You should read the following management's discussion and analysis of our financial condition and results of operations together with the audited consolidated financial statements and notes to our financial statements included elsewhere in this Annual Report on Form 10-K. This management's discussion and analysis is intended to help provide an understanding of our financial condition, changes in financial condition and results of our operations and contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under the caption "Item 1A. Risk Factors" and elsewhere in this Annual Report on Form 10-K. Furthermore, such forward-looking statements speak only as of the date of this Annual Report on Form 10-K and we expressly disclaim any obligation to update any forward-looking statements. Overview We currently operate two primary business segments, Pay-TV and Wireless. Our Wireless business segment consists of two business units,Retail Wireless and 5G Network Deployment. Our Pay-TV business strategy is to be the best provider of video services inthe United States by providing products with the best technology, outstanding customer service, and great value. We promote our Pay-TV services as providing our subscribers with a better "price-to-value" relationship than those available from other subscription television service providers. In connection with the growth in the OTT industry, we market our SLING TV services to consumers who do not subscribe to traditional satellite and cable pay-TV services, as well as to current and recent traditional pay-TV subscribers who desire a lower cost alternative. OurRetail Wireless business unit offers prepaid and postpaid retail wireless services to subscribers under our Boost Mobile and Ting Mobile brands, as well as a competitive portfolio of wireless devices. We offer customers value by providing choice and flexibility in our wireless services. We offer competitive consumer plans with no annual service contracts. Our retail wireless business strategy is to expand our current target segments and profitably grow our subscriber base by acquiring and retaining high quality subscribers while we complete our 5G Network Deployment. We intend to acquire high quality subscribers by providing competitive offers, increased consumer value and innovative new value-added services that better meet those subscribers' needs and budget. We intend on retaining those subscribers through compelling new value-added services and outstanding customer service. As we work to integrate our retail wireless brands one of our focuses will be to ensure that our Pay-TV subscribers are aware of the increased value available to them through our retail wireless brands. Our 5G Network Deployment business unit strategy is to commercialize our wireless spectrum licenses through the completion of our 5G Network Deployment. To that end, we have undertaken several key steps including identifying markets to build out, making executive and management hires and entering into agreements with key vendors. For example, onNovember 16, 2020 , we announced a long-term agreement with Crown Castle pursuant to which Crown Castle will lease us space on up to 20,000 communication towers. As part of the agreement, we will also receive certain fiber transport services and have the option to utilize Crown Castle for pre-construction services. DuringDecember 2020 , we completed a successful field validation, utilizing our fully-virtualized standalone 5G core network and the industry's first O-RAN compliant radio. 45 Table of Contents Financial Highlights
2020 Consolidated Results of Operations and Key Operating Metrics
? Revenue of
? Net income attributable to
earnings per share of common stock of
? Loss of approximately 526,000 net Pay-TV subscribers
? Loss of approximately 408,000 net DISH TV subscribers
? Loss of approximately 118,000 net SLING TV subscribers
? Pay-TV ARPU of
? Gross new DISH TV subscriber activations of approximately 1.094 million
? DISH TV churn rate of 1.38%
? DISH TV SAC of
? Gross new wireless subscriber activations of approximately 2.093 million
? Loss of approximately 575,000 net wireless subscribers
? Wireless ARPU of$38.24
Consolidated Financial Condition as of
? Cash, cash equivalents and current marketable investment securities of
billion
? Total assets of
? Total long-term debt and finance lease obligations of
Recent Developments COVID-19 Update A novel strain of coronavirus which causes the disease COVID-19 has resulted in a worldwide health pandemic. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in global travel restrictions and business slowdowns or shutdowns. The COVID-19 pandemic has also created unanticipated circumstances and uncertainty, disruption, and significant volatility in the economic environment generally, which have adversely affected, and may continue to adversely affect, our business operations and could materially and adversely affect our business, financial condition and results of operations. As the COVID-19 pandemic continues, many of our subscribers are impacted by recommendations and/or mandates from federal, state, and local authorities to practice social distancing, to refrain from gathering in groups and, in some areas, to refrain from non-essential movements outside of their homes. Governmental authorities are taking various actions in an effort to slow the spread of COVID-19. COVID-19 has impacted our business, in particular in the following areas:
In response to the outbreak and business disruption, first and foremost, we
have prioritized the health and safety of our employees. We have implemented
? increased health and safety practices including, increased use of personal
protective equipment for employees to protect them and our subscribers, and
temperature checks at certain locations.
With respect to our wireless business, in March we provided access to certain
of our wireless spectrum licenses to AT&T and T-Mobile for no cost for a 60-day
? period and
of their wireless spectrum licenses at no cost to Verizon for a 60-day period.
We extended access to certain wireless licenses for T-Mobile throughJune 30, 2020 . 46 Table of Contents Our commercial business is impacted as many bars, restaurants, and other
commercial establishments have been and continue to be recommended and/or
? mandated to suspend all non-essential "in-person" business operations and/or
operate at reduced capacity. In addition, airlines and hotels significantly
reduced operations as a result of government actions and/or related lower
consumer demand. Beginning in the second half ofMarch 2020 , COVID-19 and the related
governmental recommendations and/or mandates created reduced in person selling
? opportunities, and a reduction in subscribers' willingness to open
direct mail marketing and allow in-home technicians into their homes. As a
result, we reduced our marketing expenditures and our gross new DISH TV subscribers began to decrease.
Our
? and/or mandates caused temporary retail store closures and reduced in person
selling opportunities.
Our OnTech Smart Services and DISH Smart Home Services brands were impacted as
? in-home installation and support has been impacted by government actions and/or
related lower consumer demand for these services.
Widespread unemployment may impact our subscribers' ability to pay for the
services they receive and, as a result, we have increased our allowance for
? credit losses as a component of "Trade accounts receivable, net" as of December
31, 2020 on our Consolidated Balance Sheets. We continue to monitor the health
of our business, including the potential impact of widespread unemployment on
our subscribers' ability to pay for the services they receive.
Our supply chain has been impacted by COVID-19, and there have been and could
be additional significant and unanticipated interruptions and/or delays in the
supply of materials and/or equipment across our supply chain, due to, among
other things, surges in COVID-19. Furthermore, we may not be able to diversify
? sources of supply in a timely manner to mitigate these interruptions and/or
delays. These interruptions and/or delays in our supply chain could have a
material adverse effect on our business, including our Pay-TV and Retail
Wireless operations, our ability to meet our build-out requirement deadlines
for our wireless spectrum licenses and our 5G Network Deployment generally.
Due to the economic climate, combined with changing needs of our subscribers
? and how we can best serve them, during the second quarter of 2020, we made the
decision to reevaluate our organization. This included a focused set of
staffing reductions to align our workforce to best serve our subscribers.
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health agencies and may take additional actions based on their recommendations. In these circumstances, there may be developments beyond our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. Acquisitions We accounted for the Boost Mobile Acquisition and Ting Mobile Acquisition as business combinations. The identifiable assets acquired and liabilities assumed were recorded at their preliminary fair values as of the acquisition date and are consolidated into our financial statements. Our Consolidated Statements of Operations and Comprehensive Income (Loss) includes the results of the Boost Mobile Acquisition fromJuly 1, 2020 and the Ting Mobile Acquisition fromAugust 1, 2020 . See Note 6 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. 47 Table of Contents Boost Mobile Acquisition Asset Purchase Agreement. Effective onJuly 1, 2020 , upon the terms and subject to the conditions set forth in the APA and in accordance with the Final Judgment, we completed the Boost Mobile Acquisition andDISH Network officially entered into the retail wireless market, serving more than 9 million customers under the Boost Mobile brand.
In connection with the Boost Mobile Acquisition and the consummation of the Sprint-T-Mobile merger, we, T-Mobile, Sprint, DT and SoftBank came to an agreement with the DOJ on key terms and approval of the Transaction Agreements and our wireless service business and spectrum. OnJuly 26, 2019 , the Defendants entered into the Stipulation and Order with the DOJ binding the Defendants to the Proposed Final Judgment, which memorialized the agreement between the DOJ and the Defendants. The Stipulation and Order and the Proposed Final Judgment were filed in the District Court onJuly 26, 2019 and onApril 1, 2020 , the Final Judgment was entered with the District Court. Ting Mobile Acquisition OnAugust 1, 2020 , we completed the Ting Mobile Acquisition. In addition, we entered into a services agreement pursuant to which Tucows will act as a mobile virtual network enabler for certain of our retail wireless subscribers. The consideration for the Ting Mobile Acquisition is an earn out provision and the fair value of the earn out provision has been assigned to a customer relationship intangible that is recorded in "Intangible assets, net" with the offset recorded in "Long-term deferred revenue and other long-term liabilities" on our Consolidated Balance Sheets. See Note 6 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Service revenue. "Service revenue" consists principally of Pay-TV subscriber revenue and fixed monthly recurring charges for wireless voice, text, and data services and other fees earned from our retail wireless business unit. Certain of the amounts included in "Service revenue" are not recurring on a monthly basis.
Equipment sales and other revenue. "Equipment sales and other revenue" principally includes the sale of wireless devices and the non-subsidized sales of Pay-TV equipment.
Cost of services. "Cost of services" principally include Pay-TV programming expenses and other operating costs related to our Pay-TV segment, costs of wireless services (including costs incurred under the MNSA), as well as costs associated with our SLING TV services.
Cost of sales - equipment and other. "Cost of sales - equipment and other" principally includes the cost of wireless devices and other related items as well as costs related to the non-subsidized sales of Pay-TV equipment. Costs are generally recognized as products are delivered to customers and the related revenue is recognized. Selling, general and administrative expenses. "Selling, general and administrative expenses" consists primarily of direct sales costs, advertising, third-party commissions related to the acquisition of subscribers, costs related to the installation of our new Pay-TV subscribers, the cost of subsidized sales of Pay-TV equipment for new subscribers and employee-related costs associated with administrative services such as legal, information systems, and accounting and finance. Interest expense, net of amounts capitalized. "Interest expense, net of amounts capitalized" primarily includes interest expense (net of capitalized interest), prepayment premiums, amortization of debt discounts and debt issuance costs associated with our long-term debt, and interest expense associated with our finance lease obligations. 48 Table of Contents Other, net. The main components of "Other, net" are gains and losses realized on the sale and/or conversion of marketable and non-marketable investment securities and derivative instruments, impairment of marketable and non-marketable investment securities, unrealized gains and losses from changes in fair value of certain marketable investment securities and derivative instruments, and equity in earnings and losses of our affiliates.
Earnings before interest, taxes, depreciation and amortization ("EBITDA").
EBITDA is defined as "Net income (loss) attributable to
Operating income before depreciation and amortization ("OIBDA"). OIBDA is defined as "Operating income (loss)" plus "Depreciation and amortization." This "non-GAAP measure" is reconciled to "Operating income (loss)" in our discussion of "Results of Operations" below. DISH TV subscribers. We include customers obtained through direct sales, independent third-party retailers and other independent third-party distribution relationships in our DISH TV subscriber count. We also provide DISH TV services to hotels, motels and other commercial accounts. For certain of these commercial accounts, we divide our total revenue for these commercial accounts by$34.99 , and include the resulting number, which is substantially smaller than the actual number of commercial units served, in our DISH TV subscriber count. SLING TV subscribers. We include customers obtained through direct sales and third-party marketing agreements in our SLING TV subscriber count. SLING TV subscribers are recorded net of disconnects. SLING TV customers receiving service for no charge, under certain new subscriber promotions, are excluded from our SLING TV subscriber count. For customers who subscribe to multiple SLING TV packages, each customer is only counted as one SLING TV subscriber. Pay-TV subscribers. Our Pay-TV subscriber count includes all DISH TV and SLING TV subscribers discussed above. For customers who subscribe to both our DISH TV services and our SLING TV services, each subscription is counted as a separate Pay-TV subscriber. Pay-TV average monthly revenue per subscriber ("Pay-TV ARPU"). We are not aware of any uniform standards for calculating ARPU and believe presentations of ARPU may not be calculated consistently by other companies in the same or similar businesses. We calculate Pay-TV average monthly revenue per Pay-TV subscriber, or Pay-TV ARPU, by dividing average monthly Pay-TV segment "Service revenue," excluding revenue from broadband services, for the period by our average number of Pay-TV subscribers for the period. The average number of Pay-TV subscribers is calculated for the period by adding the average number of Pay-TV subscribers for each month and dividing by the number of months in the period. The average number of Pay-TV subscribers for each month is calculated by adding the beginning and ending Pay-TV subscribers for the month and dividing by two. SLING TV subscribers on average purchase lower priced programming services than DISH TV subscribers, and therefore, as SLING TV subscribers increase, it has had a negative impact on Pay-TV ARPU. DISH TV average monthly subscriber churn rate ("DISH TV churn rate"). We are not aware of any uniform standards for calculating subscriber churn rate and believe presentations of subscriber churn rates may not be calculated consistently by different companies in the same or similar businesses. We calculate DISH TV churn rate for any period by dividing the number of DISH TV subscribers who terminated service during the period by the average number of DISH TV subscribers for the same period, and further dividing by the number of months in the period. The average number of DISH TV subscribers is calculated for the period by adding the average number of DISH TV subscribers for each month and dividing by the number of months in the period. The average number of DISH TV subscribers for each month is calculated by adding the beginning and ending DISH TV subscribers for the month and dividing by two. 49 Table of Contents DISH TV SAC. Subscriber acquisition cost measures are commonly used by those evaluating traditional companies in the pay-TV industry. We are not aware of any uniform standards for calculating the "average subscriber acquisition costs per new DISH TV subscriber activation," or DISH TV SAC, and we believe presentations of pay-TV SAC may not be calculated consistently by different companies in the same or similar businesses. Our DISH TV SAC is calculated using all of costs of acquiring DISH TV subscribers (e.g., subsidized equipment, advertising, installation, commissions and direct sales, etc.) which are included in "Selling, general and administrative expenses," plus capitalized payments made under certain sales incentive programs and the value of equipment capitalized under our lease program for new DISH TV subscribers, divided by gross new DISH TV subscriber activations. We include all new DISH TV subscribers in our calculation, including DISH TV subscribers added with little or no subscriber acquisition costs. Although we no longer have a separate line item for subscriber acquisition costs on our Consolidated Statements of Operations and Comprehensive Income (Loss), our methodology for calculating DISH TV SAC is unchanged from prior periods.
Wireless subscribers. We include prepaid and postpaid customers obtained through direct sales, independent third-party retailers and other independent third-party distribution relationships in our wireless subscriber count.
Wireless average monthly revenue per subscriber ("Wireless ARPU"). We are not aware of any uniform standards for calculating ARPU and believe presentations of ARPU may not be calculated consistently by other companies in the same or similar businesses. We calculate average monthly revenue per wireless subscriber, or Wireless ARPU, by dividing average monthly retail wireless business unit "Service revenue" for the period by our average number of wireless subscribers for the period. The average number of wireless subscribers is calculated for the period by adding the average number of wireless subscribers for each month and dividing by the number of months in the period. The average number of wireless subscribers for each month is calculated by adding the beginning and ending wireless subscribers for the month and dividing by two. Wireless average monthly subscriber churn rate ("Wireless churn rate"). We are not aware of any uniform standards for calculating subscriber churn rate and believe presentations of subscriber churn rates may not be calculated consistently by different companies in the same or similar businesses. We calculate our "Wireless churn rate" for any period by dividing the number of wireless subscribers who terminated service during the period by the average number of wireless subscribers for the same period, and further dividing by the number of months in the period. The average number of wireless subscribers is calculated for the period by adding the average number of wireless subscribers for each month and dividing by the number of months in the period. The average number of wireless subscribers for each month is calculated by adding the beginning and ending wireless subscribers for the month and dividing by two. Free cash flow. We define free cash flow as "Net cash flows from operating activities" less "Purchases of property and equipment" and "Capitalized interest related toFCC authorizations," as shown on our Consolidated Statements of
Cash Flows. 50 Table of Contents
RESULTS OF OPERATIONS - Segments
Business Segments
We currently operate two primary business segments: (1) our Pay-TV segment; and (2) our Wireless segment. Our Wireless segment consists of two business units, theRetail Wireless business unit and 5G Network Deployment business unit. Revenue and operating income (loss) by segment are shown in the table below: Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 .
For the Years Ended December 31, Variance 2020 2019 Amount % (In thousands) Revenue: Pay-TV$ 12,897,413 $ 12,810,248 $ 87,165 0.7 Wireless 2,599,842 1,673 2,598,169 * Eliminations (3,820) (4,237) 417 9.8 Total revenue$ 15,493,435 $ 12,807,684 $ 2,685,751 21.0 Operating income (loss): Pay-TV$ 2,903,183 $ 1,961,700 $ 941,483 48.0 Wireless (320,568) (82,824) (237,744) * Eliminations - - - * Total operating income (loss)$ 2,582,615 $ 1,878,876 $ 703,739 37.5
* Percentage is not meaningful.
Total revenue. Our consolidated revenue totaled$15.493 billion for the year endedDecember 31, 2020 , an increase of$2.686 billion or 21.0% compared to the same period in 2019. The increase primarily resulted from the completion of
the Boost Mobile Acquisition. Total operating income (loss). Our consolidated operating income totaled$2.583 billion for the year endedDecember 31, 2020 , an increase of$704 million or 37.5% compared to the same period in 2019. The change primarily resulted from an increase in the operating income from our Pay-TV segment and ourRetail Wireless business unit, partially offset by an increase in operating losses associated with our 5G Network Deployment business unit, principally related to an "Impairment of long-lived assets" of$356 million in the first quarter of 2020. 51 Table of Contents Pay-TV Segment
We offer pay-TV services under the DISH® brand and the SLING® brand
(collectively "Pay-TV" services). As of
We market our SLING TV services to consumers who do not subscribe to traditional satellite and cable pay-TV services, as well as to current and recent traditional pay-TV subscribers who desire a lower cost alternative. Our SLING TV services require an Internet connection and are available on multiple streaming-capable devices including streaming media devices, TVs, tablets, computers, game consoles and phones. We offer SLING domestic,SLING International , and SLING Latino video programming services. Trends in our Pay-TV Segment Competition Competition has intensified in recent years as the pay-TV industry has matured. We and our competitors increasingly must seek to attract a greater proportion of new subscribers from each other's existing subscriber bases rather than from first-time purchasers of pay-TV services. We face substantial competition from established pay-TV providers and broadband service providers and increasing competition from companies providing/facilitating the delivery of video content via the Internet to computers, televisions, and other streaming and mobile devices, including wireless service providers. In recent years, industry consolidation and convergence has created competitors with greater scale and multiple product/service offerings. These developments, among others, have contributed to intense and increasing competition, and we expect such competition to continue. We incur significant costs to retain our existing DISH TV subscribers, mostly as a result of upgrading their equipment to next generation receivers, primarily including our Hopper receivers, and by providing retention credits. Our DISH TV subscriber retention costs may vary significantly from period to period. Many of our competitors have been especially aggressive by offering discounted programming and services for both new and existing subscribers, including bundled offers combining broadband, video and/or wireless services and other promotional offers. Certain competitors have been able to subsidize the price of video services with the price of broadband and/or wireless services. Our Pay-TV services also face increased competition from programmers and other companies who distribute video directly to consumers over the Internet, as well as traditional satellite television providers, cable companies and large telecommunications companies that are increasing their Internet-based video offerings. We also face competition from providers of video content, many of which are providers of our programming content, that distribute content over the Internet including services with live-linear television programming, as well as single programmer offerings and offerings of large libraries of on-demand content, including in certain cases original content. These providers include, among others, Netflix, Hulu, Apple, Amazon, Alphabet,Disney , Verizon, AT&T, T-Mobile, ViacomCBS, STARZ, Peacock, Fubo and Philo. Significant changes in consumer behavior with regard to the means by which consumers obtain video entertainment and information in response to digital media competition could have a material adverse effect on our business, results of operations and financial condition or otherwise disrupt our business. In particular, consumers have shown increased interest in viewing certain video programming in any place, at any time and/or on any broadband-connected device they choose. Online content providers may cause our subscribers to disconnect our DISH TV services ("cord cutting"), downgrade to smaller, less expensive programming packages ("cord shaving") or elect to purchase through these online content providers a certain portion of the services that they would have historically purchased from us, such as pay per view movies. 52 Table of Contents Mergers and acquisitions, joint ventures and alliances among cable television providers, telecommunications companies, programming providers and others may result in, among other things, greater scale and financial leverage and increase the availability of offerings from providers capable of bundling video, broadband and/or wireless services in competition with our services and may exacerbate the risks described in our public filings. These transactions may affect us adversely by, among other things, making it more difficult for us to obtain access to certain programming networks on nondiscriminatory and fair terms, or at all. Our Pay-TV subscriber base has been declining due to, among other things, the factors described above. There can be no assurance that our Pay-TV subscriber base will not continue to decline and that the pace of such decline will not accelerate. As our Pay-TV subscriber base continues to decline, it could have a material adverse long-term effect on our business, results of operations, financial condition and cash flow. Programming
Our ability to compete successfully will depend, among other things, on our ability to continue to obtain desirable programming and deliver it to our subscribers at competitive prices. Programming costs represent a large percentage of our "Cost of services" and the largest component of our total expense. We expect these costs to continue to increase due to contractual price increases and the renewal of long-term programming contracts on less favorable pricing terms and certain programming costs are rising at a much faster rate than wages or inflation. In particular, the rates we are charged for retransmitting local broadcast channels have been increasing substantially and may exceed our ability to increase our prices to our subscribers. Going forward, our margins may face pressure if we are unable to renew our long-term programming contracts on acceptable pricing and other economic terms or if we are unable to pass these increased programming costs on to our subscribers. Increases in programming costs have caused us to increase the rates that we charge to our subscribers, which could in turn cause our existing Pay-TV subscribers to disconnect our service or cause potential new Pay-TV subscribers to choose not to subscribe to our service. Additionally, even if our subscribers do not disconnect our services, they may purchase through new and existing online content providers a certain portion of the services that they would have historically purchased from us, such as pay-per-view movies. Furthermore, our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate may be negatively impacted if we are unable to renew our long-term programming carriage contracts before they expire. In the past, our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate have been negatively impacted as a result of programming interruptions and threatened programming interruptions in connection with the scheduled expiration of programming carriage contracts with content providers. For example, inJune 2018 andNovember 2018 ,Univision Communications Inc. ("Univision") removed certain of its channels from our DISH TV and SLING TV programming lineup. OnMarch 26, 2019 , we and Univision signed a new programming carriage contract which restored certain of these Univision channels to our DISH TV programming lineup. InOctober 2018 , AT&T removed itsHBO and Cinemax channels from our DISH TV and SLING TV programming lineup, as we and AT&T have been unable to negotiate the terms and conditions of a new programming carriage contract. AT&T offers its programming, including itsHBO and Cinemax channels, directly to consumers over the Internet and providesHBO for free to its subscribers under certain offers. InJuly 2019 ,Fox Regional Sports Networks ("RSNs") also removed certain of its channels from our DISH TV and SLING TV programming lineup. InAugust 2019 , Sinclair Broadcast Group acquired the Fox RSNs. We experienced a higher DISH TV churn rate, higher net Pay-TV subscriber losses and lower gross new DISH TV subscriber activations during 2018 and 2019, when Univision, AT&T and Sinclair RSNs removed certain of their channels from our DISH TV and SLING TV programming lineup. There can be no assurance that channel removals, such as the removal of the channels discussed above or others, will not have a material adverse effect on our business, results of operations and financial condition or otherwise disrupt our business. 53 Table of Contents We cannot predict with any certainty the impact to our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate resulting from additional programming interruptions or threatened programming interruptions that may occur in the future. As a result, we may at times suffer from periods of lower net Pay-TV subscriber additions or higher net Pay-TV
subscriber losses. Master Transaction Agreement
On
Pursuant to the Master Transaction Agreement, among other things: (i) EchoStar carried out an internal reorganization in which certain assets and liabilities of theEchoStar Satellite Services segment, the business segment of EchoStar that provides broadcast satellite operations and satellite services, as well as certain related licenses, real estate properties and employees (together, the "BSS Business") were transferred to Newco (the "Pre-Closing Restructuring"); (ii) EchoStar distributed all outstanding shares of common stock, par value$0.001 per share, of Newco (such stock, "Newco Common Stock") on a pro rata basis (the "Distribution"), to the holders of record of Class A common stock, par value$0.001 per share, of EchoStar and Class B common stock, par value$0.001 per share, of EchoStar; and (iii) upon the consummation of the Pre-Closing Restructuring and the Distribution, Merger Sub merged with and into Newco (the "Merger") such that, upon consummation of the Merger, Merger Sub ceased to exist and Newco continued as our wholly-owned subsidiary. EffectiveSeptember 10, 2019 , pursuant to the terms and subject to the conditions set forth in the Master Transaction Agreement, in consideration for the Merger, we issued 22,937,188 shares of our Class A common stock to the holders of Newco Common Stock at a ratio of 0.23523769 of our Class A common stock for each outstanding share of Newco Common Stock. The transaction was structured as a tax-free spin-off and merger. In addition, as the result of the Merger, we, EchoStar and, as relevant, certain of our or their respective subsidiaries, entered into ancillary agreements involving tax, employment and intellectual property matters, which set forth certain rights and obligations of us and EchoStar and our and their respective subsidiaries related to the Merger with respect to, among other things: (i) the payment of tax liability refunds, and the filing of tax returns related to Newco and the BSS Business; (ii) the allocation of employment-related assets and liabilities between us and EchoStar; (iii) certain employee compensation, equity awards, benefit plans, programs and arrangements relating to employees who are expected to be transferred to us pursuant to the Merger; (iv) a cross-license between us and EchoStar for certain intellectual property either transferred to us as part of the Merger or retained by EchoStar that is also used in the BSS Business; and (v) the provision of certain telemetry, tracking and control services by us and our subsidiaries to EchoStar and its subsidiaries. The description of the Master Transaction Agreement in this section is qualified in its entirety by reference to the complete text of the Master Transaction Agreement, a copy of which is filed as Exhibit 2.1 to our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2019 . The Merger was accounted for as an asset purchase, as substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets. As the Merger was between entities that were under common control, we recorded the assets and liabilities received under the Merger at EchoStar's historical cost basis, with the offsetting amount recorded in "Additional paid-in capital" on our Consolidated Balance Sheets. A significant portion of the assets received under the Merger were historically leased to us by EchoStar. As these assets and the related liabilities have been transferred to us pursuant to the Master Transaction Agreement, they are no longer be included in "Operating lease assets," "Other current liabilities" and "Operating lease liabilities," but rather in "Property and equipment, net" on our Consolidated Balance Sheets. 54 Table of Contents
RESULTS OF OPERATIONS -
Year Ended
For the Years EndedDecember 31 , Variance
Statements of Operations Data 2020
2019 Amount % (In thousands) Revenue: Service revenue $
12,702,345
195,068 193,806 1,262 0.7 Total revenue 12,897,413 12,810,248 87,165 0.7 Costs and expenses: Cost of services 7,812,003 8,377,351 (565,348) (6.7) % of Service revenue 61.5 % 66.4 % Cost of sales - equipment and other 114,780 173,136 (58,356) (33.7) Selling, general and administrative expenses 1,453,521 1,676,251 (222,730) (13.3) % of Total revenue 11.3 % 13.1 % Depreciation and amortization 613,926 621,810 (7,884) (1.3) Total costs and expenses 9,994,230 10,848,548 (854,318) (7.9) Operating income (loss) $
2,903,183
Other data: Pay-TV subscribers, as of period end (in millions) ** 11.290 11.986 (0.696) (5.8) DISH TV subscribers, as of period end (in millions) ** 8.816 9.394 (0.578) (6.2) SLING TV subscribers, as of period end (in millions) 2.474 2.592 (0.118) (4.6) Pay-TV subscriber additions (losses), net (in millions) (0.526) (0.336) (0.190) (56.5) DISH TV subscriber additions (losses), net (in millions) (0.408) (0.511) 0.103 20.2 SLING TV subscriber additions (losses), net (in millions) (0.118) 0.175 (0.293) * Pay-TV ARPU $ 91.77 $ 85.92$ 5.85 6.8 DISH TV subscriber additions, gross (in millions) 1.094 1.348 (0.254) (18.8) DISH TV churn rate 1.38 % 1.62 % (0.24) % (14.8) DISH TV SAC $ 851 $ 822$ 29 3.5 Purchases of property and equipment $ 317,196 $ 393,501$ (76,305) (19.4) OIBDA$ 3,517,109 $ 2,583,510 $ 933,599 36.1
* Percentage is not meaningful.
**During the first quarter 2020, we removed approximately 250,000 subscribers representing commercial accounts impacted by COVID-19 from our ending Pay-TV subscriber count. During the year ended December, 31, 2020, 80,000 of these subscribers came off pause or had temporary rate relief end and are included in our ending Pay-TV subscriber count as ofDecember 31, 2020 . The effect of the removal of these 250,000 subscribers as ofMarch 31, 2020 and the addition of these 80,000 subscribers as ofDecember 31, 2020 was excluded from the calculation of our gross new Pay-TV subscriber activations, net Pay-TV subscriber additions/losses and Pay-TV churn rate for the year endedDecember 31, 2020 . See "Results of Operations - Pay-TV subscribers" for further information. 55 Table of Contents Pay TV subscribers
DISH TV subscribers. We lost approximately 408,000 net DISH TV subscribers during the year endedDecember 31, 2020 compared to the loss of approximately 511,000 net DISH TV subscribers during the same period in 2019. This decrease in net DISH TV subscriber losses primarily resulted from a lower DISH TV churn rate, partially offset by lower gross new DISH TV subscriber activations. SLING TV subscribers. We lost approximately 118,000 net SLING TV subscribers during the year endedDecember 31, 2020 compared to the addition of approximately 175,000 net SLING TV subscribers during the same period in 2019. This decrease in net SLING TV subscriber additions was primarily related to lower SLING TV subscriber activations, increased competition, including competition from other subscription video on-demand and live-linear OTT service providers, and delays and cancellations of sporting events as a result of COVID-19. DISH TV subscribers, gross. During the year endedDecember 31, 2020 , we activated approximately 1.094 million gross new DISH TV subscribers compared to approximately 1.348 million gross new DISH TV subscribers during the same period in 2019, a decrease of 18.8%. This decrease in our gross new DISH TV subscriber activations was primarily related to the impact of COVID-19. Beginning in the second half ofMarch 2020 , COVID-19 and the related governmental recommendations and/or mandates created reduced in person selling opportunities, and a reduction in customers' willingness to open direct mail marketing and allow in-home technicians into their homes as well as delays and cancellations of sporting events. As a result, beginning in the first quarter 2020, we reduced our marketing expenditures and our gross new DISH TV subscribers began to decrease. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our gross new DISH TV subscribers as a result of, among other things, higher unemployment and lower discretionary spending and reduced ability to perform our in-home service operations due to the impact of social distancing. In addition, our gross new DISH TV subscriber activations continue to be negatively impacted by stricter customer acquisition policies for our DISH TV subscribers, including an emphasis on acquiring higher quality subscribers, and by increased competitive pressures, including aggressive short term introductory pricing and bundled offers combining broadband, video and/or wireless services and other discounted promotional offers, and channel removals. DISH TV churn rate. Our DISH TV churn rate for the year endedDecember 31, 2020 was 1.38% compared to 1.62% for the same period in 2019. This decrease primarily resulted from the impact of COVID-19, including, among other things, the recommendations and/or mandates from federal, state, and local authorities that customers refrain from non-essential movements outside of their homes and the resulting increased consumption of our Pay-TV services. In addition, COVID-19 had an impact on competitive pressures due to, among other things, a reduction in customers' willingness to allow competitors' technicians into their homes and delays and cancellations of sporting events that reduced the attractiveness of competitors' promotional offers and services. Furthermore, our DISH TV churn rate for the year endedDecember 31, 2019 was negatively impacted by Univision's removal of certain of their channels from our programming lineup. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our DISH TV churn rate as a result of, among other things, higher unemployment and lower discretionary spending and reduced ability to perform our in-home service operations due to the impact of social distancing. In addition, this decrease also resulted from our emphasis on acquiring and retaining higher quality subscribers. Our DISH TV churn rate continues to be adversely impacted by external factors, such as, among other things, increased competitive pressures, including aggressive marketing, bundled discount offers combining broadband, video and/or wireless services and other discounted promotional offers, as well as cord cutting. Our DISH TV churn rate is also impacted by internal factors, such as, among other things, our ability to consistently provide outstanding customer service, price increases, programming interruptions in connection with the scheduled expiration of certain programming carriage contracts, our ability to control piracy and other forms of fraud and the level of our retention efforts. 56 Table of Contents Beginning inMarch 2020 , several federal, state, and local government agencies implemented recommendations, guidelines, and orders regarding "social distancing" in an attempt to slow or stop the spread of COVID-19. As a result of these actions, many bars, restaurants, and other commercial establishments have been and continue to be recommended and/or ordered to suspend all non-essential "in-person" business operations and/or operate at reduced capacity. In addition, airlines and hotels significantly reduced operations as a result of government actions and/or related lower consumer demand. In an effort to avoid charging commercial customers for services in their establishments which are no longer open to the public, we have paused service or provided temporary rate relief for certain of those commercial accounts. For certain commercial accounts, each subscription is counted as one Pay-TV subscriber. For other commercial accounts, as discussed above, we divide our total revenue for these commercial accounts by$34.99 , and include the resulting number, which is substantially smaller than the actual number of commercial units served, in our Pay-TV subscriber count. During the first quarter 2020, we removed 250,000 subscribers from our ending Pay-TV subscriber count for commercial accounts we placed on pause, or received reduced revenue, or for which we anticipate the account to disconnect due to COVID-19. During the year endedDecember 31, 2020 , 80,000 of these subscribers came off pause or had temporary rate relief end and 69,000 of these subscribers disconnected.
We have not incurred and do not expect to incur any significant expenses in connection with the return of these commercial accounts and accordingly, these commercial accounts were added to our ending subscriber count and were not recorded as gross new Pay-TV subscriber activations. We cannot predict when the remaining commercial accounts will be able to fully reopen, how many will return or when they may return to active subscriber status, and there can be no assurance that they will return. We continue to assess the impact of COVID-19 and cannot predict with certainty the impact to our subscriber base, gross new DISH TV subscribers and our DISH TV churn rate as a result of, among other things, higher unemployment and lower discretionary spending and our reduced ability to perform our in-home service operations due to the impact of social distancing. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition and results of operations. We cannot predict with any certainty the impact to our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV subscriber churn rate resulting from programming interruptions or threatened programming interruptions that may occur in the future. As a result, we may at times suffer from periods of lower net Pay-TV subscriber additions or higher net Pay-TV subscriber losses. We have not always met our own standards for performing high-quality installations, effectively resolving subscriber issues when they arise, answering subscriber calls in an acceptable timeframe, effectively communicating with our subscriber base, reducing calls driven by the complexity of our business, improving the reliability of certain systems and subscriber equipment and aligning the interests of certain independent third-party retailers and installers to provide high-quality service. Most of these factors have affected both gross new DISH TV subscriber activations as well as DISH TV subscriber churn rate. Our future gross new DISH TV subscriber activations and our DISH TV subscriber churn rate may be negatively impacted by these factors, which could in turn adversely affect our revenue. Service revenue. "Service revenue" totaled$12.702 billion for the year endedDecember 31, 2020 , an increase of$86 million or 0.7% compared to the same period in 2019. The increase in "Service revenue" compared to the same period in 2019 was primarily related to an increase in Pay-TV ARPU discussed below, partially offset by a lower average Pay- TV subscriber base. Pay-TV ARPU. Pay-TV ARPU was$91.77 during the year endedDecember 31, 2020 versus$85.92 during the same period in 2019. The$5.85 or 6.8% increase in Pay-TV ARPU was primarily attributable to the DISH TV programming package price increases in the first quarter 2020 and 2019, the SLING TV programming package price increases in the first quarter 2020 and fourth quarter 2019, higher ad sales revenue and fewer commercial accounts compared to the same period in 2019, which have lower Pay-TV ARPU than residential subscribers. 57 Table of Contents
Cost of services. "Cost of services" totaled$7.812 billion during the year endedDecember 31, 2020 , a decrease of$565 million or 6.7% compared to the same period in 2019. The decrease in "Cost of services" was primarily attributable to a lower average Pay-TV subscriber base and the reduction of expense associated with the transfer of certain assets to us pursuant to the Master Transaction Agreement, partially offset by increases in programming costs per subscriber. Programming costs per subscriber increased during the year endedDecember 31, 2020 due to rate increases in certain of our programming contracts, including the renewal of certain contracts at higher rates, particularly for local broadcast channels. These increases were partially offset by a decrease in programming costs per subscriber due to, among others, Sinclair RSN's removal of certain of their channels from our programming lineup inJuly 2019 and multiple one-time programming adjustments in the third quarter 2020. "Cost of services" represented 61.5% and 66.4% of "Service revenue" during the year endedDecember 31, 2020 and 2019, respectively. See Note 20 in the Notes to our Consolidated Financial Statements for further information on the Master Transaction Agreement. In the normal course of business, we enter into contracts to purchase programming content in which our payment obligations are generally contingent on the number of Pay-TV subscribers to whom we provide the respective content. Our "Cost of services" have and will continue to face further upward pressure from price increases and the renewal of long-term programming contracts on less favorable pricing terms. In addition, our programming expenses will increase to the extent we are successful in growing our Pay-TV subscriber base. Selling, general and administrative expenses. "Selling, general and administrative expenses" totaled$1.454 billion during the year endedDecember 31, 2020 , a$223 million or 13.3% decrease compared to the same period in 2019. This change was primarily driven by a decrease in subscriber acquisition costs resulting from fewer gross new DISH TV subscriber activations, a$70 million reduction to litigation expense as a result of the Telemarketing Litigation settlement and cost cutting initiatives in the Pay-TV segment, including a focused set of staffing reductions. See Note 16 in the Notes to our Consolidated Financial Statements for further information on the Telemarketing Litigation.
DISH TV SAC. DISH TV SAC was$851 during the year endedDecember 31, 2020 compared to$822 during the same period in 2019, an increase of$29 or 3.5%. This change was primarily attributable to fewer commercial additions compared to the same period in 2019 and an increase in advertising costs per subscriber. Commercial activations historically have lower DISH TV SAC than residential activations, and therefore the decrease in commercial activations had a negative impact on DISH TV SAC. Beginning in the first quarter 2020, as a result of COVID-19 and the related governmental recommendations and/or mandates, our in person selling opportunities and our customers' willingness to open direct mail marketing and allow in-home technicians into their homes were reduced. Accordingly, we reduced our marketing expenditures and our gross new DISH TV subscriber activations began to decrease. Although we reduced our marketing expenditures, gross new DISH TV subscriber activations decreased at a higher rate, resulting in an increase in advertising costs per subscriber during 2020 compared to 2019. During the year endedDecember 31, 2020 and 2019, the amount of equipment capitalized under our lease program for new DISH TV subscribers totaled$151 million and$191 million , respectively. This decrease in capital expenditures primarily resulted from a decrease in gross new DISH TV subscriber activations.
To remain competitive, we upgrade or replace subscriber equipment periodically as technology changes, and the costs associated with these upgrades may be substantial. To the extent technological changes render a portion of our existing equipment obsolete, we would be unable to redeploy all returned equipment and consequently would realize less benefit from the DISH TV SAC reduction associated with redeployment of that returned lease equipment.
Our "DISH TV SAC" may materially increase in the future to the extent that we, among other things, transition to newer technologies, introduce more aggressive promotions, or provide greater equipment subsidies. See further information under "Liquidity and Capital Resources - Subscriber Acquisition and Retention Costs."
For discussion of the Pay-TV results of operations for the year ended
58 Table of Contents Wireless Segment Our Wireless business segment operates in two business units,Retail Wireless and 5G Network Deployment. Revenue, operating income (loss) and purchases of property and equipment by business unit are shown in the table below: Retail 5G Network For the Year Ended December 31, 2020 Wireless DeploymentTotal Wireless (In thousands) Total revenue$ 2,579,057 $ 20,785 $ 2,599,842 Operating income (loss)$ 162,743 $ (483,311) $ (320,568)
Purchases of property and equipment
96,106 Wireless -Retail Wireless As a result of the Boost Mobile Acquisition and the Ting Mobile Acquisition, we have entered the retail wireless business. See Note 6 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. We offer nationwide prepaid and postpaid retail wireless services to subscribers under our Boost Mobile and Ting Mobile brands, as well as a competitive portfolio of wireless devices. Prepaid wireless subscribers generally pay in advance for monthly access to wireless talk, text, and data services. Postpaid wireless subscribers generally are qualified to pay after receiving wireless talk, text, and data services. We are currently operating our retail wireless business unit as an MVNO while we build our 5G broadband network. As an MVNO, we depend primarily on T-Mobile to provide us with network services under the MNSA. A majority of ourRetail Wireless subscribers currently receive services through T-Mobile's CDMA Network, under the MNSA.
We
acquired over 9 million subscribers as a result of the Boost Mobile Acquisition and acquired over 200,000 subscribers as a result of the Ting Mobile Acquisition. Our Consolidated Statements of Operations and Comprehensive Income (Loss) includes the results of the Boost Mobile Acquisition fromJuly 1, 2020 and Ting Mobile Acquisition fromAugust 1, 2020 . As ofDecember 31, 2020 , we had 9.055 million retail wireless subscribers. Currently, we offer wireless subscribers competitive consumer plans with no annual service contracts and monthly service plans ranging from$10 for 1GB of high-speed data and unlimited talk and text to$60 for unlimited data, talk and text. We also offer promotional plans, including, among others, three lines for$90 for unlimited data, talk and text. Competition Boost Mobile operates within the prepaid wireless space and Ting Mobile operates within the postpaid wireless space.Retail Wireless is a mature market with moderate year-over-year organic growth. Competitors include providers who offer similar communication services, such as talk, text and data. Competitive factors within the wireless communications services industry include pricing, market saturation, service and product offerings, customer experience and service quality. We compete with a number of national wireless carriers, including Verizon, AT&T and T-Mobile, all of which are significantly larger than us, serve a significant percentage of all wireless subscribers and enjoy scale advantages compared to us. Verizon, AT&T, and T-Mobile are currently the only nationwide Mobile Network Operators ("MNOs") inthe United States . Primary competitors to ourRetail Wireless business unit include, but are not limited to, Metro PCS (owned by T-Mobile),Cricket Wireless (owned by AT&T),Tracfone Wireless and other MVNOs such as Consumer Cellular and Mint Mobile. Verizon announced its pending acquisition ofTracfone Wireless inSeptember 2020 . 59 Table of Contents
Wireless - 5G Network Deployment
We have directly invested over$11 billion to acquire certain wireless spectrum licenses and related assets and made over$10 billion in non-controlling investments in certain entities, for a total of over$21 billion . The$21 billion of investments related to wireless spectrum licenses does not include$6 billion of capitalized interest related to the carrying value of such licenses. See Note 2 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information on capitalized interest. DISH Network Spectrum We have directly invested over$11 billion to acquire certain wireless spectrum licenses and related assets. These wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. We plan to commercialize our wireless spectrum licenses through the completion of our 5G Network Deployment. To that end, we have undertaken several key steps including identifying markets to build out, making executive and management hires and entering into agreements with key vendors. For example, onNovember 16, 2020 , we announced a long-term agreement with Crown Castle pursuant to which Crown Castle will lease us space on up to 20,000 communication towers. As part of the agreement, we will also receive certain fiber transport services and have the option to utilize Crown Castle for pre-construction services. DuringDecember 2020 , we completed a successful field validation, utilizing our fully-virtualized standalone 5G core network and the industry's first O-RAN compliant radio. We currently expect expenditures for our 5G Network Deployment to be approximately$10 billion , excluding capitalized interest. Prior to starting our 5G Network Deployment, we notified theFCC inMarch 2017 that we planned to deploy a narrowband IoT network on certain of these wireless licenses, which we expected to complete byMarch 2020 , with subsequent phases to be completed thereafter. In light of, among other things, certain developments related to the Sprint-T-Mobile merger, during the first quarter 2020, we determined that the revision of certain of our build-out deadlines was probable and, therefore, we no longer intended to complete our narrowband IoT deployment. TheFCC issued an Order effectuating the build-out deadline changes contemplated above onSeptember 11, 2020 . During the first quarter 2020, we impaired certain assets that would not be utilized in our 5G Network Deployment, resulting in a$253 million non-cash impairment charge in "Impairment of long-lived assets" on our Consolidated Statements of Operations and Comprehensive Income (Loss). We will need to make significant additional investments or partner with others to, among other things, complete our 5G Network Deployment and further commercialize, build-out and integrate these licenses and related assets and any additional acquired licenses and related assets, as well as to comply with regulations applicable to such licenses. Depending on the nature and scope of such activities, any such investments or partnerships could vary significantly. In addition, as we complete our 5G Network Deployment we will incur significant additional expenses and will have to make significant investments related to, among other things, research and development, wireless testing and wireless network infrastructure. We may also determine that additional wireless spectrum licenses may be required to complete our 5G Network Deployment and to compete with other wireless service providers. See Note 2 and Note 16 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. 60 Table of Contents
DISH Network Non-Controlling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
During 2015, through our wholly-owned subsidiariesAmerican AWS-3 Wireless II L.L.C. ("American II") andAmerican AWS-3 Wireless III L.L.C. ("American III"), we initially made over$10 billion in certain non-controlling investments inNorthstar Spectrum, LLC ("Northstar Spectrum"), the parent company ofNorthstar Wireless, L.L.C. ("Northstar Wireless ," and collectively with Northstar Spectrum, the "Northstar Entities"), and inSNR Wireless HoldCo, LLC ("SNR HoldCo"), the parent company ofSNR Wireless LicenseCo, LLC ("SNR Wireless ," and collectively with SNR HoldCo, the "SNR Entities"), respectively. OnOctober 27, 2015 , theFCC granted certain AWS-3 wireless spectrum licenses (the "AWS-3 Licenses") toNorthstar Wireless and toSNR Wireless , respectively, which are recorded in "FCC authorizations" on our Consolidated Balance Sheets. Under the applicable accounting guidance in Accounting Standards Codification 810, Consolidation ("ASC 810"), Northstar Spectrum and SNR HoldCo are considered variable interest entities and, based on the characteristics of the structure of these entities and in accordance with the applicable accounting guidance, we consolidate these entities into our financial statements. See Note 2 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. The AWS-3 Licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The Northstar Entities and/or the SNR Entities may need to raise significant additional capital in the future, which may be obtained from third party sources or from us, so that the Northstar Entities and the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential Northstar Re-Auction Payment and SNR Re-Auction Payment for the AWS-3 licenses retained by theFCC . Depending upon the nature and scope of such commercialization, build-out and integration efforts, regulatory compliance, and potential Northstar Re-Auction Payment and SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. See Note 16 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. We may need to raise significant additional capital in the future to fund the efforts described above, which may not be available on acceptable terms or at all. There can be no assurance that we, the Northstar Entities and/or the SNR Entities will be able to develop and implement business models that will realize a return on these wireless spectrum licenses or that we, the Northstar Entities and/or the SNR Entities will be able to profitably deploy the assets represented by these wireless spectrum licenses, which may affect the carrying amount of these assets and our future financial condition or results of operations. See Note 16 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. 61 Table of Contents
RESULTS OF OPERATIONS - Wireless Segment - Retail Wireless Business Unit
Year Ended
For the Years EndedDecember 31 , Variance Statements of Operations Data 2020
2019 Amount % (In thousands) Revenue: Service revenue $ 2,143,703 $ -$ 2,143,703 *
Equipment sales and other revenue
435,354 - 435,354 * Total revenue 2,579,057 - 2,579,057 * Costs and expenses: Cost of services 1,282,022 - 1,282,022 * % of Service revenue 59.8 % * %
Cost of sales - equipment and other 806,198 - 806,198 * Selling, general and administrative expenses 239,035 - 239,035 * % of Total revenue 9.3 % * % Depreciation and amortization 89,059 - 89,059 * Total costs and expenses 2,416,314 - 2,416,314 * Operating income (loss) $
162,743 $ -
Other data: Wireless subscribers, as of period end (in millions) 9.055 - 9.055 * Wireless subscriber additions, gross (in millions) 2.093 - 2.093 * Wireless subscriber additions (losses), net (in millions)
(0.575) - (0.575) * Wireless ARPU $ 38.24 $ -$ 38.24 * Wireless churn rate 4.76 % - 4.76 % * OIBDA $ 251,802 $ -$ 251,802 *
* Percentage is not meaningful.
The results of the Boost Mobile Acquisition fromJuly 1, 2020 and the Ting Mobile Acquisition fromAugust 1, 2020 are included in ourRetail Wireless Business Unit. During the third quarter 2020, we added over 9 million wireless subscribers as a result of these acquisitions. We are currently in the process of integrating our retail wireless operations and have made and continue to make certain changes to our marketing, sales, and operations to further enhance our profitability. We lost 575,000 net wireless subscribers for the year endedDecember 31, 2020 , primarily as a result of these operational changes. Our current results of operations are not necessarily indicative of future results, in part based on the ongoing integration and operational changes we are currently implementing. We are working to ensure that the customers we acquire and retain are profitable under our MVNO economics. As an example, certain subscribers that use high amounts of data, may be profitable for an MNO, but are not profitable under an MVNO. 62 Table of Contents
RESULTS OF OPERATIONS - Wireless Segment - 5G Network Deployment Business Unit
Year Ended
For the Years EndedDecember 31 , Variance
Statements of Operations Data 2020 2019 Amount % (In thousands) Revenue:
Equipment sales and other revenue $ 20,785 $
1,673$ 19,112 * Total revenue 20,785 1,673 19,112 * Costs and expenses:
Cost of sales - equipment and other 18,743 19,685 (942) (4.8) Selling, general and administrative expenses 117,368 56,045 61,323 * Depreciation and amortization 11,567 8,767 2,800 31.9 Impairment of long-lived assets 356,418
- 356,418 * Total costs and expenses 504,096 84,497 419,599 * Operating income (loss)$ (483,311) $ (82,824) $ (400,487) * Other data:
Purchases of property and equipment $ 72,896 $
187,580$ (114,684) (61.1) OIBDA$ (471,744) $ (74,057) $ (397,687) *
* Percentage is not meaningful.
Equipment sales and other revenue. "Equipment sales and other revenue" totaled$21 million for the year endedDecember 31, 2020 , an increase of$19 million compared to the same period in 2019. This increase primarily resulted from leasing a portion of our 600 MHz spectrum licenses to T-Mobile, which began onSeptember 11, 2020 . The spectrum lease with T-Mobile will result in$56 million of annual revenue during its 42 month term, subject to our right to terminate individual licenses prior to 42 months. The specific termination rights vary by license. Selling, general and administrative expenses "Selling, general and administrative expenses" totaled$117 million during the year endedDecember 31, 2020 , a$61 million increase compared to the same period in 2019. This increase was primarily driven by an increase in general and administrative expenses related to our 5G Network Deployment. Impairment of long-lived assets. "Impairment of long-lived assets" of$356 million during the year endedDecember 31, 2020 resulted from impairments of the T1 satellite and D1 satellites, as well as certain wireless equipment and operating lease assets related to our narrowband IoT deployment which we no longer intend to complete. See Note 2 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. Purchases of property and equipment. "Purchases of property and equipment" totaled$73 million for the year endedDecember 31, 2020 , a decrease of$115 million compared to the same period in 2019. The year endedDecember 31, 2019 was impacted by capital expenditures related to our narrowband IoT deployment for which we determined in the first quarter of 2020 that we would no longer complete. See Note 2 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. Capital expenditures for the year endedDecember 31, 2020 are related to our 5G Network Deployment. We anticipate expenditures for our 5G Network Deployment to increase substantially throughout 2021 as we ramp up the build-out phase of our 5G Network Deployment. 63 Table of Contents OTHER CONSOLIDATED RESULTS
Year Ended
For the Years EndedDecember 31 , Variance
Statements of Operations Data 2020 2019 Amount % (In thousands) Operating income (loss)$ 2,582,615 $ 1,878,876 $ 703,739 37.5 Other income (expense): Interest income 22,734 77,214 (54,480) (70.6)
Interest expense, net of amounts capitalized (12,974)
(23,687) 10,713 45.2 Other, net (20,164) 11,524 (31,688) * Total other income (expense) (10,404) 65,051 (75,455) *
Income (loss) before income taxes 2,572,211 1,943,927 628,284 32.3 Income tax (provision) benefit, net (698,275)
(451,358) (246,917) (54.7) Effective tax rate 27.1 % 23.2 % Net income (loss) 1,873,936 1,492,569 381,367 25.6 Less: Net income (loss) attributable to noncontrolling interests, net of tax 111,263 93,057 18,206 19.6 Net income (loss) attributable to DISH Network$ 1,762,673 $
1,399,512
* Percentage is not meaningful.
Interest income. "Interest income" totaled$23 million during the year endedDecember 31, 2020 , a decrease of$54 million or 70.6% compared to the same period in 2019. This decrease primarily resulted from lower percentage returns earned on our cash and marketable investment securities, partially offset by higher average cash and marketable investment securities balances during the year endedDecember 31, 2020 .
Other, net. "Other, net" expense totaled$20 million during the year endedDecember 31, 2020 , a decrease of$32 million compared to the same period in 2019. This change primarily resulted from a$22 million decrease in the fair value of our option to purchase certain of T-Mobile's 800 MHz spectrum licenses under the Spectrum Purchase Agreement. See Note 7 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. Income tax (provision) benefit, net. Our income tax provision was$698 million during the year endedDecember 31, 2020 , an increase of$247 million compared to the same period in 2019. The increase in the provision was primarily related to an increase in "Income (loss) before income taxes" and an increase in our effective tax rate due to changes in the state apportionment applied to our deferred taxes as a result of the Boost Mobile Acquisition, partially offset by a benefit recognized for the carryback of net operating losses under the CARES Act.
Non-GAAP Performance Measures and Reconciliation
It is management's intent to provide non-GAAP financial information to enhance the understanding of our GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. We believe that providing these non-GAAP measures in addition to the GAAP measures allows management, investors and other users of our financial information to more fully and accurately assess both consolidated and segment performance. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be directly comparable to that of other companies. 64 Table of Contents Consolidated EBITDA
Consolidated EBITDA is not a measure determined in accordance with GAAP and should not be considered a substitute for operating income, net income or any other measure determined in accordance with GAAP. Consolidated EBITDA is used as a measurement of operating efficiency and overall financial performance and we believe it is a helpful measure for those evaluating operating performance in relation to our competitors. Conceptually, EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. For the Years Ended December 31, 2020 2019 (In thousands) Consolidated EBITDA$ 3,165,740 $ 2,427,920 Interest, net 9,760 53,527
Income tax (provision) benefit, net (698,275)
(451,358)
Depreciation and amortization (714,552)
(630,577)
Net income (loss) attributable to
1,399,512
The changes in Consolidated EBITDA during the year ended
Segment OIBDA
Segment OIBDA, which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income (loss) as a measure of operating performance. We believe this measure is useful to management, investors and other users of our financial information in evaluating operating profitability of our business units on a more variable cost basis as it excludes the depreciation and amortization expenses related primarily to capital expenditures and acquisitions for those business units, as well as in evaluating operating performance in relation to our competitors. Segment OIBDA is calculated by adding back depreciation and amortization expense to business unit operating income (loss). See Note 17 to the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. For the Years Ended December 31, 2020 2019 (In thousands) Pay-TV OIBDA$ 3,517,109 $ 2,583,510 Depreciation and amortization 613,926 621,810 Segment operating income (loss)$ 2,903,183 $ 1,961,700 Retail Wireless OIBDA $ 251,802 $ - Depreciation and amortization 89,059 -
Segment operating income (loss) $ 162,743 $
- 5G Network Deployment OIBDA$ (471,744) $ (74,057) Depreciation and amortization 11,567 8,767
Segment operating income (loss)
Consolidated OIBDA$ 3,297,167 $
2,509,453
Depreciation and amortization 714,552
630,577
Consolidated operating income (loss)
The changes in OIBDA during the year ended
65 Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Cash,
We consider all liquid investments purchased within 90 days of their maturity to be cash equivalents. See Note 7 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information regarding our marketable investment securities. As ofDecember 31, 2020 , our cash, cash equivalents and current marketable investment securities totaled$3.733 billion compared to$2.860 billion as ofDecember 31, 2019 , an increase of$873 million . This increase in cash, cash equivalents and current marketable investment securities primarily resulted from cash generated from operating activities of$3.312 billion ,$1.986 billion in net proceeds from the issuance of our 0% Convertible Notes due 2025 and$998 million in net proceeds from the issuance of our 7 3/8% Senior Notes due 2028. These increases were partially offset by the Boost Mobile Acquisition for a net aggregate purchase price of$1.313 billion , cash used for the redemption of our 5 1/8% Senior Notes due 2020 with an aggregate principal balance of$1.1 billion , capital expenditures of$1.193 billion (including capitalized interest related toFCC authorizations), a$1.048 billion payment to theFCC for the 3550-3650 MHz Licenses and the 37 GHz, 39 GHZ and 47 GHz Licenses, and a$312 million payment for the Northstar Purchase
Agreement. Debt Issuances and Maturity During the year endedDecember 31, 2018 and 2019, we repurchased$83 million and$22 million , respectively, of our 7 7/8% Senior Notes due 2019 in open market trades. The remaining balance of$1.295 billion was redeemed onSeptember 3, 2019 .
Our 5 1/8% Senior Notes with an aggregate principal balance of
OnJuly 1, 2020 , we issued$1.0 billion aggregate principal amount of our 7 3/8% Senior Notes dueJuly 1, 2028 . Interest accrues at an annual rate of 7 3/8% and is payable semi-annually in cash, in arrears onJanuary 1 andJuly 1 of each year, commencing onJanuary 1, 2021 .
On
Our 6 3/4% Senior Notes due 2021 with an aggregate principal balance of$2.0 billion mature onJune 1, 2021 . We expect to fund this obligation from cash and marketable investment securities balances at that time. However, depending on market conditions, we may refinance this obligation in whole or in part. Stock Rights Offering DuringNovember 2019 , we launched a rights offering pursuant to which we distributed transferable subscription rights pro rata to holders of record of our Class A and B common stock, and outstanding convertible notes (based on the applicable conversion ratio for those notes as of the record date) onNovember 17, 2019 . The subscription rights entitled the holder to acquire newly-issued shares of our Class A common stock at a subscription price of$33.52 per share.
Upon completion of the rights offering on
66 Table of Contents Cash Flow
The following discussion highlights our cash flow activities during the years
ended
Cash flows from operating activities. We typically reinvest the cash flow from operating activities in our business primarily to grow our subscriber base, expand our infrastructure, make strategic investments, such as significant investments in wireless, including our 5G Network Deployment, and repay debt obligations. For the years endedDecember 31, 2020 and 2019, we reported "Net cash flows from operating activities" of$3.312 billion and$2.662 billion , respectively. Net cash flows from operating activities from 2019 to 2020 increased$650 million , primarily attributable to a$1.569 billion increase in income adjusted to exclude non-cash charges for "Impairment of long-lived assets," "Depreciation and amortization" expense, "Realized and unrealized losses (gains) on investments and derivatives," "Non-cash, stock-based compensation" expense, and "Deferred tax expense (benefit)." This increase was partially offset by a decrease in cash flows resulting from changes in operating assets and liabilities principally attributable to timing differences between book expense and cash payments, including taxes. In 2020, changes in operating assets and liabilities were negatively impacted by the$210 million litigation settlement payment related to the Telemarketing Litigation. See Note 16 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information. Cash flows from investing activities. Our investing activities generally include purchases and sales of marketable investment securities, acquisitions, strategic investments, including purchases and settlements of derivative financial instruments, and purchases of wireless spectrum licenses, capital expenditures and capitalized interest. For the years endedDecember 31, 2020 and 2019, we reported outflows from "Net cash flows from investing activities" of$3.862 billion and$718 million , respectively. The year endedDecember 31, 2020 was impacted by cash outflows primarily related to the closing of the Boost Mobile Acquisition for a net aggregate purchase price of$1.313 billion , capital expenditures of$1.193 billion (including capitalized interest related toFCC authorizations), a$1.048 billion payment to theFCC for the 3550-3650 MHz Licenses and the 37 GHz, 39 GHZ and 47 GHz Licenses. The year endedDecember 31, 2019 was impacted by cash outflows primarily related to capital expenditures of$1.482 billion (including$901 million of capitalized interest related toFCC authorizations) and cash inflows related to$770 million in net sales of marketable investment securities. During the years endedDecember 31, 2020 and 2019, capital expenditures for new and existing DISH TV customer equipment totaled$211 million and$280 million , respectively. The decrease in 2020 for new and existing DISH TV customer equipment primarily resulted from lower gross new DISH TV subscriber activations. Cash flows from financing activities. Our financing activities generally include net proceeds related to the issuance of equity and long-term and convertible debt, cash used for the repurchase, redemption or payment of long-term debt and finance lease obligations, and repurchases of our Class A common stock. For the years endedDecember 31, 2020 and 2019, we reported "Net cash flows from financing activities" inflows of$1.499 billion , and outflows of$328 million , respectively. The net cash inflows in 2020 primarily related to$1.986 billion in net proceeds from the issuance of our 0% Convertible Notes due 2025 and$998 million in net proceeds from the issuance of our 7 3/8% Senior Notes due 2028, partially offset by the redemption of our 5 1/8% Senior Notes due 2020 with an aggregate principal balance of$1.1 billion , a$312 million payment for theNorthstar Purchase Agreement and repayment of long-term debt and finance lease obligations of$101 million .
The net cash outflows in 2019 primarily related to the redemption and
repurchases of our 7 7/8% Senior Notes due 2019 with an aggregate principal
balance of
67 Table of Contents Free Cash Flow
We define free cash flow as "Net cash flows from operating activities" less "Purchases of property and equipment," and "Capitalized interest related toFCC authorizations," as shown on our Consolidated Statements of Cash Flows. We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments (including strategic wireless investments), fund acquisitions and for certain other activities. Free cash flow is not a measure determined in accordance with GAAP and should not be considered a substitute for "Operating income," "Net income," "Net cash flows from operating activities" or any other measure determined in accordance with GAAP. Since free cash flow includes investments in operating assets, we believe this non-GAAP liquidity measure is useful in addition to the most directly comparable GAAP measure "Net cash flows from operating activities." Free cash flow can be significantly impacted from period to period by changes in "Net income (loss)" adjusted to exclude certain non-cash charges, operating assets and liabilities, "Purchases of property and equipment," and "Capitalized interest related toFCC authorizations." These items are shown in the "Net cash flows from operating activities" and "Net cash flows from investing activities" sections on our Consolidated Statements of Cash Flows included herein. Operating asset and liability balances can fluctuate significantly from period to period and there can be no assurance that free cash flow will not be negatively impacted by material changes in operating assets and liabilities in future periods, since these changes depend upon, among other things, management's timing of payments and control of inventory levels, and cash receipts. In addition to fluctuations resulting from changes in operating assets and liabilities, free cash flow can vary significantly from period to period depending upon, among other things, subscriber additions (losses), service revenue, subscriber churn, subscriber acquisition and retention costs including amounts capitalized under our equipment lease programs for DISH TV subscribers, operating efficiencies, increases or decreases in purchases of property and equipment, expenditures related to the commercialization of our 5G Network Deployment and other factors. The following table reconciles free cash flow to "Net cash flows from operating activities." For the Years Ended December 31, 2020 2019 2018 (In thousands) Free cash flow$ 2,119,270 $ 1,179,953 $ 1,201,144 Add back: Purchases of property and equipment (including capitalized interest related toFCC authorizations) 1,192,506 1,482,448 1,316,697 Net cash flows from operating activities$ 3,311,776 $
2,662,401$ 2,517,841 Operational Liquidity We make general investments in property such as satellites, wireless devices, set-top boxes, information technology and facilities that support our Pay-TV segment andRetail Wireless business unit. We are also making significant additional investments and will need to continue making these investments and/or partner with others to, among other things, complete our 5G Network Deployment and further commercialize, build-out, and integrate our wireless spectrum licenses and related assets. Moreover, since we are primarily a subscriber-based company, we also make subscriber-specific investments to acquire new subscribers and retain existing subscribers. While the general investments may be deferred without impacting the business in the short-term, the subscriber-specific investments are less discretionary. Our overall objective is to generate sufficient cash flow over the life of each subscriber to provide an adequate return against the upfront investment. Once the upfront investment has been made for each subscriber, the subsequent cash flow is generally positive, but there can be no assurances that over time we will recoup or earn a return on the upfront investment. 68 Table of Contents 69 Table of Contents
There are a number of factors that impact our future cash flow compared to the cash flow we generate at a given point in time. The first factor is our churn rate and how successful we are at retaining our current subscribers. To the extent we lose subscribers from our existing base, the positive cash flow from that base is correspondingly reduced. The second factor is how successful we are at maintaining our service margins. To the extent our "Cost of services" grow faster than our "Service revenue," the amount of cash flow that is generated per existing subscriber is reduced. Our Pay-TV service margins have been reduced by, among other things, a shift to lower priced Pay-TV programming packages and higher programming costs. OurRetail Wireless service margins are impacted by our MNSA agreement with T-Mobile and the speed with which we are able to convert retail wireless subscribers onto our 5G Network once operational. The third factor is the rate at which we acquire new subscribers. The faster we acquire new subscribers, the more our positive ongoing cash flow from existing subscribers is offset by the negative upfront cash flow associated with acquiring new subscribers. Conversely, the slower we acquire subscribers, the more our operating cash flow is enhanced in that period. Finally, our future cash flow is impacted by the rate at which we complete our 5G Network Deployment, incur litigation expense, and any cash flow from financing activities. Declines in our Pay-TV subscriber base and subscriber related-margins continue to negatively impact our cash flow, and there can be no assurances that these declines will not continue.
Subscriber Base - Pay TV Segment and Retail Wireless Business Unit
See "Results of Operations" above for further information.
Subscriber Acquisition and Retention Costs
We incur significant upfront costs to acquire subscribers, including advertising, independent third-party retailer incentives, payments made to third-parties, equipment and wireless device subsidies, installation services, and/or new customer promotions. While we attempt to recoup these upfront costs over the lives of their subscription, there can be no assurance that we will be successful in achieving that objective. With respect to our DISH TV services, we employ business rules such as minimum credit requirements for prospective customers and contractual commitments to receive service for a minimum term. We strive to provide outstanding customer service to increase the likelihood of customers keeping their Pay-TV services over longer periods of time. Subscriber acquisition costs for SLING TV subscribers are significantly lower than those for DISH TV subscribers. Our subscriber acquisition costs for ourRetail Wireless subscribers are primarily related to subsidies on wireless devices. Our subscriber acquisition costs may vary significantly from period to period. We incur significant costs to retain our existing DISH TV subscribers, mostly as a result of upgrading their equipment to next generation receivers, primarily including our Hopper receivers, and by providing retention credits. As with our subscriber acquisition costs, our retention upgrade spending includes the cost of equipment and installation services. In certain circumstances, we also offer programming at no additional charge and/or promotional pricing for limited periods to existing customers in exchange for a contractual commitment to receive service for a minimum term. A component of our retention efforts includes the installation of equipment for customers who move. Retention costs forRetail Wireless subscribers are primarily related to promotional pricing on upgraded wireless devices for qualified existing subscribers. Our DISH TV subscriber retention costs may vary significantly from period to period. Seasonality
Historically, the first half of the year generally produces fewer gross new DISH TV subscriber activations than the second half of the year, as is typical in the pay-TV industry. In addition, the first and fourth quarters generally produce a lower DISH TV churn rate than the second and third quarters. However, in recent years, as the pay-TV industry has matured, we and our competitors increasingly must seek to attract a greater proportion of new subscribers from each other's existing subscriber bases rather than from first-time purchasers of pay-TV services. As a result, historical trends in seasonality described above may not be indicative of future trends. 70 Table of Contents
Our net SLING TV subscriber additions are impacted by, among other things, certain major sporting events and other major television events. The first and third quarters generally produce higher gross newRetail Wireless subscribers. Due to the COVID-19 pandemic the historical trends discussed above, for both net Pay-TV subscriber additions and netRetail Wireless subscriber additions, may not be indicative of future trends. Satellites
Operation of our DISH TV services requires that we have adequate satellite transmission capacity for the programming that we offer. Moreover, current competitive conditions require that we continue to expand our offering of new programming. While we generally have had in-orbit satellite capacity sufficient to transmit our existing channels and some backup capacity to recover the transmission of certain critical programming, our backup capacity is limited. In the event of a failure or loss of any of our owned or leased satellites, we may need to acquire or lease additional satellite capacity or relocate one of our other satellites and use it as a replacement for the failed or lost satellite. Such a failure could result in a prolonged loss of critical programming or a significant delay in our plans to expand programming as necessary to remain competitive and cause us to expend a significant portion of our cash to acquire or lease additional satellite capacity. Stock Repurchases Our Board of Directors previously authorized stock repurchases of up to$1.0 billion of our outstanding Class A common stock. OnOctober 30, 2020 , our Board of Directors extended this authorization such that we are currently authorized to repurchase up to$1.0 billion of our outstanding Class A common stock through and includingDecember 31, 2021 . As ofDecember 31, 2020 , we may repurchase up to$1.0 billion under this program. During the years endedDecember 31, 2020 , 2019 and 2018, there were no repurchases of our Class A common stock.
Covenants and Restrictions Related to our Long-Term Debt
We are subject to the covenants and restrictions set forth in the indentures related to our long-term debt. In particular, the indentures related to our outstanding senior notes issued byDISH DBS Corporation ("DISH DBS") contain restrictive covenants that, among other things, impose limitations on the ability of DISH DBS and its restricted subsidiaries to: (i) incur additional indebtedness; (ii) enter into sale and leaseback transactions; (iii) pay dividends or make distributions on DISH DBS' capital stock or repurchase DISH DBS' capital stock; (iv) make certain investments; (v) create liens; (vi) enter into certain transactions with affiliates; (vii) merge or consolidate with another company; and (viii) transfer or sell assets. Should we fail to comply with these covenants, all or a portion of the debt under the senior notes and our other long-term debt could become immediately payable. The senior notes also provide that the debt may be required to be prepaid if certain change-in-control events occur. In addition, the Convertible Notes provide that, if a "fundamental change" (as defined in the related indenture) occurs, holders may require us to repurchase for cash all or part of their Convertible Notes. As of the date of filing of this Annual Report on Form 10-K, we and DISH DBS were in compliance with the covenants and restrictions related to our respective long-term debt. Other We are also vulnerable to fraud, particularly in the acquisition of new subscribers. While we are addressing the impact of subscriber fraud through a number of actions, there can be no assurance that we will not continue to experience fraud, which could impact our subscriber growth and churn. Economic weakness may create greater incentive for signal theft, piracy and subscriber fraud, which could lead to higher subscriber churn and reduced revenue. 71 Table of Contents
Obligations and Future Capital Requirements
Contractual Obligations and Off-Balance Sheet Arrangements
See Note 16 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information.
Future Capital Requirements
We expect to fund our future working capital, capital expenditures and debt service requirements from cash generated from operations, existing cash, cash equivalents and marketable investment securities balances, and cash generated through raising additional capital. We will need to make significant additional investments to, among other things, complete our 5G Network Deployment and further commercialize, build-out and integrate our wireless spectrum licenses and related assets. The amount of capital required to fund our future working capital and capital expenditure needs varies, depending on, among other things, the rate at which we deploy our 5G network and the rate at which we acquire new subscribers and the cost of subscriber acquisition and retention, including capitalized costs associated with our new and existing subscriber equipment lease programs. Certain of our capital expenditures for 2021 are expected to be driven by the rate at which we deploy our 5G network as well as costs associated with subscriber premises equipment. These expenditures are necessary for the deployment of our 5G network as well as to operate and maintain our DISH TV services. Consequently, we consider them to be non-discretionary. Our capital expenditures vary depending on the number of satellites leased or under construction at any point in time and could increase materially as a result of increased competition, significant satellite failures, or economic weakness and uncertainty. Our DISH TV subscriber base has been declining and there can be no assurance that our DISH TV subscriber base will not continue to decline and that the pace of such decline will not accelerate. In the event that our DISH TV subscriber base continues to decline, it will have a material adverse long-term effect on our cash flow. In addition, theNorthstar and SNR Operative Agreements, as amended, provide for, among other things, the SNR Put Right and the Northstar Put Right for a purchase price that equals the equity contribution to Northstar Spectrum and SNR HoldCo, respectively, plus a fixed annual rate of return. As ofDecember 31, 2020 , Northstar Manager's ownership interest in Northstar Spectrum and SNR Management's ownership interest in SNR HoldCo was$351 million , recorded as "Redeemable noncontrolling interests" on our Consolidated Balance Sheets. We expect to incur capital expenditures in 2021 related to our 5G Network Deployment, including capital expenditures associated with our wireless projects and 5G Network Deployment, and potential purchase of additional wireless spectrum licenses. The amount of capital required will also depend on the levels of investment necessary to support potential strategic initiatives that may arise from time to time. These factors, including a reduction in our available future cash flows, could require that we raise additional capital in the future. Volatility in the financial markets has made it more difficult at times for issuers of high-yield indebtedness, such as us, to access capital markets at acceptable terms. These developments may have a significant effect on our cost of financing and our liquidity position. Boost Mobile Acquisition
See Note 6 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information
Wireless - 5G Network Deployment
See Note 16 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K for further information.
72 Table of Contents
Availability of Credit and Effect on Liquidity
The ability to raise capital has generally existed for us despite economic weakness and uncertainty. While modest fluctuations in the cost of capital will not likely impact our current operational plans, significant fluctuations could have a material adverse effect on our business, results of operations and financial condition.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect amounts reported therein. Management bases its estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from previously estimated amounts, and such differences may be material to our consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur. The following represent what we believe are the critical accounting policies that may involve a high degree of estimation, judgment and complexity. For a summary of our significant accounting policies, including those discussed below, see Note 2 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K. Long-Lived Assets Valuation of long-lived assets. We review our long-lived assets and identifiable finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For assets which are held and used in operations, the asset would be impaired if the carrying amount of the asset (or asset group) exceeded its undiscounted future net cash flows. Once an impairment is determined, the actual impairment recognized is the difference between the carrying amount and the fair value as estimated using one of the following approaches: income, cost and/or market. The carrying amount of a long-lived asset or asset group is considered impaired when the anticipated undiscounted cash flows from such asset or asset group is less than its carrying amount. In that event, a loss is recorded in "Impairment of long-lived assets" on our Consolidated Statements of Operations and Comprehensive Income (Loss) based on the amount by which the carrying amount exceeds the fair value of the long-lived asset or asset group. Fair value, using the income approach, is determined primarily using a discounted cash flow model that uses the estimated cash flows associated with the asset or asset group under review, discounted at a rate commensurate with the risk involved. Fair value, utilizing the cost approach, is determined based on the replacement cost of the asset reduced for, among other things, depreciation and obsolescence. Fair value, utilizing the market approach, benchmarks the fair value against the carrying amount. See Note 9 in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K. Assets which are to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. We currently evaluate our DBS satellite fleet for impairment as one asset group whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Valuation of intangible assets with indefinite lives. We evaluate the carrying amount of intangible assets with indefinite lives annually, and also when events and circumstances warrant. DBS Licenses. We combine all of our indefinite-lived DBS licenses that we currently utilize or plan to utilize in the future into a single unit of accounting. For 2020, 2019 and 2018, management performed a qualitative assessment to determine whether it is more likely than not that the fair value of the DBS licenses exceeds its carrying amount. In our assessment, we considered several factors, including, among others, overall financial performance, industry and market considerations, and relevant company specific events. In contemplating all factors in their totality, we concluded that it is more likely than not that the fair value of the DBS licenses exceeds its carrying amount. As such, no further analysis was required. 73 Table of Contents Wireless Spectrum Licenses. During 2020, we acquired the 37 GHz, 39 GHz, and 47 GHz wireless licenses and during 2019, we acquired the 24 GHz and 28 GHz wireless licenses, together (the "High-Band Licenses"). We currently combine our 600 MHz, 700 MHz, AWS-4, H Block, High-Band Licenses and the Northstar Licenses and SNR Licenses into a single unit of accounting. In 2020 and 2019 (excluding the High-Band Licenses), management performed a qualitative assessment to determine whether it is more likely than not that the fair value of these licenses exceed their carrying amount. In our assessment, we considered several factors, including, among other things, the projected financial performance of our Wireless segment, the business enterprise value of our Wireless segment, and market transactions for wireless spectrum licenses including auction results. In assessing these factors, we considered both macroeconomic conditions and industry and market conditions. In contemplating all factors in their totality, we concluded that it is more likely than not that the fair value of these licenses exceeds their carrying amount. During 2019, our 24 GHz and 28 GHz wireless spectrum licenses were assessed as a single unit of accounting. These licenses were purchased during the fourth quarter 2019 through our participation in Auction 101 and Auction 102. For 2019, management's assessment of the fair value of these licenses was determined based on the auction results. In 2018, we assessed our 600 MHz, 700 MHz, AWS-4, H Block Licenses and the Northstar Licenses and SNR Licenses quantitatively. Our quantitative assessment consisted of both an income approach and a market approach. The income approach estimated the fair value of these licenses using the "Greenfield" approach. The Greenfield approach values the licenses by calculating the cash flow generating potential of a hypothetical start-up company that goes into business with no assets except the licenses to be valued. A discounted cash flow analysis is used to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. The market approach uses prior transactions including auctions to estimate the fair value of the licenses. In conducting this quantitative assessment, we determined that the fair value of these licenses exceeded their carrying amount under both approaches. During 2020, 2019, and 2018, our multichannel video distribution and data service ("MVDDS") wireless spectrum licenses were assessed as a single unit of accounting. For 2020 and 2019, management assessed these licenses qualitatively. Our qualitative assessment focused on recent auction results and historical market activity. We concluded that it is more likely than not that the fair value of these licenses exceeded their carrying amount. For 2018, management assessed these licenses quantitatively under a market approach. The market approach uses prior transactions including auctions to estimate the fair value of the licenses. In conducting the quantitative assessment, we determined that the fair value of these licenses exceeded their carrying amount.
Changes in circumstances or market conditions could result in a write-down of any of the above wireless spectrum licenses in the future.
Income Taxes Our income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carryforwards. Determining necessary valuation allowances requires us to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities. We periodically evaluate our need for a valuation allowance based on both historical evidence, including trends, and future expectations in each reporting period. Any such valuation allowance is recorded in either "Income tax (provision) benefit, net" on our Consolidated Statements of Operations and Comprehensive Income (Loss) or "Accumulated other comprehensive income (loss)" within "Stockholders' equity (deficit)" on our Consolidated Balance Sheets. Future performance could have a significant effect on the realization of tax benefits, or reversals of valuation allowances, as reported in our consolidated results of operations. 74 Table of Contents Management evaluates the recognition and measurement of uncertain tax positions based on applicable tax law, regulations, case law, administrative rulings and pronouncements and the facts and circumstances surrounding the tax position. Changes in our estimates related to the recognition and measurement of the amount recorded for uncertain tax positions could result in significant changes in our "Income tax provision (benefit), net," which could be material to our consolidated results of operations. Contingent Liabilities A significant amount of management judgment is required in determining when, or if, an accrual should be recorded for a contingency and the amount of such accrual. Estimates generally are developed in consultation with counsel and are based on an analysis of potential outcomes. Due to the uncertainty of determining the likelihood of a future event occurring and the potential financial statement impact of such an event, it is possible that upon further development or resolution of a contingent matter, a charge could be recorded in a future period to "Selling, general and administrative expenses" or "Litigation expense" on our Consolidated Statements of Operations and Comprehensive Income (Loss) that would be material to our consolidated results of operations and
financial condition. Business Combinations When we acquire a business, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component using various valuation techniques, including the market approach, income approach and/or cost approach. The accounting standard for business combinations requires identifiable assets, liabilities, noncontrolling interests and goodwill acquired to be recorded at acquisition date fair values. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to the amount and timing of estimated future cash flows and the discount rate utilized. Inflation
Inflation has not materially affected our operations during the past three years. We believe that our ability to increase the prices charged for our products and services in future periods will depend primarily on competitive pressures.
Backlog
We do not have any material backlog of our products.
New Accounting Pronouncements
Debt with Conversion and Other Options and Derivatives and Hedging. InAugust 2020 , the FASB issued ASU 2020-06 Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity's Own Equity ("ASU 2020-06"), which simplifies the accounting for convertible instruments and contracts in an entity's own equity. This standard will be effective for fiscal years beginning afterDecember 15, 2021 , including interim periods within those fiscal years. Early adoption is permitted. We currently expect to early adopt and, as a result of this standard, the equity component related to our Convertible Notes will be reclassified from "Additional paid-in capital" within "Stockholders' equity (deficit)" to "Long-term debt and finance lease obligations, net of current portion" on our Consolidated Balance Sheets. The adoption of this standard will have no impact on the methodology utilized to calculate diluted earnings per share ("EPS") as we already use the if-converted method for convertible instruments and will have no impact to our Consolidated Statements of Operations and Comprehensive Income (Loss) as we capitalize materially all of our interest expense. 75 Table of Contents
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