<PAGE>
As filed with the Securities and Exchange Commission on December 26, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
SCHEDULE TO
(Rule 14d-100)
TENDER OFFER STATEMENT UNDER SECTION 14 (d) (1) OR SECTION 13 (e) (1)
OF THE SECURITIES EXCHANGE ACT OF 1934
_________________
TELOCITY DELAWARE, INC.
(Name Of Subject Company (Issuer))
DIRECTV BROADBAND, INC.
a wholly owned subsidiary of
HUGHES ELECTRONICS CORPORATION
(Names Of Filing Persons (Offerors))
_________________
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title Of Class Of Securities)
______________________
(Cusip Number Of Class Of Securities)
_________________
LARRY D. HUNTER
VICE PRESIDENT
HUGHES ELECTRONICS CORPORATION
200 N. SEPULVEDA BOULEVARD
EL SEGUNDO, CALIFORNIA 90245
(310) 662-9688
(Name, Address And Telephone Number Of Person Authorized To
Receive Notice And Communications On Behalf Of Filing Persons)
_________________
COPIES TO:
GARY OLSON, ESQ.
LATHAM & WATKINS
633 WEST FIFTH STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
CALCULATION OF FILING FEE
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<CAPTION>
------------------------------------------------------- ---------------------------------------------------------
Transaction Valuation Amount of Filing Fee
--------------------- --------------------
Not Applicable Not Applicable
Check the box if the filing relates solely to preliminary communications made before the commencement of a tender
offer.
<S> <C>
Amount Previously Paid: Filing Party:
-------------------------- ---------------------------
Form or Registration No.: Date Filed:
------------------------ -----------------------------
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</TABLE>
[X] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
Check the appropriate boxes below to designate any transactions to which the
statement relates:
[X] third-party tender offer subject to Rule 14d-1.
[ ] issuer tender offer subject to Rule 13e-4.
[ ] going-private transaction to Rule 13a-3.
[ ] amendment to Schedule 13D under Rule 13d-2.
Check the following box if the filing is a final amendment reporting the results
of the tender offer:
================================================================================
<PAGE>
HUGHES ELECTRONICS CORPORATION
Telocity stockholders are advised to read the tender offer statement and the
solicitation/recommendation statement regarding the acquisition referenced
in the following transcript, which will be filed with the Securities and
Exchange Commission upon the commencement of the tender offer. The tender
offer statement (including an offer to purchase, letter of transmittal and
related tender offer documents) and the solicitation/recommendation
statement will contain important information which should be read carefully
before any decision is made with respect to the offer. Telocity stockholders
may obtain a free copy of the tender offer statement and the solicitation/
recommendation statement when it is available and other documents filed by
HUGHES and Telocity with the SEC at the SEC's Web site at www.sec.gov. The
tender offer statement and the solicitation/recommendation statement and these
other documents may also be obtained by Telocity stockholders without cost to
them from HUGHES and Telocity.
Moderator: John Rubin
December 21, 2000
10:00 a.m. CT
Operator: Good day, everyone, and welcome to today's Hughes Analyst conference
call on the Telocity acquisition. Today's conference is being recorded.
At this time, for opening remarks and introductions, I would like to turn
the conference over to the Director of Investor Relations, Mr. John Rubin.
Please go ahead, sir.
John Rubin: Thank you, operator, and thank you everyone for joining us to
discuss the Hughes acquisition of Telocity. On the call to answer your
questions are Mike Smith, Hughes Chairman and CEO; Eddie Hartenstein,
Corporate Senior Executive VP of Hughes Consumer Sector; Larry Chapman,
President of DIRECTV Global Digital Media; and Bob Meyers, CFO of DIRECTV.
In a moment, I'll hand the call over to Mike Smith, who will touch on some
of the strategic highlights of this deal. Eddie Hartenstein will then
provide greater insight into the business implications and financial
details. We'll follow that up with Q&A.
Before we proceed, let me remind you that our use of the words expect,
anticipate, project and similar expressions are intended to identify
forward-looking statements. While these statements represent our current
judgment on what the future may hold and we believe
<PAGE>
that they are reasonable, actual results may differ materially due to
important factors, including those described in our FCC filings and General
Motors FCC filings.
With that, I'm pleased to introduce Mike Smith. Mike.
Mike Smith: Thank you, John. Good morning, everybody, and thank you for
joining us on such short notice. As you've probably already seen in the
press release, Hughes is acquiring Telocity, one of the industries leading
providers of digital subscriber lines, or DSL services for about $179
million in cash.
With this agreement, Hughes is one step closer to achieving our vision of
being the world's leading provider of integrated information in
entertainment services, a vision you will note that has intentionally never
included the word "satellite." Telocity is a powerful addition to the
Hughes family as it offers consumers a neat, one-stop, plug in place
solution for high speed Internet connectivity. Furthermore, Telocity is
the only DSL provider to offer a totally integrated and scaleable solution.
As you know, the broadband services market is growing rapidly. In fact,
most analysts expect it to reach 50 to 60 million subscribers within five
years. As we have shared with you before, we have always believed that in
order to meet this demand it was necessary to have a terrestrial platform
to complement DirecPC, our satellite based national-wide Internet service,
which, by the way, today is announcing separately the addition of their
two-way DirecPC service, and that will come out later today.
The Telocity nation-wide broadband platform does this quite nicely in terms
of offering nation-wide Internet service. It allows us to add significant
capacity on a national basis and to expand our growth opportunities. As a
result of this acquisition, we have a
<PAGE>
terrestrial capability in areas where DSL is available, and we'll have
DirecPC in areas where it isn't. Bear in mind that by most analyst's
estimates, approximately 30 percent of the nation's households will never
have a terrestrial option for high speed Internet connectivity.
I'm happy to report that with today's announcement of the launch to buy new
DirecPC two-way satellite product, we will be in a much stronger position
to capture a significant portion of that otherwise unserved market. The
additional Telocity interactive capability is also moving DIRECTV that much
closer to being a true gateway into the home. A full host services provider
of both entertainment and information services.
We will also attract stickier subscribers, those who are more likely to
stay with a service for a longer period of time. Most importantly, however,
this new DSL capability makes DIRECTV an even more competitive -- even more
competitive with digital cable and bolsters our competencies in financial
returns in the broadband subscriber marketplace.
Now, I'll ask Eddie to provide you a little more color on the transaction
and its impact on our business. Eddie.
Eddie Hartenstein: Thanks, Mike, and thank all of you for joining us, as Mike
said, on such short notice. I'd like to expand a little bit on Telocity
and why we think this is such an important strategic transaction for us.
Telocity operates a national broadband network. Similar to DIRECTV,
Telocity has a culture that emphasizes customer service. In fact, Telocity
controls the entire customer relationship, which is unique in the broadband
industry. Telocity's core assets are its people. Patti Hart, the CEO and
President is a visionary and a manager with a proven track record of
building scaled, subscriber-based businesses. I'm thrilled that Patti is
going to be working with us and leading this effort.
<PAGE>
Through the vigilance of Patti and her team, Telocity has created a really
unique technological advantage -- the home gateway product. This home
gateway is the proprietary piece of hardware that attaches to the home
computer and includes a high-speed modem, and it configures itself without
a network interface card or an in-home service call. In other words, you
don't need to roll a truck to your house, you can install it yourself just
as easily as plugging in a printer.
The gateway also allows customers to purchase additional service, such as
data security, automatic backup, home networking and virtual private
networks. These value-added services can provide incremental revenue with
limited incremental cost, because the ability is already built into the
customer's equipment through the home gateway.
The use of the home gateway equipment is free to customers who subscribe to
Telocity's broadband service. The Telocity network supports the delivery of
two-way broadband services, the typical speeds of 500 to 750 kilobits and
as high as 1.5 megabits downstream and in the 256 kilobit range per second
upstream, all for about $50 a month.
As Mike said, the most important aspect of this transaction is that it
makes DIRECTV even more competitive with cable, and we can jump start our
broadband business by marketing to our install base of over nine million
customers that exist today at DIRECTV.
We also believe that this transaction improves our overall broadband
economics. We expect to get more subscribers, faster and less expensively
-- more cheaply to us -- for both our interactive broadband services and
our core DIRECTV television service. As a result, we expect to obtain
somewhere between three to four million DSL broadband subscribers within
the next five years.
<PAGE>
Our return on investment for these subscribers will be very similar to that
which we're seeing today for our DIRECTV subs. The average monthly revenue,
or RPU, for broadband customers today through DSL and Telocity is around
$45 to $50 per month. And we see that staying fairly constant over the next
few years. We believe that the basic subscription fees will decline over
time. However, we think this decline will be more than offset by revenues
from new value added services, as I mentioned before, particularly as we
leverage the capabilities which flow from having two broadband pipes into
the home.
Subscriber acquisition cost, or SAC, is lower than DIRECTV's. With the
acquisition, we expect Telocity's SAC to be about $400 today, half of which
relates to the cost of the gateway. As we've gained more subscribers and
achieved scale benefits, we expect the cost of the gateway to decline.
Telocity's churn today is currently well below that of DIRECTV's and, over
time, we would expect that churn get closer to, perhaps, where DIRECTV's
is. Telocity today is around one percent a month churn.
Telocity's gross margin is slightly negative due to the very small
subscriber base. They're going to end the year around 40,000 DSL customers,
and we're targeting a gross margin of over 40 percent just within the next
three years, reflecting the benefits achieved as we ramp up the subscriber
base, particularly due to line-sharing and volume equipment cost
reductions.
It's important to note that we're expecting to achieve significant
operating benefits and synergies by leveraging DIRECTV's key assets with
Telocity's. For example, we'll attain significant savings by combining our
sale and marketing efforts, our back office functions
<PAGE>
and our R&D efforts. We also believe that DIRECTV's demographically
attractive subscriber base will be a great target market for this service.
Adding up these synergies results in at least $2 to $3 billion in value, as
we conservatively look at it.
Finally, we expect to reach EBITDA break even on this business, on an
incremental basis, in about three years. In 2001, we expect to attain about
150,000 to 200,000 additional broadband subscribers, while incurring an
EBITDA loss in the range of $100 to $125 million. So, you can see that the
Telocity acquisition is a key strategic move, with a promise for
significant returns. It makes DIRECTV an even more formidable competitor
where we are gaining most of our net new subscribers, and that is in the
cable territory, and it infuses our company with an even higher level of
service expertise and technical innovation. And all of that adds up to more
subscribers, faster, at a lower cost.
With that, I'd like to turn the call back over to John.
John Rubin: Thank you, Eddie. Keep in mind that we may have members of the
media on this call in a listen-only mode. I'd like to remind the media
that they are not authorized to quote any participants on this call either
directly or in substance, other than the representatives of Hughes. In
addition, we are web-casting this call, and an archived copy will be kept
on our site.
I would also like to remind everyone that consistent with our new
procedures to comply with regulation FD, we are currently in a (black-out)
period. We enter into this quiet period at the end of each quarter. As
such, we will not be providing any guidance for 2000 or 2001, other than
the guidance given on this call for the Telocity acquisition.
<PAGE>
Operator, we're ready for the first question.
Operator: Thank you. Today's question-and-answer session will be conducted
electronically. If you would like to ask a question today, please press
the star or asterisk key, followed by the digit one on your touch-tone
telephone. We will proceed in the order that you signal us and take as
many questions as time permits.
And, once again, to ask a question today, please press star one. We'll
pause for a moment to assemble the roster.
Our first question comes from Brad Wilson with Lehman Brothers.
Brad Wilson: Yeah. Real quickly, guys. When DIRECTV and the satellite link
and DSL are both available for a -- for a singular subscriber, how are you
making that choice? How are you deciding from an economic standpoint?
Mike Smith: It's a choice that the subscriber himself will make. There's
pluses and there's minuses to each system. They'll have to balance that
out themselves, but, as I said earlier that our satellite service does have
a capacity limitation on it, so, in theory, we'll be making this less
available in the high population areas and DirecPC will stay primarily in
the rural areas.
Brad Wilson: What's the RPU on your DirecPC product?
Eddie Hartenstein: The R -- the RPU on DirecPC is on the order of $40 a month.
<PAGE>
Brad Wilson: OK. So, this is probably going to be a lower end, less urban
solution and you're going to use DSL in the urban market for maybe higher
throughput.
Eddie Hartenstein: I think we're -- again, the throughput levels -- the data
rate levels are, as with any DSL provider, dependent on distance from the
central office. The RPU number we gave you for DirecPC is for the one-way
DirecPC product. As Mike indicated, we are announcing today the launch of
the DirecPC two-way product and we expect the RPU to be incrementally
higher for that. Pricing will be something that as we roll out we make
more complete, as will the bundle offerings that we can afford for
broadband plus DIRECTV, be it satellite based DirecPC or DSL based through
the Telocity service.
Brad Wilson: OK. I mean, it just seems a little -- you're going to have two
boxes at the customer site -- one for DSL, one for DIRECTV and doing the
Internet over the -- over the DSL box seems, you know, not very leveraged.
Eddie Hartenstein: Ultimately, the technology for whichever it is, the DSL
function or DirecPC, gets integrated into a single box. You -- you're
right -- today Telocity and DirecPC have separate stand-alone boxes, which,
in general you put in near proximity to your PC.
Brad Wilson: OK. Thank you.
Operator: Our next question comes from Armond Musey, with Bank of America.
Armond Musey: Good morning, guys, and congratulations on a really, you know, --
very interesting transaction. Could you talk a little bit about, you know,
potential price bundling. You talked about $50 for the -- for the Telocity
DSL product and, I think, now your RPU is
<PAGE>
about $58 for Direct -- DIRECTV. Do you see any -- any, sort of, any
discounts there? Do you see selling Telocity alone, without DIRECTV, going
forward as you're doing now?
Mike Smith: Yeah. Sure.
Armond Musey: And, finally, do you see any potential synergies in terms of
maybe using Telocity installers and sales force, things like that?
Mike Smith: Three part question. We, absolutely, would sell DSL on a stand-
alone basis as Telocity has been doing. As to how we will exactly price it
on a bundled basis, you know, we'll be competitive with cable. This is
absolutely the same way that cable would sell it and, from a marketing and
sales end, you're right, we're going to be integrating that. We will
integrate the customer service function as our businesses, respectively,
grow.
From the installation perspective, remember it's the -- it's the local
carriers that are doing the provisioning and the beauty of the Telocity
technology is that it really doesn't require an installation. This is about
as hard as loading a CD and, as we said before, hooking up a printer to
your USV port with this Telocity gateway product.
Armond Musey: Do you see -- do you see this impacting any of your relationships
with any of the RBOC's at all?
Male: No, we think it compliments.
Male: It should enhance it.
Male: Absolutely.
<PAGE>
Armond Musey: OK. Thank you very much and, again, congratulations.
Male: Thanks, Armond.
Operator: We'll move on now to Hugh Scott with McDougall Mactier.
Hugh Scott: Yes. Hi. Actually, my question has been answered. Thank you.
Operator: And, once again, to ask a question, please press star one. If you
find that your question has been answered, you may remove yourself from the
queue by pressing the pound key.
Our next question comes from Bill Pitkin with Merrill Lynch.
Bill Pitkin: Yes. Hi, guys. Sounds like a great deal. We think it's clearly
a positive for you guys to have this as another option. I just wanted to
understand, I -- it's -- I hear you that you're not going to give any
guidance for other than what you just talked about, but can you at least
say how Telocity will be handled within the Hughes family? Will it be -- I
assume it's just going to be consolidated -- will it be considered a, you
know, a separate entity like Hughes Network Systems and DIRECTV and
reported on that basis?
Male: Well, yes, it will be a separate entity, but keep in mind that the
interface with the customer is going to be a single point of contact, so
we'd have a seamless interface where it regards either installation,
maintenance or service, and that's really where a lot of the synergies come
from is that what we will be able to handle anybody's activities whether it
be broadband, Internet or multi-channel television in a seamless fashion.
<PAGE>
Male: Bill, we began this kind of integration over a year ago with the -- you
know, first the USSV transaction and then PrimeStar. We today have a home
service network that can provide installation capabilities nation-wide,
and we absolutely expect to provide level one customer service through
single call centers where both television and the broadband product, be
it DirecPC or DSL based.
So, there -- that's where a huge number of the synergies come in and,
frankly, that's where we'll be able to, by cutting and combining those
underlying costs, be able to do some very attractive bundling as well.
Male: I just want to add -- Bill, I don't think we know exactly from a segment
reporting standpoint how we'll be displaying the information, but I can
assure you at leas in the near term that we'll be providing you with the
financial information you're looking for related to Telocity. We're still
working on how it will be reported from a segment standpoint.
Bill Pitkin: OK. Great. I think, you know, part of what I'm getting at is,
you know, you had mentioned -- just, I guess, actually verify for me you
said you expect an EBITDA loss of about $100 t $125 million, and I'm
assuming that's for 2001. Is that correct?
Male: Yes.
Male: Yes.
Bill Pitkin: And that you expect to be about EBITDA break even at some point in
2003. Is that correct?
<PAGE>
Male: Yes.
Bill Pitkin: OK. We understand that it's possible that it may be as much as --
require as much as $1 billion for this company to be EBITDA break even. I
mean, I just -- I guess, I just want to understand your calculations of the
ROI, you know, I just want to understand how you view, you know, the
potential cost to make this entity break even versus the, you know, the
incremental RPU that you're going to see here.
I mean, obviously, one of the benefits of acquiring the company outright
is that you retain all of the economics, you don't have to deal with
revenue sharing agreements, et cetera, but there's also, you know, what we
think may be a significant cost to bring it to be break even.
Mike Smith: Yeah. Bill, let me answer the question this way, and then I'll ask
Bob Meyers to jump in. The range there is clearly dependent on -- in '01
and every other year -- as to how many new incremental subscribers you get,
given the ((inaudible)) cost. What we like about this so much is that it
fits the model that we have so very well. If you have very low churn, and
we're going to take some lessons here from Telocity, given their lower
churn than we have, an RPU and a margin of very similar proportions, it
looks very much on an incremental ROI basis like we -- like we have.
We're looking at, you know, one percent to one and a half percent churn
on incremental RPU of $40 to $50 getting to a margin -- a gross margin in
the 40 to 50 percent range with a ((inaudible)) cost, actually, quite a bit
less and going down more rapidly with line sharing and hardware volume
reductions coming, you get an incremental rate of return that is in the
same ballpark that we have in the core DIRECTV business.
<PAGE>
Bob Meyers: I guess the obvious corollary, too, is that, you know, having this
as an option should, perhaps have a side benefit of producing churn, you
know, make ((inaudible)) your customer on the video side.
Mike Smith: Yeah. Absolutely. As we are going to, you know, more appliances
in the home and delivering the kind of quality customer service that our
folks are used to, this makes it, we feel, just an overall stick to your
stuff.
Bill Pitkin: Just one final question, you know, EchoStar just announced a deal
on Monday with Bell South, and Bell South is scrapping their satellite TV
business, and we think it's entirely likely that they may be discussing in
and doing a bundling offering on DSL with Bell South, although, obviously,
it would -- if that were to happen would only be in the Southeastern
territory, not on a national basis like this could be.
Do -- you had answered the question before about does this impact, you
know, your relationship with RBOC's. You're response was, "No, absolutely
not, it enhances it." I guess I don't really understand that. The deal
that we understood you had with SPC was very much a bundled offering with
telephony, with DSL -- I mean, do you just not sell in SPC's territory
through Telocity?
Larry Chapman: Hi, this is Larry Chapman. No, we view it a complimentary in
the sense that -- a couple of levels. First of all the -- Telocity is one
of the largest DSL wholesale customers to the RBOC's. They buy a lot of
surface, and that's a good business for the RBOC's. On a basic wholesale
business, this is a plus as we grow that business beyond even (our)
projections.
<PAGE>
On the other side, there are opportunities for us to work with the RBOC's
to create specialized offerings using some of the Telocity infrastructure
in that. So, in cases where RBOC's wants to have a more bundled offering
enhancing the DIRECTV, and there are indications that some of them wanted
to get more into the ISP position in the he home. We can work with them
and to find the right balance between offering our service and their suite
of services. So, we look at this as basically an infrastructure that has a
lot of opportunities to exploit, and we think it can only benefit our
already existing partnerships with the RBOC's.
Bill Pitkin: OK. Great. Thanks very much.
Operator: Our next question today comes from John Paulson with Paulson
Partners.
(Nick Lipachek): Yeah. Hi. This is (Nick Lipachek) for John Paulson. (Can I
ask you) -- I, actually, have a more technical question. Are there any
business conditions to the merger agreement?
Male: Could you expand on that a little bit?
(Nick Lipachek): Is the -- is the completion of the transaction subject to any
business tests in Telocity's performance?
Male: As Patti Hart mentioned in her call, there are some standard material
adverse change provisions in this. We were consciously white in the area
of things like performance obligations, in light of what the market is
doing right now. So to answer your question, there's some very standard
material adverse change language, nothing that we feel in any way has a
potential impact on the deal.
<PAGE>
(Nick Lipachek): Let me make sure I understand you clearly, but you said you
were consciously white in the definition of this material adverse changes?
Male: As Patti said, we were sensitive to what the market is doing right now.
So, there are -- in some cases, you have material adverse change provisions
that look at the overall financial message associated with the business
between signing and closing. We did not focus on those, given the
volatility in the market.
Male: There's a bit of consolidation going on with some other DSL providers,
and there's some opportunities there, and we want to stay flexible and take
advantage -- let Patti and her team take advantage of that consolidation in
terms of quickly, you know, perhaps, taking over some existing subs from
other carriers.
(Nick Lipachek): I see. Well, really, I'll tell you why I'm asking my question
-- in terms of the time frame of the closing of the deal -- why are you
launching the ((inaudible)) February the first, which is a week after
Telocity's announcement of their fourth quarter? Is there any relation
here?
Male: Well, we -- the -- we always let the business sort of drive the ...
Male: There's no -- there's no relationship at all. I think the February 1st
date is a factor of a lot of things -- one, right now, we're in the middle
of a holiday period. We don't know how long it will take to -- (although)
we don't expect a big delay there. I think it's just a conservative date.
But, there was no intention to put it off beyond any announcement period.
<PAGE>
Male: Yeah. The company integration timetable with the infrastructure systems
we'd (bought) to go -- we work backwards from where we can get it all
integrated, which is the April 1st time frame, and that's where we came out
-- February 1st. There's no magic there.
(Nick Lipachek): OK. Just, finally, it has -- it has to be something concrete
with the company, which is different from the general market for it to be a
material adverse change. Is this correct?
Male: That -- we're not going to go into the specific details. We try to give
you a flavor that we have some very standard ((inaudible)) language we --
neither of the parties expected to be operative between signing and
closing.
(Nick Lipachek): OK. Thank you. Thanks a lot.
Operator: Michael French with ING Barings has our next question.
Michael French: Good morning, gentlemen. I just had a couple of quick
questions about the gateway box itself. This device, as you explain it,
does not require the installer to open up the PC and that, obviously, is an
advantage, because you don't have to roll the truck. But, I'm just
wondering if there are any tradeoffs. Does it cost you in terms of
performance, or is it just a larger unit that is going to be outside the PC
itself?
Male: No. Contrary to any negative impact or performance, we think it's of
mass performance. For instance, Telocity right now is often a value-added
package in which you can use this Gateway computer to very seamlessly
network multiple computers within the home.
<PAGE>
As you pointed out, the big advantage is that it doesn't require any
opening up of the computer. And in fact, it performed lots of functions,
especially from (exciting) value-added ones that will be implemented in the
future, given the tenant of the computer. This is very important to
DIRECTV as we look at becoming a media manager. Gateway (is the hump) (as)
the idea that we can consolidate the technology into Gateway into our
current (set) top technology and have devices which operate independently
above the television and the PC that can process and manage media
throughout the home.
Michael French: How long will it take to actually integrate the Gateway box
with the DIRECTV box? And what will that processing entail? Will that
require, you know, substantial spending on your part to get the technology
to the point that it works together?
Male: No, we don't see any significant spending necessary to do that. As far
as the timeline, we're just now exploring exactly what we can do. I should
point out that right now, on a pure technical basis, the Gateway products
in our set are against set-tops do have the capability of communicating to
each other via a USB port.
So, even prior to the actual physical integration of the technology,
we'll be looking at ways in which we can support the Gateway technology to
feed content and allow two-way access from our advance (set-tops) via the
USB connection.
Operator: And we'll move on now to Tom Galvin with Fortsmann-Leff.
Tom Galvin: Yes, hi. A couple of questions, if I could. Firstly, the assets
that Telocity had, do you have a lot of co-locations? Or are you just
reselling? That's the first question. The second one, how does cap ex
look over the next couple of years? And then I have a couple more. I'll
come back on.
<PAGE>
Male: All right. On cap ex ((inaudible)) about $40 to $50 million. A lot of
that is due to the Gateway, the box itself that goes to each customer.
Then there is some money on infrastructure support, such as customer
service and billing systems and some other network infrastructure.
Eddie Hartenstein: Tom, this is Eddie. Can you explain what you mean by co-
locations?
Tom Galvin: Well, you know, do you -- does the company have a lot of, you know,
physical plants out there? Were they owned ((inaudible)) that are co-
located at an RBOC's headquarters? So there is, you know, physical assets
here. Or are they just, you know, renting and reselling lines from the
RBOC's themselves on a wholesale basis? You know, is that national
footprint, does it come along with hard tangible assets? Or is it just a
sales force to, you know, kind of sell the service?
Male: Well, a couple of answers. Telocity has taking approach, which we think
is the right one, in which they are reliant on other providers for the
actual business called DSL conductivity both ILECs and DLECs. So, from a
cap ex standpoint, it's the ((inaudible)) and the RBOC's of the world is
taking ((inaudible)), and what Telocity does is ((inaudible)) of that.
Telocity does have a number of network operation centers, which allow for
distributed processes -- distributed processing distribution hub there
content. I am trying to remember. I think it's about a dozen now that
they have. Those areas are not contained servers, and other distribution
equipment to allow for, you know, the rapid dissemination of (broadband).
<PAGE>
Tom Galvin: Got you. OK. And then, two last questions or so. Just for
clarification, the three million DLS subscribers for three to five years
was that was mentioned earlier in the call. Is that three to five million
with the direct PC, or will you be trying to sell the product on just a
broadband only, you know, type of an offer?
Male: That three to four DSL subscribers within five years, and we think that's
additive to the direct PC subscriber forecast in the one to 1.5 million
range in three years. We don't see it cannibalizing at all. As Mike
pointed out earlier, this is really from an overall Hughes perspective, but
a broadband everywhere solution, wherever you are. And we will, you know,
we will steer the customers to the most cost-effective solution for them
depending on where they are located.
Tom Galvin: Got you. OK. And the -- do you have a roadmap in terms of taking
their Gateway box and embedding it into yours? So you go from two boxes to
one? Is there a, you know, a certain timing that you're expecting that to
happen?
Male: We're in the beginning processes of establishing that time. I don't want
to pretend that, you know, there would be integrations to the extent that
we do not have a standalone Gateway product. We'll probably always have
that. But the integration benefits in households that have both our video
service and broadband service, we'll be exploring to rapidly introduce in
the market.
Tom Galvin: OK. And then finally, for Mike and, perhaps, Eddie, this strategic
investment. In your mind, does it enhance the appeal that the company may
have to a potential acquirer?
<PAGE>
Mike Smith: I'm going to stay away from the appeal to the acquirer, but it
certainly enhances the value of the company. And I think Eddie, in his
remarks, said that we probably are going create $2 to $3 billion worth of
value here in a very short period of time. You can take what you want
((inaudible)) what that does to a potential acquirer. And what we simply
are going to take away from that subject in terms of discussion for that.
Tom Galvin: OK. Fair enough. Thanks very much.
Mike Smith: Thanks, Tom.
Operator: Once again, if your question has been answered, you may remove
yourself from the queue by pressing the pound key. And we'll move on now
to Ty Carmichael with CS First Boston.
Ty Carmichael: Good morning. Just -- most of my questions have been answered.
But to follow up on the whole integration issue, my understanding is that
it would be a fairly easy development to integrate or develop a DIRECTV set
top box for the DSL back channel. Not necessarily integrating the Telocity
Gateway box with a DIRECTV box.
And, you know, that would obviously allow you to offer somewhat more
robust interactive television applications over the near term. And I'm
curious as to whether or not you're thinking along those lines and have any
plans to roll something out either next year or 2002.
Male: Yes. Hi. We certainly see the potential of that. And as I mentioned
before, the actual physical conductivity here in the USB port is already
there in our advanced set tops the (TBOW) units, the ultimate TV and (AOL
TV) units.
<PAGE>
So, we'll be rapidly exploring how we can quickly create the appropriate
software interfaces and applications to allow (set-tops) to have that IT
two-way conductivity. The integration efforts are both driven by potential
cost reductions and just simplicity from a household standpoint. But we'll
be able to get in front of that quickly by just having a USB connection
between the two devices.
Mike Smith: Ty, this is Mike Smith. Let me just add to it already.
Integrating DSL with our set top boxes is something that we've had on the
((inaudible)) looked at over the last 18 months or so. So we know how to
do it. I think that the question is and if we can all help to be cautious
(with this), how does the market develop? From a technical point of view,
we've looked at it. It's a doable do. It's not that expensive. But as
the market develops, we'll be able to go with where we see it going. So
we're not going to say today exactly what that is going to be, but I think
from -- as you asked your question, not only is it doable, but we've looked
at doing it and have done it in the past.
Eddie Hartenstein: This is Eddie. The folks at Telocity have always looked at
the addition of value added services in products -- in their product
development department at, you know, looking at the model the way we look
at it, how do you -- how do you increase (R2), add value added services
for, you know, for high margin low additional costs expenses?
And we like where they are going, these new suite of value-added services
they have added are just the beginning. And if you (marry) that up with
our product roadmap, I think you'll see a lot of exciting things happen
here. We are certainly looking forward to it. And, as we anticipate what
consumers are going to be wanting, we've now got the capacity to do it with
the dual pronged approach between DirecPC and with Telocity.
<PAGE>
Ty Carmichael: OK. And finally following on a question that I asked earlier on
the Telocity conference call, NBC was prepared to be fully actively
involved with Telocity as part of this acquisition. Do you anticipate
working closely with NBC on a going forward basis? Or are they pretty much
going to exit this part of the sale?
Male: That's kind of a complex area. There are certain parts of the
relationship that we will see diminish over time. There are certain
others, including advertising on NBC media properties, that will continue.
We intend to work with NBC and specifically (NBCi) to explore what
opportunities there may be in kind of this new DIRECTV Telocity bundle
area.
So this -- the door is wide open. We have a good relationship with NBC.
We carry a lot of their video properties. And we'll be exploring exact,
you know, what we can do together. It is clear that in terms of some of
the (NBCi) content areas that one of the reasons we needed to see some
modification of that area was to allow DIRECTV to exploit the, you know,
the multi-digital contact point within the household by having an ability
to control and present to the user interfaces and a consistent look and
feel between television and the PC product.
Ty Carmichael: OK. And then two points of clarification. You talked about
three to four million broadband tubs within five years. Is that Telocity
only subscribers? Or does that include DirecPC as well?
Mike Smith: No, that's Telocity DSL broadband.
Ty Carmichael: OK.
<PAGE>
Mike Smith: That's additive to DirecPC. And we expect a very high percentage
of those to be, you know, DIRECTV customers, as well.
Ty Carmichael: And when you talk about EBITDA break even within a three-year
period, I believe, does that assume that subscriber acquisition costs are
expensed or capitalized?
Male: Expenses.
Ty Carmichael: Fully expensed?
Male: Well, they are part of the Gateway. So and the Gateway is capitalized
over two years.
Male: Three years.
Male: Two years. Sorry.
Ty Carmichael: Capitalized. OK. And then last, are there any plans to re-
brand Telocity? Or is it you're going to as part of, you know, especially
when you offer it as part of a DIRECTV bundle, would the ...
Male: We're exploring that. We haven't made a decision on that. But we've got
a lot of options in that area, and we're going to take advantage of the
brand awareness that we have.
Ty Carmichael: OK.
Male: We're coming to that point.
<PAGE>
Ty Carmichael: Thank you. And congratulations on the transaction.
Male: Thanks.
Male: Thanks, Ty.
Operator: Our next question comes from Marc Crossman with JP Morgan.
Marc Crossman: Thanks. I had a couple of quick questions for you. First one
is just really quickly the implication for Spaceway, and is everything
still progressing toward there as planned? And then the second, I guess
the additional revenues you were talking about getting, I guess in this DSL
market we've actually seen over the last year, or, say, 12 months pricing
could come down by about 20 percent. Now, a lot of the -- a lot of the
traditional DSL guys kind of brought their prices down, but it certainly to
(their) level. You know, prices come down from like 49.99 to 39.99. So
how are you going to be able to offset that with additional revenues? I
mean, what are these revenues going to be?
Eddie Hartenstein: Marc, let me answer the Spaceway question. Spaceway
continues to be on track. The late 2002 launch that ((inaudible)) service
in the early part of 2003. We are very excited about Spaceway.
This is -- Spaceway is a different kind of a system. Spaceway fully meshes
conductivity. We think we can (see) a great set of offerings here between
DSL, two-way DirecPC and Spaceway. Again, I remind you that Spaceway is
primarily an enterprise system. We do believe that it's got -- because as
we bring the cost of it down, we do have -- I believe it has a consumer
application, particularly where you want to network between two locations
or a couple of locations with connecting video.
<PAGE>
So, from that aspect, this is totally complimentary because in no way slows
us down what we are doing with Spaceway. The other part ((inaudible)).
Male: Just in terms of DSL pricing and the downward pressure, we are certainly
aware of that and have built in to (our) performance projections that DSL -
- the secured broadband Internet access as part of DSL will go down in
terms of price points over a period of time. And it will become more of a
commodity.
The one thing that, you know, one of the things that greatly appealed to us
about Telocity was their more progressive perspective in looking at this
beyond just simple (plug) and Internet access. And focused from the get go
on creations of value-added services and the (enabling) technology to allow
for those services.
So, whereas we do project that the (R2) from basic DSL will diminish over
time, we see an increase to value-added services that help make
((inaudible)) and in fact ((inaudible)) allow you to stay above water --
above the aggregate (archway) out of the home between value-added services
and DSL content.
Marc Crossman: But what would (the) value-added services ((inaudible))?
Male: Well, ((inaudible)), we're being a little cautious in - (and I say that)
because there's some competitive issues that we want to be careful of right
now in order to get these into the market without tipping our hand too
much. But I can talk about a couple. Telocity itself just introduced a
service called ((inaudible)). It sells for $10 a month. And it has a
number of features, including a sophisticated firewall feature, virus
protection. And what the key to that is that it's done prior to any data
signals feeding into the computer and, in
<PAGE>
fact, can protect all the household computers because it is, in fact, a
((inaudible)) technology.
I think that's just the beginning of what the Gateway products are capable
of, and Telocity certainly has a lot on the drawing board and has we think
a very sophisticated roadmap as to the introduction of these things over
time.
I think that the combination of the DIRECTV set of resources can greatly
augment that, take it merely from a more computer centric set of value-
added services to things that are in the media manager category. So, we can
take a single set-top or devices feeding multiple points within the home,
whether it's television, PC, Internet appliances and stuff. Along with
that, we can (install) security applications, more sophisticated networking
including wireless opportunities.
So it is very clear in some sense, this Gateway is overbuilt for it's --
the simple use to create a DSL connection. But that is a conscious effort
to build into it the ((inaudible)) support a lot of things independent of
the computer.
Male: When you marry it up with our demographic, what we've found in the basic
DIRECTV service, I mean, look at the (arch) where we get for, if you will,
value-added services that we haven't even begun tapping the potential on
the event set-top boxes. But, just in terms of how we have been able to
sell and up sell folks, just in linear video programming, again, that was
because we, if you will, over-designed our basic, you know, DIRECTV set-top
box. And that's exactly what we've done in Telocity, where you've got huge
upside potential.
<PAGE>
Marc Crossman: I mean, do you guys take a look at any of the other asset based
DSL providers, like (Kova), (Northpoint), you know, those guys?
Male: Yes, we did. We did a very exhaustive review of them. And we really
came back with the strong feeling that Telocity is extremely unique. We --
if you went with one of those other entities, you still have to solve a lot
of the issues associated with provision and ensure that consumer access
point, the back-end processes, none of which the rapid base that DSL
provided -- can provide.
Telocity is very unique in both its consumer focus and its one-stop shop
focus. And, from a DIRECTV perspective, that's exactly what we try to be
in the video world. So it's a strong compliment, and it's -- I'll really
say it narrows down to a list of one quite rapidly which we checked off
what we needed in this area.
Eddie Hartenstein: And I can't help but overemphasize, again, Telocity's
absolutely world class management team that's there in place. Patti Hart
who, basically, built Sprint's long-distance business to a $10 billion
company before joining Telocity. (Kevin Grundy), (Dave Finley), (Thomas
Obenhuber), Ned Hayes, you know, previously CFO of Lucent, and I am
probably forgetting some of the other names right here. But that was a
clear differentiator for us, as well. As we've found doing acquisitions,
if you don't have the right people there to do them, you're not going to
realize the synergies, and you're not going to be able to realize the
growth. There's a lot of forward thinking. And there's a lot of very
bright capable senior management and middle management already in place who
are really looking forward to help us grow for the future.
Marc Crossman: Two other just really quick questions. I am not familiar with
the Telocity side of it. But how much ownership of the company is
management going to retain after then?
<PAGE>
And then also, did you actually have discussions with the RBOC's, namely,
Verizon and SPC, about this deal before doing that? And how it would, you
know, how it was going to impact the relationship?
Eddie Hartenstein: The first question is that we are doing 100 percent
acquisition of Telocity. The management team there will be (incentivized)
the same way that the Hughes and DIRECTV management teams are
(incentivized) and that through ...
Male: Ownership in Hughes.
Eddie Hartenstein: ... ownership in Hughes. With respect to the other RBOC's
that we have relationships with, as with our other partners, we talked to
them about this late last night or early this morning. And the reaction we
got is generally favorable.
Marc Crossman: OK. Great. Thank you very much.
Operator: We'll move on now to George Shapiro with Salomon Smith Barney.
George Shapiro: Yeah. Good morning. I had a couple of questions. You had
mentioned you expect EBITDA loss to be 100 to 125 million this year in '01.
What does it turn out to be in '00?
Eddie Hartenstein: George, we'd have to refer you back to Telocity. That's
their business. We're not going to close this transaction until the end of
the first quarter.
George Shapiro: OK. And, Eddie, you figured that you'd add 125,000 subscribers
in '01. They have 40 currently. How many have they added so far in '00?
<PAGE>
Eddie Hartenstein: All of their -- all of that is in '00. They started in the
basically second quarter. And, George, we're looking to add 150,000 to
200,000 in '01.
Mike Smith: George, what they said in their call today is they have 23,000 year
to date. They were expecting to get 40,000 to 41,000 at the end of the
quarter.
Male: Excuse me. That's 23,000 through third quarter.
Eddie Hartenstein: Through third quarter and 40,0000 to 41,000 as of the end of
the current quarter. That's what they said in their call -- the call this
morning.
George Shapiro: OK. And so, what is it that gives you the ((inaudible)) that
you can add that many more subscribers in '01, given that they've added
even if you annualize it maybe six -- they'll add 60,000 this year. So you
want to add 2.5 times what they added.
Eddie Hartenstein: George, it's pretty simple. We look at the daily add rate
and the run rate that they're running right now here in the fourth quarter.
And there is not a huge stretch at all. Bear in mind, as we started, you
know, sort of mid-year in 1994 when we started -- you're a little slow out
of the starting gate as you get your infrastructure up. But we're going to
be -- there's a built in base, you know, to ((inaudible)) the market, which
is the nine million plus existing customers that we've got, just for
starters. And their current daily add rate is such that we think the
150,000 to 200,000 is an easily achievable number.
George Shapiro: OK. Eddie, if you look at their stock price has gone from it
looks like 16 to two over the last nine months. So clearly, the market is
seeing life differently than you're looking at it. So, what do you think
the market is seeing as the big concerns? Because
<PAGE>
certainly if you're on the verge of acceleration, I don't think the stock
would be as low as it is.
Eddie Hartenstein: I think it's, basically, the availability of capital in a
subscriber growth business, George. We're in the, you know, we are in the
continuing subscriber growth business. We understand that. This enhances
our proposition. I think the market with its general lack of availability
of capital, basically, you know, has put them to the position that they and
others are in today. I think the synergies that we have, and I know that's
an oft overused word, but I firmly believe it here in providing whole house
entertainment and information solutions is what makes this a powerful story
for us.
George Shapiro: OK, Eddie. And more generally, competitively you mentioned
that they are one of the largest providers. Who are their major
competitors? And what do they offer that others don't? Because I'm just
not familiar with this whole market.
Eddie Hartenstein: The uniqueness of Telocity is they have exclusively focused
on consumers and have focused on customer service. Not going after the
enterprise businesses. And, again, with that focus on consumers, and
marrying that up with DIRECTV is where we see the value creation that Mike
mentioned is going to come from.
George Shapiro: And so who were their major competitors?
Male: It depends on what level you look at the competition. At the pure retail
level, I'd say Earthlink is a competitor. They're promoting a retail DSL
service. It has some similarities to Telocity. But, as Eddie pointed out,
the number of entities who have both a national focus and a consumer focus
are essentially limited to one guy. That does the whole one-stop shopping.
<PAGE>
But what the other entities tend to do or have a series of in some ways
complicated alliances between themselves, an ISP service, and then ultimate
provider of the DSL connections, whether it's an ILEC or a DLEC. In
Telocity's case, they take all of that confusion out of the picture. You
can call one place. You can watch your order being processed with the
Internet site and know where it stands in the queue at all times. So, it's
those value-added services from just a consumer-provisioning standpoint
that we can set them apart.
Eddie Hartenstein: Yeah. In their nationwide footprint, and we (said our)
relationships matches up excellent with ours, George.
George Shapiro: OK. And Eddie, is it the -- with the expectation that they're
going to add, like, I guess, 17,000 or 18,000 subscribers in the fourth
quarter, it's got the same kind of seasonality that DIRECTV has in terms of
the fourth quarter being the monster quarter.
Eddie Hartenstein: I don't think that the seasonality is such a factor here.
We'll see over time. Bear in mind, this is their first year of operation
as well. And, just for a broadband service, I don't think that has the
same sort of seasonality as a television based product. But, you know,
we'll see as we go forward, George.
George Shapiro: So you would attribute the big add this quarter just to the
fact that they are in the ramp up mode as opposed to seasonality?
Eddie Hartenstein: Well, bear in mind, one of the things that we want to bring
to bear here is our retail distribution as well. In the early call this
morning to our retail distribution partners,
<PAGE>
they are very excited about this. So to the extent that retail is seasonal,
and a significant part of our distribution is through them, we may get some
of that affect also.
George Shapiro: OK. And then last, Eddie, you said you would reach EBITDA
break even in '03. What was the expectation for subscribers at that point?
I think you gave three to four million in five years and 150 for next year.
But what was the expectation for the break even?
Eddie Hartenstein: Yeah, there's always a relationship between, you know, the
EBITDA and how fast you build subscribers. But, Bob, maybe you want to ...
Bob Meyers: Yeah. George, we're not giving specific (items), other than right
now the 2001 number that we gave you earlier and also kind of a five-year
look. For now, we're just going to keep it at that level.
George Shapiro: But then why, John, give the '03 as break even?
John Rubin: Well, we wanted to give you a sense of how this business can scale
up and let you see how the -- how we expect the growth margins to get up
into that 40 percent plus type range. And how that flows through the
EBITDA levels if you can just kind of gauge the business and where we see
it going. But, obviously, if the subscriber growth is much faster than we
have modeled out in our plan, then you know how the game works.
George Shapiro: Right. OK. Thanks a lot and good luck.
Male: Thanks, George.
<PAGE>
Operator: And now we'll move on to Kunel Madhukar with Morgan Stanley.
Kunel Madhukar: Hi. A question on DirecPC ((inaudible)). We still haven't
seen the news release out, so we don't know -- but going in deeper, what is
the kind of economic that we're likely to see on this new product?
Male: You'll see -- you'll see a release a little bit later today, you know,
outlining some of the specifics to that, and I think we would, you know,
through John's (wire) department be happy to have them or some of the HNS
folk to answer the details on that.
Kunel Madhukar: So, are we going to have another conference call later on
today?
Male: No, we're not, but we will be sharing with you, Kunel, some of the
specifics on the DirecPC economics as well.
Kunel Madhukar: OK. Great. Thanks.
Operator: And our next question comes from Adam Simon of Goldman Sachs.
Adam Simon: Thanks a lot, guys. A question you touched upon, Eddie, on the
retail channels. How long before we could go buy Velocity, Gateway at a
Radio Shack, or at Circuit City, or a Best Buy?
Eddie Hartenstein: Again, we're not looking to close this deal until, you know,
late first quarter, early second quarter, and I think those are some
details that we're going to be working out here as early as in the next
couple of weeks at the -- when we have our big meetings
<PAGE>
with our retail partners at the CES show, the consumer electronic show
first week of January.
Gauged by their initial excitement this morning, I would expect, you
know, to be able to affect those kinds of relationships as quickly as we
can.
Adam Simon: All right. Fair enough, and I think Patti said earlier that --
it's also in the press release, about 40 percent of the country's
population. Have you done a (crash) check on, like, right now, how many of
your subscribers, I mean, just taking ((inaudible)) in a relationship, I
guess it would be, you know, 40 percent, the nine or 10 million that could
have access to this, and where do you see that 40 percent going to over the
next several years?
Eddie Hartenstein: Well, as to the point where we are right now, the
penetration or the availability through our subscribers matches up pretty
well. We haven't done the detailed run, and that's something that we do,
you know, for the direct marketing purposes very quickly but I don't expect
to see a huge change there.
Going forward, Larry, let me ask you to talk about what, you know, what
the analysts in general are saying.
Larry Chapman: Well, I think you'll see a little artificially lower DSO access,
by virtue that we have a, on a legacy basis, a slightly more rural (hue)
that is constantly being diminished over time, because most of our growth
is coming out of urban environments.
So, whatever the ratio is, and we're doing those kinds of cross-
correlations now, you'll see it increase over time as our subscriber base
becomes more and more urban.
<PAGE>
Adam Simon: Yeah. And more specifically, the four -- you know the Telocity
reached the 40 percent of homes, you know, forgetting about, you know,
where your DIRECTV sub base is, can you assume that goes to 50, 60, 70
percent over the next couple of years ...
Male: Yes.
Adam Simon: As they form more deals with RBOC's or ...
Male: Yeah. As the network is build out and the technology becomes more
sophisticated, in terms of within a market, it's already in reaching more
and more customers, we could see it reaching, you know, 70 percent plus
range.
Adam Simon: All right. Thanks a lot.
Operator: And we'll take another question from Goldman Sachs. Mark Gordon,
please go ahead.
Mark Gordon: Hi. Have there been any plans or discussions about offering
telephony and, also, do you anticipate that this acquisition will act as a
catalyst for the RBOC's to start to roll out more DSL and more bundled
satellite DSL?
Male: The possibility of voice -- IP voice is there. I'll readily admit that's
a world we're not overly familiar with and intend to explore aggressively
with the Telocity folks who definitely have been thinking about it a lot,
so more to come on that.
In terms of the RBOC's, as I said before, we think that there are some
very interesting possibilities of working with them to exploit these
capabilities. So as to how much it
<PAGE>
serves as a catalyst for increased levels of bundling, we'll know within
the next few months here.
Mark Gordon: And, right now, the consumer electronics stores, are they are
offering DSL modems, or will this be a new product they'll be offering with
you guys?
Male: You know, various retailers offer DSL modems. They have alliances with
various people. As Eddie alluded to, the reaction of this was very
favorable in that DIRECTV has been very good to them in the sense of as a
product category. They recognize that digital cable is a more worthy
competitor to DIRECTV and see the addition of a broadband compliment, a
wire line ((inaudible)) as a very strong counter to any competitive
((inaudible)) digital cable. So they'll welcome the product. Many of them
are sophisticated in selling this, and we intend to, you know, exploit that
pretty quickly.
Eddie Hartenstein: With our national relationships with our national
distributors and even the key regionals, the fact that we've got a pair of
solutions here -- they -- what bothered them before is you had to get out a
little map and see where what is available. What we have with them is that
they can advertise on a national basis that there's a broadband solution
for any customer living anywhere that comes in. This is a quick one that
fills in for broadband, be it wireline, DSL, Telocity, or DirecPC with the
two way product that we're announcing today.
Mark Gordon: So, do you anticipate prominent displays in most of the consumer
electronics good retailers stores?
Male: Absolutely.
<PAGE>
Mark Gordon: OK. Thanks a lot.
Operator: Now we'll move on to David Gibson with MacQuarie Bank.
David Gibson: Yes, just two questions. First one is are you looking to extend
Telocity's offering to the business market and the second is, is there any
protection of constraints given we've got a Telocity proprietary box?
Male: From the production constraint, there's no problem there. The existing
Gateway boxes are being produced by contract manufacturers. We have both
that capability, and we have got a world class set of relationships with
set top box manufacturers for DIRECTV, you know, including Hughes network
systems are, you know, within the Hughes family, RCA, Sony and others.
So we don't see any constraint there. These, while very sophisticated
boxes, I think have a prospect of coming down significantly in their
manufacturing cost with just a modest increase of volume.
David Gibson: OK. And the business offering for Telocity at all?
Mike Smith: As with DIRECTV, we have commercial offerings, which are not a
large part of our revenue stream, but growing in importance. We'll explore
opportunities to bring broadband offerings into businesses. It's a more
complex world. It has a lot more competition, quite frankly, in the DSL
arena than ((inaudible)), so it's not something that we're counting on, but
we'll be looking at.
<PAGE>
Male: Actually, Mike, just speaking from an enterprise basis, the satellite
connectivity does a much better job, because it can get everywhere, where
you can't necessarily guarantee on DSL line everywhere. ((inaudible))
interconnect your business ((inaudible)), the satellite solution probably
offers the best and cheapest solution.
David Gibson: OK. Great. Thank you.
Operator: We'll move on now to Robert Berzins with Lehman Brothers. Mr.
Berzins, you're line is open. Please go ahead.
Robert Berzins: My questions have been answered. Thanks.
Operator: Thank you. We'll take a follow up question now from Armond Musey
with Bank of America.
Armond Musey: Hi, real quick housekeeping question here. How many DirecPC
boxes two way version do you really have available now, and can you talk a
little bit about the boxes availability progression during the rest of
2001?
Eddie Hartenstein: Yeah, the announcement's -- I mean that's coming out today
announces that we're making our first shipment today (to make) available at
retail, (initially) will ramp up over the next six to 12 months, and we'll
effectively get that ramp up in line with the demand part, so, in about
three months, we'll have what we think is a good availability at retail
((inaudible)), obviously, for our home services network.
Armond Musey: OK. Could you -- are you prepared to put (actual) numbers on
that? I mean, how many boxes do you expect maybe at the end of Q1, the end
of Q2?
<PAGE>
Eddie Hartenstein: No, we're not going to get into that.
Armond Musey: OK. Thank you very much.
Operator: And we'll take another follow up question from Mark Gordon with
Goldman Sachs.
Mark Gordon: Hi. I was just wondering. If you pass 40 percent of the homes,
or if 40 percent of the homes are DSL capable, will the consumer
electronics good stores know when they make a sale whether or not this
consumer has a home that's capable of receiving DSL?
Male: Yeah. That's absolutely possible. We're going to put into the retailers
hand the same software that can continuously be upgraded as the -- as the
availability of service is there to be able to, you know, quickly qualify
that customer so he, you know, know which SKU to scan in for them when they
want their broadband.
Male: Yeah. One of the things that appealed us to with Telocity was that that
process in terms of being able to quickly and accurately identify the DSL
potential, with something that was very unique to Telocity. Their systems
are, from our perspective, much better than anything offered out on the
market.
John Rubin: OK. Operator, I think we may have time for one more question or
...
Operator: Thank you. Our final question comes from Michael French with ING
Barings.
Michael French: I was just curious how you came to evaluation on the companies
here. Were you looking at it on a per sub basis or, you know, how did you
determine what to pay?
<PAGE>
Eddie Hartenstein: Mike, let me take a stab at that, is the variety of ways to
look at this business -- key of which is, you know, clearly where they have
their strength. Number one, their Gateway product, we took a very hard
look at that, had some outside consultants verify its robustness, its
viability and, frankly, we -- this is a huge leap in time and money -- we
didn't have to spend to get this to market. It's a product that works.
Clearly, they have an existing customer base with a growth ramp and
capability that we saw as a huge head start. There's a management team in
place. There's a potential to create the kind of value that Mike Smith
indicated early on -- in the $2 to 3 billion value creation range here.
Obviously, taking a look at where this property was trading at today lead
us to, with our advisors, and Telocity certainly had theirs, come to where
we think this was a reasonable and fair proposition for both sides to get
us to the price. Yeah. That's where we came in at.
Michael French: OK. Thanks. Fair enough. The last thing, I noticed you guys
had a room set aside at CES for a press conference. Is this going to be to
discuss DirecPC, or is it interactive products that are coming out now?
Male: With the CES you have to, along with making floor space reservations the
week after or the second week of January for the (ensuing) CES, you have to
do the same thing to just reserve space there. We have traditionally used
that as an opportunity just for the CE press, which is a different press,
to recap the year's events. It's basically for the dealer trade magazines,
and just tell them what's going on, a year in review, and we have always
held space there just to make sure that we have it. Nothing planned right
now.
<PAGE>
Michael French: OK. Well, best of luck with the new -- with the new offering
and have a good show.
Male: Thanks, Mike.
Operator: And that concludes our question-and-answer session. Mr. Rubin, I'll
turn the conference back to you for any additional or closing remarks.
John Rubin: I'd like to just thank you all for joining us today. If you have
any further questions, please don't hesitate to call our investor relations
department. Thank you.
Operator: And that does conclude today's conference call. Thank you for using
Premiere Conferencing.
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