direc tv group Feb 22, 2006 Analyst Meeting

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Conference Call Transcript

DTV - The DIRECTV Group, Inc. Analyst Meeting

Event Date/Time: Feb. 22. 2006 / 9:00AM ET

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Feb. 22. 2006 / 9:00AM, DTV - The DIRECTV Group, Inc. Analyst Meeting



C O R P O R A T E P A R T I C I P A N T S John Ruben DIRECTV Group - VP of Investor Relations

Chase Carey DIRECTV Group - President and CEO

Michael Palkovic DIRECTV Group - CFO

Romulo Pontual DIRECTV Group - Chief Technology Officer

David Hill DIRECTV Group - President, DIRECTV Entertainment

Eric Shanks DIRECTV Group - EVP, DIRECTV Entertainment

John Suranyi DIRECTV Group. - President, DIRECTV Sales and Services

C O N F E R E N C E C A L L P A R T I C I P A N T S Aryeh Bourkoff UBS - Analyst

Rich Greenfield Poly Research - Analyst

Jason Bazinet Citigroup - Analyst

P R E S E N T A T I O N

John Ruben - DIRECTV Group - VP of Investor Relations

Good morning everybody. I'm [John Ruben], VP of Investor Relations. I'd like to thank everybody for joining us here for our first Investor Day. Before we get started I just wanted to go over a couple of housekeeping items. First, on your table you'll see an agenda. You see we've got a lot of presentations to get through today, so we're going to ask everybody to hold off on their questions until the end, and we've allocated a lot of time at the end of the session to make sure we get all of your questions answered. We will have hard copies of the presentation at the break, so if you can hold off to there, we'll have all the presentations for you. As you would expect, we will have some forward looking information in this presentation and I am sure most of you at this point have this slide memorized so we won't spend a lot of time on it. In addition to forward-looking information, we also will be providing some Non-GAAP measures and in accordance with Regulation G, we reconcile all of these Non-GAAP measurements to the most directly comparable GAAP measure. We provide reconciliation schedules for the non-GAAP measures to the GAAP measures on our website and also in the handout that you'll be getting at break. This presentation will be webcast and we will be archiving a copy of the webcast and the slides on our website at www.directv.com. That's about it. At this point let's get started.

Chase Carey - DIRECTV Group - President and CEO

Good morning, everybody. I'm Chase Carey and I want to thank you for coming out today. Thanks for the opportunity to speak to you. I'm only going to make a couple of comments to start. And actually probably one comment I wasn't planning to make until later when I came back, but it

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became pretty clear in the half hour I spent at breakfast talking to a number of you, that question number one seemed to revolve around broadband. Not to take the wind out of everybody's sails or have half of you leave, we don't have a broadband announcement today. If you recognize, [Rupert's] given us about five days until the end of February to get an announcement done. I don't think we'll make that deadline either. I will make some comments when I come back towards the end of the morning about broadband, but it is not the mainstream or the focus of this event. Although, again, I'm not saying it's not important or it's something that we want touched on and give you our prospective on and our thoughts about that as the day goes along. Really our intent here is, and Mike Palkovic and I have been talking about it for a while, to really find an opportunity to sit down with you in a forum, in a place, in a setting, where we can really give you what we think is a much better picture of what's going on at DIRECTV; in something better, and they're great for what they are, but the 40 minute cattle prod processes at the investor conferences. An ability to really show you first hand some of the stuff that hopefully all of you will have a chance to play with during the breaks and afterwards and some of the products we've got coming, hear from an array of people, and really get a sense of what's really going on and what are our real plans. We've been talking about trying to get something like this together for a year. It's been a bit of a challenge for us. First we wanted to find a -- we wanted to make sure we really had the management team in place. We've gone through a series of changes, but that was, for us, a requirement and really have, in the last year, solidified the management team. Probably about half the people you'll hear this morning have been in their current role less than a year although they've been in place for a good part of 2005. They're well along the way in terms of executing on the plans we have. We also wanted to get to a place where some of the key initiatives that we had planned were far enough along that we could talk to them at a level of confidence and a level of openness. Certainly our HD boxes, our DVR boxes; we wanted to be able to have that product in the marketplace, talk about what that product meant to us. We wanted to be able to describe initiatives in the content area like BOD, sales initiatives; they're going to drive quality and service through that business. We continued to look and we finally, as we finished out 2005 and headed into 2006, we really feel we've gotten to a point, a place, and it's where we are today where we can really lay out for you and hopefully provide some clarity as to the management team that's going to drive us forward and the key initiatives and the key plans that are going to really define DIRECTV over the next few years and ultimately what we expect those to mean for this business in a way that's probably more tangible than we have in the past. This morning you'll hear from a number of key senior executives that will lead us forward with these efforts. First, Mike Palkovic, our Chief Financial Officer, will provide a quick overview of the strength of DIRECTV. He'll touch on recent results and in particular highlight as he goes through it is when you look at the last year, the progress we've made in terms of driving the bottom line. Both in terms of profits and cash flow, which clearly will be a continuing theme as we drive the business out over the next few years. He'll be followed by Romulo Pontual, our Chief Technology Officer, who will lay out our technology road map. He'll describe a plan that capitalizes and takes advantage of our scale, the upscale customers we've got, ability to launch new initiatives from a technology perspective much more quickly than our competitors, what the opportunity is for us to be a part of a global agenda with Newscorp that enables us to be at the forefront of really launching and leading the marketplace in terms of new technologies. Romulo, as you will find, has an accent. We felt that was important. He'll add a little color to -- give him that sort of bad professor technology edge to him. We'll follow on after Romulo, David Hill and Eric Shanks, our President and Executive Vice Presidents of the Entertainment Group. We'll describe a content plan that is going to see us bringing a constant flow of distinctive content, exciting enhancements, an array of things to our customers. Really at the end of the day what we want to make sure from the content prospective is that people say DIRECTV is the TV service I have to have. There are things that are constantly going on. It's an exciting service that has features that you want to tell your neighbor about and we really think we can be at the forefront of that and, again, I think with David and Eric one thing you will certainly see is we've [inaudible] the television business with David. We are in the television business and then some. After David, John Suranyi, our President of Sales and Service, will lay out a broad array of initiatives that will really be focused on our ability to capture the most valued customers on a cost efficient basis and a broad array of initiatives to really bring efficiency and quality to the service side of our business, which we know has to be a signature part of what DIRECTV is all about, is excellence in service. We have to achieve it; this market demands we achieve it in a way; that we lead the market in efficiency as well. John is one who has a track record that began many decades ago in the pay television business and brings a unique prospective of expertise and insights and leadership and a few initiatives will be launching there.

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Finally, I'll come back and try and wrap up by giving you a view of the business. We expect to build, essentially, the plans that you've seen. What that means is we build the business out in the next few years. In a nutshell, I think the two words we've looked at upon ourselves is profitable growth. If I wanted to trace what does profitable growth mean as you look out a few years to make it a bit more tangible, I'd say as we look out to the end of 2008, or towards 2008, we see a platform that should be close to $18 million subs with a cash flow that exceeds $3 billion. We think it's a tremendously exciting agenda and set of plans we have. We hope it's an interesting morning for you. We think it's going to be a great year for us and we really do look forward to the opportunity to share it with you. With that I'm going to turn it over to Mike. Thank you.

Michael Palkovic - DIRECTV Group - CFO

Good morning. Thanks Chase. I'm going to start with a little bit of where we're at today from an infrastructure standpoint and also give you a little insight into the customer profile. Infrastructure will cover both technology and the service infrastructure that we've built through the end of 2005. Then I'll talk a little bit about 2005 results and then get into a little bit more color about the key operating metrics that we use to run the business. First of all, from the satellite standpoint, this chart shows you, quickly. Basically we have eight satellites today. Seven are owned, one is leased in orbit today operating at roughly six different orbital locations. By the end of 2007, which this chart depicts, we'll have 12 satellites in operation at seven orbital frequencies. It will combine both Ku and Ka frequencies as well as [Conus], which is a national footprint technology, along with stopping technology, which is how we provide the local platform today. So what does that add up to? It adds up to roughly 3200 channels by the end of 2007. That will break down. A little less than half of that will be standard definition. Most of that will be coming from the Ku satellites, though more than half of that will be high definition. Most of that coming off of the new DIRECTV 10 and 11 satellites that we'll be launching in 2007. Local channels will comprise approximately 2650, about 1150 of that are standard def that we have today. Those channels are servicing 141 markets, about 94% of TV households and another approximately 1500 capable in high def locals once the new satellites are launched. Important point to make, the first bullet, these satellites at the end of '07 will have an average life of over 10 years for every satellite. Over half of these satellites will have a life that exceeds 14 years of fuel life. Significant life left in these satellites when we get done with this CapEx, this somewhat stepped up satellite CapEx period and significant in-orbit backup capacity. Should any type of failure occur in any of these satellites, there's a number of opportunities we have to quickly replace that capacity. From a service standpoint, the two areas of service that we've built significant infrastructure; on the left hand side of the chart -- from a call center standpoint, we have 22 call centers, three of them are manned by DIRECTV employees, 19 are manned today through vendors. Four of those call centers are outsourced offshore. We have three in the Philippines. We have one in Monterey, Mexico to support our Para Todos business. Most of the offshore business is somewhat of the easier main bank transactions as opposed to say a more complicated technical call or an activation call. We handle most of that, first and foremost, through our call centers that have our employees in it. We do that specifically so we can have better training and more control over the quality of the call in those call centers. John will get into a little bit more detail in his presentation about some of the initiatives we're doing to try and not only increase quality in the call centers, but also lower costs. On the right hand side, our home service provider network is approximately 11 companies, 14,000 technicians. These technicians provide the installation work, the service call work, and all of the upgrade opportunities that our customers take to either upgrade to DVR, HD, or our movers program. Today, in 2005, about 8 million work orders were processed through this network. About 85% of the work is done through the network that we directly manage through these 11 companies. These companies have made significant investments. Today there is over 9,000 DIRECTV branded vans in the marketplace that these companies have invested in and as a sign of dedication to our business. Moving on to our customers, just to show you a little bit of insight into the 15+ million customers we have today. 2.5 million of those customers have a DVR in their home. 1 million have high definition. Of that 1 million, 85% subscribe to the monthly $10.00 package today. We have a million customers through our Telco partnerships. We have 1 million international subscribers, most of those are the Hispanic service Para Todos. More recently we approached new markets including Philippino, Vietnamese, South Asian, Russian, Italian, and Korean. We're putting a more dedicated focus towards the international marketplace beyond just our historical Hispanic service.

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Importantly, 5 million of our customers have their own broadband solution. About 80% of those have a DSL solution and 20% of those have a cable modem. The point to make there is that one-third of our customers have already picked the best in breed solution for their broadband solution today, by choosing the best video product and the broadband solution of their choice. To look at our subscribers from a geographic composition, you can see the U.S. population split down into A and B counties and C and D. A and B counties are a rough, not exact, but a rough proxy for urban/suburban customers in the country and you can see they comprise approximately a little bit more than two-thirds of the population. Rural comprises 30% or about one-third of the customers in the country. If you look at our subscriber base today, we skew more rural. The primary reason for this is when the platform launched in 1994, the early low hanging fruit, if you will, was in rural America where they were significantly underserved and it was a significant opportunity. If you look at the second half of 2005, you'll see that our acquisition efforts skew more in line with the U.S. population and roughly 68% of our growth adds in the second half of the year in A/B counties. We're approaching the U.S. population today. The primary reason for that is we now have a full favorable price in the market with 141 markets, 94% TV households have local channels and we have a full whole house solution with boxes in 2005 coming out of the air average a little over 2.6 boxes per home which is approximately the number of TVs in a household. If we look at the customer base on the demographics standpoint, it shows one statistic, which is basically below or above $60,000 household income, which is considered upper-mid to wealthy above that range. You can see by the numbers we track very well against the U.S. population, 14% higher than the population. You can see some of the key characteristics, married male, 35-55, college graduates, and the majority of our customers own a home. We have a very, very attractive subscriber base and we index much higher than the national average, particularly when you take into consideration what I just said about rural America and the fact that we skew more rural yet we index much higher on the demographic profile. Switching it over now to 2005, some of the highlights of 2005. I'll get into a little bit more detail on the next chart on our revenue earnings and subscriber growth numbers. We built out critical infrastructure. We spent the time to build out -- we launched the DIRECTV owned DVR, we launched the mpeg-4 receiver, we launched three satellites, and we built the HD regional uplink center to support the new stopping technologies for the HD platform, and the backhaul network to get the signals back into those uplink centers. All of that work, will be continued work, obviously, in 2006 and 2007, but all of that work was done in 2005. We enhanced our content services. We increased our local channel coverage. We added more standard def and we started the fourth quarter by launching our first 12 markets local HD. Again, we're in 141 markets, 94% are TV households, and we have even more capacity for local HD than we have today for standard def. We launched a DIRECTV interactive platform, which Eric is going to talk about in a few minutes when he comes up, and we significantly expanded our international program as I discussed in the previous slide. Taking a look at the financial results. The first line you see is gross add, $4.2 million in 2005, $4.2 million in 2004. The point I'd like to make about 2005 is nine months of the year we had a new credit screening process in place, so the quality aspect of those customers, and I've got a slide that will show you a little bit more detail on that coming up, is significantly better in 2005 than 2004. The issue we had in 2005, which was primarily caused, I think, in 2004 primarily, and a little bit in 2005, was turn. You've heard us talk a lot about that and lot of the initiatives we've put in place to address that. Shifting down to the financial side, the revenue increased $2.4 billion on the platform. I want to note that about $500 million of that is the full year impact of the NRTC. The remaining $1.9 billion is about two-thirds driven by subscriber growth of volume and one-third of that is driven by the annual price increase and other ARPU increases. Operating profit before D & A. The point I'd like to make on this is $917 million increase year over year. If you can stabilize your growth adds, more importantly your SAC rate, which you'll see in a minute, and control your retention and upgrade spending, the rest of the platform scales pretty well as you grow the revenue strength. In this case, about 40% of the incremental revenue dropped to the bottom line. That's the profitability that we're looking forward to seeing in the next two to three years on the platform. It's consistent with one of the comments that Chase made as we look out to 2008. CapEx, you can see the stepped up CapEx period as we built up the infrastructure. The majority of that are satellites and ground infrastructure to support high definition. You can see the pre cash flow number. One note is the $247 million on the left. There is an error in that number. That's actually cash required. It should be bracketed, so when you get your handouts you'll need to note that on your handouts.

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We went from a use of $247 million to supplying $536 million of cash so we're very happy about that and I think it's just the beginning of what you're going to see in the future. I'll talk a little bit about the subscribers we're adding. We picked three what we consider very high value aspects of our subscriber acquisition efforts. The percentage of customers that take DVRs, those that take HDs, and those that come through our Telco partnership. In 2004 those three components comprised 14% of our gross adds. They comprised 31% of our gross adds in 2005, so we're acquiring a much higher quality of subscriber on the platform. I think you've heard a lot about DVR and HD. From a Telco prospective, while they're also in SAC, is reasonably in line with the rest of the platform. Their churn is significantly lower today, so we're going to get very, very sticky long term quality subs in the Telco partnerships if the data we see today holds. I'll talk a little bit about our ARPU. I'll start at the bottom. We had about a 4% increase on this chart. The 2005 numbers do have a little bit of a dilutive effect of the NRTC being in our numbers for the full year. If I do an apples to apples comparison, that number is approximately 6%. Instead of $2.66, you'd see something closer to a $4.00 increase. If you go up to the top line where the majority of the revenue comes from, which is our monthly packages, premiums, and sports, you see a $0.90 increase. Most of the NRTC dilution is in that number. If I add approximately $1.50 back to that number, I'm somewhere in the $2.50 range year over year, which is primarily driven from price increases and maintaining, as you see on the right, 1.3 premium channels. 130% penetration of our sub base takes some type of a premium, either a movie or a monthly sports package. 55% of our sub take at least one premium. That's significantly higher than our competition both cable and dish. As you go down the page, you can see the impact of putting these new boxes in the home and how it translates to close to $6.00 in 2005 and as we come out of the year even higher in 2006. Pay per view at 33%, about two-third of that is driven by movies and the rest of it is driven by events and other types of pay per view transactions. Ad sales, while not a big number, it's important to note that it's very fast growing. It's a new revenue stream to us and it's extremely high margins, so while not as big on an ARPU standpoint, the cash flow is significant. Advanced products, as we begin to roll out DVR and HD you're going to begin to see that revenue stream start becoming more prominent in our ARPU growth profile going forward. Let's talk about churn for a minute. We are highlighting the voluntary/involuntary here because if you look at the voluntary line and you can see from the last two years, January 2004 to the end of 2005, the voluntary line is essentially flat. If you look at the two bars and you look at July through July, the voluntary number in July 2004 was 1.16. The number in 2005 was 1.03. If you take out the seasonality and you just do a year over year comparison. We're actually flat to a little bit down on the voluntary line and all of the problems we're having is on the involuntary side, which is where we put most of the significant focus in terms of initiatives to address that from a quality standpoint. As we come in to 2006, we expect to see the benefit of some of the initiatives put in place to address this very issue that is showing up in our 2005 numbers. As I said earlier, I wanted to give you a little bit more insight to what's going on with the quality of our subs. If you look at the left hand side of the chart you can see that about two-third of our subs were what we considered high quality, meaning the top two credit score bands in Q4. It acted out a little bit worse in Q1. We implemented the new credit scoring policy in Q2 of 2005 and you can see the results driving from 61% up to 82% as we come out of 2005. We expect this number, at least the internal goal, is that we get this number closer to 90% in 2006. Again, John is going to talk a little bit more about our focus in terms of quality aspects of our acquisition strategy and you can see the breakdown in the number of gross adds. Most importantly you can see that while we might have lowered our gross adds in total, we increased the number of gross adds that we considered the highest quality, which is very important to us. Let's talk about SAC for a minute. There's four main components in SAC. Hardware, which is primarily all the boxes, and to a lesser extent some of the few of the hardware that has to go into the home like the antennae and the switches and the light, installation work, dealer commission, and marketing. Hardware, the important point to make there is that number in 2005 while flat, includes significantly more boxes, more DVR, and more HD. Much higher appetite for advanced products. We were able to cover the cost of that increase in pay grade by lowering the cost of all the boxes, basic, DVR, and HD throughout 2005.

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Installation was flat to slightly down. Dealer commission was relatively flat. We had a slight increase as we had a little bit more of a fuller media plan, if you will, in 2005. We decided to have a little bit stronger mix of local and national marketing and that drove that cost up a little bit. At the end of the day, as I said earlier, to drive this platform from a profitability standpoint, this number has got to stay relatively flat. We have to continue to look for ways in all of these categories to lower cost. While we expect box cost to continue to come down, installation is another that there's initiatives that John and his team are focused on to try and take that cost down a bit. The dealer's commission line, which includes direct sales, is an area where, as we focus on direct sales more as a higher percentage of our mix, will drive some cost out of that category as well allowing us to fund even higher pay grades of DVR and HD. From an upgrade in retention standpoint, you can see that we grew roughly 10% on an absolute basis. You'll see in a minute how that translates to our pre SAC margin chart. If we can hold this category relatively flat or generally flat in absolute dollars, we can improve the margin significantly. You can see some of the traditional programs like box upgrades and standard local into local upgrades is starting to come down, as you would naturally expect. DVR and HD and HDDVR are starting to increase and our movers program increasing significantly. The comment I'd make about movers is a couple of things. First of all, the 1.4 million NRTC customers that we acquired in 2004 now have access to that program where in the past they did not. We had a full year impact of those customers being able to take advantage of the movers program. We marketed this program more aggressively in 2005 because it's a point where the customers made a decision to leave our platform. It's one of the best places we can put an investment just to make sure we stay with that customer during the move process and it's going to naturally grow with the size of the base. Then we have other more ongoing upgrade and customer communication activities that's in that other marketing line. We increased the number of transactions by 1 million from 2004 to 2005, in the equipment revenues, we don't often talk about this, but when we spend that $1 billion or $1.1 billion, we collect over $200 million in upfront revenues but we're required from an accounting standpoint to record that in the revenue line. The net of those two numbers is just below $900 million of net cash outlay. We typically talk more about the expense side on the P&L, not the $200 million that's in revenue. That net number is roughly about $5.00 a month per sub. If we can keep that relationship fairly steady. Pre SAC margin. You can see basically the components of the P&L. The first component programming, which is just under 40% of our cost, increasing about seven-tenths of a point. 7% programming costs, which is embedded in the contract. The important point to make there is if I separate all the sports programming out, ESPN and all the regional sports networks, that number is closer to 5 or 6%. The cost of the sports programming today is our biggest challenge. That number is more than double what the remainder of the programming services on the platform are costing us. That's our biggest challenge in getting that category down. As we grow our ARPU 4 or 5%, if this category stays in the 7% range, we're going to have a natural hit, if you will, to margin on that line. We have to make that up in order to grow pre SAC margin in other areas of the P&L. If you look at those other areas and you look at other costs, which are basically other costs of sale costs that are tied primarily to revenue strains, subscriber services and G&A or broadcast ops and upgrade and retention, as I just talked about, all of those are tracking favorably. The one that did not in 2005 is subscriber services. That's primarily driven by the cost of the service calls for the hurricane. If I take those out, we were relatively flat in that area. That's the area that has all of our call center expenses. John is going to talk a little bit more about how he's going to focus initiatives on quality and to drive costs down in that area. Let's talk about our balance sheet. We're in a $1 billion net cash position today. We expect to continue to generate significant cash flow beyond what we did in 2005. You heard the number that Chase mentioned earlier in his comments. From a leverage and a credit rating standpoint, right now, today, we're very comfortable where we sit with the two rating agencies in terms of our credit rating. That said, we have significant borrowing capacity. The only comment I'd make to you today, and I think Chase will make a similar comment later when we get into Q&A, is we don't have a plan today to go out and do anything to our current debt level. That doesn't mean that if there isn't a compelling reason, if circumstances change, that we're not going to keep an eye on that. We know we have significant borrowing capacity if we need to do it. Right now, today, we also have -- we've announced the $3 billion buy back. You guys are all aware of it. We're just in the first week or two of getting into that program and we're going to work through that program. We think it will take us about 2+ years to process through that $3 billion. That does not take into consideration a significant single transaction if that were to present itself, but just being in the market on an opportunistic basis, it will take us a little over two years. Right now our focus [inaudible] to execute on that program that's been approved by our board and that's really just a statement about where we're at today from a balance sheet standpoint.

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Let's talk a little bit about the lease program. We're going to begin our lease program in March. Set-top boxes only will be capitalized. What that means is all installs, costs, dishes, commissions are expected to be expensed. We'll apply a three-year book deprecation life to those boxes. You can expect the lease fee to be fairly comparable to the current mirroring fee from an ARPU standpoint. Most of our other policies will remain unchanged. Commitments, monthly programming fees for DVR and HD, credit policies, and upfront payments, all those current policies will remain unchanged. Basically the benefit of this program is starting in March all boxes we deploy to new customers and throughout upgrade and retention activities, we will be able to recover when those customers churn and re-deploy those boxes and get future savings to help pay for our future run in SAC expenditures on the platform. To summarize, we feel we are poised for profitable growth and increasing significant cash flow. We are a leading multi-channel TV provider today. 100% digital. I talked a little bit about the infrastructure that provides that platform to us today from a technology standpoint. We're introducing unique and exclusive programming. You're going to see some good examples of that today. We're showing strong revenue in outside growth. Again, if we focus on the right components of the P&L, you can flow a lot of the incremental revenue that this platform generates to the bottom line. Here we have a strong balance sheet with substantial liquidity. That's the last thought I have and with that I'd like to introduce our next speaker, DIRECTV's Chief Technology Officer, Romulo Pontual.

Romulo Pontual - DIRECTV Group - Chief Technology Officer

Good morning. As you are going to see later, during the break, we have brought to you some exciting technology components and devices as they invite all of to be testing and asking questions about them. They are all in the hall behind you. We have also tried to bring a satellite to show, but the closest we could get to was -- I just wanted to give a glance at how complex and what else we're doing in the space that we can't see in the ground. When Chase and I joined DIRECTV about three years ago, the company faced two big challenges. One, there was an array of different set up box models in the market, each one of them having different user interfaces and remote controls. It was a challenge for DIRECTV to efficiently support those customers and to control costs with those devices. We had plans to launch an interactive platform, and again this array of devices made it much more complex and was essentially putting DIRECTV in a dangerous position of being behind others in the interactive platform. The other challenge we faced was that the world was moving at that pace but it was moving from standard definition to high definition and the company had no solution for it. [Inaudible] and in less than 24 months we resolved both of these issues. We have brought down the number of boxes to 4. We have found a solution and we are assisting in a solution to keep that activity at the forefront of the distribution and to be delivered in the high definition television. I will address today our roadmap four major categories. It is of paramount importance to this business that we take control and reduce costs. Particularly the ones related to consumer and consumer premises. Our main charge is to find the balance between equipment costs and the features and expected life of this equipment. [Inaudible] life can be extended by adding resources, but we have to anticipate resources needed to achieve what the consumer will demand in the years ahead. We are being [inaudible] participation to the [inaudible] and we believe that has been quite successful and the first thing I am going to do is dive in and what have we done in set top box loss. There is a portion of this chart that presents actual data and the other ones are forecasts. The set top box loss has direct impact to us from a subscriber position and as we average about 2.6 of them per home, it's one of the significant acquisition cost drivers we have. During this period, the range in years of relationship of our suppliers and put in place real incentives for cost reductions. We have made great strides specifically in high definition units which in the first two years we have been achieving savings in the average more than $100.00 in savings in equipment in the consumer home. We have also increased features. We added memory. We added hard drive space. As a company when we see this high definition cost, we start with the hard drives of 40 hours and we are now at 160 hours, while at the same time bringing the price down. [Inaudible - highly accented language] and introduced common interface and remote control design across the category of boxes. After introduction of our HD DVR later this year, all DIRECTV products will share common user interface elements and a common remote control design, which we are demonstrating today and you're welcome to experience it in the hall back to you. The interface consistency across the product line assists customers in having to learn just once. This is even customers who can effortlessly operate boxes in different room, reduce the number of calls for support in our call center, and greatly assist DIRECTV to improve customer

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service. Another benefit of the customization was that in the process we created a national reference platform to support interactive services. [Inaudible - highly accented language] that already support these services. We will be expanding to the high definition products during the summer. We'll start the downloads and introduction of the new HD DVR. The phase and introduction of the platform come with no shortcuts. We increase the amount of memory in our boxes to allow for future expansion and launch the most sophisticated DVR with the larger hard drive in its class. The introduction of DIRECTV plus was not a without challenges and initial snags, but a cornerstone event for DIRECTV. Our DIRECTV plus DVR supports an array of interactive services and relies on the MDS XTV technology to safeguard the contents. The high [inaudible - heavily accented language] scheme associated with the powerful interactive support allows more [inaudible - heavily accented language] services. For example, next month we will be introducing an on demand viewing service that includes valuable early window contents. I will leave that for Dave and Eric after me to explain the applications themselves. Our consumer app includes a powerful, exciting, easy to use platform and you will see in a few minutes after we are through this technology stuff that DIRECTV will be introducing new exciting services. Some of these services will rely on the unique features of our DVR and the high [inaudible - heavily accented language] local storage. What's next for us in the technology? We need to expand the reach of these services to all television sets in the households. We are seeking the solutions shown and aiming to resolve both cost equation and the design and functionality. And this solution will expand the full experience of DIRECTV service to all sets and have a tied benefit to consumers who will be able to record from one set and watch the show on a different set. Before leaving the consumer premise equipment, I would like to highlight the impact that the high definition position has to us. Clearly, DIRECTV had to find a path to position its service to high definition and we did. However, because the position required to double the channel count and because high definition television consumes much more hard drive capacity, we had to find more frequencies, much more satellites, and introduce new consumer equipment to receive the transmission. DIRECTV has chosen a high frequency, the so-called CabM frequency, for its expansion and secured significant expansion on two orbital locations. We [inaudible - heavily accented language] support both previous services and the new services to a single dish. [Inaudible - heavily accented language] dish of support this new service manufactured last August. We are already working a second generation and the goals of the second generation were to reduce weight, to reduce size, reduce cost, looks better, and we have here for the second generation, in the hall demonstrating to you, the new product to be introduced at the end of summer this year. I have an [inaudible - heavily accented language] to point out that HDTV capacity plan has a most significant advantage to DIRECTV. It is complex and requires strict cost control, but is worth it. And [inaudible - heavily accented language] is the [inaudible] service debuted next month. It should gradually grow and accumulate by year-end with hybrid, on demand system that relies on satellite and a broadband access to make it a high efficient delivery system. From a technical prospective, there is no better way to explain the high definition position than projecting the channel capacity and that is what I am doing. Firstly, we will address the need for national channels. We are launching a couple of national high definition channels this year, but the major roll out will take place next year once our new satellites are launched. We plan to expand HDTV national offerings on our [inaudible] channels today to 150 by 2007. The expansion put that activity on the forefront and opened facilities for our creative team to introduce new services. I tried to put an estimation of our competitors' capacity for national coverage and that's what I have, clearly showing that we'll be basically the absolute leader in the offering of HD and be basically driven by what is it we will find to put in this capacity. The national high definition expansion plan wouldn't be as valuable if not [inaudible - heavily accented language] of local channels. I will show you in the next slide, DIRECTV expands coverage in it's HD locals offering from the 12 markets today, to close to 17 by year end and to most of the households by end of 2007. This is an opportunity for DIRECTV. Having reached leadership in this area and given that this area is skewed towards the higher wealth households, we elected to focus in home theater and will be launching a new product, which is specifically designed for home theaters. It will be a professional grade receiver, which is, based functionality in our HD DVR, but with bells and whistles that are desirable by professional installers that fits and installs computers at 10 to $25,000.0 installs. Just switching back to the video download. As I said in the beginning, there is a another DIRECTV service that we are processing and we will start to offer this later this next month. It's a high efficiency -- we started with a highly efficient delivery mechanism, which is being demonstrated

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here in the hall, and where customers can have an experience that's similar to Netflix and provides instant gratification, there's a rich selection of [inaudible] and multiple billing options. Later, as our technology gets ready, we will support delivery of niche broadcasts to the internet, rely on existing consumer broadband access. This should be the most efficient delivery of this kind of service. While developing those products and getting excited about the possibilities, we're still keeping our attention to how can we improve efficiency. What else can we do? How can we reduce costs? [Inaudible - heavily accented language] technician has service calls, we have consumer complaints, or issues and we have installation issues. And while pursuing the high definition, we have been trying to address few opportunities. The first one being, we launched last year some solutions for MDU. It was a choice to us given that they are 20 million households located in multi-dwelling units and are satellite DIRECTV home services [inaudible - heavily accented language]. Last year, we resolved that the last technological barrier and that had prevented a similar provisioning of this service and we're now uniquely positioned to address these additional households. The solution that we found for the MDU. We found dozens of new technologies that can be adapted to resolve also a costly issue we have today. As a way of example, when our installers reach a home, which was previously served by cable, he ran new wires to each television set. It is costly to us and unpleasant to our customers. The [inaudible - heavily accented language] model will simplify the installation process and will allow us to re-use the existing cable wire. The improvements in retention are aiming to control cost, but also to increase the number of homes [inaudible - heavily accented language] a return channel. A connection is highly desirable to us to support future service but is also a win to customers, which would get access to some of our new services. We are starting a trial that relies on power line technology eliminating the need to run phone line to every box and if it is successful the technology below that for our product line and we should see a savings in installation time and cost, as well as convenience to our customers. Here is another are of improvement that may be a win-win to DIRECTV and its customers to provide the ability for hard drive expansions. Hard drive size is considerably increasing. As a case, that's much faster than the life we want for our set top boxes. We have initiated the development of hard drive expansion device that is user installable which allows you free storage without the need for [inaudible] or replacement of the original DVR. The new device should become available next year. In addition, [inaudible - heavily accented language] improve diagnostic tools where the box will call us back and inform that activity of user experiences that ought to have been ideal. That will allow and give DIRECTV the opportunity to identify and rectify those problems before becoming an issue for the consumer. There are also other improvements possible especially if we meet the growing consumer desire for flexibility and that's where we're going. The widening scope of our services is certainly a challenge to DIRECTV and is not where we have been. We have a closed system today, but we hear our customers and you can see the growing demand for flexible solutions. Consumers want to watch our service where they want, when they want. They want mobility. They want to [inaudible]. They want to be able to be on the road and they want us to make it simple. We do have several initiatives ongoing. One of them is how can we make it simple to consumers. How can we allow consumers to watch DIRECTV in the kitchen as they used to in the old kitchen TV. How can we have a space saving solution for small apartments or bedrooms where they just want to have a TV set? What we have done is we have allowed our partners, in the case [inaudible], to integrate our set-top box inside the television. This provides the full DIRECTV experience identical to what it would have been a cable high def television with the extra benefit of no outside wires, having just one remote control, and being simple to use. You are also again invited to play with those devices in our hall. These devices will be commercially available within a month or two. Now we come to the product expansions where both the home networks are growing and consumers are getting more services from both Microsoft technologies and other devices in the home and [inaudible] that we can and we should be able to inter-communicate those devices. In order to achieve that, DIRECTV has jointed the DLMA Alliance, which sets standards for, the industry and we have selected to partnership with the two key players and the worldwide leaders in this front; Microsoft and Intel. To start, we will be offering a suite of services for non proprietary devices such as DC, DIRECTV to go devices, if you have also demonstrated, [inaudible - heavily accented language] which allows fast deployment and flexible solutions.

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In this consumer home that I am trying to present here, we will offer the consumer DIRECTV to go portable devices. Multiple devices will be available and you can see there is an array of devices in the room, but we have been working to make sure that our DIRECTV to go initiative works with any of the [inaudible] devices. The Microsoft leadership in this technology will make the devices [inaudible] configuration and all other settings similar to consumers to go with just a plug and play and with [inaudible - heavily accented language] Microsoft backing and the size of DIRECTV viewer opportunity is bringing device manufacturers to us with offers [inaudible - heavily accented language]. We're quite excited about this product. Another dimension is the Intel initiative. Intel came to DIRECTV and DIRECTV met Intel and we entered into a partnership, which is quite complimentary. Intel's view on the emphasis in the home is that it has to be similar. It has to be easy. It has to work. And that's exactly how we think; in fact that's how we deliver our service today. Consumers don't have to set up or problems. With the partnership with Intel, we became the leader and the only one [inaudible] support of device technology That brings us worldwide coverage attention for all the device suppliers. We're currently working with Intel and Microsoft to integrate [inaudible] PCs into DIRECTV systems. Later this year we should be able to have the first [inaudible] and demonstrating how DIRECTV experience, the high definition DIRECTV experience can be and will be digested, not only for our boxes, but [inaudible] PC, potentially Xbox devices. This partnership has also an additional benefit to consumers which will allow consumers to [inaudible] and what's the purpose and the personal video and throughout our devices even if the storage may in fact be at their personal computer. In summary, technology innovation is a key element for competitiveness. It can create opportunities for new revenue generating services. It can reduce costs and it can increase consumer satisfaction. In itself it's not sufficient. It has to be tailored to the new service needs and to [inaudible] that aim to reduce costs or increase customer over all satisfaction. DIRECTV is well positioned to be and to maintain a forefront on the new product services. DIRECTV customer base is skewed for the upscale customers when compared to [inaudible]. DIRECTV has access to a news corporation, to global issues, [inaudible] and can view the as leverage of news corporation worldwide presence to capture the interest of major partners and the camp we have seen here today of Microsoft and Intel. DIRECTV has the unique [inaudible] distribution strength and has a robust and capable fleet. DIRECTV adopted certain protection in [inaudible] on the industry leader and DIRECTV is the industry leader in both [inaudible] and condition access. And we have a [inaudible - heavily accented language] infrastructure that is flexible, quick to change, an example you see is we are taking out, finding a different path for our technology and provide a range of high definition channels. [Inaudible] decision process that's streamlined and incredibly fast. With that, I'm glad to introduce the most creative person I ever met. He still denies having an engineer background and [for] this is David Hill.

David Hill - DIRECTV Group - President, DIRECTV Entertainment

I too will be speaking with an accent. For those of you who have difficulties with it, there will be subtitles showing on the screen. Two things about that, the subtitles are from the movie, "La Glory de ma pier" so they won't make terribly much sense. Secondly, I'm more used to doing production meetings so most of my remarks will be in single syllables. I've got to tell you, you guys are tougher than an upfront audience. It's unbelievable. The toughest thing that I've ever done is do the upfronts. You know what the upfronts are? Jessica, can you tell them? And the funniest thing that ever happened to me was when I was doing the network, when dinosaurs walked the earth, we had a show called, "Action" and I'm not going to tell the story about what Buddy Hackett said because I will face the wrath of Chase afterwards. Do you want to hear the Buddy Hackett story? Okay. Here's what happened, but just keep it in this room. All right? You're not to tell a soul. We had this show staring Jay Moore, called, "Action." It was the inside story of Hollywood. It was very cleverly written. Buddy Hackett, for reasons that I still don't fully understand, had a roll in it. What you do in the upfronts is you address an audience like this, much bigger, but equally stonified. I think you've all done drugs this morning, but the wrong ones. What happens is that you would show a clip from the show. The audience and the stars would come in. I'm going this is a story about action. It was going to be running at 8:30 on Tuesday night. What normally happens is that the cast walks past. You wave,

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they wave. Self-applied audience sits there. That actually is a pretty good imitation of [Larry Hunter], who, for some reason, has started making sounds like a baby seal being clubbed. But on this particular occasion, the legendary comedian, Buddy Hackett, started walking towards me. It's like being approached by a Sherman tank. So, I am standing here just like this doing this. So, he bang, bip, bop. So, he looks the audience in the eye, and he says, I am Buddy Hackett. The audience, for some reason, wakes up. Raaa! I'm 75. Raaa! I take Viagara! Raaa! Do you know why? The audience yells back, why? He said, so I don't piss on my shoes. So, he tells them the share price will drop dramatically and they are all sitting there pressing their [inaudible] buttons even as we speak. There is a pulse out there. You take the blue ones first, followed by the purple ones, then the pink. Do it the other way around, and there's a terrible reaction. There's a few druggies out there. That got a giggle. It is fascinating that something, which originally made cows terribly uncomfortable and got a whole bunch of guys hung by the neck until they were dead, should assume such importance to date. Where the hell is he going? Cows, pig guts? Think about it. I'm talking about branding. It's probably more important now than it ever was, and probably has more similarity to the wild west activity than ever before. Think about it. Building a brand and sustaining it is just about as uncomfortable as having a red hot flying J pressed into your butt. If you don't get it right, the branding that is, you're dead. How many brands do you think we are subjected to each day? Thousands, tens of thousands, hundreds of thousands? A bunch. And if you work hard enough to make that brand stick in the consumer's mind, you've done good. DIRECTV has done pretty good. The brand is simple and iconic. It has stickiness. The messaging may have changed subtly over the years. I know the agencies have. That's a little advertising joke. I'll explain that later. Top of the side, cost you five bucks a head. True story. For what the brand stands for in the consumer's mind from the get go is that DIRECTV is simply the best television experience around. Let me define best. It's the best service, the best technology - - you just heard Romulo. I've got to tell you, these dudes are so smart, they've all got IQs in four figures. But first and foremost, what DIRECTV is all about, and what established it in the first place is, it's the best entertainment and it's simply unique and distinctive content. And that entertainment bit, to my mind, tends to get a little lost in all the conversations about our industry. Sure, the opposition scored up a bit. Didn't need to. There is more technology jargon thrown around now than ever before, and to me, it totally confuses the entertainment picture. But let me tell you something. Consumers do not look at the back of their television sets. They are not there sitting, looking at the back, marveling at the coupled wire, the connections, the dingleflappers and beeblepetses. They are technical terms that I too will explain, five bucks a head, later off to the side. Consumers buy because of the entertainment because of the entertainment that comes into their home day by day, night after night after night. I'd love to use the phrase best in breed, but it always makes me think of a Pomeranian prancing around the Westminster Dog Show, so I won't. When Chase asked me to come down to DIRECTV - - asked - - it implies a friendly exchange, doesn't it? It implies that there was something nice about it. When Chase asked me to come down to DIRECTV with a cattle prod 12 months ago, it was to build a team, which made unique and compelling content for us. That's what we've been doing. What's scrolling through these monitors, apart from the subtitles of the glory [inaudible] is our development slate, some in production and others just a gleam in the eye. And what we are doing and what Indiana's own Eric Shanks will take you through in just a moment is totally broadening our entertainment offering. DIRECTV has always appealed to the adult male with our rich, varied and constantly changing sports product. And those of you who have got Sunday tickets and watched what we did with the [superpad] package, especially the Red Zone, will have more than a clue than where we are heading in that direction. But we are also targeting audience segments that we believe were under-served. The reason I am reading is because if I don't, I tend to go for about three hours. So, I do apologize for reading, but it's in everyone's best interest, trust me. I've had more lawsuits from when I have spoken extemporaneously. Kids and young adults have been targeted with shows like CD USA and our massive gaming league, which we hope to get up and running in a couple months, but Eric will take you through that. Faith-based programming, like our Songs of Praise, coming up over Easter, the huge American Idol audience, the deal we have just cut with the folks at Reality Channel to repeat their weekly American Idol rap show. Chase keeps telling me not to call it the post game show, but old habits die hard. And what that show is going to do is sensational because it highlights the angst, emotion, elation, the kissing and the crying of each week's episode of American Idol.

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Families with young kids, with the addition of cognitive games and channels like Baby First. What we're doing, we're cherry picking potential audiences, area by area. Let me tell you another thing. You guys are all aware. You're all college educated. You're all bright, taking the right drugs. You know about the DVR. You understand what the DVR is, understand what it does? Anyone not? Put their hand up. Okay, cool. You know what it's doing? Totally revolutionizing television before our very eyes. Why? Very simple. It puts the customer in charge of everything. You totally control your entertainment destiny. And that is the key to what we're doing. The team which is being built in our original entertainment area is young and smart, but most of all agile, none of which applies to me. We can move, or they can move, on a dime. And the reason we're doing that is to eventize the year week by week by week. Songs of Praise that we're doing over Easter is a classic example. Our aim is to eventize the calendar - - Mother's Day, Father's Day, Thanksgiving, Halloween, Valentine's Day. Think about it - - programming controlled by the customer through a DIRECTV Plus, our great DVR, which fits the family mood of each and every holiday. Now I'm not saying that we are going to be doing the Punxatony Phil story anytime soon, but you get the idea, right? Right. Punxatony Phil - - okay. With me? Anyone not know Punxatony Phil? Good. Let me give you another example - - movies. I watch with amazement our competition talking about 20,000 titles, 30,000 titles, 40,000 titles on VOD. Big deal. Now let me ask you a personal and intimate question. How many of you guys have got a DVD that you bought still sitting in your living room in the plastic wrapper? I bought a DVD for my kids of Finding Nemo. It's still there. It's just gathering dust. So, you know what I'm saying, right? How many of you have got a burning desire to watch the Maltese Falcon right now? Sure, there's going to be one or two out there, but that's about it. Now what we're doing is, instead of bulk, we're working on quality. We're working with one of America's leading movie experts, [Leonard Morton], to totally make over our pay-per-view movie offering, which is not only to do the best deals that we possibly can with the studios, but also to offer companion pieces. For example, Kurt Russell's movie about the racehorse, the little girl. The ideal companion piece to that is where it all started, National Velvet. So, if you see one, the other. So, we are working with Leonard, going through all the movies that are on offer. We are looking through all the slates that are coming through and he is - - I tell you what, for a movie nerd, a totally nice guy. Really surprised. No, it's not surprising. I'm surprised he's a nice guy. So, what we're trying to do is, in the near future, offer a carefully thought through, compelling offering, which will be the closest thing to a cineplex in your living room that has ever been available. 60,000 movies. There's still 24 hours in a day and you're still going to sleep a few of them, you're still going to work and whatever. So, the entertainment time that you have available to you is still limited. And we believe that if we put on offer simply the best that the audience is going to respond. What DIRECTV is about is about service, it's about technology and more HD than anyone else. And I'm just wearing my fox hat that we're pumped out, I think at Fox Sports, more hi-def pictures of Super Bowls and World Series, NASCAR events than any other broadcaster. So, we've probably got more experience in working with HD - - let me tell you a quick story. So, when HD comes in, right, 16x9 format as opposed to 4x3, so I call a meeting of my directors. And I say, boys, how are we going to handle this? For the next five years the number of HD sets in the country is going to be minimal. And one of my directors said, we're going to do what Mr. Ford said. Mr. Ford, I'm thinking, Henry? No, no, the western movie director. He had a simple instruction for all his cameramen. Keep the stagecoach in the center of frame. There's not a single cameraman in the audience. That, in a production meeting, brings the house down. The cameraman, you know, like - - side speak. So, you saw what [inaudible] said, so that's where we're going to be next year. But above all, what we are above all that is about unique and distinctive content. We're an entertainment company first and foremost. Think about our name. We're direct. That's simple. And we're TV. We're DIRECTV . And we have been, and still are, and continue to be simply the best television experience in the world. Now the reason that Eric Shanks is going to take you through the school programming, which will be on offer, is because a lot of it is technical. I don't do technical. In fact, I'm still not terribly sure why, if the cable that comes out of the wall is round, why the picture on the TV is square. I'll leave you to think about that. Ladies and gentlemen, Indiana Jones, Eric Shanks! Round of applause! Come on, give it up! Eric Shanks: I'm sorry, but now you're going to have to try and deal with my Indiana accent, so I will speak slowly. You can smile. It's not a problem. We're going to get back to the numbers as quickly as possible and you'll all be happy again.

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Romulo earlier gave you a good sense of our HD capacity in the very near future, but he is a cliche. It's not the size of a pipe, it's what you put through it that matters. We've already launched 12 local HD markets. We'll be in 22 by April, 36 by the end of June, including such markets as Seattle, Pittsburgh, Denver and, just to prove that you don't have to win a playoff game to get HD in your city, we've included Cleveland and Indianapolis. By the end of this year we'll cover more than three quarters of the country with D10 and D11 to provide local HD, plus capability to launch 150 national hi-def channels, and if you do the math, which I think you all can, by the end of 2007 our HD package will be superior to cable in at least, if not more, than 75% of the country. But our definition of the best TV experience doesn't end with HD. We've built a team, led by David, that is committed to producing exclusive and unique programming in an array of genres and formats, ranging from traditional television to interactive and on-demand. And that's what I will walk you through now. Our initial on-demand offering capitalizes on the DIRECTV Plus DVR. And here is a snapshot of what our offering will look like by year's end. You know our drive in the box is partitioned to give 100 hours of use to the customer and roughly 60 hours for us. And here is how it's breaking down. We've already announced TV deals with NBC, Universal and Fox, which give us access to the most popular shows. And with FX, that allows us to do what we call pre-runs, allowing viewers access to popular FX series up to 48 hours before they air on FX. So, in essence, what we're doing is providing the top tier of television and movies right at the customer's fingertips, which is a little different than what research shows is Cable VOD, which is usually the destination of last resort. We'll also be working with other studios and networks to find new ways to distribute content. You'll hear more from us about earlier windows for movies and using the DIRECTV Plus DVR to deliver DVD-like features through DIRECTV Plus. However, the on-demand offering is not just movies and TV shows. We'll use DIRECTV Plus as a portal for games, as a gaming device, also for customer service and interactive advertisement. But because we have unique capabilities on DIRECTV Plus, the DVR is completely customizable to the viewer. So, you can see the bottom line there. If customers are interested in different pieces of content, including movies, they can opt in to services. So, if somebody is really interested in underwater basket weaving, they just tell DIRECTV Plus, and each week they'll get a mind-boggling amount of underwater basket weaving. Plus, in 2007, as Romulo says, we are roughly going to double the size of the drive, so that will give us even more capacity in the viewer's home. Then later this year, the next generation of DIRECTV Plus will support our MPeg4 HD broadcasts, as well as broadband connectivity. This will enable the viewer to download titles, through the broadband connection, right to their play list. So, with only a single head end for us to manage, unlike cable, we will have the technical capabilities to deliver the same volume, tens of thousands of titles, if they want them, that cable can offer. So, David can watch the Maltese Falcon over and over and over again. We expect this universe of boxes that will support this service to be around 300,000 by the end of 2006. We'll include rich graphics, promoting the broadband content inside of our existing EPG. You can see one example of how graphics will be integrated into the EPG to give viewers easy access to find the titles. Plus customers will be able to use DIRECTV .com or even their mobile phone to select titles and have them downloaded to their DVR at home. So, broadband VOD is the obvious starting point for us. But once the set-top box is hooked up to the home network, the possibilities become virtually endless. Sports - - one of my favorite topics. Since its beginning, DIRECTV has been the leader in delivering sports programming to its customers. We are now broadcasting more than 50,000 live events each and every year. We are committed to not only maintaining this leadership as we saw with our renewal of our exclusive NFL Sunday ticket package 320/10 and the NCAA March Madness package, and further enhancing them with interactive and on-demand services this year, but we will separate ourselves even further from the pack with new alliances. And today, because somebody up there loves you guys, I'm going to be the first one to let you know that I'm proud to announce our latest addition to our interactive sports assets. DIRECTV has teamed with the Yes Network and Major League Baseball Advanced Media to deliver the first-ever interactive broadcast of the 26th-time World Championship New York Yankees. All Yes Network's broadcast of the Yankees right after the All Star break will give DIRECTV customers access to an array of interactive services, including exclusive camera angles like StarCam, which is something that we started at [inaudible] and is hugely popular. It would be a dedicated camera that will follow specific stars for certain periods of the game and the customers will still be able to see the main broadcast. Other features included on-demand scores and stats, as well as player cards and bios. Plus we will launch an interactive game that viewers can play during the broadcasts. We are also looking at getting these enhancements tied around the HD side of the Yes Network, but that is probably

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on tap for 2007. So, we are extremely excited to open this new chapter of the best TV experience with the Yes Network and Major League Baseball. And as I can tell, you're all very excited. Come on, position players reported yesterday. Come on, you've got to be excited. We also want to get game service on our set-top boxes called DIRECTV GameStar. Every day in this country millions of people play casual games on their computer or on their phone and it's now generating about $500 million annually in revenues. We'll create games using some of the most popular brands in the world, and most of them will be exclusive to us. And one of the more important things, unlike our competitors, you will be able to watch your favorite TV shows while playing most of these games. So, you won't be taken away from your entertainment experience. It will not only be entertaining, but also educational. We're teaming up with some of the children's brands to deliver games that also teach your kids how to count, maybe even teach them Spanish or hopefully count in Spanish or Portuguese or Australian. On top of that, our DIRECTV Plus DVR customers will have access to a whole new genre of interactive games. These are DVD-based games that you're starting to see, but we'll go right to [inaudible]. DVD-based games that retailers are starting to give up shelf space for, games like Scene It, Disney's [inaudible] Madagascar game. We can essentially take those DVDs and reformat them and broadcast them to the DVR to make them completely interactive. And they're very family-friendly, some of them educational. We're also in development with the number one news channel on television, the Fox News channel, to develop a video-rich, interactive enhancement that will add a new dimension to TV news. We haven't yet set a launch date for this service, but it will probably be sometime in Q3. So, as you can see, we are taking full advantage of our sister companies within the news corp family. I mentioned the Fox VOD and FX VOD deals. I mentioned potentially getting earlier windows for movies, Fox News. On the gaming side, with massive gaming league, we're working with IGN and if you have had a chance to see CD USA, every couple of weeks we take the top band from My Space and let them perform to a national audience. Finishing off our interactive slate for 2006, one of the things that I'm most excited about - - it's probably one of the coolest things to build community around the television experience, that you'll see anywhere. So, if any of you have visited Yahoo or USA Today, you probably have, and you take a look at some of the most e-mailed articles of the day, what are the top photos of the day? Everybody loves to go see what the most popular stuff is. In April, we will launch the first-ever consumer, real-time ratings service that is completely interactive. Viewers will be able to see what the most popular shows are on DIRECTV right now and, with their remote, directly tune to them. We'll take a look at what that's going to look like. Viewers can choose either national or local or even drill down into a variety of genres, so they can see what the most popular movies are, what the most popular sporting events are, and we've actually got a demo of that running out back. All right. Even though they're pretty, we've had enough of the slides, right? We're an entertainment company. So, as you know, we've already begun producing our first DIRECTV original entertainment show called CD USA. It's a weekly rock and roll show with a lot of bands that probably nobody in this room has ever heard about except for bands like the Goo Goo Dolls, Kelly Clarkson, Mariah Carey, who have all already been on CD USA. Let's take a look at what is on tap for the rest of original entertainment for the rest of this year. Roll the tape. [video playing] So, one other interesting note that I had to double check myself about CD USA, we have a CD USA page up on My Space, and the show launched January 21. During the month of January, the server reports from My Space indicated that we have 70 million page views to our CD USA My Space page, and just yesterday I removed the bandage from my finger, which I couldn't realize that I could actually click that much. None of our content initiatives will actually mean a thing if customers don't have an easy way to find and access all of this new content. So, we've already started a project to design our next generation user interface. The new interface, when it's launched in 2007, will have a powerful search and recommendation engine, redesigned graphics and community features that allow you to share your entertainment experience with friends. And because the new boxes that we've deployed over the last two years are upgradable via software download, if we choose to, we can actually upgrade the interface that is already in customer's homes. But when we talk about original entertainment, don't get the idea that every week we're going to make Gone With the Wind or even Maltese Falcon. We've put together a team that can move quickly, can produce unique, compelling content efficiently, either on our own or with sister companies, and the goal is to really have what David and Chase explained as a constant flow of unique content.

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Like you said, it's all about the entertainment, and you can see that we're starting to take our shots, and we're going to be constantly analyzing what works and what doesn't. We'll make changes along the way, but our commitment to producing the best TV experience won't ever change. And just remember, somebody up there loves you guys. Next, Ruben?


We're just going to take a short break now for about 10 or 15 minutes. I'd like to remind everyone we do have hard copies of the presentation at the registration desk, so I'll see you in about 15 minutes. [Break] Okay. If everybody could take a seat, we'd like to get started with the next presentation, the head of Sales and Service, John Suranyi.

John Suranyi - DIRECTV Group. - President, DIRECTV Sales and Services

Good morning. After Chase introduced me as someone with decades of experience, you probably expected somebody a little bit older. Just to put it in perspective, I did start in the cable industry in high school as an [inaudible] scholar back in the mid-70s and worked my way through college. And I've spent about, a little more than half or two-thirds of my career in the cable business, shifted over to the MMDS world, worked in that business, which was the first wireless video opportunity and then spent a little time at EchoStar and proud to be with DIRECTV . It's certainly an exciting time for somebody like me who has spent such a long time in the business developing paid television. I thought a good way to start my presentation would be to show a one-page slide illustrating the responsibilities of my organization as well as the customer lifecycle of DIRECTV. In simple terms, my team really owns the delivery of the customer experience and that includes from a functional perspective sales, marketing, field services, which is our installers and technicians, call centers, supply chains, warehousing and logistics. We have three primary strategies that we're really focused on as a group that's to generate profitable growth, improve quality and efficiency of customer care and make measured investments to retain quality customers. The first stage in driving profitable growth for us is to really identify who is it that we want to go after and target as prospects as future customers. So we started by leveraging our existing customer base to define segments based upon their profitability which assists us in finding like kind prospects in similar areas. This chart represents a snapshot we took of our database. DIRECTV does have a very in depth robust database available to us but this chart represents a snapshot we took in 2005 of our customer base and as you can see in this chart based upon using our internal customer lifetime value calculation 33% of our customers account for 63% of our profitability from subscription revenue and our intent is to use this data to attract more customers like those that fall in the 33% category. We'll take it a step further. We apply a demographic overlay to the profitability segments which puts a face on the lifestyle on our customer base and also assists us with our targeting efforts. We have learned that our demographics we spot for DIRECTV is for targeting purposes. Is higher income, higher educated married men with families that range in the age group between 35 and 65 with household incomes that are $60,000 all the way up to the wealthiest of families. We also use third party data appends to add other behavioral availables that help us with predicting profitability and that includes home ownership, home value, how many third party credit and marketing files a prospect might show up on. Total number of credit lines. Total outstanding credit limits. Average household income and marital status. Sometimes there's some risks when you do it this way, but we've found this to be very successful that our most profitable customers tend to have similar demographic characteristics and we don't just cover demographics. We also do an in depth geographic analysis for the purpose of finding key markets that are ripe for acquiring profitable customers. In this case, we've actually covered up some of the data for obvious reasons. Specifically, it's illustrated in the spreadsheet. We've identified key DMAs where we've acquired highly profitable customers in the past combined with an overall penetration rate and our momentum for growth over the past 12 months. In 2006, we plan to be very aggressive and targeted in at least 20 key DMAs that we consider must win markets or markets that we plan to own from a growth perspective within our business and our outfits will include marketing alignment in key areas with our business partners including our Telco partners, consumer electronics, retailers and the independent base. In the past, these efforts were probably not coordinated in an optimum manner.

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Finally, we also focused on what we call need based segments or customers who have a real need to switch their television service. We're focused on two categories as shown here. One is movers, over 18 million movers moving households in the coming year. One thing we've done that is somewhat new is we've aligned our self with third party middle men who coordinate or simplify the transfer of services when you move such as when you call to change your power services. Sometimes these companies will also you if they can assist you with changing your television service, your voice, your data and other services that might be applicable. We've partnered with those companies to not only take advantage of the opportunities that occurs during that phone call but also ensure that our DIRECTV customers get transferred across appropriately. We also are working with CE retail partners and television manufacturers to drive promotions associated to customers who are going to buy a new TV set and of course in 2006 they're varying abstinence between 15 and 20 million new digital TVs should be sold most of which will be high definition and in fact we just finished a promotion with Samsung and the NFL tied to customers who purchase a Samsung television and subscribe to DIRECTV. Another strategy that has helped us drive quality growth and balance cost through direct sales. When we thought of direct sales it's really people who call to subscribe to 1-800-DIRECTV or DIRECTV.com. Not too long ago, the direct sales represented a very small portion of our growth but in 2006 we see that expanded beyond 30% of our total sales activity. Through our direct sales efforts we've been able to be more targeting going after quality customers another infrastructure to control the customer experience. This includes targeting by direct mail by zip code, door to door teams and even leveraging our installation networks to put store hangers on adjacent households in neighborhoods if they're working in. We're also recapturing some of the alternate media used predominately by our independent dealers in the past such as Yellow Pages, Directory Service, and add both and in 2006 we plan to increase our .com sales by at least 34%. We've increased our paid searches to ensure that when you do a search on DIRECTV it comes up on the top of the list. Last year you may not have found it that way. We're coordinating our efforts on paid search words or keywords in the web space with many of our retail partners. We're also planning to launch a new website for prospects at the end of April. Of course, we continue to leverage our existing partnerships with key business partners including the independent dealers. The independent dealers today represent 40% of all of our activations. January1st, we made some pretty significant changes to the dealer compensation plan to ensure that they focus on quality growth and specifically we changed the card sack provisions so that there's a six month cliff effect that includes the installation charges. So any customer that - it's pretty painful for any customer that would churn out prior to a six month window when in the past it was prorated over a 12-month period and it did not include the installation revenues that they would have received. Telco, our Telco partners today are a very important part of our business. A few years ago, it was nothing. Today, it's 20% of all activations. That includes Verizon, Bell South, Qwest, Cincinnati Bell, and we're in discussion with other potential partners right now. Telco deals enable us to leverage bundling opportunities with broadband, voice, wireless and other services.

Unidentified Company Representative

(inaudible-microphone inaccessible).


I have no idea what that was about. Any how we also plan to leverage our recently announced deal with Earthlink to provide a bundle in areas where we don't have a relationship for the Telco partners today. One other opportunity for existing customers we do provide them with an opportunity to opt in to a bundle so if they're an existing DIRECTV customer they can actually opt into one of the bundles that we have through our Telco partners and in some cases even receive a single bill. It's a little early to compare the results that we get from our Telco partners compared to the rest of our base, but we do believe we're going to receive some significant benefits through reduced churn and of course increased customer satisfaction. Consumer electronics channels. About 3 to 5% of our business today is a better opportunity for us to showcase our products and also leverage the point of sale when the customer is there buying a new TV set. I think you'll see in 2006 Best Buy is going to take a very strong position to accelerate our business to a much higher level and then the MDU world as Romulo talked about it's really an untapped business for us. It's 33 million MDUs or multiple dwelling units across the United States. Twenty-two million of those have 5 or more units per structure. Between 6 and 8 million structures have 50 or more units within a building such as those that you might find here in New York City and the growth in that category is pretty significant with over 350,000 per year being built. So it's a big untapped market for us.

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Today, our share is quite limited. We have about 1.2 million customers in total. Most of those customers receive their service by a dish that's hanging down on the balcony facing the south. There's a very limited number that actually receive service through a wired infrastructure within the building. So we're excited to having new single wire technology that we can use to overlay or plug into existing cable infrastructure that might be in the building to be able to deliver the full DIRECTV experience. This is an interesting chart that shows sales by activations - or sales by channel that have occurred over last year and you can see a couple of big points in the early days. Of course, a lot of our business evolved from the consumer electronics business. That of course has changed quite a bit now. There's a lot of focus for existing customers to buy products there. Then you can also see our continued focus in the direct sales arena as well as the growth that we've achieved with our Telco partners. Our next significant area of focus is tied to service. Certainly service and customer satisfaction is the cornerstone to our success with our efforts really tied to quality and efficiencies. Operating a call center that receives over 130 million phone calls a year certainly brings a lot of challenges and opportunities and there are many different metrics we utilize to track our progress in the call centers including the number of calls that we receive by type, the length of time that a customer could be on hold, the service level that they have and in particular the two categories we track. One is service level and contract rate. Service level in the call center is defined as a percentage of calls that are answered within 30 seconds or less. Overall, across all call types in all of our call centers our goal is 85%. That might change by category such as in direct sales. We want to answer the phone immediately or retention call or technical call we might answer the call more promptly and be able to allocate our resources. We've improved over the last couple of years. However, we're not where we want to be. We ended 2005 with a service level of 72%. Contact rate which reflects the percentage that our customer base calls us within a given month. It's an important measure because it really needs to align itself with the forecast that we have for staffing and answering the calls. Sometimes we trigger an event where we prompt our customers to contact us such as the launch of local channels or HD services or things of that nature. Even the launch of new technologies like a DVR or an HD box. We ended 2005 with a 69% contact rate. Sixty-nine percent for a one month period against 15 million customers about 10 million phone calls for the month that we would receive across many different categories. We do this increasing slightly in 2006 as we continue to rollout advanced products and launch high definition services. One big opportunity we have with contact rate is moving customers to a self-care platform where they use technology like an IVR or a website to handle their issue. We see ourselves as a leader in this category today with over 34% of all of our contacts being handled through a self-care application where they never talk to a person and in 2006 we plan to introduce more functionality that will us to put that to about 40%. So as you can see in this chart although we've been successful in reducing costs much of it is a factor of controlling volumes and moving calls to self-care applications. Another strategy in the call centers is to leverage our owned and operated call centers to drive quality and reduce costs. As shown in this chart, about 30% of our calls - total calls received are answered by a DIRECTV employee. We believe that's important. It's important for us to handle the most critical more difficult calls today by an employee which includes retention, technical. We also utilize third party outsource centers to handle routine calls and help with the seasonal aspect of our business. In 2006, we expect the offshore activity to increase to 22% and as Mike said, that includes (inaudible) in the Philippines today and one near shore call center that's in Monterey, Mexico. So far our customer satisfaction surveys have indicated very positive results to the center and call activities that we're sending to an outsource or an offshore provider. We also leverage offshore companies to assist us with administrative activities such as emails which today is a growing activity in our business. The call center world it's important for us stay focused on people and infrastructure and the tools that we provide. This chart lists quite a few activities that have been deployed or activities that we're focused on right now. I just want to cover a couple of them. One is in 2005 in Denver, in our Denver operation we launched a national command center. That activity was previously contracted through one of our third parties West, and what our command center is it brings all of our call activities into one area and allows us to route the co-activity by type, to location by time within 15 minute segments, so that we can coordinate the flow of co-activity. It's been a great success story for us

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because today these people are in a position to choreograph the activities that occur in the company so that the call flow is consistent with the forecast of people that we have answering the phones. We're also going to upgrade our IBR to a natural language application. We believe natural language is a little more friendly. It's something like if you call directory assistance today it sounds like you're talking to a person not a machine. So we're going to go in that direction. It's a self-learning application. We think it will be a much friendlier experience on the front-end to get the customer routed to the person who can assist them. And then finally we are looking at local service centers that will allow our customers a place to go to either exchange their product upgrade or have their product tested should they have a technical issue and that might include a location like using the ink box center at Best Buy so that if a customer has a problem today we either roll a truck or send them a box in the mail. So in this case, they could get immediate gratification by taking the box in have it tested, verify that it doesn't work and if in fact that's the case they could exchange it. Technology is something that can greatly improve and accelerate the customer experience. One example that I wanted to point out is we've had a big success with a self-help technical form that we have on our website which allows our existing customers to answer questions from other customers so all we do is facilitate the form and I wasn't a big believer in this when we started it, but today we're fielding over 45,000 postings a week. Each posting gets about three responses. Those responses usually occur within an average of six hours. So all this customer service activity as I see it occurs and is handled by existing customers. So there's a lot of very smart customers out there helping other customers. The in home service or field services network are really the face of DIRECTV as they drive the in home experience. As Mike mentioned, we have over 14,000 technicians spanning across 11 companies that we have a contractual relationship with. Last year, we spent a great deal of time focusing on improving our - the image we have in the field. Many of the companies in the past were subcontractors or subcontractors of subcontractors and the tier just went down from there. Last year we transitioned to where the companies we work with represent an employee based network driving a DIRECTV logo van, wearing a DIRECTV uniform. So you wouldn't really be able to tell the difference as to whether it's a contract or not but when they walk up to the door you're clearly going to recognize as DIRECTV. We also expanded our business to seven days a week which we didn't do in the past so now we work seven days a week, day in and day out in orders across the country. The simplest way for us to reduce costs to drive more volume into the business today. Beginning in 2005, our installation - our managed network meaning the contractors that we control only completed less than 50% of all installation that were being done. Currently, it's over 65% and by the end of the year we see that 75% of the installs only will be done by our network and we've done that by moving some of the business done by other third parties into our network so we took over the installations that could have been done by a sales that occurred at Best Buy. Some of our large independent groups. We also performed the fulfillment installation for our Telco partners and we leveraged technology as best as possible. For the last couple of years we've been working on a new work order management system which today is being tested in a few key markets where we can route work orders more efficiently to a handheld terminal similar to what you might find with a Federal Express driver and we plan to roll that out through the course of this year so that we can route work more efficiently, more timely, same touch for the technicians, stock inventory, complete the work order, add programming, sell other services, all occurring without actually talking to somebody over the phone. So today it's a pretty complicated process but we're excited that that's being deployed as we speak and then as Romulo mentioned our technology is just getting simpler and easy to use so as we move towards a single wire aspect of being able to leverage an IP protocol versus RF, it certainly gives us opportunities to simplify the install and use the existing wiring that's in the homes. This is a chart that illustrates the benefits. It's an example of a regional HSP that we have and as we drive volume as you can see here as we substantially increase the volume we've been able to bring down the cost per work order - the average cost significantly and we expect that to continue in 2006. Last but not least once we find the right customers and get them hooked up we want to make sure we keep them. As you can imagine we spend a great deal of time focusing on when and why customers might leave DIRECTV and as this chart represents the blue line is our total churn. The red lines is involuntary. The green diamond is voluntary churn. Churn by tenure by reason a couple of points. One is the spike in the first three month period is mostly involuntary churn and that's been driven by high risk or no pay customers. This is a snapshot from last year so certainly we've made many, many changes to impact that behavior in that first three month period not only changed incentives to our sales agents but also changed the way that we qualify our customers. The second spike is in the 12-month period which is really tied to the end of the commitment period and we've of course now expanded our commitments so if you buy an advanced product there's a two year commitment so we expect that to continue to improve. Voluntary churn in the

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12-month over the 12-month period is primarily tied to the top categories of customers who are moving which is about 32% today followed by a competitive offer of 24, 25% and that should be customer service or an issue they deal with the sales agent at 13% or a personalized change of 11%. That's information based on what customers tell us as to why they're leaving our service. We want to be smart in our efforts to retain customers and we're utilizing segmentation data to help make these decisions. This chart is an example of customers broken out into defined regions and it illustrates really the customer lifetime value or the percentage of products or profits as well as the recommended treatment that a customer might receive. It doesn't apply to all circumstances but it's certainly a tool that helps our agents know how to place investments in existing customers when they call us and we do scale that service accordingly. This chart actually shows a screen shot from our system that our agents use where we're able to tag accounts for certain events that would include new customers, anniversary dates, best customers or perhaps competitive market. Competitive market for example could be where a cable company is changing hands. Time Warner and Adelphia are changing hands. We want our agents to be knowledgeable about the competitive aspects in that marketplace and we give them data to compare our pricing and packaging and services against the other services that are available to them. We also have what's illustrated here is what we call a hearts program and we use this to help our agents understand the value of a particular segment. So in this case five hearts would represent our best customer and one heart would represent our lowest value customers. Key other points. We also follow critical lifecycle points like the end of the first two moving change or new competition into a marketplace and the bottom portion of this chart represents the activities that we deploy during the first year that a customer comes onboard and then rewarding - we launched a program in 2005 to reward our best customers. I'm sure there are many of you out there in the audience today which today is over a million customers that pass over $100 a month and there's other qualifiers that tie into that process. We do offer them a premiere type service today including priority call center support. Same or next day service calls. Free in home service. Sometimes free pay-per-view coupons. They're usually the first to know about special offerings that we have. Sometimes we ask them to participate in advisory boards to give us feedback or other reward programs that we have throughout the year such as tickets to see CDUSA or holiday cards that we might have in conjunction with the retailer in the marketplace. This information really only scratches the surface of all the things that we have going on in the company that will help us and ensure that we maintain our leadership in the service arena. When we get to the Q&A period, I'd be glad to answer any questions that you might have. Other than that, I'll turn it back to Chase to finish up with some closing comments. Thank you.


Thanks John. Hopefully, what we've been able to do in over these last set of presentations is give you a sense of the breathe of activities and initiatives we have going on across the company. I should kind of really - the vast majority - I'm not sure of everything that was talked about in terms of the initiatives didn't exist 12 months ago. So there's been an enormous level of activity in the company and really that John talked about, Dave and Eric and Ruben are really the activities we've been putting into place to drive this business forward. And I guess what I'd like to do is spend the last log of time before questions to get as David promised get back to the numbers and really try and take these plans that we've talked about and give you a little bit of a picture of what does it mean as we look out at the business over the next few years as we look at sort of to a three year timeframe and when News [inaudible] bought out GM about two years ago, I came in and some of my colleagues came in we gave you at that point a bit of a three year snapshot of sort of what we thought the business what we were expecting and looking toward - looking forward as we looked at 2004 through 2006. I know we're not through that timeframe. We're obviously two not three years in. Although I say that in looking back I think we've actually given all the uncertainties in a market that moves as fast as ours and changes as quickly as ours I think we've been pretty true to what we put forth. I think in terms of the operating and issue free structuring and licensing we achieved an awful lot of what we expected to do and I think in terms of the financial metrics we talked about obviously it's a mixed bag. We certainly beat some light subs and [philly] trails like churn but balance it as you say, I think we're reasonably given again the marketplace we compete in reasonably true to [inaudible]. The metrics we were targeting for the business and I think where we do have some misses I think they're mostly misses in timing. I think we'll still get there but we really felt this was a point in time I think I said when I opened where enough has changed. We've done enough. We've got

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enough going that it was really an opportune time to take a step back and try and give you a renewed view with these plans in place of what we looked at the business as we look out over the next three years. Let me focus - preface on the projections or the metrics I'm going to give you by emphasizing the challenges in terms of trying to project the future. When John, Ruben and I first talked about the slides we put together John put ranges on - you know you've got to put ranges on all the numbers and I said well look realistically every number up here is a range and if people don't understand that then they don't understand the uncertainties and the challenges of projecting and the reality of putting - anytime you try and make a projection in a business like our business is incredibly difficult to predict the future and realistically anybody who doesn't realize the challenges in doing so probably is in trouble. It doesn't mean the plans or visions I going to outline here are the targets are or [inaudible]. However, I think if you're realistic about the constantly changing marketplace, technology development that we can't foresee today, consumer trends that really you can't predict looking out. Who could have predicted the iPods and the way its evolved. That any plan is going to be constantly changing. There are opportunities and challenges we don't know that will certainly exist a year from now. With all of that light we actually had a little bit of a debate of sort of do you try and put out some targets to let you see what the business looks like. And I guess where I came down is -- you know my view is if you believe in your plans and you believe in your ability to drive the business you ought to share your honest targets and as long as its honest and shared with a perspective that you clearly communicate again the uncertainties and the challenges of the competitive issues in the marketplace that I think - I think it's important to stand behind what you believe and at least try to paint a picture. Again, with the appropriate qualifications. So in sum, what I'm going to talk about really is a real plan a vision of our future? Probably the one truth is our future won't look exactly like this. I mean that is the reality of the marketplace and in many ways I think equally important to recognize that I think our ultimate success over the next few years is probably less dependent on hitting these numbers than in our ability to intelligently and quickly adapt to what occurs in the marketplace to adopt these plans to fit the marketplace we're competing in and I think that's just the way you need to compete in the business. So with that, let me start with subscriber growth and as implied [inaudible] by 18 million. I think as we look out to the next three years we think we can add 2.5 to 3 million subs which will bring us close to the 18 million sub number that I talked about upfront. As I said in the earnings call, we expect to bid over a million net subs in '06 and probably that number declining a bit each year as we go forward. We believe we can grow this amount in a mature market. Essentially because we continue to have a better product than our competitors and I think our position will get stronger as we really move forward from a full fledged basis with the HD product, the DVR product where we haven't really been competitive in '05 as we move forward with the content initiatives and the service initiatives that John and David talked about. We believe we'll have an attractive solution for VOD so we think in that regard we're well positioned and we think we're well positioned to compete certainly for the short term in the bundled world. DSL [inaudible] take market share. We have a strong relationship with Telco partners so at the end I'll talk a little bit about it but I think we continue to feel that while they're challenges competing with the bundle that we actually have a pretty effective solution and a pretty vibrant response to the bundled - to the competition of bundled offers. What this chart shows inside - I mean I guess you have to have an underlying assumption to what's the environment and what your driving these subs. I mean what we've assumed here at the Auerbachs do move forward with their fiber plans. I don't think they are a major factor in the next few years. It's going to take - I mean their build out timeframe could be seven to eight years so it will take them a while to build some market share. I do think they'll go forward with their plans certainly in the early years I think until they get some results they have to answer to. I mean I continue to remain a skeptic about their ability to ultimately succeed but I think for the first couple of years that they'll build out selected markets. They'll pick off some low hanging crew and they'll get - they'll be a small factor in the market but not a major one. Again, how far - what they look at as you go in time I'd probably be more skeptical about their ability to make that work. But even with their [pentry] here again relatively small. We think we can achieve the type of growth - the 2.5 to 3 million subs. I talked about it. I guess if you - you can look at it two ways. One, I would get the class of where the subs come from and I think they probably come from two places. First, there's more market growth than people expect. The market continues to expand about 2 million subs a year. So in a three year timeframe you're going to have about 6 million new pay households and then I think from the bottom 30 to 40% of cable, you'll continue to take share and I think it will probably be a more even sites that are on the top half but I think at the bottom 30 to 40% of cable. I think we'll get communicate shares so I think between the new entrants and the share we'll take from cable. I think you do have - on an analytical basis you want to limited that to sort of 8 million or so homes but they're up for grabs and we are about to take three of them at least five. I think we truly believe we should be getting at least a 60% share of the satellite market and that gives us the 3 or 2.5 to 3 that we'd expect.

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I looked at it another way which is really the way we'll drive - drive growth is clearly as John said we'll get more targeted in our initiatives and I think the targets - the targets that we're really going to place is we'll focus on to drive subs I think first is DMA geographic markets. John talked about 20 DMA's that we'll drive forward. Particular cables were strong and 20s not the end of the list but I think we'll continue to learn and grow but they'll be geographic targeting. They're clearly be segments within the market again that were talked about where we undelivered today DMDU segment and John said 20 plus million homes without barely over one million in the up tick segment which is close to 20 million homes. Again, we have about a one million segment and the rural marketplace where we've reversed the ground we lost. We started to reverse on the ground we lost personal PNRTT purchase but our sub-count in rural America would still be below today below where it was four years ago which obviously not true for any other segment in our business. So that continues to be an opportunity. I think we'll focus on content niches where we have unique strengths. Sports is obviously been the one we're the most advanced on but [inaudible] ties into teams which ties into families and young kids so I think it's another segment we'll delve into and then really both strengthen some unique sales channels. The Auerbach channel clearly has a pair of strengths. The mover category you've got 15% plus of American households moving every year and the strength of our proposition and the channels we can tap into to attack that is a real opportunity for us. But I guess the point I want to make before I move onto the next aspect of subs is I think that's a realistic goal for us to get to in terms of sub growth. Out of all the metrics I'll talk about today I don't think it's the most important and I guess what I'd say is if it ends being - you know for us we ended up at 17 instead of 18 I'm not going to lose a lot of sleep over that. I mean I think what we really want to make sure is we drive the right subscribers and profit subscribers. So in many ways our sub story is much about driving quality subs and we think we can drive quality subs to that level but as you go through it that is not priority one, and I think - we want to take advantage of the opportunity to drive a superior product into the marketplace, but really quality is the first and foremost. What is going to be at the forefront of our initiatives and certainly one way - one important measure of quality in a subscriber context is driving an increasing percentage of product HD and CVRs and the HD-DVR into our households. I know I've previously talked in earnings calls and saying sort of toward the end of 2007 we think we'd get to close to around a 50% penetration - or 50% of our customers would have some sort of advanced product. I think as we've gotten a little more experience, I think that probably looks a little aggressive. I'd say the number is probably more in the mid 40s where we'll be at the end of '07. I think we'll exceed. I still expect we'll see 50% during '08 but I think the take up as we ramped it up we'll probably take a little longer than we initially anticipated and although again these are tough numbers to predict for us and we've really just started really aggressively pushing and launching DHD and DVR products and HD as we said we're still launching locals and the like. Moving past subscribers to the other half of what lies at the top line is Oracle and here we do expect continued strong growth essentially. We expect our growth to be about 5% per year and I think clearly underlying that assumption - again you sort of act on assumption in the marketplace that we'll be able to put through a reasonable level of annual price increases. We announced recently our price increases for this year will go into March and sort of in the 4% and change range. What we'd assume here is we can put through about 3% price increases per year and we feel pretty good about it - about that. I don't see a price war coming from cable and they've got a pretty hefty price war on their hands in broadband and I think if they launch into voice that's going to be a battle for them to. I think the Auerbachs have a challenge. I don't see them leading with price war. They said they won't. They've got to figure out to justify the investment they're making and they've already got premium prices at paying for programming but it certainly as they build out I don't see it coming from them either. Again, nobody has a perfect crystal ball but I don't - I think we feel pretty good as you look out the next three years that you'll be able to have a reasonable level of price increases. Probably one place we do see a continued level of competition is probably on the upfront offer side. The price of deals and I think that is why you see the tick up on the chart from 3 to 4 million - 3 to $4.00 in sub which is a little but that's where we account for it. A little bit more than the sort of - that we're absorbing in the upfront offers so I think we've planned for a little bit there. One area that will clearly be a source of ARPU growth will be DOD and pay-per-view and advertising and I think these will particularly accelerate as we - as DVR penetration picks up which really opens up opportunities for us in both fronts. We also expect these advanced products to be a growth area and we do expect -- I mean another question I've got to work on is do you think you'll continue to charge for HD and DVR product and I said certainly in a three year timeframe I think you do and you go out long enough - you know we use to charges for locals now it gets absorbed but I don't think that occurs certainly in the next few years. I think that's a longer term proposition so I think the incremental charges for HD and DVR I do think continue to be a part of the marketplace we compete in so - but a good side of our business will again be pretty healthy.

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Turning to the cost side. A month key costs start with SAC and we feel very good about our ability to maintain a sub $700 SAC through the next few years. As both John and Mike talked about we've been very successful to date. Essentially, we had a flat year on year SAC. We've been very successful at driving down box -- driving down box costs, installation costs, sales costs to increase to offset the cost of an increased penetration of advanced products. We expect the marketing portion of SAC to probably remain relatively stable on a per sub basis and I think the fact as we look at SAC I'd end up saying we think there's some upside because this does not assume a leasing program in it so as we look at leasing or technological enhancements - again, Tom only touched on some. I think there's actually upside for us to do better in SAC through the combination of leasing and taking advantage of technologies - of technological capabilities to make SAC a more efficient and effective process for us. So it's also important to note that while our SAC is higher for customers taking HD and DVR product that the increase in value more than exceeds the incremental costs and this chart is a little bit confusing to read. I tried to really compute the incremental value and plus to show you the incremental value that's created by the investment in more advanced products at home and what's really have two set of numbers. Sort of the darker numbers are really the numbers we project out for a couple of years. The lighter numbers are really as it exists today. I mean what you clearly see is on the ARPU side is significantly higher ARPU both direct because of the fees we charge for the product as well as indirect as a [inaudible] product and clear term benefits that as you get a richer experience people like this product. They're less inclined to churn. What we have assumed in both cases is the magnitude of differences. Somewhat narrow over the next few years as these products move more into the mainstream but we still expect real differences so today our churn in advanced products probably 7 to 8%. We'll see if that moves up more like to 1% a month or 12%. We don't assume we maintain the type of ARPU difference we have today but clearly there's a real ARPU benefit. So bottom line is well yes our SAC is higher. It actually is a great investment for us and is really a value creating investment by us that we can make in these higher quality customers. So it's something we're very supportive of and we'll continue to try and find ways to push. Another area that is of critical importance and talked about throughout the morning is churn. We said we've taken steps in the last nine months they'll bring churn down significantly in 2006 and we still believe we're on track as we go out to 2008 to achieve the 15 to 16% churn per year that we talked about. The initial focus in reducing churn has been driven by focusing on quality subs and changes in the customer and dealer terms that John talked about. We're also shifting our sales to higher quality sales channels that helps as well. The increased competition continues to be a pressure. We have to go back but again I think if we continue to build upon a leadership place in the market I think it positions us well and if we're going up to quality subscribers they're probably not susceptible to the deal of the day and I think that - a few moments to the degree we have to compete with the bundle from cable. We do believe the strength of [inaudible] with the Auerbachs and DSL market enable us to have an effective way to compete with that in the short term. Clearly, one of the dynamics in driving down churn will be increased penetration in HD and DVR products. As I've showed you before, we do expect that product to continue to be during this period at or below 1% a month and if you weight that through the overall mix of product it will be a critical factor in driving churn to the levels we've talked about. Another big cost area that we've spent time on certainly over the last year is retention marketing. One of the real challenges we've had in the last year plus the retention marketing a rapidly escalating number of homes that we're upgrading and really what we've found is we had a range of sort of historical upgrades that we had to make adding locals to home. Adding boxes to home. At the same time, we were satisfying the oncoming demand for advanced products and moved by design to be more aggressive in some places like movers. Fortunately, some of these demands like the new box, the additional boxes and local are mitigating so as we look out the next few years we see that sort of the number of transactions that we're supporting really starting to stabilize more at about a 5 million number of transactions per year. A second dynamic that is important in understanding in retention marketing is that the DVR and HD portion of this will continue to increase and that is true. Those are more expensive upgrades. We do look to the type of savings we talked about in SACs to help offset that expense so box cost savings installs will be a part of it but there's clearly other initiatives that could help us in the advanced products area and for example in this past year one of the real problems we've had is with these boxes being new we've had a disproportionate number of box failure problems. Too many boxes coming back in reality. Second problem is that over 60% of the boxes that come back actually don't have a problem so we redeploy them. We can redeploy them for bill of costs. That is the box [inaudible] as we get more on top of that that is an area that we can make real headway and really help us manage the pressures of - in retention marketing and we do believe the combination of these efforts will enable to keep overall retention marketing pretty close to flat on an overall basis from 2006 through 2008. An aspect of retention marketing and this probably goes hand in hand what I showed you on SAC a few minutes ago that's important to recognize is that as we upgrade existing customers to advanced products that is actually a value creating investment. Here what you have in the second to

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last group cost to upgrade as opposed to SAC what you have is the upgrade costs of upgrading a sub as you can see just as with SAC, the higher ARPU, the lower churn against the cost of the upgrade this category of upgrade - of retention marketing a value creating proposition for us. So again, we need to move to make this as efficient as possible. Make sure we're upgrading the right customers but by in large properly done this is the place that we create value in the business and it is an important area of opportunity for us. One final aspect of retention marketing just to touch on is the MPEG4 conversion related to HD. In many ways I look at the MPEG4 conversion - as from a managerial - almost more like an investment in HD and with the satellites we build out and this is really the third piece investment to get us. I mean there is more of a CapEx investment to get us to the place where we have an HD infrastructure in place. It's not the way we account for it but it's really an anomaly in the retention market. I mean it's the one place where we actually have a group of customers that we're forcing to convert their equipment at some point in time. We're actually going to turn off their equipment so it really is not part of what we view as the ordinary course of regular ongoing retention marketing program but yet it is across the deal web. As we said, we'll end up with what looks like about 800,000 customers that will convert over the next two to three years and at a cost of probably 3 to $400 million spread out over that timeframe and so that is an increment we have to deal with in retention marketing arena. There are a number of other key costs that they didn't track their bottom line. On the earnings call two weeks ago, I touched on some of these as it relates to '06. I said in '06 we will have a handful of pressures. The NFL contract which does not generate a margin sports product in general, ramping up original programming, early launch costs in HD, the MPEG4 conversion that will actually give us a little bit of a hit on the margin in '06 but as we go out through '06 to '08, we do think this 36% pre-SAC margin is a margin we should drive to inside as it reflects sort of programming costs stabilizing at about 40% and I think if you look at that number - you know that number I guess a couple of things. First. It's a difficult number to compare to our peers. We have a handful of costs that don't compare the NFL contract is really an apples to oranges for our peers. We also have some contracts in the premium category that we inherited years ago from USSD, bit clearly are above market that we deal with and overall our premium penetration we see in our competitors and that's a different margin. But overall we think this is a good place to be. In some ways we actually by design look to have the richest programming offer out there. We want to negotiate the best deals we can. We feel quite good the deals we've negotiated in the last years are very much in line with our peers in the marketplace so I think programming costs there's no question is an ongoing challenge for us but we think we've grown. We certainly brought programming cost increases in line with the competitive marketplace and I think for us we'll make judgments about what's the right level - sort of reflects where we think we should be for the mix of programming content initiatives we have going on. Clearly we look to capture efficiencies in places like subscriber services as we capture efficiencies and scale. Move to self-help and things like that. G&A broadcast op is really again a play scale helps us manage those costs. We do have again some additional costs that come out of the HD local that sort of is an increment that gets out of there beyond '05 but it's a place we should be able to catch and drive an ongoing improvement to really drive the margin to what you see and if you take that pre-SAC profitability - to get the cash flow in essence you've got to deal with CapEx. I think as we've talked we've got about a three year CapEx build up program. We're finishing sort of '06 as the peak. It sort of comes down in '07 and really by '08 we move to a more sort of - our ongoing recurring level of CapEx in that sort of mid $300 million range. So, if you try to say where does this all get to and the cash flow I talked about - when you take that margin, you take off SAC and I think to look at what is the level of SAC you see we're assuming we sort of [inaudible] about a 10% top line growth which factors out. Obviously, it's a combination of ARPU and sub growth but still a healthy top line growth. Not what it's in but a 10% top line growth. Take out the SAC associated with those additional subs. Take out 350 million or so of CapEx and that gets you to before tax and interest we'll get us to a business - a U.S. business that's generating in excess of $3 billion in cash and a margin - and a cash margin. Again, pretax at interest. That is that exceed 17%. We clearly know these are challenging goals. We think it's important for us to set challenging goals for ourselves but we really have the plans in place to drive this business to those levels although we're not naive about the competitive marketplace and the uncertainties of that which we compete. To finish on the comp line - on a couple of topics. First, the one I started on broadband. As I said throughout we do believe the Auerbach partnerships provide us a solid short term solution so the broadband issue is not a short term issue. It is really a longer term one and I have people ask me what our objectives - I mean at the end of the day there really our objectives in broadband is what we'd like to make sure is there're multiple choices. Relatively if they're third and fourth players in broadband that's what's important for us. I think there will be. I think you've got enough initiatives coming and I think there're enough attractive options that we'll see them but I think if we can intelligently help push a third option beyond the

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Auerbach table going forward we'd look to do so. We spend a time on it. We're predominately focused on the terrestrial wireless options. I guess what people call WiMax where we're actually quite excited about the opportunities there. It's a vibrant service. Actually has tremendous advantages in terms of costs of the infrastructure to build out and compete quite effectively. On a capability basis competes well in sixth and then you get the extra dimension of mobility that comes with it in a world that's going to be increasingly mobile. I think the shape and form if we did something would probably be more in the form of a defined investment. Probably something that certainly does not exceed a billion dollars in really a broadband entity that carries its own weight and builds it out so its not investments that we're taking on our backs to build out. But we only make this investment if realistically we can find one who gives back to us. It has to be on the right terms and realistically it has to be one that reflects the value we bring. I think we bring unique value to any player that wants to enter the broadband business sitting here with 15 growing to 20 million subs that really put us in a unique place and I think we're more than happy to continue to stay the course we're on and let the marketplace play out. Again, we don't need an answer today. I think if we could find an intelligent one we'd be open to doing so but it has to be on terms that make sense to us and recognize realistically the challenges of a broadband market that's becoming increasingly commoditized and competitive. Again, I think we'd want to make sure we have something that can differentiate us from those that are in it and I do think that mobility and wireless are two and the flexibility and other things are a number of things that create the opportunity and again it's not clear we do it. The second point in broadband that I just want to mention so it's not forgotten is. I think we continue to work with and talk to you about our Auerbach partners about ways to work in the long term as well as short term. I mean their pretty wide into the fiber plans and obviously those are certain implications but we are open to and continue to engage with them to see if they're ways to find a win-win solution for us on a long term basis as well as a short term one. And finally, I want to spend a minute on Latin America. Bruce Churchill who runs it is here with us but the primary focus today was really the U.S. business. In the past that called our Latin American business a hidden jewel. I actually want to reiterate that. I think it is an area that we continue to be very excited about. Our most advanced platform is Mexico where we complete a merger. We own about 41% of the Mexican business. It's really begun to hit its stride. In 2006, the Mexican business will generate free cash flow before interest and taxes of about 150 million in that number and will move north of 200 million by 2008 and Brazil we hope to complete the merger by mid 2006 and we'll have the majority ownership of both Brazil and the rest of Latin America and we'll have to in '06 get through the merger digest and the like. We expect the business to really start to gel in 2007 and by 2008 we expect our share of the cash flow and again before taxes and interest in those - in Brazil and the rest of Latin America to exceed $150 million. So, all in all across the depths of our businesses we're tremendously excited about the opportunities in front of us. We know they'll be challenges. We know they'll be curves. It's an intensely competitive business but we really think we have a combination of management, asset, speed, flexibility, reach and capabilities that put us in a place to be a real winner as we go out the next couple of years in this marketplace. So with that, we're happy to take any questions from myself and my colleagues any questions that you've got. Q U E S T I O N A N D A N S W E R

Unidentified Audience Member

Hi Chase. I don't know whether you can address this in anymore detail or not but with respect to the potential arrangement that you might have with a broadband entity would that be something that you would imagine pursuing for example the customer acquisition costs as an arms length relationship where it would be a provider to DIRECTV? Would DIRECTV be acquiring customers directly and using a broadband provider as a service provider or would that be an entirely separate relationship?


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First, we're actually contemplating a mix of retail so there's not a clear answer. I was going to handicap what I probably say would look like the most likely form of a relationship would be we're an investor with others in a broadband entity but again that entity's responsible for raising its own capital, building it out. Building up the infrastructure. We have a wholesale arrangement that we have access to the broadband capacity on a set of terms that probably have us dealing with predominately the SAC side of that. Most of resale is a bundle so there isn't a lot of marketing. It's going to be sort of part of our marketing and installation process. It's not going to take a lot to install it. Well you put something outside the house and put it in a pole or inside so the fact is pretty minor. I mean if you do have a CE equipment that probably is - starts off a little over a hundred just to come down below a hundred pretty fast if you've got any volume, but I think that's probably the most likely configuration and that entity would be providing broadband service on a retail or potentially a wholesale basis to other providers in the marketplace. Again, I think (inaudible) licensee - it's good if there's a vibrant marketplace of choices and we believe we have the best video solution and we can truly win in the video solution in the video marketplace. I think that there's a vibrant broadband marketplace that gives choices and options to customers that's good for us. So they'd like to see it strong but I think - it may end up varying. You don't have a deal until you have a deal and again we may decide the right course for the short term is to not do something. Again, if we can something that's intelligent for us we will, but I think that's probably - if I was going to handicap a construct again its us as an investor standalone in the wholesale relationship that we pay some monthly fee for capacity that they maintain and really we separately have is we probably do the billings if it's a bundled bill anyway and we handle really the SACs, most of the CE equipment put it in the home. I think for us I mean I think the initial threshold in some ways I think what we've said is you have to [inaudible] so you can do real time standard video out of loss will probably put you somewhere in the 2 to 5 megahertz bandwidth and I think that - have a pretty reliable track move up what you're doing real time, high def video, but I don't think you'll probably come out of the block with something that's real time high def video but I do think you can out of the box or something that has - either something out of the box that has capability to have television quality real time standard def video and I think real time what you do between spectrum, between technology improvements is just as our satellite and we're putting down - and put more than three times the capacity we were putting down two years ago - down satellite. So between technology build out and spectrum you'll continue to enhance those capabilities and actually we feel we'll be able to really offer a vibrant product that satisfies the vast majority of the market and continues to improve and stay ahead of - there may be - maybe that's sort of high end, high tech that want for some reason 100 megs into their home. It's pretty tough to figure out what are you really doing with that so I think for the lions share of the marketplace we'll be well ahead of the curve in terms of what they want, what they offer and then if we did it we'd have the additional capabilities and mobility with it.


Thanks. If I could follow-up on broadband Chase. I guess more broadly, what is the objective here with broadband? Is it to grow subscribers? Is there a financial objective? You have 5 million of your subscribers take broadband. That's almost the same penetration as cable and I guess just lastly if the Earthlink deal may be a forerunner of other kinds of partnerships? Thanks.


To the Earthlink answer because it's a shorter answer I mean the answer would be yes. I mean I think - we would like to have a vibrant broadband marketplace that has options and alternatives for customers and I think we will continue to aggressively to pursue ways to have broadband options available to customers. I think the issue in terms of why have broadband is really one of again - it's a longer term question. Not a shorter term question. The short term - the next few years we're competing fine. I think the question is there are those who will say out in time you may have one or two wire players, cable and the Auerbach guys that basically offer a bundle of services. Now if that was the world I don't think that would be - that would create challenges for us if those were your only broadband options. I don't actually think that occurs. I think you will find - I think there's enough momentum, enough interest and enough appeal to particularly these wireless broadband options and I think you'll find the cellular business will move into it from their direction throughout the WiMax business we've entered from their direction but you will have third and fourth - you will have additional players entering in the market, but there's an uncertainty there. And I think - resolve the uncertainty and then there will be people will end up saying you just are going to have one or two players offering a bundled service so I think to the degree - we can intelligently try and push forth - again, it has to make sense. It has to be a value creating investment for us to help ensure there's at least a third entry in the broadband marketplace. We'd like to see a fourth to that we could push

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forward. Other alternatives in the broadband marketplace that's a positive thing for us to do if we can do it on terms that make sense and reflect the value we bring to such proposition and I don't think it's anymore complicated than that.

Aryeh Bourkoff - UBS - Analyst

Chase, Aryeh Bourkoff, UBS. Just two questions. One is on the data side. Can you confirm that you mentioned at the beginning of the slide show that about 10 million of your 15 million subscriber base does not currently have broadband and that's just surprising to me. It's around the average for the country but your customer base is skewed sort of to a higher income class and obviously suburban versus rural so can you reconcile that and the second question is on the Telco ad given your guidance of roughly 3 million net ads into '08, how much of that is coming from the Telco channel? It seems to be pretty meaningful and can you talk about that tension with the Telco fire bills?


Yes I mean like John's said - John's had his - disagree right at color on the Telco side but I think in terms of Auerbach heads I think you guys going to look out probably about 20% of our ads over the next few years coming through the Auerbach bundles. We have a different number.

Aryeh Bourkoff - UBS - Analyst

I mean clearly today we see that growing about 20% but as you move out into LA I would see that savings.


I think it's a big opportunity so I'm probably a little more optimistic, 20, 20 plus percent from the Auerbach channel. Having the fiber - I mean I think as we compete in a competitive world and just as we may be pursuing an initiative to compete with their fiber broadband they're pursuing ones and I don't think you let it get in the way - I think you have your eyes open and they can tell you decisions better recognizing what you're doing. Again, I think you're going to build out over a long period of time. I think clearly the benefits far exceed the issues involved in our short term. Again, I think partially because I'm a skeptic on where they ultimately go. I'm not sure why make a battle royal at this point. I will take a while to get out there. I think in terms of the subscriber, the subscriber spread I actually think that's being around with the markets. We are a little bit higher but I think the reality is we're a little slower into market. I mean does DSL - we had the bundles for a year. I mean obviously cable - [inaudible] wake up the day before. I mean in sort of a 60% of the market going - broadband market going to cable and it's progressively each this year shifted to what I guess I saw was originally in the high 50% said I wanted DSL but you've had incrementally - our broadband customers are much more DSL than cable so to the degree you had the cable guys have a pre-year run to build into the marketplace. I think it's probably creates a little bit of that to the degree that it large but to the degree. You'd end up saying its the quality of our customers on it does not get above sort of an average but I think probably again is more our broadband customers are clearly more apt to be solving case.


This is customer research that's done that we extrapolate to our base. It tells us that roughly a third of our customers have a broadband solution and the remainder are still in dial up --


We've only sold a million something through the bundle - through our bundled relationships was only a million something in sales. So high definition the gap is those who have broadband independent of offer with the Auerbachs and us.

Rich Greenfield - Poly Research - Analyst

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[Rich Greenfield] from [Poly Research]. The comment was made before that you expect a much more aggressive approach to marketing satellite at Best Buy over the course of the next year. I presume that means relative to the cable product offerings that Best Buy has in their store and could you just give us some color on what will be their consumer marketing approach to satellite relative to cable and how it's going to change over the course of the next 12 months? Thanks.


I think I'll probably let John, and John's closer to it so I'll let John answer that.


Yes. I mean we've been spending a lot of time working with Best Buy and our other retail partners to drive that business and today if you walk into a Best Buy its often that you might find cable providers right next to us and in some cases they would have a person working the floor selling cable. So we're almost attracting customers to that segment of the business. So recently we spent a great deal of time working with them on a better way to approach that business and with what Best Buy's doing with their home theater segment. And their focus on high definition televisions we see a real opportunity to move closer to the Magnolia space that they offer today and also leverage some of our resources that we have in the field from an installation perspective and leverage what they have in the home theater world to take advantage of that. But there's not doubt about it for us in the retail world including Best Buy we are going after attachment to the high def TV and we see the people who walk into Best Buy they want the picture that they see and to get that picture they're going to have to have the best service available. That is DIRECTV.


Chase, when you unveiled the $3 billion buyback authorization two weeks ago you indicated that you thought that pension fund was price sensitive at that point and the stocks are about 15% since then. Do you have a sense of - and I think that we're pretty close to where the pension fund actually files to sell at this time last year. So just curious if you had a sense of whether we're getting closer to a price where it would be feasible to repurchase some of that stake? That's the first question. Unrelated to the second question is you alluded to possibly was having discussions with the Auerbachs on something that's more comprehensive I guess involving some kind of broadband partnership there. Could you maybe go into a little more detail what you meant by that?


Yes, in terms of a lot of detail but the pension fund realistically I really don't have much more to add. They haven't given me where their at or thresholds or plans or the like. It's obviously sort of in their court so as far I - I've talked to them since then - I've talked to them a couple of times and in some ways they've got to make their mind up. I'm not - what their doing and so I really don't have anything new as to where they're at. In terms of the Auerbachs, I think the question - I don't think it's anything other than probably the obvious. But I think that one recognizes if you wrestle with the tradeoffs and to some degree they have to wrestle with their experience we have to do as well is clearly - if you were going to say - you were going to build out something - a version of broadband - build out their infrastructure so that they can compete in the broadband and telephony business but didn't have to incur the full costs of being able to compete in a hundred channel plus high def market with VOD and the like you probably have a much more - a much different level of CapEx and a much different level of potential success as opposed to trying to un-top the rest of it going into video and show that in the business you haven't been in. They've got to wrestle with those tradeoffs. Obviously, we do to but I think it's basically a [inaudible] recognizing I'm not sure - a relatively obvious alternative would be which is a much lower CapEx to tap into a much more established marketplace and again tailor something that doesn't try to be an end to end solution and therefore has a different cost commitment and a different level of success if you could find out how - there's a list of complexities as long as your arm to sort of figure out where's the middle ground in an array of things from VOD and other services you come through either path particular if you get into expanded storage but I don't think it's - it's a topic we sort of talked about more in a thousand foot context than a - sort of negotiate the more granular aspect. Talk about the more granular aspects again I think in the short term there's sort of on their fiber. Again, I think they have clearly an array of views in their places about one to challenges.

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Jason Bazinet - Citigroup - Analyst

Jason Bazinet, Citigroup. Two quick clarifying questions on the presentation. First on CapEx and then the one on churn. On CapEx on slide nine, you talk about 3 to 400 million in CapEx in '08. Should we interpret that sort of as a long term kind of run rate CapEx or is that sort of a low because you don't anticipate spending any money on satellites in that year or HD upgrades?


Yes, I guess it is really a run rate and it's got - we've capitalized smart cards and there's other things in there to that - and maintenance but in our satellite fleet pretty tough sort of today figure out what would be the demand. And again, we're going to have a set of capabilities that proceed most or those that we keep with and our satellite and I think that as Mike said there is 11 satellites up there. I think the average [inaudible] is 10 years. So clearly at some point you'll have a satellite CapEx but you've got to get out a ways before you sort of get to a satellite and I don't really see a ground or something today on the horizon that would be - like the HD local build out. So I think there is more of an ongoing so pretty significant - would continue to be the type of run rate for maintenance for the ordinary course upgrades of the business and does sort of look at it but I don't see what would be - and you look at what's creating the lift in this three year period it's satellites and the local build out and I don't see anything comparable as you look at over certainly the next few years and we've got a ways before we get satellites.


And then the second question on churn on slide 48, I may be reading the slides wrong but it looks like you add up the voluntary and involuntary the numbers are sort of north of two. Are there adjustments that we - am I reading the slide wrong or are there adjustments we need to make to kind of reconcile back to the churn numbers you report?


Like the [inaudible] better and closer to the chart and that's not our churn.


Chase, I wanted to ask you a question about your high definition plans how there's 10 and 11 going off you've got capacity to do more than cable can do by a large margin and only about a year and change away from when those satellites come online but what is the programming going to look like? What are your suppliers telling you when HD will be available? What are the 150 stations I think you can realistically provide the people sort of by the end of '07?


That's an ongoing topic right now. There're aren't 150 clearly. I mean realistically we're actually still reasonably competitive today. We just added TNT which is probably the one - if you had one and a lift of one it would make a difference to consumers. In my own view I don't quite put boom in that category so with all respect to Chuck but -- so I think we carry most of what exists today. I think you will see that continue to ramp. I think there are already ones that have announced [inaudible] but I think that is core with both in channels as you know them and is continuing to introduce an HD version in the bigger channels which has been the case first. Some of them will do selective programming but I think you'll see a continuing progression of those over the next few years of sort of the channels as you know them first and foremost providing - introducing an HD version of that channel. You obviously have the pay channels that end up with multi tasks and so you could have the multi task versions of HDL and Showtime and Stars. Those all become versions of it. You'll have VOD as it becomes versions of pay-per-view or events, but I think the market - it won't fill up and I don't expect April 1st, '07 we've got 150 channels of hi def. I think we want to put forth a high def product program that again I think - we think is the best in the marketplace and focus on things people really want but I think it will take a few years to sort of have the business continue to move to a lot of the stuff being in HD so I don't think we go out and say how do fill up ahead? We've got to fill up 150 channels in whatever way

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possible by April '07, but I think you'll actually see channels continue to introduce HD versions at an increasing rate of speed if you go through '06 and through '07.


Chase, I don't think I heard anything about the solutions that you have out there to address the portability market. I was wondering if you can kind of give us a roadmap of the kind of products and the timing of the products you have out there to address the content portability as well as how to - your plan to integrate those into your home networking solutions and I'm assuming that the all of DVR pluses are shipping to the network already. How do you deal with the inter operability issues for DRM between Intel, Vive, and some of the subscribers who might be amenable to the platforms such as AMBs live and so on? So I'm just trying to get a sense of how you kind of bring all these together within the portability as well as the home networking solutions that you're planning to have this kinds of integration plans?


I think we- I mean we tried to touch at least on some of it. I think Romulo did. Its the two dimensions as to portability and then clearly DIRECTV to go which in essence is a portable device. It's not a device you screen content to but it's a portable device that we will in the middle of the year introduce products we've got out there that will be a portable extension of the DIRECTV experience that is all part of - that sort of goes hand in hand with the second half of the year we launched the initiatives with Intel and Vive and Microsoft which will again be not just portability but being able to really in a new and better way be able to pry together the TV, the PC the laptops and portable devices. So, and I think we will have -- we certainly -- portability of the DIRECTV experience is a big part of what we're going to be launching as we go through the middle and second half of '06 and I guess there's another dimension to this that is clearly -- which really mobility. Today, actually are a leader in the - and it's not really a mainstream consumer product but got a big cost. They're willing to write a sizeable check but we have DIRECTV for automobiles across keeping it down. I think if we continue to look for -- and that's probably at a slightly longer timeframe than days could bring. A mobile version and what was the device, I mean you can describe [Capital]. Your comment in general but why don't you describe --?

Romulo Pontual - DIRECTV Group - Chief Technology Officer

Capital is part of initiative to allow [inaudible-highly accented language] to move. It will be the first offer of a television that is portable. But actually you can install in your balcony. You have to [inaudible-highly accented language] and are using a small antenna with a combined television set and its started mobility as Chase said we have a cost solution which [inaudible-highly accented language] and we have riding on these thunders and to avoid the culpability issues that you describe work within Microsoft to be able to allow portability to activity device that we have outside and including laptops.


Any other questions?


Thank you very much for your time, and also if you didn't get a chance do take a look at some of the products we have out there. Grab a bite and we look forward to catching up again soon.

FINAL TRANSCRIPT




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direc tv group Feb 22, 2006 Analyst Meeting

Economy & Finance