Filed by General Motors Corporation
Subject Company - General Motors Corporation
and Hughes Electronics Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Commission File No.: 001-00143
The following is a transcript of an analyst call, a replay of which was made
available beginning February 28, 2002. Certain text contained within the
transcript has been bracketed because it was inaudible or for clarification
purposes.
In connection with the proposed transactions, General Motors Corporation ("GM"),
Hughes Electronics Corporation ("Hughes") and EchoStar Communications
Corporation ("EchoStar") intend to file relevant materials with the Securities
and Exchange Commission, including one or more Registration Statement(s) on Form
S-4 that contain a prospectus and proxy/consent solicitation statement. Because
those documents will contain important information, holders of GM $1-2/3 and GM
Class H common stock are urged to read them, if and when they become available.
When filed with the SEC, they will be available for free at the SEC's website,
www.sec.gov, and GM stockholders will receive information at an appropriate time
on how to obtain transaction-related documents for free from GM. Such documents
are not currently available.
GM and its directors and executive officers, Hughes and certain of its officers,
and EchoStar and certain of its executive officers may be deemed to be
participants in GM's solicitation of proxies or consents from the holders of GM
$1-2/3 common stock and GM Class H common stock in connection with the proposed
transactions. Information regarding the participants and their interests in the
solicitation was filed pursuant to Rule 425 with the SEC by EchoStar on November
1, 2001 and by each of GM and Hughes on November 16, 2001. Investors may obtain
additional information regarding the interests of the participants by reading
the prospectus and proxy/consent solicitation statement if and when it becomes
available.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any jurisdiction
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction. No offering of securities shall be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act of 1933,
as amended.
Materials included in this document contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause our actual results to be materially different
from historical results or from any future results expressed or implied by such
forward-looking statements. The factors that could cause actual results of GM,
EchoStar, Hughes, or a combined EchoStar and Hughes to differ materially, many
of which are beyond the control of EchoStar, Hughes or GM include, but are not
limited to, the following: (1) the businesses of EchoStar and Hughes may not be
integrated successfully or such integration may be more difficult,
time-consuming or costly than expected; (2) expected benefits and synergies from
the combination may not be realized within the expected time frame or at all;
(3) revenues following the transaction may be lower than expected; (4) operating
costs, customer loss and business disruption including, without limitation,
difficulties in maintaining relationships with employees, customers, clients or
suppliers, may be greater than expected following the transaction; (5)
generating the incremental growth in the subscriber base of the combined company
may be more costly or difficult than expected; (6) the regulatory approvals
required for the transaction may not be obtained on the terms expected or on the
anticipated schedule; (7) the effects of legislative and regulatory changes; (8)
an inability to obtain certain retransmission consents; (9) an inability to
retain necessary authorizations from the FCC; (10) an increase in competition
from cable as a result of digital cable or otherwise, direct broadcast
satellite, other satellite system operators, and other providers of subscription
television services; (11) the introduction of new technologies and competitors
into the subscription television business; (12) changes in labor, programming,
equipment and capital costs; (13) future acquisitions, strategic partnership and
divestitures; (14) general business and economic conditions; and (15) other
risks described from time to time in periodic reports filed by EchoStar, Hughes
or GM with the Securities and Exchange Commission. You are urged to consider
statements that include the words "may," "will," "would," "could," "should,"
"believes," "estimates," "projects," "potential," "expects," "plans,"
"anticipates," "intends," "continues," "forecast," "designed," "goal," or the
negative of those words or other comparable words to be uncertain and
forward-looking. This cautionary statement applies to all forward-looking
statements included in this document.
HUGHES ELECTRONICS CORPORATION
ANALYST CALL
MODERATOR: GEORGE JAMISON
FEBRUARY 26, 2002
8:30 AM CT
Operator: Good day and welcome to today's EchoStar-Hughes conference call.
Today's conference is being recorded. At this time for opening
remarks and introductions, I would like to turn the conference over
to the Vice President of Corporate Communications for Hughes
Electronics, Mr. George Jamison. Please go ahead, sir.
George Jamison: Good morning. And welcome to our conference call, the
EchoStar-Hughes conference call with EchoStar's Chairman and CEO
Charlie Ergen, Hughes' President and CEO Jack Shaw, and DirecTV's
Chairman and CEO Eddie Hartenstein.
Before we proceed, let me remind you that use of our - of the words
expect, anticipate, project, and similar expressions are intended to
identify forward-looking statements.
While these statements represent our current judgment on what the
future may hold and we believe that they are reasonable, actual
results may differ materially due to important factors, including
those described in EchoStar, Hughes, and General Motors SEC filings.
At this point, I'd like to turn the call over to Jack Shaw, President
and CEO of Hughes.
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Jack Shaw: Thank you, George. And thank you all for being with us this
morning.
We're pretty excited this morning. We at Hughes, and DirecTV, and
EchoStar have been working for quite some time on a proposal that we
feel is beneficial to the consumer population as a whole and the
rural marketplace in particular. The ability to offer local channels
in all 210 TV markets, we believe, makes us a true competitor to what
we consider to be the dominant cable providers.
In the last six months, we've been reviewing this particular kind of
proposal. And we have concluded that we think we can do it. We
believe that it's good for the consumer. And we believe that it makes
us a complete competitor to cable.
Eddie Hartenstein, who has kind of headed up the effort in putting
this proposal together, is here with me. And I'd like to turn it over
to Eddie to give you kind of an overview of what this means.
Eddie Hartenstein: Thanks, Jack. And good morning to all of you joining us
on such short notice.
This call is being simultaneously Webcast on the Web. Specifically,
at Hughes.com is a presentation of about 18 or 19 pages that's
entitled, The Hughes-EchoStar Merger, Local Channels and Competitive
Broadband for All Americans. It's there. You can flip along with it
if you like.
For those of you that aren't there and don't have access to it, let
me just summarize briefly. And then we'll quickly go to your
questions and give some answers.
Today as separate companies both EchoStar and DirecTV are able to
provide local channel service to some 42 television markets, which
represents only some 61% of this nation's households. There's some
107 million television households in America.
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And we're taking a good look at that, because philosophically both
companies are aligned and won't be satisfied until there's a little
dish outside of every home in America.
We together have developed a plan that's both economically and
technically feasible to broadcast local channels to every one of the
210 local markets in the country and remain in full compliance with
the must-carry obligations. That's on the order of 1600 television
stations that we would be broadcasting.
The plan can be achieved because the merger will eliminate some 500
channels of duplicative programming. It will combine each company's
spectrums and its satellite assets and combine the companies'
subscriber bases, making service to smaller markets commercially
feasible.
The number of satellites that are up today and are planned to be
launched between the two companies number about 15. There are
satellites spread at each of the 101-degree, 110-degree, and
119-degree orbit locations. There are four spot-beam satellites, two
launched and two more to be launched.
And with the application that we filed at the commission yesterday in
conjunction with our comments to the opposition, we also put in an
application to together upon approval of the merger launch a fifth
spot-beam satellite.
Today about 42 million television households do not have the option
to receive local channels via satellite and thus really have no
choice but to subscribe to cable if they want to get all the national
services and their local channels. With the EchoStar and DirecTV
merger, these homes will now finally have a true replacement to cable
- alternative to cable.
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New equipment will be deployed that will be capable of receiving
signals from multiple orbit locations and make available to those
customers who need it to get their local stations free of charge.
There'll be one dish and one rate card for all US television
households. Implementation of the plan could begin immediately
following approval of the merger, when we could go to roughly 100
markets, and can be completed and go to all 210, hence serving those
42 million today households that have no alternative to cable within
about 24 months.
From a financial perspective, delivering local channels to all the
households is just plain good business sense. It'll increase our
gross subscriber ads. We know this from the list that we've both seen
from markets that...incrementally add local channels to. It'll lower
our churn. It'll increase our net ads as a combined company. It'll
increase the ARPU [average revenue per subscriber]. It'll improve the
margins.
And although we're not prepared today to provide detailed financial
projections, we do believe that as a result of this announcement
we're going to be even more confident that we'll hit the EBITDA
[earnings before interest, taxes, depreciation and amortization] and
synergy projections that we shared with you at the time of the merger
announcement. And during, you know, subsequent questions you might
have, we can certainly directionally give you where we think that
this will go.
With respect to the broadband front, there are today some 40 million
households located primarily in rural areas that have no access to
wired broadband services. They have neither access to cable modems
nor to DSL [Digital Subscriber Line] and, frankly, won't get it in
any of our lifetimes. For those consumers, rolling out wired
broadband services is cost-prohibitive and just simply won't happen.
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This merger will bridge the digital divide by providing consumers in
every community with a competitively-priced satellite-based broadband
solution, turning those 40 million homes into haves as opposed to
have-nots vis-a-vis the digital divide.
That's all I had. Let me turn it over now to Charlie Ergen for his
comments. And then I think we'll go to Q&A. Charlie?
Charlie Ergen: Thanks, Eddie. Just a couple quick comments, I mean, obviously
we're excited that we're able to really simplify our message to the
consumer.
And it's very frustrating, you know, to get calls from customers
today. And they wonder why they can't get their local televisions,
why they can't switch from cable. It's hard to explain that their
market's too small.
It's hard to explain that they live in a Grade B Contour when they
say their off-air antenna doesn't work and that they're supposed to
be able to, theoretically, get it.
People are asking about high-speed Internet access. And we can't get
it to them economically today. People aren't willing to spend $700,
you know, for equipment and installation and $70 [per] month and get
a service that's not consistent enough.
So we know we have to make progress in all that. Obviously with the
merger, because we free up spectrum - the added spectrum - we free up
spectrum between us, this really solves really all those problems for
us.
When our technical teams were able to get together along with the
finance people and marketing people, it was clear that the merger can
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do, as Eddie said, well over 100 cities with the four spot-beam
satellites that we have either up or under construction. And by
adding a fifth spot-beam satellite that can fill in the gaps for the
smaller markets, we can go to all markets.
And that's - and then with obviously advances in the broadband
satellite platforms, in particular Spaceway, we believe - well we
have high expectations that we can get a one-dish solution to every
American that allows them to pick any of our services that they want.
That could be any one of 500 video channels. That could be their
local broadcast network channels. It could be high-definition - a
dozen high-definition channels, one with interactive advanced
services or high-speed Internet broadband access.
And obviously that makes us a competitor long term to the dominant
cable providers who can already do those things where they want to
deploy their capital and obviously, hopefully, raises the bar a bit.
It's not enough just to be as good as cable. We hope to raise the bar
with high-definition television and obviously economies of scale to
get competitive prices going forward.
That's an exciting part of this business. And now that our teams have
been able to work together, you know, we're committed to making that
happen. And it's - the spectrum, the economics, and the technical
innovation that we can do, you know, all lead to a company that will
be able to compete.
With the consolidation that we see going on in cable and in the
franchise areas, the consolidation we've seen going on in the
broadcasting industry and the network arena, you know, we feel
comfortable that we now will be able to compete against that.
So with that, we'll take questions.
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George Jamison: Okay, Brian, we're now ready to take questions.
Operator: Today's question and answer session will be conducted electronically.
If you would like to ask a question, please signal by pressing the
star key followed by the digit 1 on your touch-tone phone. Once
again, that's star 1 for questions.
We'll go first to Karim Zia with Deutsche Bank.
Karim Zia: Thanks. Guys, with the spot-beam satellites, how many of the
combined 96 frequencies do you envision being used for local under
this plan?
And you mentioned some of the engineering work you've done. Does this
assume that you'll use some kind of new modulation scheme that would
require replacing all the set-top boxes?
And what are the - is there an assumed higher compression ratio
involved as well? And then can you just talk about the box switch-out
costs? Has the $2 to $2-1/2 billion number changed? Thanks.
Eddie Hartenstein: Karim, this is Eddie. We are using - we'll combine all
the spectrum, for which at CONUS [Continental United States] there'll
be [are] some 96 frequencies, twenty-eight of those frequencies,
spread across the five spot-beam satellites and the three orbit
locations, will be used for spot-beam.
There is no final decision yet on a final platform. But we're not
looking at some new exotic modulation scheme. It'll be capable of
QPSK going forward.
7
But we're very cognizant of the fact that we've got an installed
subscriber base of some 17 million homes and well in excess of 20
million set-top boxes between the two of us out there. The migration
will be one that will be gradual.
We think it will be on the order of $2-1/2 to $3 billion in terms of
the cost to do. And as indicated earlier, we could have some
immediate gratification upon the merger of going with the existing
spot-beam fleet almost immediately to 100 channels and then roll out
to the two hundred and tenth market within 24 months after approval
of the merger.
Charlie Ergen: Yes. And, Karim, the cost of the satellite that we're - the
fifth satellite incremental to the ones that both of us already have
is about $300 million.
And we've always talked about the $2-1/2 billion to trade up boxes,
because we're going to add another dimension, which is, if you
subscribe to local on these next 100 markets that we're doing, we'll
provide that equipment free.
That number will go up somewhere - so I think we're going to start
talking about $2-1/2 to $3 billion on the box trade-out costs. We
haven't done all of the analysis of what that is. It's probably
somewhere - but we know it's somewhere in that neighborhood.
On the counterbalance side, obviously we'll get incremental
subscribers, obviously we'll get lower churn, obviously we'll get
some added ARPU. Net, net, net, we think that this makes good
economic and business sense to do.
Eddie Hartenstein: Yes. I said 100 channels upon closure - completion of
the merger. I meant 100 markets -- apologize for the slip.
Karim Zia: Got it. Thanks, guys.
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Operator: We'll go next Robert Kaimowitz with SG Cowen.
Robert Kaimowitz: Hi. Good morning. I was wondering if you had determined -
or do you expect to make available the local channels in the rural
markets to the NRTC [National Rural Telecommunications Cooperative]?
I mean, that would eliminate the argument that people have that rural
consumers are worse off.
It would - you would argue that the rural consumers would be far
better off. Would you - have you thought about it? Or I'm sure you've
thought about it. What do you expect to do?
Eddie Hartenstein: That's a discussion that we'll certainly have. Many of
the markets that we're looking to add from 101 to 210 aren't in the
NRTC territory.
So this a set of services that certainly will be available. Exactly
what our ongoing contractual relationship will be with the NRTC is
something that we'll discuss with them over the next few days.
Robert Kaimowitz: Okay. And regarding a report that was done by Roger Rusch
regarding the technology to do -- I think you referred to it earlier
-- the enhanced compression and that you could basically do all the
local markets and provide all the channels without merging, he weaves
off a lot of important considerations. Yet it's been getting a lot of
airplay. Can you address that report and the concerns regarding it?
Eddie Hartenstein: Sure, Rob. That report is one that is - pushes the
envelope on technologies and new things and I think would be - make a
lot more sense if we were starting from a clean slate and not from
the place that we are today with some, you know, 17 million plus
customers.
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It did talk about being able to do everything with one satellite at
one orbit location. That's just not practical, nor is it economically
feasible to start over and take everything out and start from
scratch.
We've got some of the best - not some of, we've got the best
satellite engineers and experts between our two companies, EchoStar
and HUGHES and DIRECTV and Dish Network, looking at this.
And the solution they've come to taking all things into consideration
are the ones that we've laid out before -- using a configuration of
five spot-beam satellites as part of a 16-satellite combined fleet
spread across the three orbit locations and using roughly 30% of the
spectrum for local channels in all markets, being full must-carry
compliant, and to stay competitive with all of the national services
that we provide today, some 350 channels of CONUS services, stay true
and deliver the promise of some 12 high-definition channels
nationwide, interactive services, and have a bit of growth for what
we know will come in terms of new services nationwide and regionally
that keep coming up every quarter as we go forward.
Charlie Ergen: Yes. And, you know, Rob, people who aren't ever going to build
a spot-beam satellite and just want to - and aren't - and for the
merger obviously can talk technical a lot on the Rusch report.
But there's two other elements that are necessary in addition to
technical, which, you know, one is having the spectrum to be able to
do it, which we use, as Eddie said, 28 frequencies. So at 30% of our
spectrum, we have to have the spectrum to do it.
And the other is economics. Even if you could build a spot-beam
satellite to do all the markets, you wouldn't economically be able to
go to all the markets without putting in the scale of our subscriber
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bases, and the scale of putting the fiber together, and the scale of
the up-link centers, and the billing and customer service. You
wouldn't be able to do it economically.
So, you know, technical - we don't agree with the Rusch report from a
technical perspective in a lot of areas, which I think we've pointed
out. But it also doesn't solve the economic and the spectrum issues,
which the merger of course does.
Robert Kaimowitz: Okay. Thank you.
Operator: We'll take our next question from William Kidd with Lehman Brothers.
William Kidd: Hi. Good morning. I guess my first question relates to
broadband. And particularly I was wondering how would the broadband
offer that you're proposing as a merged company be different than
what's presently available?
And I guess my question really specifically relates to pricing. Could
you give us an idea of how the service and equipment prices would be
different?
Jack Shaw: William, this is Jack. As you know, both EchoStar and Hughes
have a broadband offering. And we have both had limited success,
again as you know.
The principal issue also is that we're both losing some money in
making the offering. And we believe that it - that that can be
corrected with the current KU Band offering just by putting the two
systems together, reducing the infrastructure by half, of course, and
moving forward with what we have.
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However that's kind of...not the ultimate, because you still have
pretty high satellite costs and you still have reasonably high
hardware costs. Obviously we - in order to get the hardware costs, we
have to drive the volume up.
We are both willing to do that - or we're willing to do that with the
new company, assuming that we think we have a future in consumer
broadband. And we do.
And we think that the new Spaceway platform, which is, again as you
know, primarily enterprise-oriented, can be utilized with consumers
on a more cost-effective basis with enhanced services.
So we think by putting the two companies together we kind of have an
offering for today and tomorrow. And then we have a new offering
which is for the future.
When you talk about pricing, William, we - both companies, believe
that the offering's got to be competitive with cable. And where we're
in the $60 to $70 per month range and $700 to $1000 for the hardware,
you know, we've got to get that down so that the normal consumer can
afford it. And that will help drive the volume up.
So we've got a lot of work to do. But it's kind of fun work when you
think putting it together and combining the volumes it gives us a lot
of good feeling that we can really pull a good broadband offering
off.
William Kidd: Thanks, Jack. And another question, I guess relating to the one
rate card and the national rate policy, I guess it's really a
two-part question surrounding that.
One part is, based on the criticisms that have, you know, really
mounted on the hill, you know, against the - you know, protecting the
consumer and so forth, I'm wondering, in the collective minds of you
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distinguished gentlemen, do you think that this one rate card solves
those criticisms? Do you think this is all you need to do on pricing,
one?
And I guess my second question related to pricing is, do you envision
the initial rate of the combined company being cheaper or equal to
what you presently charge?
Charlie Ergen: Okay. I think that - you know, that the politicians and the
regulatory agencies really have a fundamental question to ask, which
is that in, you know, some 40 million homes there is a no-opoly
today, which means customers don't have high-speed Internet access.
And the only access to local might be the cable operation.
So the huge benefits of the merger, we take rural America and 40
million homes to more of a three-dimensional business, where they
have a chance for high-definition television, they have a chance for
broadband high-speed Internet access, they have a chance for local
channels along with their normal video channel whether it be from
cable operator who covers most of the country today or whether it be
from a satellite provider.
That's what customers want. And all that's good. The key is that
there are about three million homes that aren't passed by cable. And
we may be the sole provider. And you've got to protect those three
million homes according - you know, that's the number for the FCC
Competition Report last month.
And we think we do that with a nationwide price and our commitment to
one nation, one rate card. And when you do that, that's good public
policy, that's good consumer policy, and we think that's good
antitrust policy. And we're going to do that.
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In terms of the combined pricing, we've got to get Internet broadband
costs down and consistency up in our product. We can only do that
with another generation of satellites that's specifically designed
for that purpose.
Neither one of us -- I can speak for EchoStar -- we're certainly not
willing to continue to invest in broadband via satellite without a
path to being able to do that. We see the merger as being that path.
And we're committed to getting that done.
And if we don't, then we can't compete against, you know, the
entrenched cable companies who have that advantage over us today.
They've got digital cable now, so they've caught up on the video
side. They've got local across 100% of the country. That's why their
industry started. And they've got broadband.
So we've got a lot of catching up to do. And the merger allows us to
catch up and hopefully surpass and give a better quality of service,
hopefully, at a less expensive price.
William Kidd: Thanks, Charlie.
Operator: We'll take our next question from Mark Nabi with Merrill Lynch.
Mark Nabi: Thanks a lot. Guys, just a couple of questions. Eddie, one
thing that you had talked about was the recent switch from 41 markets
- that you had 31 of the 41 markets using the 101 [inaudible] for
local channels. And what you - what I've noticed is that you're
probably going to get a big lift in local channels in those
territories.
Now you're talking about going into various market opportunities,
things like, you know, [inaudible] across all 96 frequencies. And
is that going to help or hurt? And what I mean by that is, I would
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think actually, you know, by going to one sized satellite dish that
would actually increase the ability to increase your penetration.
Eddie Hartenstein: Mark, we're - DirecTV is serving some 41 markets from
101 degrees today, all channels in those 41 markets.
We are looking at, as you indicate, across ultimately all 210 markets
going to all channels. And yes, with the single-dish solution which
we have, an 18 by 22 inch dish - we've actually got a picture of it.
If you look on the Web site, it's one of the pages in the
presentation. So you can see what it looks like.
Those are actually working today. Both the Dish Network and DirecTV
have working models of that. DirecTV actually has channels on all
three orbit locations [today].
We expect to see on the order of a 15% lift in those markets when we
begin offering local channels anew. And that's consistent with the
kind of lifts that both DirecTV and EchoStar separately have seen
when they've added - when we've added local channels in a market.
So yes, that's part of the...part of the economics and the viability
of doing this. We're not doing this just to have other parts of the
business subsidized doing this.
This makes good business sense. Although it does require, as Charlie
indicated, on the order of $300 million of more capital with
satellites and some ground equipment and back-haul equipment from
those new markets.
Mark Nabi: So I guess getting to that question, so even with the increased
costs -- really the biggest one is the back-haul, right -- do you
feel that the synergies you've discussed will actually be equal to or
surpass what you had talked about in late October?
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Eddie Hartenstein: I think there's nothing yet that we've seen that would
change those synergies that...
Charlie Ergen: Well they'll go up.
Eddie Hartenstein: ...we talked about.
Charlie Ergen: They'll go up because of the incremental market.
Eddie Hartenstein: Right.
Charlie Ergen: So we get additional - there'll be some increase in the
subscribers that we get. There'll be some decrease in churn in those
markets since we have local and they won't have to go to cable to get
their local.
But there's some incremental cost to build the satellite. And there
is some ongoing incremental cost for the fiber back-haul from those
additional markets. So - but when you - and we've done cursory - you
know, we haven't done the detailed model of this. But when you go
through the big picture of that, we think that net, net, net that's
an economic gain for us.
Eddie Hartenstein: Yes.
Mark Nabi: Charlie, one thing I'll applaud DirecTV doing -- and I don't
know if you are doing the same thing -- is on the simplification of,
you know, one price essentially gets you your local channels -- and
the local markets - you know, the territories are often local -- plus
all the basic services. Do you plan on doing that as well?
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In other words, local really is not, you know, oh I need to get it.
It's like - you know, it's a necessity. And how are you guys
approaching that at EchoStar?
Charlie Ergen: We've always - we always kind of price things ala carte. And
even in DirecTV my understanding is you can get locals ala carte. And
it - yes, I agree, it could be probably all of satellite. You know,
we have so many channels it could be simplified.
But the problem that we have is we don't have - we have local in I
think 36 or 37 markets. That leaves us, you know, 170 markets where
we don't have local.
And therefore we have - we can't penalize the folks in those 170
markets by adding a price tag on where they can't get the local. So
that's why we give customers a choice. And it may be a - I don't
disagree with you, having listened to some of our call center calls,
that it can be confusing to people.
I mean, it's very frustrating to talk to customers on the phone and
try to explain to them that they live in Little Rock Arkansas and
therefore they can't have local, and oh by the way, you can't bring
in a distance signal because you're in a Grade B area, and them
telling you that they can't get it with an off-air antenna and then
telling you that their cable company just raised their rates 12%.
And you can't do anything for those customers. And that - the merger
and what we filed at the FCC solves that problem long term. And
that's what we're focused on.
Mark Nabi: Last question maybe for the three of you is this. This is, in
my view again, the first of hopefully many steps that we're going to
hear about this transaction. Now you've decided to offer local
channels in all the markets of the United States.
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I mean, are there many more things that are going to happen between
now and the timeframe that you've talked of September? Is it kind of
like a give and take process -- just some thoughts on that?
Charlie Ergen: I don't - when you can - when we can offer every single
American in every household in the United States, Alaska, and Hawaii
HDTV, high-speed Internet access, local television, and 500 channels
of video, and high - and interactive - and advanced services all for
a lower price than what they can get from cable today -- we offer
them a true alternative to the dominant provider -- I don't think
there's anything else - it doesn't get any better than that.
But we can't rely on the broadcasters to do it. They're certainly not
delivering HDTV to all America. They're filing extensions at the FCC.
We certainly can't count on NRTC to do it. They sold out to Pegasus
many years ago. They're not investing in high-speed access. They're
not investing in local television to local markets.
We certainly can't count on the phone companies to do it. And we
certainly can't count on the cable companies to go to rural America
for high-speed access. So I think that we're out there with a
business plan that we think makes sense for all consumers. We'll
hopefully get our fair share of the business.
If we give good service and we charge a fair price, then we'll be
successful. And if we don't, obviously we'll be, you know, road kill
on the telecommunications super-highway like some other companies are
today.
Mark Nabi: Okay. Thanks very much, guys.
Operator: We'll take our next question from Ty Carmichael with Credit Suisse
First Boston.
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Ty Carmichael: Thank you. I just have a couple of questions. I guess the
first one would be just if you could provide some perspective on what
catalyzed the decision to expand the local channel offering.
Was it feedback that you had gotten from the DOJ? Or was it response
to some of the FCC filings in opposition to the deal or just, you
know, the general sense that you were picking up in Washington? Or
was it just, you know, further analysis that led you to believe, you
know, this could be done in an economic fashion?
Charlie Ergen: I mean, two things, one is just talking to customers every day
and the tremendous amount of frustration that both of our companies
had in not being able to take care of all of our customers.
And the second thing really was the transitions teams met and were
allowed to meet and were able to look at the different beams that we
had as companies, which we hadn't been able to do before. And we got
people in there. Really I've got to give Eddie the credit. He
challenged them to do more markets and, you know, wouldn't take no
for an answer.
And when they got people really thinking outside the box and being
challenged in that manner, they were able to come up with a plan to
do it. And the financial people were able to look at the model and
see that it made economic sense.
And the marketing people of course were ecstatic. You know, marketing
guys will spend money no matter what of course. And of course they
were ecstatic when they realized that this gives us the chance to
market a more uniform message.
And realizing that the transition meetings didn't start until late
December, they've done an incredible job. I think it points out - it
should give you some confidence - or the investors some confidence
that the two companies can work together.
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This was a fairly tough task that was done in a pretty short
timeframe with efforts from Hughes, and DirecTV, and EchoStar, you
know, working together to solve a tough problem.
So a lot of positives from what I saw in that, and I've got to give
Eddie - Eddie really takes the credit for issuing the challenge, and,
you know, knowing what satellites maybe can do, and so forth.
Ty Carmichael: Okay. And then just on the - Charlie, you talked about an
incremental cost of $300 million. Does that cost include - I mean,
are there going to be additional kind of broadcast centers that you
have to put in place to handle the local channels on top of that $300
million? Or is that included in that cost estimate?
Charlie Ergen: We think the $300 million includes probably whatever we have
to do on the ground. It does not include the incremental monthly
back-haul cost, which will be an ongoing cost each year, for the
additional markets. So...
Ty Carmichael: Okay.
Charlie Ergen: And, you know, would I be shocked if the number was $350
million? No. I don't think it's going to be $250 million. But our
best guess is about $300 million. Eddie, you've looked at it more
than I have.
Eddie Hartenstein: Ty, we articulated in the filing what we think it is.
It's not just the satellite. But it's - we need a total of four
ground stations - up-link sites to do it. And then there needs to be
some fine-tuning on the aggregation - you know, the aggregation
network.
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The two additional broadcast centers are not the kind and as
extensive and developed as any of our existing broadcast centers
today, because they're just data aggregation points for fiber and
turnaround services for up-linking. But that's about the price range
that we think it'll be in, the $300 million plus.
Ty Carmichael: Okay. And then just the last question relates to the
broadband. As part of this, you know, filing, has there been a
decision on - I mean, has it been finalized, you know, that Spaceway
will be the broadband platform that will be used to deliver those
services to consumers?
Charlie Ergen: I think that, you know, Spaceway of course hasn't been
launched yet. But our analysis is that that is the - that kind of
system is the future to technologically compete. And maybe advance
broadband from where it is today.
And I'll let Jack maybe talk about some of the advances in Spaceway
that have - you know, it doesn't mean there's not some interim
solutions to it. But the long term solution is the kind of thing
Spaceway is looking at.
Jack Shaw: Yes. As you know, Ty, Spaceway has a lot of capability. It was
kind of designed and built for the enterprise business. But if you
take a subset of that capability, we think we can first drive the
per-bit cost down with a Spaceway kind of platform.
As you know, it's mesh connectivity, which has not been done in
satellite communications before, successfully, in geosynchronous
satellites. So that brings into play, you know, video conferencing
and lots of cool stuff that consumers may want.
So yes, we think it's - you can kind of call it the cable-plus
solution. You know, we think we can offer up an equal cable solution
today using KU Band, and the speeds that we have, and so forth.
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But we have to be prepared for cable progressing. And we want to be
able to be either in lock-step with them or a step ahead of them. And
we think Spaceway allows us to do that.
Ty Carmichael: Okay. Do you see caching at the local site, you know, in
the homes as a key component to that plan?
Jack Shaw: Okay, hang on just a second.
Ty Carmichael: Caching...
Jack Shaw: Caching at the...
Eddie Hartenstein: Oh certainly. It's - I think we have a far better - from
an infrastructure perspective, we have a far better solution to
video-on-demand. And that's putting a server in every settop box...
Ty Carmichael: Okay.
Eddie Hartenstein: ...one that the people want. You don't have to fight for
contention on the cable head-end and all of that.
And we clearly - that's one of the things that the engineering teams
will be looking at next, what's the right architecture going forward
in terms of a common low-cost platform for those who want to avail
themselves of this capability of having an advanced settop box. Today
local channels, tomorrow we'll look at that. So...
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Charlie Ergen: Yes. I think we have three potential advantages in how we're
going to try to do broadband via satellite. One is with Spaceway you
have the mesh connectivity, so you can do things such as
teleconferencing direct to the person.
Two, we have caching technology with settop boxes today. And three,
we have multicasting capability, which means that if a lot of people
want, you know, the same thing, we can - instead of independently
sending it to an individual user, we can send it to a lot of users at
one time such as weather, or a sporting event, or whatever.
So the technology of satellite will have plenty of competition from
the phone companies, and the cable companies, and some wireless
providers. But it is going to get its - hopefully get its fair share
and drive the units using other people to compete and advance their
technologies as well.
But it is definitely a viable - you know, if allowed to merge and
we're allowed to invest in this technology, it's a viable competitor
to broadband. And it's definitely a solution, at least in my
lifetime, to rural America, who will never get broadband, you know,
from the cable companies and the phone companies.
Ty Carmichael: Okay. Thank you very much.
Operator: We'll take our next question from Ray Schleinkofer with Thomas Weisel
Partners.
Ray Schleinkofer: Just two quick questions, first, you mentioned that at
the close of the deal you'd be able to do local channels to 100
markets. If it weren't for the merger, where do you think that you
would max out in terms of local markets that you could deliver with
today's technology?
And then secondly, kind of a follow-up on the PVR [personal video
recorder] issue, since you're going to be doing quite a few box
change-outs in the process of the merger, how do you see yourselves
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sort of using that truck roll that you're doing to market PVR and
maybe do some of the change-outs then and get people to upgrade?
Eddie Hartenstein: Sure. I can only answer from DirecTV's perspective that
technologically and economically, you know, we wouldn't do more than
probably about the top 70 markets DirecTV standalone.
We have neither the spectrum nor the spot-beam satellites nor the
economic model to go any further than that while still preserving,
you know, the host of CONUS signals that we need to deliver.
And here again we have two spot-beam satellites, one launched, one
yet to go, with which to do it. And I think Dish Network is in a
similar position. Charlie?
Charlie Ergen: Yes. I'd say we're probably below - we see it - from a
spectrum and an economic perspective, we're probably something less
than 70 markets in standalone.
So, you know, again what it means is that without the merger you're
going to end up with about 40 million, 35 million homes who just
don't have a choice. So the merger really is about more choice.
I know a lot of you read in the press about this merger being less
choice. This merger is actually about more choice for services. And
as long as consumers are protected on price, ultimately we think that
that's good public policy and good antitrust policy. And that's why
we'll prevail.
Eddie Hartenstein: The quantification of more choice, remember, is those 42
million households that today only have cable as a choice to give you
your national channels and your local news, sports, and whatever.
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Charlie Ergen: Yes. This - said another way, this is like going from one
provider to two providers, from one choice to two choices.
And in rural America for broadband, you're going from no choice to at
least one choice. Because, you know, Teledesic hasn't delivered. You
know, Astrolink wrote off $1.6 billion. Then they shut down. Who was
the one from France? Alca...
Eddie Hartenstein: SkyBridge.
Charlie Ergen: SkyBridge is not proceeding. We've yet to see Wild-Blue
proceed. We've yet to see Pegasus do anything with their KA Band
spectrum. We've yet to see NRTC do anything. We've yet to see the
broadcasters do anything. You know, we've yet to see the cable
industry doing anything in rural America.
You know, as you guys know, money for telecommunications projects is
tight. The marketplace is demanding a return and lower risk. And, you
know, it's a tough environment to do these kind of projects.
Jack Shaw: I think as a corollary to what Charlie said, from the Hughes
side -- and I think Charlie might tell you the same thing from the
Echo[Star] side -- the amount of money that we're spending on our
broadband offering now does not square with the number of subscribers
that we're getting for our money.
And it's probably very doubtful that - absent the merger - that
Hughes would be able to fund our broadband offering. We got it funded
for 2002. But I think it's real doubtful given the economy that we
would be able to continue funding it with the number of subscribers
that are able to afford what we're offering.
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Eddie Hartenstein: Ray, the second part of your question is, in the
transition would we take advantage of the truck rolls and all that
going out there to upgrade people to the PVR solution.
As I said before, that's the next thing that I think the joint team
from the companies will be looking at. That's certainly an option - a
selectable option to consumers who want to, perhaps, in one or more
of the - on one or more of the television sets in their household
upgrade to that capability.
But that's some - that's a detail we'll yet have to work out. And
it's certainly an opportunity. You do a truck roll, you can achieve a
lot of things. And that's something we're going to look at.
Because we know both separately from DirecTV's experience with TiVo
and UltimateTV and Dish Network's experience with DishPlayer, a
subscriber - a customer that has a PVR device is a better customer,
higher ARPU, lower churn, than one who doesn't. So we're - you can
bet we're going to look at that.
Ray Schleinkofer: Thanks, guys.
Operator: We'll go next to Robert Berzins with Lehman Brothers.
Robert Berzins: Good morning. You mentioned in your plans that you're going
to have nationwide pricing.
In the past, you've had rate increases that really have been quite a
bit lower than those in the cable television industry. Would you be
willing to formalize your practice of conservative rate increases in
order to help secure regulatory approval for the deal?
26
Charlie Ergen: I don't think that'll be necessary, Bob, if we're allowed to
merge. We have to be competitive with the cable companies. We have
huge fixed costs, you know, billions of dollars in outer-space. So we
have to get incremental customers, because we have low marginal costs
for that.
Obviously with scale - it's a known fact that we pay more for
programming than comparable sized cable companies today. Obviously we
hope to get improved contracts and so forth. All that leads to our
ability to offer lower prices than we otherwise would be
individually.
And obviously some of those synergies between the businesses will be
passed on to savings in customers. Thus we'll drive, you know, more
subscribers our way. And, you know, ultimately the best distribution
path, you know, will - the low-cost distribution path will, you know,
reap the rewards.
And it's not something that has to be mandated by the government.
It's something that's going to happen today. And our pricing today is
strictly based on where we see the cable industry and our cost of the
content. And, you know, we have a good track record of keeping those
increases down.
Robert Berzins: Thank you very much, Charlie.
Operator: We'll go next to Armand Musey with Salomon Smith Barney.
Armand Musey: Morning, guys. A couple of questions, first I wanted to follow
up on one of Jack's earlier comments.
27
You indicated that without the companies together you'd have trouble
investing as much in Spaceway. Are you - first of all, are you
essentially saying if the merger doesn't go through you're going to
stop Spaceway where it is?
Jack Shaw: No, no, no. I didn't - I never mentioned Spaceway, Armand. I
said the [consumer] broadband offering. Spaceway is well covered with
the enterprise business that we have.
Armand Musey: Okay.
Jack Shaw: Okay?
Armand Musey: So that means that no matter what...
Jack Shaw: Spaceway is solid one way or the other.
Armand Musey: Okay. Earlier Charlie had mentioned that putting the companies
together would enable you to - the combined company to invest in
next-generation satellite technology for broadband. Is that thing in
addition to Spaceway? And if so, are there - what other broadband
technologies are envisioned in addition to Spaceway beyond Spaceway?
Jack Shaw: I think Charlie was referring to Spaceway.
Charlie Ergen: Yes. And the other piece, just to make clear, when you go to
Ka-Band and you're trying to go to the consumer, you're not going to
get the - for the enterprise Spaceway business, the VSAT business
they have today, you're talking about several hundred thousand settop
boxes and systems. When you're talking about consumer, you're talking
about millions.
28
And to get - the consumer is not going to pay thousands of dollars
for the hardware or hundreds of dollars a month for the spectrum. He
doesn't need as much capacity.
And he wants, you know, Internet broadband as we know it, you know,
which - through a cable modem or something like that. So we've got
our work cut out for us to do that. To make the investment, we have
to make sure that we can get a return to do that. And that's where a
lot of the effort goes.
And then obviously there's additional satellites you would have to
launch to meet the demand. If you can build the demand, you'll have
to launch additional satellites. So that's where the two come
together.
Armand Musey: Okay. So essentially you're saying that to get the Spaceway
hardware prices down to consumer prices you would need to put the
companies together.
Charlie Ergen: And you need volume.
Armand Musey: And therefore you...
Charlie Ergen: If we can sell this to 17 million customers potentially as
opposed to 7 million or 10 million, obviously almost off the bat
we've got a chance of cutting our price, you know...
Armand Musey: Okay.
Charlie Ergen: ...considerably.
29
Armand Musey: This brings up the next point. I think one of the questions
that has been sort of hinted in the FCC request for information back
to you has been, why can't you do what you're talking about through
some kind of a joint venture?
Charlie Ergen: It's a simple - first of all, we tried to do that for years.
That's no secret. The main reason is that we have two different
standards. Right? We have a DSS standard. And we have our MPEG DVB
standard.
To put the companies together in any other - short of a merger one of
us would have to replace all our boxes. And we would love to put the
companies together [do a joint venture] and have DirecTV replace all
their boxes, because it would take them a couple years to do it and
we would be the sole provider for those two years while they're doing
it.
On the other hand, Eddie has suggested to me that we replace all our
boxes while he keeps - and go to the DSS standard. And while that's a
gracious offer from Eddie, we decided not to go out of business for
the two years while we were doing that.
So the only way you can do it is when you merge the companies you
then - the merged entity will share the cost of replacing either the
DSS or the MPEG standard. We won't replace both the standards,
obviously. So...
Armand Musey: Okay. So there's no way to do a JV...
Charlie Ergen: There...
Armand Musey: ...unless you both agree to replace all your boxes.
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Charlie Ergen: Let me put it another way for you. I like having 96% of the
votes and 50% of the economics of EchoStar. I'm not personally as
thrilled with 30% of the votes of the bigger company since I can get
fired.
And therefore we have - I can only tell you personally we looked at
every single possible scenario not to merge. And there just wasn't
any practical solution.
It's more complicated than I explained to you. The two different
standards is the main reason that you just can't put it together. But
there's other issues there as well. So...
Armand Musey: So there's no way to negotiate a JV where you'd both agree to
swap out all of your boxes?
Charlie Ergen: Well now we're talking about $4 billion. It doesn't make any
sense. I mean, why would you? So let's - we're not going to burden
our industry and the American public with a couple of billion dollars
of swap-out that's not necessary.
Eddie Hartenstein: Armand, we spent several months looking at that.
Financially or operationally, there's just no way to do it. We're two
companies that respectively have almost 11 million and 7 million
customers already with many more settop boxes on top of that.
And there's just no way to take advantage of rationalizing the
spectrum given the infrastructures we've both got in any reasonable
time that makes any sense for our respective shareholders.
Charlie Ergen: But with the merger, over a period of years we will get to a
single standard with one or the other of the current standards today.
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And we have a transition - because of the capacity and the spectrum,
we have a transition that allows us to go replace those boxes on a
time schedule as opposed to overnight.
It's the same problem cable has with digital. They couldn't go 100%
digital because they couldn't turn their analog signal off. So they
had to go with a hybrid system that ultimately worked, you know,
strategically for them. We have to go with a hybrid system while
we're putting it on a single standard.
Armand Musey: Okay. A final...
Charlie Ergen: We can't turn it off overnight.
Armand Musey: A final question, you talked about a timeframe of
approximately 24 months or 2 to 2-1/2 years. Is that how long it
would take to get the new satellite up? Or does that include also the
swapping out of all of the boxes? Or...
Charlie Ergen: The satellite is - yes, the satellite is 24 months. To do all
the markets - realize almost immediately we're doing over 100
markets.
But all the markets in America is about two years after the merger is
approved, same with broadband to everybody economically. And in terms
of the actual single-standard system, that is something that's
between two and three years to get to single standard.
Armand Musey: Two and three years from the time...
Charlie Ergen: Two to three years to get...
Armand Musey: ...the satellite is launched or two...
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Charlie Ergen: No, two to three years from when the merger is approved to get
to a single standard.
Armand Musey: Okay. Thank you very much.
Charlie Ergen: Was I confusing on that?
Operator: Again, that's star 1 for questions. We'll go now to Eric Hugel with
Dresdner Kleinwort Wasserstein.
Eric Hugel: Good morning, guys. One question, this plan that you've
outlined and filed with the FCC, is this something that you would
sort of agree to as a merger condition to basically provide full
local channel coverage and Internet coverage to all the 210 DMAs?
Charlie Ergen: We've already agreed to it. We filed to do it. All they've got
to do is approve it.
Eddie Hartenstein: This makes good economic sense, you know, from both
aspects of the business both from the broadband side and from the DBS
side. It makes economic sense given the resources, and spectrum, and
respective assets that we have.
You know, however the government and regulatory agencies choose to
deal with that, we'd certainly abide by. But there is no better
compelling reason to do it than the business case that we've worked
out with these combined assets.
Eric Hugel: Thanks.
Man: Okay.
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Operator: Gentlemen, we have no further questions.
Charlie Ergen: Great. Thanks, guys.
George Jamison: This concludes our conference call. Thank you very much for
joining us. And please call the Investor Relations Department of
Hughes or EchoStar with any further questions. Thank you. Goodbye.
END
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