| ECHOSTAR COMMUNICATIONS CORP Item 1A RISK FACTORS The risks and uncertainties described below are not the only ones facing us |
| Additional risks and uncertainties that we are unaware of or that we currently believe to be immaterial also may become important factors that affect us |
| If any of the following events occur, our business, financial condition or results of operations could be materially and adversely affected |
| Risks Related to Our Business We compete with other subscription television service providers and traditional broadcasters, which could affect our ability to grow and increase our earnings and other operating metrics |
| We compete in the subscription television service industry against other DBS television providers, cable television and other system operators offering video, audio and data programming and entertainment services |
| Many of these competitors have substantially greater financial, marketing and other resources than we have |
| Our earnings and other operating metrics could be materially adversely affected if we are unable to compete successfully with these and other new providers of multi-channel video programming services |
| Cable television operators have a large, established customer base, and many cable operators have significant investments in, and access to, programming |
| Of the total US households in which cable television service was available as of June 30, 2005 approximately 60prca subscribed to cable |
| Cable television operators continue to leverage their advantages relative to satellite operators by, among other things, bundling their analog video service with expanded digital video services, 2-way high speed internet access, and telephone services |
| Cable television operators with analog systems are also able to provide service to multiple television sets within the same household at a lesser incremental cost to the consumer, and they are able to provide local and other programming in a larger number of geographic areas |
| As a result of these and other factors, we may not be able to continue to expand our subscriber base or compete effectively against cable television operators |
| Some digital cable platforms currently offer a VOD service that enables subscribers to choose from a library of programming selections for viewing at their convenience |
| We are continuing to develop our own VOD service alternative which was launched on a limited scale during 2005 |
| There can be no assurance that our VOD service will be successful in competing with other video providers |
| 24 _________________________________________________________________ [82]Table of Contents News Corporation owns a 34prca controlling interest in the DirecTV Group, Inc |
| News Corporation’s diverse world-wide satellite, content and other related businesses may provide competitive advantages to DirecTV with respect to the acquisition of programming, content and other assets valuable to our industry |
| In addition, DirecTV’s satellite receivers are sold in a significantly greater number of consumer electronics stores than ours |
| As a result of this and other factors, our services are less well known to consumers than those of DirecTV Due to this relative lack of consumer awareness and other factors, we are at a competitive marketing disadvantage compared to DirecTV We believe DirecTV continues to be in an advantageous position relative to our Company with regard to, among other things, certain programming packages, and possibly, volume discounts for programming offers |
| DirecTV recently launched two new satellites and announced plans to launch two additional new satellites in 2007 in order to offer local and national channel programming in HD to most of the US population |
| Although we have recently launched our own HD initiatives, if DirecTV fully implements these plans, we may be placed at a further competitive disadvantage compared to DirecTV Furthermore, other companies in the United States have conditional permits or leased transponders for a comparatively small number of DBS assignments that can be used to provide subscription satellite services to portions of the United States |
| These new entrants may have a competitive advantage over us in deploying some new products and technologies because of the substantial costs we may be required to incur to make new products or technologies available across our installed base of over 12 million subscribers |
| Most areas of the United States can receive traditional terrestrial VHF/UHF television broadcasts of between three and 10 channels |
| These broadcasters provide local, network and syndicated programming |
| The local content nature of the programming may be important to the consumer, and VHF/UHF programming is typically provided free of charge |
| In addition, the FCC has allocated additional digital spectrum to licensed broadcasters |
| At least during this transition period, each existing television station will be able to retain its present analog frequencies and also transmit programming on a digital channel that may permit multiple programming services per channel |
| Our business could be adversely affected by continued free broadcast of local and other programming and increased program offerings by traditional broadcasters |
| Although we believe we currently offer more HD content than our competitors, we may be placed at a competitive disadvantage to the extent other multi-channel video providers increase their offering of HD programming |
| We could be further disadvantaged to the extent a significant number of local broadcasters begin offering local channels in HD, unless we make substantial additional investments in infrastructure to deliver HD programming |
| There can be no assurance that we will be able to effectively compete with HD program offerings from other video providers |
| New technologies could also have a material adverse effect on the demand for our DBS services |
| For example, we face an increasingly significant competitive threat from the build-out of advanced fiber optic networks |
| Verizon Communications, Inc |
| (“Verizon”) and AT&T have begun deployment of fiber-optic networks that will allow them to offer video services bundled with traditional phone and high speed internet directly to millions of homes as early as the second half of 2006 |
| In addition, telephone companies and other entities are also implementing and supporting digital video compression over existing telephone lines and digital “wireless cable” which may allow them to offer video services without having to build a new infrastructure |
| We also expect to face increasing competition from content and other providers who distribute video services directly to consumers over the internet |
| With the large increase in the number of consumers with broadband service, a significant amount of video content has become available on the Internet for users to download and view on their personal computers and other devices |
| In addition, there are several initiatives by companies to make it easier to view Internet-based video on television and personal computer screens |
| We also expect to face increasing competition from content and other providers who distribute video services directly to consumers via digital air waves |
| Mergers, joint ventures, and alliances among franchise, wireless or private cable television operators, telephone companies and others also may result in providers capable of offering television services in competition with us |
| In addition, our competitors are increasingly using existing and new technologies to offer bundles of television and telecommunications services that may prove to be more competitive than our current offerings |
| As a result, we may not be able to compete successfully with existing competitors or new entrants in the market for television services |
| 25 _________________________________________________________________ [83]Table of Contents Satellite programming signals have been subject to theft, which could cause us to lose subscribers and revenue |
| It is illegal to create, sell or otherwise distribute mechanisms or devices to circumvent that encryption |
| Our signal encryption has been compromised by theft of service and could be further compromised in the future |
| Theft of our programming reduces future potential revenue and increases our net subscriber acquisition costs |
| In addition, theft of our competitors’ programming can also increase our churn |
| Compromises of our encryption technology could also adversely affect our ability to contract for video and audio services provided by programmers |
| We continue to respond to compromises of our encryption system with security measures intended to make signal theft of our programming more difficult |
| In order to combat theft of our service and maintain the functionality of active set-top boxes, we recently replaced the majority of our older generation smart cards with newer generation smart cards |
| These existing smart cards have been compromised, and we are implementing software patches and other security measures to help secure our service |
| However, there can be no assurance that our security measures will be effective in reducing theft of our programming signals |
| If we are required to replace existing smart cards, the cost of card replacements could have a material adverse effect on our financial condition, profitability and cash flows |
| Furthermore, other illegal methods that compromise satellite programming signals may be developed in the future |
| If we cannot control compromises of our encryption technology, our revenue, net subscriber acquisition costs, churn and our ability to contract for video and audio services provided by programmers could be materially adversely affected |
| Increased subscriber turnover could harm our financial performance |
| Our subscriber churn may be negatively impacted by a number of factors, including but not limited to, an increase in competition from other multi-channel video providers and new technology entrants, signal theft, and increasingly complex products |
| There can be no assurance that these and other factors will not contribute to relatively higher churn than we have experienced historically |
| Additionally, certain of our promotions allow consumers with relatively lower credit scores to become subscribers and these subscribers typically churn at a higher rate |
| However, these subscribers are also acquired at a lower cost resulting in a smaller economic loss upon disconnect |
| SHVERA requires, among other things, that all local broadcast channels delivered by satellite to any particular market be available from a single dish by June 8, 2006 |
| We currently offer local broadcast channels in 164 markets across the United States |
| In 38 of those markets a second dish was previously required to receive some local channels in the market |
| While we have subsequently reduced the number of markets where a second dish is necessary, we can not entirely eliminate the second dish necessity in all markets absent full operability of EchoStar X In the event EchoStar X experiences any anomalies, satellite capacity limitations could force us to move the local channels in some two dish markets to different satellites, requiring subscribers in those markets to install a second or different dish to continue receiving their local broadcast channels |
| We could be forced, in that event, to stop offering local channels in some of those markets altogether |
| The transition of all local broadcast channels in a market to a single dish could result in disruptions of service for a substantial number of our customers |
| Further, our ability to timely comply with this requirement without incurring significant additional costs is dependent on, among other things, the continued operation of our EchoStar V satellite at the 129 degree orbital location until commencement of commercial operation of EchoStar X EchoStar V or EchoStar X anomalies could force us to cease offering local channels by satellite in many markets absent regulatory relief from the single dish obligations |
| If impediments to our preferred transition plan arise, it is possible that the costs of compliance with the single dish requirement could exceed dlra100dtta0 million |
| To the extent subscribers are unwilling for any reason to upgrade to a new dish, our subscriber churn could be negatively impacted |
| In addition, we depend on our EchoStar VIII satellite to provide local channels to over 40 markets at least until such time as our EchoStar X satellite has commenced commercial operation |
| In the event that EchoStar VIII experienced a total or substantial failure, we could transmit many, but not all, of those channels from other in-orbit satellites |
| The potential relocation of some channels, and elimination of others, resulting from failures relating to EchoStar X or EchoStar VIII, could cause a material adverse impact on our business, including, among other things, a reduction in revenues, an increase in operating expenses, a decrease in new subscriber activations and an increase in subscriber churn |
| 26 _________________________________________________________________ [84]Table of Contents Impacts from our litigation with the networks in Florida, FCC rules governing the delivery of superstations and other factors could cause us to terminate delivery of network channels and superstations to a substantial number of our subscribers, which could cause many of those customers to cancel their subscription to our other services |
| In the event the Court of Appeals upholds the Miami District Court’s network litigation injunction, and if we do not reach private settlement agreements with additional stations, we will attempt to assist subscribers in arranging alternative means to receive network channels, including migration to local channels by satellite where available, and free off air antenna offers in other markets |
| However, we cannot predict with any degree of certainty how many subscribers might ultimately cancel their primary DISH Network programming as a result of termination of their distant network channels |
| We could be required to terminate distant network programming to all subscribers in the event the plaintiffs prevail on their cross-appeal and we are permanently enjoined from delivering all distant network channels |
| Termination of distant network programming to subscribers would result in, among other things, a reduction in monthly average revenue per DISH Network subscriber and a temporary increase in subscriber churn |
| Increases in theft of our signal, or our competitors’ signals, also could cause subscriber churn to increase in future periods |
| There can be no assurance that our existing security measures will not be compromised or that any future security measures we may implement will be effective in reducing theft of our programming signals |
| Additionally, as the size of our subscriber base continues to increase, even if percentage subscriber churn remains constant or declines, increasing numbers of gross new DISH Network subscribers are required to sustain net subscriber growth |
| Increased subscriber acquisition and retention costs could adversely affect our financial performance |
| In addition to leasing receivers, we generally subsidize installation and all or a portion of the cost of EchoStar receiver systems in order to attract new DISH Network subscribers |
| Our costs to acquire subscribers, and to a lesser extent our subscriber retention costs, can vary significantly from period to period and can cause material variability to our net income (loss) and free cash flow |
| Our average subscriber acquisition costs were approximately dlra439 per new subscriber activation during the year ended December 31, 2005, as compared to approximately dlra444 per new subscriber activation during 2004 |
| Subscriber acquisition costs exclude the value of receiver system equipment provided to subscribers under our DHA lease program |
| Because we retain ownership of such equipment, we capitalize such costs and depreciate them over the equipment’s useful life |
| Our equipment lease penetration increased during the year ended December 31, 2005 as compared to 2004 |
| This reduced our average subscriber acquisition costs per new subscriber activation, and resulted in an increase in capital expenditures for the year ended December 31, 2005 |
| In the event we continue to increase our equipment lease penetration, our average subscriber acquisition costs per new subscriber activation will continue to be positively impacted and our capital expenditures will continue to increase |
| If we included in our calculation of average subscriber acquisition costs per new subscriber activation the equipment capitalized under our lease program less the value of equipment returned and payments received, our average subscriber costs would have been approximately dlra668 per new subscriber activation during the year ended December 31, 2005 compared to dlra593 per new subscriber activation during 2004 |
| This increase was primarily attributable to a greater number of SuperDISH installations, as well as an increase in DISH Network subscribers activating higher priced advanced products, such as receivers with multiple tuners, DVRs and HD receivers |
| Our subscriber acquisition costs, both in the aggregate and on a per new subscriber activation basis, may materially increase in the future to the extent that we introduce other more aggressive promotions if we determine that they are necessary to respond to competition, or for other reasons |
| In addition to new subscriber acquisition costs, we incur costs to retain existing subscribers, including costs related to the programs by which we offer existing subscribers new and upgraded equipment |
| We generally subsidize installation and all or a portion of the cost of our receiver system equipment offered pursuant to our subscriber retention programs |
| Our capital expenditures related to subscriber retention programs could increase in the future to the extent we increase penetration of our equipment lease program for existing subscribers, if we introduce other more aggressive promotions, if we offer existing subscribers HD receivers or EchoStar receivers with other enhanced technologies, or for other reasons |
| Several years ago we began deploying satellite receivers capable of exploiting 8PSK modulation technology |
| Since that technology is now standard in all of our new satellite receivers, our cost to migrate programming channels to that technology in the future will be substantially lower than if it were necessary to replace all existing consumer 27 _________________________________________________________________ [85]Table of Contents equipment |
| As we continue to implement 8PSK technology, bandwidth efficiency will improve, significantly increasing the number of programming channels we can transmit over our existing satellites as an alternative or supplement to the acquisition of additional spectrum or the construction of additional satellites |
| New channels we add to our service using only that technology may allow us to further reduce conversion costs and create additional revenue opportunities |
| We have implemented MPEG-4 technology in all satellite receivers for new customers who subscribe to our HD programming packages |
| This technology when implemented will result in further bandwidth efficiencies over time |
| We have not yet determined the extent to which we will convert the EchoStar DBS System to these new technologies, or the period of time over which the conversions will occur |
| Provided EchoStar X commences commercial operation during second quarter 2006 and other planned satellites are successfully deployed, our 8PSK transition will afford us greater flexibility in delaying and reducing the costs otherwise required to convert our subscriber base to MPEG-4 |
| Any material increase in subscriber acquisition or retention costs from current levels could have a material adverse effect on our business, financial condition and results of operations |
| We have substantial debt outstanding and may incur additional debt As of December 31, 2005, our total debt, including the debt of our subsidiaries, was approximately dlra5dtta935 billion |
| During February 2006, our total debt increased to approximately dlra7dtta005 billion when we sold dlra1dtta5 billion aggregate principal amount of our ten-year, 7 1/8prca Senior Notes due February 1, 2016 and redeemed our outstanding 9 1/8prca Senior Notes due 2009 of approximately dlra442dtta0 million |
| Our debt levels could have significant consequences, including: • making it more difficult to satisfy our obligations; • increasing our vulnerability to general adverse economic conditions, including changes in interest rates; • limiting our ability to obtain additional financing; • requiring us to devote a substantial portion of our available cash and cash flow to make interest and principal payments on our debt, thereby reducing the amount of available cash for other purposes; • limiting our financial and operating flexibility in responding to changing economic and competitive conditions; and • placing us at a disadvantage compared to our competitors that have less debt |
| In addition, we may incur substantial additional debt in the future |
| The terms of the indentures relating to our senior notes permit us to incur additional debt |
| If new debt is added to our current debt levels, the related risks we now face could intensify |
| We may need additional capital, which may not be available, in order to continue growing, to increase earnings and to make payments on our debt |
| Our ability to increase earnings and to make interest and principal payments on our debt will depend in part on our ability to continue growing our business by maintaining and increasing our subscriber base |
| This may require significant additional capital that may not be available to us |
| Funds necessary to meet subscriber acquisition and retention costs are expected to be satisfied from existing cash and marketable investment securities balances and cash generated from operations to the extent available |
| We may, however, decide to raise additional capital in the future to meet these requirements |
| There can be no assurance that additional financing will be available on acceptable terms, or at all, if needed in the future |
| 28 _________________________________________________________________ [86]Table of Contents In addition to our DBS business plan, we have contracts to construct, and conditional licenses and pending FCC applications for, a number of FSS Ku-band, Ka-band and extended Ku-band satellites |
| We may need to raise additional capital to construct, launch, and insure satellites and complete these systems and other satellites we may in the future apply to operate |
| We also periodically evaluate various strategic initiatives, the pursuit of which also could require us to raise significant additional capital |
| There can be no assurance that additional financing will be available on acceptable terms, or at all |
| We also have substantial satellite-related payment obligations under our various satellite service agreements |
| Our business depends substantially on FCC licenses that can expire or be revoked or modified and applications that may not be granted |
| If the FCC were to cancel, revoke, suspend or fail to renew any of our licenses or authorizations, it could have a material adverse effect on our financial condition, profitability and cash flows |
| Specifically, loss of a frequency authorization would reduce the amount of spectrum available to us, potentially reducing the amount of programming and other services available to our subscribers |
| The materiality of such a loss of authorizations would vary based upon, among other things, the location of the frequency used or the availability of replacement spectrum |
| In addition, Congress often considers and enacts legislation that could affect us, and FCC proceedings to implement the Communications Act and enforce its regulations are ongoing |
| We cannot predict the outcomes of these legislative or regulatory proceedings or their effect on our business |
| We are subject to significant regulatory oversight and changes in applicable regulatory requirements could adversely affect our business |
| DBS operators are subject to significant government regulation, primarily by the FCC and, to a certain extent, by Congress, other federal agencies and international, state and local authorities |
| Depending upon the circumstances, noncompliance with legislation or regulations promulgated by these entities could result in the suspension or revocation of our licenses or registrations, the termination or loss of contracts or the imposition of contractual damages, civil fines or criminal penalties any of which could have a material adverse effect on our business, financial condition and results of operations |
| You should review the regulatory disclosures under the caption “Item 1 |
| Business — Government Regulation — FCC Regulation under the Communication Act, Other Communications Act Provisions” of this Annual Report on Form 10-K We may be unable to manage rapidly expanding operations |
| If we are unable to manage our growth effectively, it could have a material adverse effect on our business, financial condition and results of operations |
| To manage our growth effectively, we must, among other things, continue to develop our internal and external sales forces, installation capability, customer service operations and information systems, and maintain our relationships with third party vendors |
| We also need to continue to expand, train and manage our employee base, and our management personnel must assume even greater levels of responsibility |
| If we are unable to continue to manage growth effectively, we may experience a decrease in subscriber growth and an increase in churn, which could have a material adverse effect on our financial condition, profitability and cash flows |
| We cannot be certain that we will sustain profitability |
| Due to the substantial expenditures necessary to complete construction, launch and deployment of our DBS system and to obtain and service DISH Network customers, we have in the past sustained significant losses |
| If we do not have sufficient income or other sources of cash, our ability to service our debt and pay our other obligations could be affected |
| While we had net income of dlra1dtta515 billion, dlra214dtta8 million and dlra224dtta5 million for the years ended December 31, 2005, 2004 and 2003, respectively, we may not be able to sustain this profitability |
| Improvements in our results of operations will depend largely upon our ability to increase our customer base while maintaining our price structure, effectively managing our costs and controlling churn |
| We cannot assure you that we will be effective with regard to these matters |
| 29 _________________________________________________________________ [87]Table of Contents Our satellites are subject to risks related to launch |
| Satellite launches are subject to significant risks, including launch failure, incorrect orbital placement or improper commercial operation |
| Certain launch vehicles that may be used by us have either unproven track records or have experienced launch failures in the past |
| The risks of launch delay and failure are usually greater when the launch vehicle does not have a track record of previous successful flights |
| Launch failures result in significant delays in the deployment of satellites because of the need both to construct replacement satellites, which can take more than two years, and to obtain other launch opportunities |
| Such significant delays could materially adversely affect our ability to generate revenues |
| If we were unable to obtain launch insurance, or obtain launch insurance at rates we deem commercially reasonable, and a significant launch failure were to occur, it could have a material adverse effect on our ability to generate revenues and fund future satellite procurement and launch opportunities |
| In addition, the occurrence of future launch failures may materially adversely affect our ability to insure the launch of our satellites at commercially reasonable premiums, if at all |
| Please see further discussion under the caption “We currently have no commercial insurance coverage on our satellites” below |
| We cannot be certain that EchoStar X will be successfully placed in commercial operation |
| Our ability to timely comply with SHVERA requirements without incurring significant additional costs is dependent on, among other things, the successful commencement of commercial operation of our EchoStar X satellite during second quarter 2006 and continued operation of our EchoStar V satellite at the 129 degree orbital location until that time |
| Delays in the commencement of commercial operation of EchoStar X would likely require us to cease offering local channels by satellite in many markets absent regulatory relief from the single dish obligation |
| Further, if impediments to our preferred transition plan arise, it is possible that the costs of compliance with this requirement could exceed dlra100dtta0 million |
| To the extent subscribers are unwilling for any reason to upgrade to a new dish, our subscriber churn could be negatively impacted |
| Our satellites are subject to significant operational risks |
| Satellites are subject to significant operational risks while in orbit |
| These risks include malfunctions, commonly referred to as anomalies, that have occurred in our satellites and the satellites of other operators as a result of various factors, such as satellite manufacturers’ errors, problems with the power systems or control systems of the satellites and general failures resulting from operating satellites in the harsh environment of space |
| Although we work closely with the satellite manufacturers to determine and eliminate the cause of anomalies in new satellites and provide for redundancies of many critical components in the satellites, we may experience anomalies in the future, whether of the types described above or arising from the failure of other systems or components |
| Any single anomaly or series of anomalies could materially adversely affect our operations and revenues and our relationship with current customers, as well as our ability to attract new customers for our direct broadcast satellites and other satellite services |
| In particular, future anomalies may result in the loss of individual transponders on a satellite, a group of transponders on that satellite or the entire satellite, depending on the nature of the anomaly |
| Anomalies may also reduce the expected useful life of a satellite, thereby reducing the revenue that could be generated by that satellite, or create additional expenses due to the need to provide replacement or back-up satellites |
| Finally, the occurrence of anomalies may materially adversely affect our ability to insure our satellites at commercially reasonable premiums, if at all |
| You should review the disclosures relating to satellite anomalies set forth under Note 4 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K Meteoroid events pose a potential threat to all in-orbit geosynchronous satellites |
| The probability that meteoroids will damage those satellites increases significantly when the Earth passes through the particulate stream left behind by comets |
| Occasionally, increased solar activity also poses a potential threat to all in-orbit satellites |
| Some decommissioned spacecraft are in uncontrolled orbits which pass through the geostationary belt at various points, and present hazards to operational spacecraft, including our satellites |
| We may be required to perform maneuvers to avoid collisions and these maneuvers may prove unsuccessful or could reduce the useful life of the satellite through the expenditure of fuel to perform these maneuvers |
| The loss, damage or destruction of any of our satellites as a result of an electrostatic storm, collision with space debris, malfunction or other event could have a material adverse effect on our business, financial condition and results of operations |
| 30 _________________________________________________________________ [88]Table of Contents Our satellites have minimum design lives of 12 years, but could fail or suffer reduced capacity before then |
| Our ability to earn revenue depends on the usefulness of our satellites |
| A number of factors affect the useful lives of the satellites, including, among other things, the quality of their construction, the durability of their component parts, the ability to continue to maintain proper orbit and control over the satellite’s functions, the efficiency of the launch vehicle used, and the remaining on-board fuel following orbit insertion |
| Generally, the minimum design life of each of our satellites is 12 years |
| We can provide no assurance, however, as to the actual useful lives of the satellites |
| In the event of a failure or loss of any of our satellites, we may relocate another satellite and use it as a replacement for the failed or lost satellite, which could have a material adverse effect on our business, financial condition and results of operations |
| Such a relocation would require FCC approval and, among other things, a showing to the FCC that the replacement satellite would not cause additional interference compared to the failed or lost satellite |
| If we choose to use a satellite in this manner, this use could adversely affect our ability to meet the operation deadlines associated with our authorizations |
| Failure to meet those deadlines could result in the loss of such authorizations, which would have an adverse effect on our ability to generate revenues |
| We currently have no commercial insurance coverage on our satellites |
| We do not use commercial insurance to mitigate the potential financial impact of in-orbit failures because we believe that the premium costs are uneconomical relative to the risk of satellite failure |
| We believe that we have in-orbit satellite capacity sufficient to expeditiously recover transmission of most programming in the event one of our in-orbit satellites fails |
| However, programming continuity cannot be assured in the event of multiple satellite losses |
| For example, we depend on our EchoStar VIII satellite to provide local channels to over 40 markets at least until such time as our EchoStar X satellite has commenced commercial operation |
| In the event that EchoStar VIII experienced a total or substantial failure, we could transmit many, but not all, of those channels from other in-orbit satellites |
| Complex technology used in our business could become obsolete |
| Our operating results are dependent to a significant extent upon our ability to continue to introduce new products and services on a timely basis and to reduce costs of our existing products and services |
| We may not be able to successfully identify new product or service opportunities or develop and market these opportunities in a timely or cost-effective manner |
| The success of new product development depends on many factors, including proper identification of customer need, cost, timely completion and introduction, differentiation from offerings of competitors and market acceptance |
| Technology in the subscription television and satellite services industries changes rapidly as new technologies are developed, which could cause our services and products to become obsolete |
| We and our suppliers may not be able to keep pace with technological developments |
| If the new technologies on which we intend to focus our research and development investments fail to achieve acceptance in the marketplace, we could suffer a material adverse effect on our future competitive position that could cause a reduction in our revenues and earnings |
| We may also be at a competitive disadvantage in developing and introducing complex new products and technologies because of the substantial costs we may incur in making these products or technologies available across our installed base of over 12 million subscribers |
| For example, our competitors could be the first to obtain proprietary technologies that are perceived by the market as being superior |
| Further, after we have incurred substantial research and development costs, one or more of the technologies under our development, or under development by one or more of our strategic partners, could become obsolete prior to its introduction |
| In addition, delays in the delivery of components or other unforeseen problems in our DBS system or other satellite services may occur that could materially adversely affect our ability to generate revenue, offer new services and remain competitive |
| 31 _________________________________________________________________ [89]Table of Contents Technological innovation is important to our success and depends, to a significant degree, on the work of technically skilled employees |
| Competition for the services of these types of employees is vigorous |
| If we are unable to attract and maintain technically skilled employees, our competitive position could be materially adversely affected |
| We depend on few manufacturers, and in some cases a single manufacturer, for many components of consumer premises equipment; we may be adversely affected by product shortages |
| We depend on relatively few sources, and in some cases a single source, for many components of the consumer premises equipment that we provide to subscribers in order to deliver our digital television services |
| Product shortages and resulting installation delays could cause us to lose potential future subscribers to our DISH Network service |
| We rely on key personnel |
| We believe that our future success will depend to a significant extent upon the performance of Charles W Ergen, our Chairman and Chief Executive Officer and certain other executives |
| Ergen or of certain other key executives could have a material adverse effect on our business, financial condition and results of operations |
| Although all of our executives have executed agreements limiting their ability to work for or consult with competitors if they leave us, we do not have employment agreements with any of them |
| We are controlled by one principal stockholder |
| Charles W Ergen, our Chairman and Chief Executive Officer, currently beneficially owns approximately 48prca of our total equity securities and possesses approximately 73prca of the total voting power |
| Ergen has the ability to elect a majority of our directors and to control all other matters requiring the approval of our stockholders |
| Ergen’s voting power, ECC is a “controlled company” as defined in the Nasdaq listing rules and is, therefore, not subject to Nasdaq requirements that would otherwise require us to have (i) a majority of independent directors; (ii) a compensation committee composed solely of independent directors; (iii) a nominating committee composed solely of independent directors; (iv) compensation of our executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors; and (v) director nominees selected, or recommended for the Board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors |
| We may not be aware of certain foreign government regulations |
| Because regulatory schemes vary by country, we may be subject to regulations in foreign countries of which we are not presently aware |
| If that were to be the case, we could be subject to sanctions by a foreign government that could materially adversely affect our ability to operate in that country |
| We cannot assure you that any current regulatory approvals held by us are, or will remain, sufficient in the view of foreign regulatory authorities, or that any additional necessary approvals will be granted on a timely basis or at all, in all jurisdictions in which we wish to operate new satellites, or that applicable restrictions in those jurisdictions will not be unduly burdensome |
| The failure to obtain the authorizations necessary to operate satellites internationally could have a material adverse effect on our ability to generate revenue and our overall competitive position |
| We, our customers and companies with which we do business may be required to have authority from each country in which we or they provide services or provide our customers use of our satellites |
| Because regulations in each country are different, we may not be aware if some of our customers and/or companies with which we do business do not hold the requisite licenses and approvals |
| Our business relies on intellectual property, some of which is owned by third parties, and we may inadvertently infringe their patents and proprietary rights |
| Many entities, including some of our competitors, have or may in the future obtain patents and other intellectual property rights that cover or affect products or services related to those that we offer |
| In general, if a court determines that one or more of our products infringes on intellectual property held by others, we may be required to 32 _________________________________________________________________ [90]Table of Contents cease developing or marketing those products, to obtain licenses from the holders of the intellectual property at a material cost, or to redesign those products in such a way as to avoid infringing the patent claims |
| If those intellectual property rights are held by a competitor, we may be unable to obtain the intellectual property at any price, which could adversely affect our competitive position |
| Business — Patents and Trademarks of this Annual Report on Form 10-K Our local programming strategy faces uncertainty |
| SHVIA generally gives satellite companies a statutory copyright license to retransmit local broadcast channels by satellite back into the market from which they originated, subject to obtaining the retransmission consent of the local network station |
| If we fail to reach retransmission consent agreements with broadcasters we cannot carry their signals |
| This could have an adverse effect on our ability to compete with cable and other satellite companies which provide local channels |
| While we have been able to reach retransmission consent agreements with most local network stations in markets where we currently offer local channels by satellite, roll-out of local channels in additional cities will require that we obtain additional retransmission consent agreements |
| We cannot be sure that we will secure these agreements or that we will secure new agreements upon the expiration of our current retransmission consent agreements, some of which are short term |
| Impediments to retransmission of distant broadcast signals; our distant programming strategy faces uncertainty |
| The Copyright Act, as amended by SHVIA, permits satellite retransmission of distant broadcast channels only to “unserved households |
| ” An example of a distant network station retransmission is a Los Angeles broadcast network station retransmitted by satellite to a subscriber outside of the Los Angeles market |
| That subscriber qualifies as an “unserved household” if he or she cannot receive, over the air, a signal of sufficient intensity (“Grade B” intensity) from a Los Angeles station affiliated with the same broadcast network |
| SHVIA has also established a process whereby consumers predicted to be served by a local station may request that this station waive the unserved household limitation so that the requesting consumer may receive distant signals by satellite |
| If the waiver request is denied, SHVIA entitles the consumer to request an actual test, with the cost to be borne by either the satellite carrier, such as us, or the broadcast station depending on the results |
| The testing process required by the statute can be very costly |
| SHVERA extends our legal authority to retransmit distant stations under SHVIA to December 31, 2009, but imposes new and complex restrictions on that authority |
| In general, we will no longer be able to offer distant network stations to new subscribers in markets in which we offer local broadcast stations |
| In addition, our ability to retransmit distant digital network stations today depends on whether a household is unserved by the analog signal of the local network station |
| While the statute gives us the ability to engage in signal strength testing to determine whether a household can receive the digital signal of the local network station, this ability does not commence until at least April 30, 2006 or July 15, 2007 (depending on the market and whether extensions are granted), and is also subject to certain restrictions |
| It is too early to fully assess all of the implications of SHVERA for our retransmissions of distant network stations |
| Business — Government Regulation — The Satellite Home Viewer Improvement Act and Satellite Home Viewer Extension and Reauthorization Act — Retransmission of Distant Networks” of this Annual Report on Form 10-K “Must carry” will negatively affect our ability to offer local network stations |
| SHVIA also imposed “must carry” requirements on DBS providers and the FCC has adopted detailed “must carry” rules |
| These rules generally require that satellite distributors carry all the local broadcast stations requesting carriage in a timely and appropriate manner in areas where they choose to offer local programming, not just the four major networks |
| Since we have limited capacity, the number of markets in which we can offer local programming is reduced by the “must carry” requirements |
| The “must carry” legislation also includes provisions which could expose us to material monetary penalties, and permanent prohibitions on the sale of all local and distant broadcast channels, based on inadvertent violations of the legislation, prior law, or the FCC rules |
| Imposition of these penalties would have a material adverse effect on our business, financial condition and results of operations |
| Business — Government Regulation — The Satellite Home Viewer Improvement Act and Satellite Home Viewer Extension and Reauthorization Act — “Must Carry” and Other Requirements” of this Annual Report on Form 10-K 33 _________________________________________________________________ [91]Table of Contents TV networks oppose our strategy of delivering distant network signals |
| We are party to a lawsuit in which the FOX Broadcasting Company (“FOX’) network and the independent affiliate groups associated with each of the four major broadcast networks have, among other things, attempted to enjoin us from selling distant network programming |
| If the plaintiffs in this lawsuit are successful in preventing us from selling distant network programming, and if we do not reach private settlement agreements with additional stations, we will attempt to assist our affected subscribers in arranging alternative means to receive network channels, including migration to local channels by satellite where available, and free off air antenna offers in other markets |
| However, we cannot predict with any degree of certainty how many of our affected subscribers would cancel their primary DISH Network programming as a result of termination of their distant network channels |
| We could be required to terminate distant network programming to all of our subscribers in the event the plaintiffs prevail on their claims and we are permanently enjoined from delivering all distant network channels |
| Termination of distant network programming to subscribers would result, among other things, in a reduction in average monthly revenue per subscriber and a temporary increase in subscriber churn |
| Please see our more detailed discussion of this lawsuit under the caption |