jason Bazinet with Citi.

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Jason B Bazinet, Citigroup Inc, Research Division - MD and U.S. Cable and Satellite Analyst [55]

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So one of the cable companies during their earnings season made an oblique reference to low-band spectrum that's available not being used within their footprint this quarter, without mentioning DISH by name. And I think you mentioned cable, I think for the first time on this call. Would you consider that one of the options in your canopy of options to operationalize your spectrum, to essentially partner with your erstwhile enemy, the cable firms?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [56]

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Well, specifically, low-band spectrum, it's not cleared on a nationwide basis today. So much of our 600 -- our low-band spectrum, of course, is in big cities, and it's not cleared and it's not -- statutorily, it doesn't have to be cleared until, I think, the summer of 2020. So I'm not really in a position to -- nor would anybody -- nor would they be able to build that. T-Mobile has been able to build out some segments of theirs, but they build that out in a 4G way. And since we want to build out on a national basis and we don't have a customer base, it makes more sense to wait for the 5G spec and for that spectrum to be cleared. So that doesn't mean that we don't -- look, if you look at the list of people that are interested in what we're doing, there's cable -- is cable as a gross generalization, interested? Yes, they are.

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Operator [57]

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We will now take questions from members of the media. (Operator Instructions) Our first question comes from Scott Moritz with Bloomberg.

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Scott Moritz, [58]

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Charlie, maybe you can speak to the OTT industry at this stage. It seems you guys are 3.5 years in. Growth kind of took off a while, but now it seems to be sputtering, not just for you guys but for others. You see customers coming in and out on their contracts or lack of contracts, but you also see a lot of people still going to Netflix. Is this -- is OTT -- has it reached that post peak in terms of growth trajectory? Or is it something that'll be around in a niche form for the time being? How do you see this play out?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [59]

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Well, I think it depends on how we, as an industry, back it. I don't think it's sputtered as much as maybe people are writing because I think that -- I don't know that everybody releases their numbers. So there may be some growth that we're not seeing with some of the other players. But OTT has a lot of potential, but you've got to give customers what they want. And so you've got a couple problems. One is, as an example, it's much more prone to piracy. So a lot of the programmers think they put it on, and they don't realize that once they get on there that a lot of people under the age of 40 know how to pirate stuff and never paid for TV in their life, and they've made it really pretty easy for them to do it. And so -- and it can be as simple as sharing passwords, but there's certainly other ways to do it that people can do it. And we're one of the few companies that actually has a full-time staff to attack piracy. People don't like commercials, and they like binge viewing. But yet, no OTT provider is really able to do that in an efficient manner today because contractually, we're not really allowed to do. So you end up with a product that people continue to watch less of the traditional linear programming, including broadcasting. Those numbers continue to go down. And things like Netflix and things continue to go up. So there has to be a fundamental shift on the thinking of the linear programmers, and I'm hopeful that, that process has started and some people are thinking about it differently. Certainly, Disney is thinking about it in a different way, and I think their product will look probably different than their linear product and hopefully, some other people will try that as well. If not, then yes, it will sputter out and not be a huge impact. But if done correctly, OTT will be a big factor. It will be as big a factor as cable or satellite have been to the business. It just has to do -- we have to go through some evolutionary changes to do it. And our philosophy has been to the extent that content owners want to work to try to achieve some of those things, we're willing to work with them.

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Operator [60]

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We'll take our next question from Mike Dano with FierceWireless.

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Mike Dano, [61]

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And I just wanted to ask about the time line for the Phase 2 build-out, considering that there's a so-called race to 5G with China and other operators are moving ahead with their 5G build-outs. What is the sort of time line that DISH would give in terms of building out a stand-alone 5G network?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [62]

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Well, so thanks, Mike, for the question. Everything kind of comes together for us in 2020. Our spectrum -- our low-band spectrum will be cleared and, hopefully, the DE situation will be cleared up one way or the other by then. We will obviously have built out our first network and nationwide on the narrowband IoT network. And the 5G spec Release 16, which allows you to really do what unleashes the power of 5G with ultra-broadband, ultra-connectivity and ultra-low latency. Those 3 things combined with the software and virtualization all come together in 2020. And so that's when we'll -- that's when you'll start seeing DISH 5G. I don't know how long it will take to build the entire nation out yet, but obviously, the more that we can plan between now and then, the faster we're able to get that done. So -- and then you'll see -- I think you'll just see it, you'll see kind of legacy networks, they'll do some of the things we can do. They won't do all the things that we can do, and they'll be a little bit -- they'll be efficient in certain things and not efficient in other things. And their primary focus is going to be consumers, and our primary focus is going to be digitizing the physical space. That's a big concept, and it's maybe hard for you to understand, but you'll hear more and more about what I just said. You'll hear a lot of people talking about that because that has way bigger impacts than the phone in your pocket.

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Operator [63]

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We'll take our next question from Sheila Dang with Reuters.

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Sheila Dang, [64]

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You mentioned with the Univision situation that there were ways that you can still go after Hispanic viewers such as providing antennas. And while HBO is dark, I was wondering if there's anything similar that you can do to stem losses from that HBO blackout?

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Charles W. Ergen, DISH Network Corporation - Co-founder & Chairman of the Board [65]

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Not really. Some of our customers that have broadband connections may be able to go directly to HBO, but that's a different situation. You can't put an antenna up and provide HBO. So that's why it's so anticompetitive because AT&T knows full well that for many of our customers, the only place they can go is to DIRECTV, and they own HBO and they own DIRECTV. So they're willing to make that trade-off. One more question?

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Operator [66]

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And that concludes the question-and-answer portion. I'd like to turn the call back over to Jason Kiser for any additional or closing remarks.

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Jason Kiser, DISH Network Corporation - IR Contact & Treasurer [67]

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Thanks, everybody, for joining us, and we'll see you at the next call.

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Operator [68]

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And that concludes today's presentation. Thank you for your participation, and you may now disconnect.