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Please stand by. Welcome to the DISH Network's Q1, 2019 Earnings Conference Call. During the presentation all participants will be listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded.
I would now like to turn the conference over to Jason Kiser. Please go ahead, sir.
Thank you, and thanks for joining us everybody. I am joined today by Charlie Ergen, our Chairman; Erik Carlson, our CEO; Brian Neylon, President of DISH; Warren Schlichting, the President of Sling, Paul Orban, our Chief Accounting Officer; and Tim Messner, our General Counsel. Ordinarily Tom Cullen would be in the room with us but he is traveling out of country this week so, unable to make the call.
I think Erik and Paul have some prepared remarks but before we do that, Tim need to do the Safe Harbor Statement first.
All right, thank you Jason, good morning everyone. Statements that we make during this call that are not statements of historical facts constitute forward-looking statements that are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results and/or from our forecast. For more information, please refer to the risks, uncertainties and other factors discussed in our SEC filings.
All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks, uncertainties and other factors discussed in our SEC filings and should not place undue reliance on forward-looking statements, which we assume no responsibility for updating.
As part of the process for SEC, auction 1 and 2, we've filed an application to potentially participate as a bidder for those spectrum assets. Because of the SEC's anti-collision rules we will not be answering any questions about the auction during today's call.
With that, I'd like to turn it over to our CEO, Erik Carlson.
Thank you, Tim and good morning everyone. Both Paul and I have a few remarks before we open it up to Q&A. On the wireless front, we're tracking to complete by March of next year our Phase 1 build out, and our performance team is busy this spring as we continue to install towers across the nation. Charlie is here for questions on wireless.
In the quarter, we really remained committed to our strategy of delivering the best service, technology, and value to our customers. The key customer benefits are a way for us to standout and really a challenged linear TV environment in our view will attract loyal, high quality, and profitable subscribers. Service is a constant priority for us, and I want to take a moment to congratulate our in-home service technicians. Look, these folks really have a tough job 365 days a year. Our last quarter for the second year in a row, our in-home service team earned the second -- the highest score in a segment from JD Power for in-home customer satisfaction. So, I just want to thank our techs for the work you do with our customers every day. But our focus on the overall customer experience like delivering excellent in-home service has really yielded consistent result. In the quarter, we reported a monthly churn rate for DISH TV of 1.74% which compares to the year-ago period of 1.47.
With that said, a few comments on programming, first on Univision. After months of work to find a deal that'd be fair to all parties and in particular for our customers, we announced an agreement with Univision at the end of the quarter. That hard work was on behalf of our customers and the Hispanic community that we've served for more than 20 years, and we continue to serve with quality content at the right value. Univision has been a good long-term partner. I appreciate the work the new management team did to help us reach an agreement.
With regard to HBO and AT&T, there is nothing new to report. We recently met again with AT&T, but unfortunately they only offered different words with really the same meaning. AT&T wants their subscribers to pay for HBO whether they want the channel or not, and AT&T continued this anti-competitive behavior by really forcing a lose-lose towards our customers, switch to AT&T's platform or have us subsidize HBO, so AT&T can give it away free to its customers. Our view hasn't changed. AT&T stance remains one of the fundamental negatives of the merger with Time Warner.
Now, as we've indicated in the past, churn attribution is not a perfect sign. There's lots of factors that go into it. Looking at the first quarter, it's fair to say that together, HBO and Univision accounted for something a little less than half of our net sub loss.
I'll wrap up with a quick look at Sling. We continue to grow our Sling subscriber base and continue to lead the live OTT category. While the rest of the marketplace is in turmoil regarding pricing and position, we remain focused, focused on delivering a great experience, meaningful value, unique flexibility, and category-leading stability. Ad sales in the Sling in the first quarter nearly doubled year-over-year, where we've enabled live dynamic ad insertion on more than 90 networks. We continue to see strong penetration of margin-rich add-ons like premium channels and our cloud DVR offering. With every move our competitors make, we become more differentiated, reaffirming our strategy of offering flexibility of the skinny bundle.
With that overview, I'd like to turn over to Paul who has a few brief remarks on the quarter and then we'll open it up to Q&A. Paul?
Thank you, Erik. Our core Pay-TV business continues to focus on acquiring and retaining high-quality subscribers with long-term profitability. In the quarter, we adopted the new accounting standard for releases on a prospective basis. This standard requires that we record operating leases on the balance sheet, and this has resulted in an increase to both assets and liabilities of $726 million. The adoption of the new standard does not have any impact on our net income or cash flows.
Q1 operating income and EBITDA were both lower year-over-year by $73 million. This is principally due to a lower Pay-TV subscriber base. We generated free cash flow of $322 million during the quarter and we ended up the period with $2.4 billion of cash and marketable securities on hand. These amounts will be used to retire $1.3 billion of our senior notes due on September 1 of this year. Revenue declined 8% year-over-year due to fewer DISH TV subscribers. This is partially offset by a higher Pay-TV ARPU and the growth of the Sling subscriber base.
Subscriber-related expenses also decreased 8% as a result of fewer DISH TV subscribers. Programming expenses were positively impacted by the Univision and HBO channel removals. Improvement in our variable expenses continued with increases in operational efficiencies, and as a result of fewer subscribers. We've continued our focus on acquiring and retaining high-quality subscribers. Our subscriber-related margins have remained roughly flat year-over-year. Our G&A expenses increased as a result of certain litigation accruals and increase cost to support our wireless initiatives. G&A in Q1, 2018, was positively impacted by legal fee reimbursements. As a reminder, substantially all of our interest expense is being capitalized while we are building our wireless network. Much of our other spend related to the build out is also being capitalized. So, you will not see that in the P&L.
And now looking at our metrics, Pay-TV ARPU is up due to DISH TV price increase in 2019 and '18, and continuing increases in revenue per subscriber related to Sling. These increases were partially offset by a higher percentage of Sling TV subscribers present in the overall Pay-TV subscriber base. We also saw a decrease in premium channel revenue mainly related to the removal of HBO.
The Sling increase was mainly driven by a mix of three factors. First, customers taking higher priced packages. Second, increased add on revenues from extras, ad sales, and cloud DVRs, and lastly, the $5 increase on our orange package from the third quarter of 2018. DISH TV SAP increased to $828 per activation, up from $707 for activation last year. The increase in the Pay TV SAP was due to an increase in hardware cost and advertising cost per activation. Do note that year-over-year comparison -- for the year-over-year comparison, DISH TV SAP in Q1 2018 was positively impacted by the reactivation of 24000 customers in Puerto Rico at a low cost per activation. We continued to gain a greater percentage of high credit and [indiscernible] based customers in each quarter. We are continuing to invest in new customers by offering a higher percentage of our subscriber Hopper receivers which deliver a better customer experience.
With that, I will turn it over for questions. Operator?
Thank you. We will now take questions from the analyst community. [Operator Instructions] Our first question will come from Doug Mitchelson with Credit Suisse.
Thanks so much. A couple of questions for Charlie, Charlie, first, I think about this time last year, I asked about financing for Phase 2, you said you have potentially $10 billion to build out. And you said about this time this year I think 2019 will be the time you would start to address that, is any sort of commentary around that financing. I think the second question, Charlie, is in terms of getting the IoT wireless build out sort of done on time. And you have talked about progress towards that, from an FCC standpoint to perfect the licenses do you also need a bona fied IoT business in place? Do you need customers and marketing alike as well? Or, should we just focus on the build out itself as to what you need? And then I have got one more follow-up.
Yes, I'll take the second part first. The terms of our flexible use license, I don't believe that it requires a service doesn't -- I know that really addresses customers, but obviously it has to be -- our intention is to build a network that is viable network and viable service, and I am hoping we will have lots of customers on the way [ph]. It's a -- it's not ideal in the sense that again we have one hand tied behind our back because we have only got 5 megahertz nationwide spectrum, which is H Block which is a nonstandard kind of frequency and not the ideal frequency for uplink and IoT network.
Obviously, we will feel better if can bring our 600 megahertz into the system. But that can't -- it has to be nationwide basis. That's not possible until that spectrum is cleared. So, -- but it will be a viable service, and we are not spiking the footfall that in terms of being done, but we are making steady progress and learning a lot and making a lot of mistakes and -- like any new business. We are focused on making sure that happens.
In terms of financing the second phase of the network, I think even your question shows kind of one of the issues we have which is the FCC is an overhang because obviously we are coming under scrutiny with the letter that they wrote to us and other things. That's an overhang in terms of perception out there. And that may not be reality but it's certainly the perception in terms of risk factor that we don't think should be there. We don't think it is there.
So, fortunately, at least for people in the home work [ph] in this quarter we saw a couple of things, one is AT&T not only announced the nationwide IoT network, I think this week or last week, which kind of takes away the argument that IoT is not in service, right? And the second thing that happened a couple of weeks ago is they actually perfected some of their licenses. I think about a dozen of their licenses they perfected those license with the FCC with IoT network as the only service that they had on it. So, there is what should be good for AT&T should be good for us. I think the argument is whether IoT as a service is probably one that some analysts have claimed that that's not under license does not allow, but I think that argument has been put to rest, but the FCC -- the government picks winners and losers. The FCC can do whatever they want. They can say that we are not there.
Having said that, so in terms of raising money, we don't need capital today for the phase one. Phase two, we clearly are going to need. We have estimated $10 billion. That can come in a lot of forms because obviously in terms of partnership we may have people contribute things that don't require cash for us but certainly realize that we are going to need to do some things there. Having said that, the story is -- the business's story is really, really good. And the business plan is getting better and better and better. And I think that ideally leave the overhand of the FCC behind us. And then we will be able to tell the story with that maybe some skepticism out there. And the people are a little bit more open minded about what we are doing, in the power of 5G and the power of standalone network and 5G. And what 5G really can do? Things aren't really obvious to people today that that's maybe more time for us and that may not be this year.
I appreciate all that.
I don't know if we can stall the FCC overhang. So we build our network and meet our internal deadline that we have here and just execute.
Thanks for that. The follow-up is I think for the first time since you launched service you are going to have some leverage Disney with the upcoming FX and Nat Geo renewal. And given your willingness to drop HBO and Univision, I just wonder if there is horse trading that you there. Or, whether any thoughts on programming cost coming down little bit in the back half of the year following that renewal? And I guess [indiscernible] Sinclair and that might be an off-cycle deal as well, but any thoughts on programming cost in the second of the year given the unique renewal structure with Fox having merged with Disney?
Well, I think the big picture is I think that contracts have to change in the linear business, right? You can't -- you have heard this from the AT&T CEO and the others. But you can't have double digit declines in viewership and have 6%, 7%, 8% increases in pricing when customers are watching less. That's just not sustainable. Some people are asking for more increases than that. So I think the Univision was very painful, but it was one the few contracts that we have where the incentives on both -- and the reason we ultimately came to an agreement that incentives for Univision and DISH are now very much aligned which is a bit unusual. And I think that's really way the contracts in the future should be done so that we are sharing each other's success. And to some degree so -- we have had good relationship with Disney.
Obviously, they have got now a direct consumer business. We don't understand where we fit in that strategy. We hope we understand where we fit in that strategy and to extent we fit in that strategy and we can do fair deal for our customers. That should be pretty easy because we had a -- we had such long term relationship with them to the extent that the Linear TV business is not part of their future, it might be difficult. So we just don't -- we don't know, and obviously with Sinclair, we're doing a lot of stuff with Sinclair particularly in ATS 3.0, so hopefully -- to a degree they are successful with the regional sport which could be really deal for them. And I am hopeful we can be productive and get aligned in an agreement that will be aligned for both us and that would be productive. So we are pretty easy to work with as along people look to do something that's fair and not try to take advantage of situation. I mean obviously AT&T that kind of tactic because they had the motivation. It appears their motivation really was to take our subs. So they didn't really try to present the deal that makes -- I mean they knew that we wouldn't do something utterly stupid and so they didn't put anything that must be for a reason, but they had a different motivation which was to take our subscribers.
Got it. Thanks so much.
Now we will move to a question Kannan Venkateshwar with Barclays.
Thank you. Just a couple, first is tell me from the FCC perspective just for our understanding, once you build out the network, is there a deadline for the FCC to approve or ask for changes or do anything with respect to the network, or there's no hard deadline and they can take their time and come in approving or rejecting the network? And secondly, just from a cash perspective, historically, I think you guys have always maintained $1.5 billion to $2 billion of cash on the balance sheet. Now the business is smaller, just wanted to understand what the minimum cash needs are just for the core business? Thanks.
Well, the minimum cash deals are dollar, right, so, we've maintained cash balances for something I mean, as we because we're always looking for opportunity out there and sometimes when you have cash you build and take advantage of an opportunity out there. Obviously, we believe the best opportunity for us is building a new state-of-the-art standalone 5G network, we think that's the best opportunity. That's what we'll use cash for, and obviously we have debt payments that we have coming up as well. So pretty clear probably where our cash balances are going to go, absent some change in the marketplace. Those are part of the questions.
Traditionally, companies just file their build out and that's accepted in short order and life goes on, we would expect that we would be treated the same as precedent has been in the past. But obviously, the FCC sometimes changes precedent. And that's always a possibility, no matter what you're doing, but again, I don't want to make it -- where the FCC wants to go is exactly where this company wants to go, right? Which is, this FCC to the credit, once this country to lead in 5G and I don't believe that it is possible to lead in 5G based on what I've seen around the world. I don't believe it's possible in 5G without somebody entering the marketplace with the new build 5G and all the 5G can do and the architecture this required to do that. Simple examples you know today you've heard about Milo antennas, most people's antennas aren't Milo antennas.
Today you've heard about virtualized networks, right, nobody's got a virtualized network today, right? The SEC would like more broadband, particularly worldwide. That's a pretty interesting thing you could do when you're building a new network from scratch. That's economics so that gets to be pretty interesting, right? So Dish Network is on the fact that I'm going to digress to the question, but there's kind of three things that happened in this quarter, that are worthy of that one is AT&T is perfected licenses with the IoT network. So, the last two years, we've answered questions as to whether an IoT is acceptable network, I think that question is answered with by AT&T.
The second thing is that mid-band spectrum is now particularly around the world, 5G networks around the world are being built but mid-band spectrum, T-Mobile's building is going to do some 5G and 600-megahertz low band. And Verizon honestly looks to be at least initially a lone wolf in the world today at this the millimeter wave technology but where the puck is going, is people are starting to look more and more mid-band for 5G. That's not surprising to us, right? But we're we are well positioned in the mid-band spectrum and low-band spectrum to build a 5G network and that's becoming more evident that those people who really people who particularly people to maybe test they took the millimeter wave stuff on the short-term. That's not to say that millimeter wave is not going to get their long-term but millimeter waves going to have some challenges for a full 5G network for most consumers in the short-term.
The second and third thing is that people are, it's a very knowledgeable people now understand its architecture has to change. For a wireless network, the legacy of 30 years of wireless networks is unsustainable, and to do -- to unleash the power of 5G. So a company called Rocket 10 in Japan demonstrated, or not demonstrated, but talked about it Mobile World Congress, their architecture for fully virtualized network, they had small companies like Dell and like Intel and Cisco and other people supporting what they're doing on and some other names you probably haven't heard of, right? But that architecture is for people who now really understand it that's starting to gain credibility, right, and as we've been talking about architecture for a longtime making a difference. We're in a position to build a virtualized network from ground floor up it's not been a very, very different for legacy companies to get to in fact we'll take them a long period of time to do it.
And I think over the next quarters and maybe next year's that architecture people will start understanding the architecture is the technology change of 5G is important, but can be fully utilized in terms of change architecture which means you got it. It means, you got to go to every tower to everything down and build back up again. That's difficult to do when you got 100 million customers. In our case, we don't have any customers that we can build it, right in the first-half. Sorry for a long answer.
No problem. Thank you.
We'll now hear from Philip Cusick with JPMorgan.
Hi guys, thanks. Two, if I can. First, Charlie to follow up on that, we've been hearing that the complexity of the Rakuten build is creating delays, how are you doing on building the architecture of your 5G network and how reliant, are you on their success. And then second, Eric, you mentioned talking to AT&T about HBO. Can you give us an idea of the impact of Game of Thrones in April. Should we expect churn to pick up again this quarter or do you think it's mostly through in the first quarter? Thanks.
So Phil, obviously we're not going to, we normally don't give guidance or not going to give guidance on kind of Q2 and what you see from a HBO perspective. But here's what I would tell you obviously, we talked a little bit about Q1 in my opening remarks there. There's really when we think about the HBO. There's really a few ways to, you know that our customers are able to access Game of Thrones and we've, been quarter in some of the trades and how we're helping folks to get that, but we kind of put it in three cohorts right, folks that are in linear TV today.
So, on the DISH TV platform that no can stream, they have the right broadband throughput to stream and they do stream right for could be Netflix via a variety of things those folks it's been, it's been fairly easy for us to help them understand where Game of Thrones is available and usually they have been able to sign up for a month or two to get the Season 8 Game of Thrones. You've got a second cohort, which are folks that have the ability to stream the right broadband throughput. But I haven't really streamed before. And so, we've been able to help a lot of those folks finding - find a device or a mechanism like Xbox or something maybe they have in their house, already an iPad and get them signed up to be able to consume the content -- the Game of Thrones content that they want for, the next month or two. And then you've got a group of customers and Charlie alluded to this a little bit earlier is which you know, they really can't stream and so they don't have a solution they rely on Satellite TV to get a premium service. And with removal of HBO from our service obviously, AT&T through DirecTV has been able to acquire those subscribers who are interested in it. And so, we're continuing to monitor the situation closely and try to provide the best experience we can in spite of our circumstances that we're in, in order to help get good folks Season 8 and kind of get through the next few weeks of Game of Thrones.
Bill, it's Charlie. First of all, for continents, I'd say just where they started on - they started on architecture of August of last year. So they've been at it for whatever it is - and they -- for me it's unbelievable what they've been able to do an eight months in terms of design a new architecture. And bringing together the parties and the partners that they have, again some you've heard of and some you haven't. But they're all incredibly - they're incredibly talented companies. I mean like some of the best ever seen, take this on the smaller ones that are involved in right now.
So I don't have any inside information as if there are schedule or run into roadblocks. It's a complicated thing that they're doing. I would, my expectation was - that they will run into roadblocks as they go along, as will we, it's just whether you're tenacious enough to overcome and with the partners to roll in the same direction. And for all indications, they have a lot of that in the companies. We are somewhat dependent on them in the sense that, that we're very fortunate that their - that they are first because much of what they're doing - I don't know we would have had the skill set to assemble that powerful, that good team as they have, I don't know we had that skill set. I don't think we understood. I don't think August of last year we understood the power of the architecture but delay they did and so we're learning incredible amount and I think that, I don't think they have to, I don't think that would be a wild success but I think they do have to make breakthroughs in technology and software and I think that will happen and I think that will demand our benefit and it reminds me a lot of 1994 when we started [indiscernible] in 1992, we believe the digital compression was going to be there by 1995.
But we'd never built a digital compressed set-top box before and we'd never done. Some of the things that were necessary is very complex project. We're fortunate that that DirecTV and RCA did a lot of heavy lifting in terms of making a digital although not truly impact to they did do digital compression first and they did a lot of the heavy lifting and we were able to come in and take the lessons learned from them and some of the vendors that they used and make it true. The world's first really true impact to product that that we own, we had a better product. We did things like flat -- we are the first guys to do flash memory in the set-top box as an example, so we could download software without having to replace the equipment. So we were able to take and build upon what they were able to do and I think in this case, not just rocket science but a couple of the companies around the world as they go to virtualize network will be able to build on that because our networks not tomorrow. Our Phase 2 is still years out and we're now confident that enough people are focused on virtualization and network that we'll be able to build upon the team to help us.
Thanks. Charlie or Erik, if I can follow up, you see the data on your customers viewing on your set-top box was Game of Thrones a big part of your HBO viewing in the past?
Phil, I think that's probably just a level of detail that we're not going to share here but you are right. I mean we do have viewership on our customers, so we understand what content is watched, when, where and the trends.
It's not just Game of Thrones for HBO, I mean HBO it is Game of Thrones, people would just drop HBO after it's over, so HBO is a powerful brand out there and it has a wide variety of following it. Having said that it's an interesting battle because customers, we're not just rated number one in in-home service. We've been number one in customer service for a while now and people like DISH and so their some of our customers saying, hey we'd love to have HBO but we're going to support you, we don't want higher fees. We don't want to pay money for it when it's available elsewhere or whether somebody else would give it away for free. We understand and we'd like you well enough, we're willing to stay with you. Some people are so, HBO is their life, is their whole lifeblood and they lead us. And I think in terms of the quarter to Erik and team with Univision down and HBO down, the results of churn are actually pretty incredible because if you take the churn of service is being down, it's pretty low. I don't know if it's a record low like you want to add.
It's definitely close to a record level, I mean we are definitely seeing very good, very good results. Based on the transition that we've been going through, and talking about for quite some time, which is really focusing on the right customer and the right geography and focusing on profitability and getting high value customers, so, obviously there's less impact but you're right, I mean Charlie in my opening I mentioned that a little bit less than half of our net sub loss could be attributed to channel removals in Q1.
So my point is some of those customers going to our competition, so their numbers are artificially propped up, ours are artificially negative given that Univision is now back on the service, right. We're still going to have a headwind from HBO obviously but on the Univision side, there could be a slight headwind in Univision because now we raised our price, so some plus customers who don't watch Univision say, I'm going to leave you because I don't love to pay too much money because I didn't, I would add Univision off but I think the vast majority of our customers appreciate Univision with the right motivations between Univision and DISH, that's actually a place we can start to maybe start to grow the business with the help of Univision, we actually grow that business thing. So it's actually from my perspective, Erik and team did a pretty good job of going through the last few quarters with some pretty, I think customers like this and they will hang in there. They like the fact that we are the company that fights, we are one company that the TV business is not sustainable as some has got to change and we got lot of ideas on how to change and change it.
Thanks, guys.
Our next question will come from Mike McCormack with Guggenheim Partners.
Hi guys, thanks. Charlie maybe just a quick comment on what you're seeing out there, you got a lot of these OTT offerings with price hikes either in the rearview mirror or pending, at the same time you guys are out there with Sling with a pretty aggressive promotion, so maybe just some thoughts around what you're seeing in there from a pricing standpoint and your strategy around Sling. And then just thinking about the maturities as we look out over the next couple of years, again put aside Phase 2 but on the 2021 maturity listing, it's not problematic but from a cash flow perspective probably not supportive. So what are the financing options as you approach 2021? Thanks.
Well I don't -- I will take the first part and Warren will take -- I will take the second part and Warren will take the first part on Sling. I don't necessarily agree with premise but obviously we are cognizant of the fact that we have obligations to buy. And we obviously we understand what our maturities are. So it is something that we focus on and something that we develop plans internally to make sure we can address it. So I don't know what else to say on that, Warren you could add to that question there.
Sure. So we expect to have, our strategy of Sling, Erik mentioned it earlier in terms of providing value and improving our user experience and always focused on stability but and profitability. So Sling's promotions have done well for us but we are focused on providing on attracting profitable customers. And it's a marathon not a sprint. So I think we like where we are, we like our position in the market with our competitors taking their prices out that's only improved ROI we think, and you'll see more of the same, I think in the second quarter from us.
Are you guys seeing rotation from your Linear product into the Sling product?
I think we keep track of cord cutting on the Linear product and I think it's inevitable, we'll see some of that but we don't specify between Sling and other OTT providers.
Okay, thanks guys.
We will now hear from Walter Piecyk with BTIG.
Thanks. Hey, Charlie. Six or seven years ago when you first started buying Spectrum, I think you framed –- you talked about the challenges that Pay-TV was going to face and kind of frame Spectrum as a hedge and maybe something from a broadband standpoint but obviously 5G is kind of a new opportunity, IoT is a new opportunity. When you think about the Pay-TV business, is it necessary to hold on to that just because it generates free cash flow to fund some of this build out or given that 5G build out could be larger and requiring a partner. Are you willing to part with the Pay-TV business. And obviously if it's free cash flow as you got an attractive offer?
Yes, let me start with actually we started buying Spectrum, I think 18 years ago, actually we about the first Spectrum auction I think which was the DVR spectrum or we entered that, we didn't buy, we entered the auction. So we've been in virtually every auction as actually said, bolt-on we don't get a lot because we don't have the money to do it. But we certainly saw six or seven years ago the kind of things that people are writing about now which is the Linear TV business as of the heavy advertising load and the disparity between the power of the content owner and the distributor that that was so that things we're going to have, where the price was going to go up more than the marketplace could allow.
So that that all happened. And instead of put money into a guy and we got penalized in Wall Street because our number we suddenly didn't grow as a company because we were taken, the capital we had and deploying that in a much longer term vision of Spectrum and Wireless. And the problem we had is that we wanted to do built we were in a position to build on LTE advanced network. But the H-block rules got changed on us. And so, we needed the H-block rules to stay the same for us to build that network, when it got changed, that still was down the spiral of going all down like in a bunch of other things that ultimately happened, which means we missed that paradigm shift window. That turns out maybe to be serendipitous, because how the 5G technologies is materially bigger breakthrough than the 4G, than the LTE advanced breakthrough.
And the architecture requires different, so had we built -- we're building it, we're building a traditional network today in IoT. We are able to build and we got a receiver in a base-band processing in all of the tower and all the archaic ways. That's what we're forced to do because the technology didn't exist till next year to do it the right way. And so, we're forced to build the network I -- when I go to one of our towers, I want to throw up. Because I'm -- we're building something that we know is technically is going to work, it's technically absolutely compared to taking -- I guess the way I would describe it is, when you go home tonight well, go look at a tower, and go get a cell tower. And when you look at the -- well, you'll see some antennas on top, but will be mindful antenna, so they can be replaced. And then you see radio and then you go down the bottom, you're probably going to see a shed about the size of a C-container. It's all got, it's got bass band process, and in it it's got power and it's got all kinds of wires, cables and get there.
We're taking that shed. We're going to take that shed, and we're going to put it in the cloud. And, and I'm oversimplifying a bit more complicated than that. But we're taking that big shed that everybody uses today for the most part, and we're going to put in the cloud. When we do that, right and when you virtualize it that means you can do something called network slicing, which means that we're not -- our business plan is not just about phones in fact phones maybe very small piece of what we're doing, we're able then to get into the power of 5G, which gets into robotics and smart cities and artificial intelligence and our fit and all the things that healthcare and climate change and agriculture, all the things that you can do, and with an API to industrial companies and verticals, right? Thomas vehicles, right? You can't do that with an existing network today. So that's why we're excited about what we're doing and look I'm not going to convince you but, in this call, I'm going to quit talking. Right, but this watch is over the next couple years and things…
But none of that has to do with the Pay-TV business. So if you can find the partner to fund it?
And answer to your question, the Pay-TV business is still the biggest use of the network is probably going to be video. And so, there are a lot of reasons why video makes a lot of sense. You saw T-Mobile go out and spend a fair amount of money on a decent video company because they believe video is important. So we think video makes sense, right? Having said that, is it as important as maybe we thought two or three years ago, I'd say maybe not quite as important as we thought.
So on a flip side, like why do you push it? Why do you push yourself? Rather than waiting for someone? Why don't you -- why don't you put that thing on the blocks and try and get what you can get because you're losing 10% of your subscriber base every year and you haven't been positive on it for six years.
Well, here's a Tennessee recommendation. We take a look at everything because we find an Analyst like you are usually have some good ideas, right? So that's one thing but from a management perspective, at least the way I like to manage is we want to build value every day. And so, I don't believe -- I don't believe that Eric and team-built value and DISH last quarter. I don't believe that Warren and team-built value and Sling last quarter, but they are very close to being able to build value, right? And the challenge to them if they have enough tenacity and focus, I do believe we had a chance to build value in those. I know we build value marvelous. I know we built by in the last quarter, and if we can build value and video and we should proceed that we can build value, then we got to figure out a way to do it. But if we have to look, anytime in business, you can change your -- good management is changing things. We don't have to do the same thing we did yesterday, we can do something different here. Erik, you might as off the subject, but you might want to talk about in-Home Services, right? There's a place we can build value. So maybe we take a talk about what we're doing in Home Services.
And then just for a second, Walt, it's one of the things that the capability that we built over the years by having a service DISH TV customers and obviously today we use it a variety of different ways and are creating value through our Smart Home Services Group, whether it's taking care of DISH customers or Sling customers or you know, other brands that we may not sell or be affiliated with from an owner perspective, right. So helping Amazon or we've talked about KB Homes, we've talked about the things that we're doing with other big brands to help where the in-Home Services Group and I mentioned earlier, I mean, tough job and as more things get connected. I mean, there's just more complexity into the homeowner's environment and they need help and we're definitely a resource that can help and that's an opportunity and a capability that grows kind of from, old legacy, Pay-TV, so to speak. So, we're excited about a variety of things here.
It's Richard Greenfield, just following up assuming you don't blow out of the Pay-TV businesses we all just suggested. But Bob Iger at Disney recently was on CNBC, and said, "Consumers don't really want 150 or 200 channels for a significant price, just wondering as you think about kind of the future of the Pay-TV business." Do you have to start tearing certain channels, the RSN deal? Whether or not Sinclair buys it or not, I think your deal with those RSN ends up this summer. Philosophically, do RSN need to be tiered? I mean, do you have to start putting channels on tiers and make smaller packages, like you did with Sling, but do you need to start doing that across all of your business?
Rich, it's Charlie, I think the linear flick, I think the linear business has to change, man the Linear TV providers will say, "Hey, we got long-term contracts," let's just wide it out and make some money. And then some of them tried to play with the direct-to-consumer while they're making that change, right. So with all due respect to Disney, not everybody wants to pay for ESPN either. So, but they don't really give you a lot of choice about where you are accurate. So everybody's looking at their own self-interest, I believe it take a little bit different approach where with it and there's probably some things you can do on your TV business, that long-term will be better for Linear TV providers, but might not help them as much in the short-term as I'd like.
But long-term it will be better for them to extend the runway and having more competitive because in Linear TV, there's better content than there is a way better content across the board than you would see on a Netflix or Amazon or whatever or Hulu that people are paying for. There's way better content in general. But it's hard to get to. And there's a lot of commercials, right? So how would you make that look a little better? And how would you make that more -- where would you -- how would you make a better product thinking about consumers first and saying if I'm a consumer, here's what I want, because otherwise, you're just it'd be like, it'll continue the kind of the way it is, except in rural America, right and rural America skews a little older, skews a little bit more, read more newspapers, they just give us a little bit more for what we're doing. And we started to focus on rural America about three years ago. And I think that's going to pay dividends for us, so there's a longer-term life of what we're doing.
Thank you very much.
Now, moving to a question from Jason Bazinet with Citi.
I just had two basic questions. One of them maybe a little bit naive. If we get to this point where the 5G network is up and running, do you imagine it being a business-to-business relationship or wholesale or do you imagine serving consumers as well? And then second, I think you filed last year some comments against the sprint T-Mobile deal. Understanding everything that you filed in as public comments, are there any advantages if the government approves Sprint T-Mobile from business perspective? Thanks.
The first part of question is that there's no question within the 5G network as we envisioned that today, that we will have a big part of business-to-business. In other words, every Fortune 500 company, in my opinion, and we spent the last three years talking to CEOs about what they want to see in a wireless network. That almost every Fortune 500 company would like to probably want -- that some part of their business would be an API that they could actually have a slice of our network, and it looks like their own network. So that's certainly a big part of it. We certainly are looking at what we would call a neutral wholesale side of the network. So that creativity that people have to be having reached on a network. So think of it as wireless AWS, in a funny sort of way. And the consumer and the network obviously, will work for consumers. But I wouldn't say that the incumbents do a pretty good job with consumers today. They're going to improve their networks in their version of 5G, not -- maybe not 5GE but the next version of 5G, they're going to improve their network for consumers. And that may be because when it commence that maybe a little tougher for us with perhaps some pretty big disruption factors, which may happen, but are not so we'll have to see.
As we architected and as we rollout the architecture of what it's become more evident of what our network will be and where the process will be and when we'll get our return on investment for that. But if we have our scheme [ph] announcement T-Mobile yes, we publicly have been against it. The harm that even their own economists have shown their prices will go up and they got it. So as presented right that we're against that merger because it of the harm that's going to create and unless they solve the four to three kind of issue that they have with concentration and inevitable price increases.
And the advantages if it goes through?
Advantages for T-mobile and to Sprint and to their executives who get 100 million pay off.
Understood, thank you.
And now I'll move to our next question. And that will come from Craig Moffett with MoffettNathanson.
Hi, two if I could one, just on the satellite business for a minute. You brought this up a minute ago, Charlie, when you talked about rural. How much of your subscriber base is sufficiently rural that you think it is kind of really well insulated from the competition. Even from OTT competition to the extent that there are limitations with their broadband connections, but where it's kind of insulated from cable competition at least. And then on the, wireless business could you just take us into a little bit of the process with the FCC.
I think to some of us from the outside. It looks a little bit like a black box where you're kind of waiting to find out what the FCC says about what you're building. I suspect, that's probably not correct. And you've got an ongoing dialog with the FCC about what does and what doesn't satisfy the build out requirements. I am wondering if you could just comment on that a little bit and take us through how that process works?
I mean, I think on the FCC you should do this homework, Craig if you not ready, but just read the terms of the license then look at the precedent that the FCC has. An FCC generally goes by precedent and we have what's called flexible use license. That license is eerily similar to what AT&T just did when they perfected - with their flexible use license they perfected spectrum with an IoT network. I think some of the confusion came we first talked about IoT which is probably 2.5 years ago or something.
That was a new term for a lot of people even people to FCC that was kind of a new thing and there was lot of skepticism on lot of people's part. That an IoT network wasn't a real network or wasn't something that was - that there wasn't really a business there. But in fact all the major players now have launched their own IoT networks. In fact that's kind of a detrimental to us right. We had hoped that they thought maybe that with all the skepticism around IoT we'd be the only guys doing IoT and we're pretty damn excited about that.
Now obviously we have not only competition in IoT but they have a head start on us. So it's going to be more difficult for us to be successful at least in Phase 1 then maybe we had anticipated a couple years ago. But I don't think that again, I think that when the FCC wrote a letter to us asking about our network and put that out publicly. It was an unusual move on their part and obviously created some skepticism on what we're doing that I think was probably necessary. All I can do is have confidence - my experience with the FCC over 30 years has been as hard working people that are focused on what's good for this country. And if that's the case then that has, I don't believe that's changed and this FCC works really hard. This FCC is working really hard on wireless. Then they're going to like they're going to like what we do. But they like what we do.
Just call for a dialog.
I am pretty confident I don't see the risk maybe that other people see that because what we're doing is going to be really good for the country. And what we're doing is really impossible to strong a word, but very difficult in the short-term rather in complex to do. And we're focused maybe on some different parts of the network, than they are, that and we want to beat China or beat the other parts in 5G. I don't believe this country can do it without people like companies like DISH. Again that's been a lot of time travel around world looking at other people's wireless network. I'm excited about our opportunity to do this the good old fashion American way. We have great strength in software so why not build a network for software so we don't have hardware providers in the United States to come. And incumbent File 14 0.33 out there today it's got U.S. hardware radios that I know of. They are all born some from China and some form Europe.
Wow, what if could use get to American ingenuity and have a network that's more secure there's lot more software, more efficient, that would be good things and I think that's where the FCC wants to go. And so I think I am not expecting them cheer leader tomorrow but I'm expecting them they'll be very curious in what we're doing and we'll learn more about what we're doing and I think they'll be supported.
But you have an ongoing dialog about it, I mean is it something where they give you feedback when you talk to them regularly about here's what we're planning to do and that either does or doesn't satisfy the build-out requirements So that some this uncertainty gets kicked out of the bar [ph]?
One thing about DISH is you have conversation with us and it goes in the fall and so as much as you might want that information we won't comment on that.
Yeah, I'm not empty for that it's much, much better to have private conversations and know that those conversations will stay that is a better way to do business and so you don't, as you know, you don't get a lot of leaks coming out of DISH.
Yeah, I'm just trying to understand, not on the substance. But on the process of just are those conversations frequent and ongoing core or is this really a sort of you do one thing and then wait for them to respond. I just. I'm just trying to understand the process?
Well, let me talk about the public process we annually filed reports on our progress, and those are public, right? And the FCC is particular case this time they did -- I will grant you, was unusual. They did ask us for follow-up questions, right, which we addressed publicly. So that's the process that the world knows about right. And so but any other process that was private. And by the way, it extends to next part take where there is something that - there is something that's that would be - there is expert rules. So to the extent that, that something that there is something that has to be disclosed, we do that as does the FCC from need to. So all that stuff, we just follow the rules but if there is private conversations between us and any company or any agency and that legally is not required to be disclosed. That's not something you're going to hear from us.
Fair enough, and on the rural…
Craig I will tell you, why would a company - the big picture stuff is we're investing -- we've invested $25 billion in spectrum because we think there is a bit - nobody gave us anything for free, we went to actions we paid for. Invested 25 years -- $25 billion I personally invested 38 years in communications but of which the last seven has been almost nonstop and wireless. And why would you do that, if you didn't think you could make a difference. And I was excited the first day we opened up our business in 1980, with a Big Dish. I was excited to sit in China and watching the satellite launch, and I'm excited about what I see in wireless from a 5G architecture perspective.
And it's fun to get up every day and build a team and work with the hardworking people here at DISH to see if we can do that. No guarantees, might fail. And some people out there are rooting against us. And some people see the glasses half full. And we think I see it -- where the decks in our favor, and we are out and we control. With the exception of regulatory we control our own destiny. And if we control our own destiny I think regulatory will be supportive, if can control our own destiny, let's see what we can do. That's what, that's what a good management is, that's was good about business. That's what makes it bond, and that makes you get out of bed every day because we have a purpose. And our - we have a purpose and our employees have a purpose, that makes it a fun company. I don't if I had answered your question. I will give you follow up.
Well I could ask a lot of follow ups I sort of beat dead horse because I'm still trying to get at, how much it's an ongoing dialog. But I'll let it go. I guess there is a rural question that I asked before. How much is rural, but then I would also love to know just as your perspective changed at all as you think about. It sounds like you're very excited about building a network, has your perspective about the calculus of ever selling this Spectrum versus building changed and has anything changed it over the last year or so, that makes you more inclined for one or the other?
So first on rural, I'll make –- I will say majority of our people are from rural, I grew up in rural America, we're a rural company at heart. We think we can make a difference in rural. We're excited about things we can do in 5G broadband. In rural America, we have already done satellite broadband in rural America. So that's a big focus of where we are, we think we're somewhat insulated to some of the things that are going on in Linear TV but not totally insulated. So it's still a declining business, right. So I don't want to sugarcoat it but we think we can build value there. I hope that Erik and team can build either. In terms you never heard me say we're going to sell Spectrum. I know a lot of analysts assume that's what we're doing. I certainly think people thought that that it seem kind of crazy that the company would go out and take on AT&T and Verizon, Sprint and T-Mobile and then do something that seems kind of a crazy thing to do, it's kind of like when we launched satellite, seem like a crazy thing to take on Comcast and AT&T and General Motors. But we want to be disruptive. We think we can, we can do it. If we fail, if we're failing or the regulatory environment as such and we just can't do it, then fairness to our shareholders and people or boys really. Yes, we'd be forced into liquidation situation.
I would, I don't know that we'd lose money but I'd see it as a personal failure. I really believe this company can make a difference. I'm going to [indiscernible], climate change, we can make a difference in climate change, right and we can still have cows because when you go to agriculture with sensors in the 5G network built the right way, you're going to know how much the water or fertilizer.
And more importantly, you are going to have that year after year after year on what you're supposed to do during the drought or so forth and so on. So we can have sensors in weather monitoring and air monitoring, right. So that we can have that real knowledge about climate change instead of a debate between this side or that side, right.
So we can affect climate change, we can still expect healthcare particularly in rural America, right because now you can you're wearing a device, it tells you before you're going to have a heart attack, before you have a heart attack means you can do robotic surgery in rural America, so that people in rural America aren't penalized, when it comes to hospital care or medical care. We can affect education, right because that means we can eliminate or reduce the digital divide, that gets pretty exciting to the company, right. And we've got 15,000 boys in Brookside about and our job as management is to lead them despite the skeptics.
Thank you very much for that, Charlie. I appreciate it.
Thanks.
So Operator, we are running little long. We need to get that pressed. I think we got one more analyst call it will take and then we'll head to the press.
Thank you. We will now take our final question from the analyst community. [Operator Instructions] We will begin the media portion of this call following the answer to the final analyst question. And our final analyst question will come from Marci Ryvicker with Wolfe Research.
Thank you. I have two, we all have our own opinions on how Sling and Pay-TV are performing relative to our expectations. But Charlie, I'm curious how you would characterize Sling and Pay-TV relative to your expectations and very curious about Sling especially after this quarter and then a quick follow-up just from an accounting standpoint, this core CapEx line is that where wireless CapEx is being recorded?
I will take that. Yes, if you're referring to the 10-Q, there's a general corporate CapEx and that's where wireless would be.
And answer to your first part of the question, Marci, I think I can't answer that question but I would say yes. I don't believe we build value in Sling. In fact, I don't think we gave guidance in Sling in the last year. And I think that's disappointing to me because every day I walk in, I try to manage by building value in what we're doing, maybe a long-term value because one of our principles was think long-term, right. And I think, but having said that Sling is perilously close to building that day. They just have to from a management perspective; they have to go do a few things. They know what those things are. They execute on those things. They're going to build real value, right. If they don't execute like anything else, we don't execute on those things, you don't build value. So yes, I think, I don't think we've built over the last quarters that value every day in Sling. And but I think we can, and I don't know if you want to comment on that, Warren?
But you get that -- I'm going to say still publicly, but it gets a speech every day.
I never heard that before.
Yes, look we've made progress on a lot of our internal KPIs. So I guess I would say I -- glass half full, we continue to march forward. We still believe we're the only profitable, gross margin basis OTT provider out there. And so, I see wins to Charlie's point. We need a lot of opportunity for improvement as well. Our user experience and the value we provide both have places where we can improve.
Thank you.
We'll take questions from the members of the media. [Operator Instructions] Our first media question will come from Scott Moritz with Bloomberg.
Great, thanks. Hey, Charlie. Speaking of obsolete 4G networks, the spec -- deal might face some challenges in that go through. Are you too far down the road on your new network to have an interest in Sprint at this point, is that window closed?
Well, I don't think I can answer that question. But obviously, that I don't think it's public that six years ago we tried to buy Sprint. I think if you look at the Sprint T-Mobile merger that's for that they filed you'll see that several companies we're in discussions with Sprint. In addition to T-Mobile about their interest in Sprint, so I think Sprint, I don't think Sprint's going away whether they have $100 billion parent, right? So if the merger then goes, I think Sprint's going to have a lot of -- they could build their own network, they can improve their own network and they can, they don't have a lot of options. Let's put it that way. But I don't think, I think not having infrastructure today is an advantage because every, every wireless operator let's say they have 50,000 towers there, they are going to touch every one of those towers to get to a 5G network. They're also going to, it's hard because if you're if you're going to get too technical, but you're but you're but when you have this big BTS thing that you bought -- your flexibility is the lowest common denominator.
And so, your kind of stuck with incumbent things until you can break it apart. And what you do in a virtualized network, you break apart the physical layer's user plane, you break all that apart, and then you got to reassemble it. It's can't do that with vendors, you put it all in one place. I mean, you can I mean those vendors have to agree to do it, right? And they're on the path do that over time. But we get to start from square one and with it all broken apart to begin with, and so all we have to do is assemble it. So it's -- what I know about wireless today, it's taken me seven years. 365 days a year, seven years. So it is not all those bits and pieces aren't that well known. I don't know if I answered your question.
Thanks.
We'll now move for our next question, and that will come from Drew FitzGerald with The Wall Street Journal.
Yes. Hi, Charlie. Two questions if I could. First are you at the stage now where for the phase two build out of the wireless network where you can have discussions with potential partners, strategic interested parties? And if so, what -- what are they looking for? Or what do they seem interested in, out of the network? And then second, on the Sling TV front, where do you see, are the recent price increases overall in the market for virtual and DPDs as those runner course or do you see that continuing?
So, Warren will take that…
So look, it's the Pay-TV businesses have price increases for longtime and I'm sure they'll continue to have price increases. I think Sling is proud of our ability to -- we introduced this skinny bundle and we've been proud of our ability to keep it skinny and keep a very unique structure of ad on tiers. So, never say never, but we have kept our price even in the face of those pricing hikes and we have benefited from that. And so, I think we'll continue to play that month and time as we grow. I mean…
So, the big picture is, yes, we've [indiscernible] to answer that, but I think the [indiscernible] the conversations that we typically have been having had been, what would you want to see in their network. So, looking for customer to make sure we design that network with potential users in mind. In terms of -- I'll make it up if they, not make it up, but there are certain things that people want to know. They want security, they want access to data, they want on demand pricing. It might be different in the middle of the night than it would be during the day. They want a nationwide, they want a private network for their factory, but they want to tie into a nationwide network. So, there are themes that people have that we have a pretty good feel for where we're taking the network.
And then, most of our conversations now are from -- I use the word, "Partner," in a different way maybe than the analysts do but they can help us build that network with what skill sets that they have and they will and take some chances on us. In other words, who's going to write that software? Who's going to help us with edge computing? So, you're starting to hear both the access edge computing but what the heck does that mean and how -- what do we need to do there? There are people who already do some of that today and so, it seems that people who are already doing some of that or have plans to do that that would be better to partner with them than build that ourselves.
And then there maybe revenue opportunities that of DISH wireless for them that they have to look at. And so, we have conversations with those people to see whether they have an interest and what are their business plans. But most companies that are involved in communications are involved in communications, are developed in their own 5G strategies. And I'm not going to put words in their mouth, right, and I am not inside of their board meetings and their strategy meetings but when you develop a 5G strategy, you can't help but come to the conclusion that a standalone 5G network with mid band and low band spectrum is a pretty good place to start.
Got you. and are any of those potential partners -- would these be -- these would all be companies that would be looking to initially either supply expertise or be customers or would these also be potentially partners that could co-invest in the network?
I think we have equal discussions between people whose primary motivation is to supply us some products and services. In other words, they are looking for sales, right? And an equal number of conversations where people stand strategically listening to what you're doing that'd be important to us and to our business. And therefore, we're interested in what you are doing because it will help our business and not looking to be in this supply, right.
Right, thanks.
And some people are waiting for us to put it out, to pick the pieces up and everything in between.
All right. With that, that does conclude today's question and answer session. I'll turn the call back over to your host for any additional or closing remarks.
We don't really have any closing remarks. So, thanks everybody for joining us today and we'll catch on the next call. Thank you.
And with that, ladies and gentlemen, this does conclude your conference. Thank you for your participation. You may now disconnect.