This was filed on 11/5/2004. Thanks for seanb61 for the alert.
I have taken various statements from the amedment filing. You make your own conclusions about it.
1 - MPEG-4 will not have happen until last quarter of 2005 for SD channels and 2006 for HD channels
2 - 35" wide by 20" high the specification of the elliptical dish. No plans yet when to use that orbital location. 5,000 of them have been initially ordered.
3 - Operational budget of VOOM DBS 661.2 million.
4 -WE HAVE EXPERIENCED OPERATING LOSSES AT RAINBOW DBS AND EXPECT TO DO SO FOR
THE FORESEEABLE FUTURE
5 -As of September 30, 2004 we had approximately 26,000 activated customers, with an additional 1,250 customers awaiting installation.
6 - Customers delinquency. Never paid.
7 - No Local offering main reason customers decided to deactivate
8 - 2 TPs were given an extension until March 31, 2005
9 - Updating/Upgrading Billing and Inventory Management.
10- Rainbow 1 on 9/25/04 suffered the loss of one solar array
circuit out of the 24 solar array circuits on the satellite
Read and draw your conclusions and I know we'll get a lot of the naysayers saying "I told you so the building is going down".
Source
OUR RAINBOW DBS BUSINESS
Our Rainbow DBS business began operations in October 2003 with the
introduction of our VOOM(SM) service, which carries a larger number of
high-definition channels than any other satellite provider or cable television
system. As of September 30, 2004, the VOOM(SM) service offering included 36
channels in high definition, including 21 currently exclusive VOOM(SM) channels,
over 80 standard definition channels and 18 audio channels. As of September 30,
2004 we had approximately 26,000 activated customers and an additional 1,250
customers awaiting installation.
Our goal is to be the premier source for high definition programming and to
exploit that position to develop a successful DBS business. During the first
year of our Rainbow DBS operations we have sought to develop a better
understanding of the market for satellite-delivered programming, and high
definition content in particular. We have also worked to overcome start up
issues particularly with respect to equipment, installation and operations.
Finally, we have tested, and continue to test, a variety of pricing, promotion
and marketing plans to develop the most effective strategy to attract and retain
subscribers to our service. This testing is likely to continue into 2005. During
this time we will focus our attention on developing a successful strategy rather
than driving rapid subscriber growth. It is possible that at various times
during this period we may lose more customers than we add. A particularly
important decision for us will be finding the right balance between a broad,
national marketing effort and an effort that is more targeted to the specific
markets in the country which we believe are most promising. There can be no
assurance that our efforts will be successful.
Our Satellite Transmission Capacity. The VOOM(SM) service is transmitted
by our Rainbow DBS satellite, Rainbow 1, that was constructed by Lockheed
Martin, successfully launched in July 2003 and delivered to its 61.5(degree)
W.L. orbital position. From this orbital position, the satellite provides
coverage to the contiguous United States, provided customers have a line of
sight to the satellite.
In addition, on April 23, 2004, we entered into an agreement with SES
Americom, Inc. to lease 13 transponders as of October 1, 2004 and three
transponders as of January 1, 2005 on its Americom-6 satellite, which is located
at 72(degree) W.L. We have not yet determined how or when we will use the
transponder capacity on Americom-6 in our DBS business. Because of the orbital
positions of the Americom-6 satellite and our existing Rainbow 1 satellite,
which is located at its 61.5(degree) W.L., a subscriber will be unable to access
the signal from both satellites with a single 18" antenna of the type we have
installed and are currently installing but both could be accessed with a single
elliptical satellite antenna that will be approximately 35" wide by 20" high or
with the 18" antenna plus a second antenna that would receive the signal from
Americom-6. The size and other specifications of the second antenna
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have not yet been determined and may depend in part on how we decide to use the
transponder capacity on Americom-6. The Company has not finalized its plans for
implementing the use of the new satellite capacity, for the installation of the
new larger antennas for new customers or for the switch over of existing
customers to the new larger antennas or the addition of a second antenna.
Our Rainbow DBS business received authorization from the Federal
Communications Commission, or FCC, to construct, launch and operate five fixed
service, Ka-band communications satellites that could be used to provide
additional services, including data and video applications. Rainbow DBS also
invested $85 million, and owns a substantial interest in an entity that holds
licenses from the FCC to provide multichannel video distribution and data
service (MVDDS) in 46 metropolitan areas in the United States. These areas
include the New York City market, although it is uncertain whether the entity
may exploit that license in light of FCC cross-ownership restrictions. Rainbow
DBS believes that these frequencies could be used in conjunction with its
satellite services to provide local broadcast signals or other services. In July
2004, our Rainbow DBS business was the winning bidder in an FCC auction of
Ku-band DBS frequencies at two orbital locations over the Pacific Ocean.
Although it has no current plans for these orbital locations, Rainbow DBS
believes that these locations could be used to provide DBS services to Hawaii
and the West coast of the United States including parts of Alaska.
Our Rainbow DBS business faces a number of challenges and risks. The most
significant of these are discussed under "Risk Factors -- Risks Relating to Our
Rainbow DBS Business" and include the risks that a sufficient number of
customers may not find our service to be attractive in order to permit us to be
successful, that we expect to incur operating losses for the foreseeable future
and may never achieve or sustain operating profits or cash flow breakeven, that
we need significant additional funding in this business which may not be
available and that our owned satellite and leased satellites could experience
operating problems.
RNS distributed approximately $1,366.1 million of the net proceeds from the
$600 million term loan borrowing and the $800 million Notes offerings to Rainbow
Media Enterprises. We, in turn, distributed approximately $704.9 million to our
existing parent company, Rainbow Media Holdings LLC, or "RMH", which used those
funds to repay all of its borrowings under its credit facility. The facility was
cancelled concurrent with the repayment and the guarantees of such facility that
had been issued by AMC, WE and IFC were discharged. We will use the remaining
portion of the funds distributed to us by RNS of approximately $661.2 million to
invest primarily in Rainbow DBS and, to a lesser extent, in certain developing
Rainbow Programming businesses.
PIRACY OF OUR CONTENT AND THE IMPACT OF PERSONAL VIDEO RECORDERS COULD
NEGATIVELY AFFECT OUR PERFORMANCE
Piracy of our content by means of interception of cable and satellite
transmissions or Internet peer-to-peer file sharing and the impact of personal
video recorder "ad-stripping" functions on advertising sales and network
branding could negatively affect our performance.
RISKS RELATING TO OUR RAINBOW DBS BUSINESS
WE HAVE EXPERIENCED OPERATING LOSSES AT RAINBOW DBS AND EXPECT TO DO SO FOR
THE FORESEEABLE FUTURE. WE CANNOT BE CERTAIN THAT WE WILL ACHIEVE OR SUSTAIN
OPERATING PROFITABILITY OR POSITIVE CASH FLOW FROM OPERATING ACTIVITIES
During the first and second quarters of 2004, our Rainbow DBS business
experienced operating losses of approximately $36.0 million and $61.6 million,
respectively, on revenues in those periods of $1.0 million and $2.7 million,
respectively. Our ability to operate our Rainbow DBS business successfully and
our ability to achieve acceptable financial performance cannot be assured.
Successful performance will depend largely upon our ability to establish and
retain a very large customer base with a viable price structure and to
effectively manage our costs and control subscriber "churn," which is the rate
at which subscribers terminate service. The principal challenge for our Rainbow
DBS business is to attract a sufficient subscriber base to reach and exceed a
break-even point and to do so with subscriber acquisition and other costs that
are within our funding capabilities. We cannot assure you that we will be
effective with regard to these matters. Our financial performance will affect
the market value of our common stock and other securities. Due to the
substantial expenditures necessary to complete construction, launch and
deployment of our direct broadcast satellite and introduction of our Rainbow DBS
service to consumers, our Rainbow DBS business has sustained significant losses
and will continue to sustain significant losses for the foreseeable future.
We will need to continue to invest funds in our Rainbow DBS business to
support its operations, including funding the shortfall between revenues and
expenses. If we are unable to rapidly grow the number of subscribers to our
VOOM(SM) service and do so without incurring unexpectedly high subscriber
acquisition costs, we may not be able to obtain sufficient funding to continue
to operate our Rainbow DBS business. Rainbow DBS will also have significant
funding requirements as it seeks to meet milestone obligations associated with
FCC authorizations to launch five Ka-band satellites and to build out the
infrastructure needed to capitalize on FCC authorizations to provide
multichannel video distribution and data services, or MVDDS, in 46 metropolitan
areas in the United States. Similarly, significant funding will be required to
meet FCC milestone obligations relating to Ku-band frequencies at two new
orbital
20
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locations for which Rainbow DBS was the successful bidder at a July 2004
auction. We may be unable to raise the necessary financing to fund all of these
costs.
CUSTOMERS MAY NOT FIND OUR SERVICES TO BE ATTRACTIVE
Ultimately our success will depend upon our ability to convince a large
number of consumers to order our service and thus attract a sufficient
subscriber base to reach and exceed a break-even point, and to do so with
subscriber acquisition and other costs that are within our funding capabilities.
We have no history of being able to do this. Through the end of September 2004,
we had attracted fewer subscribers than we anticipated and have lost more
subscribers than we expected. As of September 30, 2004 we had approximately
26,000 activated customers, with an additional 1,250 customers awaiting
installation. Our number of subscribers declined in each of August and
September, 2004. Since our launch in October 2003 through the end of September
2004, approximately 32% of the customers who had activated our service
subsequently terminated the service. In August and September, 2004, our churn
rate -- the number of disconnected customers divided by the average number of
activated customers during the month was 11% and 9%, respectively. We did not
deactivate any accounts for nonpayment prior to October, 2004. If we had
deactivated accounts that were 90 days or more past due at the end of each
month, the churn rates would have been 16% and 13%, in August and September,
respectively, and our cumulative disconnects as a percentage of customers who
activated the service since we began operations would have been 39% through the
end of September.
To be successful, we must increase substantially and continuously the rate
at which we add new customers. We experienced an upward trend in new customer
additions in April, May and June, 2004. However, the rate at which we added new
customers declined in July, August and September. We believe that this decline
is attributable primarily to our decision to scale back direct advertising
beginning in June, when it became apparent that we could not efficiently install
a growing number of customers, and to our decision, effective August 1, 2004, to
increase our consumer pricing and to eliminate our "no-money down" equipment
rental program. Unless we are able to reverse this trend and grow our customer
base quickly and significantly, we are unlikely to have a successful DBS
business.
WE HAVE A LIMITED PERIOD IN WHICH TO ESTABLISH OUR BRAND AND A LARGE CUSTOMER
BASE
We are currently offering more high-definition programming than any other
cable or satellite provider. While we hope to continue to develop new
high-definition offerings, some of which may be exclusive to us, we expect that
at some point high-definition programming will largely replace standard
definition offerings as the prevalent form of programming for all providers.
Accordingly, we will have a limited period of time in which to exploit our
high-definition programming advantage to establish our brand and a large base of
subscribers. There can be no assurance that we will be able to do so.
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WE COULD BE ADVERSELY AFFECTED BY HARDWARE AND SOFTWARE PROBLEMS
Following the launch of our VOOM(SM) service in October 2003, we
encountered operational problems with our satellite receivers. We believe that
most of these problems have been eliminated but, because our hardware and
software are new, we continue to encounter operational issues that need to be
addressed and resolved, and we expect that we will continue to encounter
problems in the future. In particular, it is likely that we will face
operational issues when we transition our compression technology from MPEG-2 to
MPEG-4, which is expected to occur no earlier than September 2005 for standard
definition programming and sometime early in 2006 for high definition
programming of 2005.
WE HAVE EXPERIENCED INSTALLATION PROBLEMS
In May 2004, as the number
of scheduled installations began to ramp up as a result of our increased
marketing efforts, we found that our installation infrastructure could not
provide timely installation. As a result, in June we began to scale back our
direct marketing efforts in order to reduce our backlog of customers awaiting
installation and thereby reduce the time between receipt of an order and
installation. Over the past several months we have been reassessing our
logistics and installation infrastructure to be able to handle an increase in
installation volume. To be successful, we will need to have the capability to
quickly install numbers of customers significantly in excess of the number of
installations that created problems for us in June and July.
WE FACE RISKS ASSOCIATED WITH THE CREDIT OF OUR CUSTOMERS
Our success depends upon our ability to collect monthly programming and
other charges from our customers. Because we offered free service until March
31, 2004 and because we offered a "no-money down" equipment rental option until
August 1, 2004, we have a large number of installed customers who have never
made any payments to us or who are otherwise not current in their payments to
us. Our existing subscriber management and billing system does not allow us to
track payment delinquencies in an accurate and timely manner. We are in the
process of upgrading that system to permit us to do so. In October 2004, we
began to terminate service to customers based upon payment delinquency.
There can be no assurance that our churn rate will decrease
over time to an acceptable level. Our churn rate has increased sharply in recent
months. We believe this increase is primarily due to (i) disconnects by
customers who took advantage of our "no money down" offer and subsequently
terminated the service; (ii) disconnects by customers who were not satisfied
with the availability of off-air signals; and (iii) disconnects by customers who
did not receive all of the cable channels they expected to receive. Since we
first began to disconnect customers in October for nonpayment, our churn rate
for October will be disproportionately high because we will be disconnecting
customers who would have been disconnected in August and September based upon a
policy of disconnecting customers who are 90 days or more delinquent in payment.
Our business model
assumed that customers would receive their local signals through the off-air
antenna that was included in our basic equipment package. We have found that
this is not always the case, particularly in areas where off-air signals are
weak, in areas where the local stations are not provided in digital format all
day or at all or at consistent power levels, and in cases where there are
particular customer problems such as inadequate line of sight to the signal or
poor installation. We have found through surveys of customers who deactivate the
service that poor reception of local signals is a significant cause of our
higher than anticipated churn rate.
OUR BUSINESS DEPENDS SUBSTANTIALLY ON FCC LICENSES THAT CAN BE REVOKED OR
MODIFIED
We have a license to transmit on 11 frequencies on our Rainbow 1 satellite
at the 61.5(degree) W.L. orbital location, which expires in 2013, as well as
authorizations to operate earth stations to control and communicate with the
satellite. These authorizations are renewable by the FCC. We also hold special
temporary authority ("STA"), to transmit over two additional DBS frequencies at
61.5(degree) W.L. The FCC has not yet adopted rules for the permanent assignment
of these channels, and we cannot predict when or if the FCC will permanently
assign them. The STA runs for a period of 180 days and may be extended. The
initial STA expired on April 5, 2004, and the first renewal of the STA expired
on
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October 2, 2004, but we have applied for an extension and under FCC rules may
continue to transmit under the STA during the pendency of the extension request.
We will have use of the two channels until the earlier of March 31, 2005, the
permanent assignment of the two channels, or an FCC order requiring Rainbow DBS
to vacate the two channels. If the FCC has not permanently assigned these
channels by March 31, 2005, we may apply to extend our STA for an additional 180
days. The STA is subject to several restrictive conditions and limitations
regarding our use of the frequencies.
WE RELY ON THIRD PARTY VENDORS TO PROVIDE THE INFRASTRUCTURE FOR OUR DBS
BUSINESS
We do not have the in-house capacity to provide the customer care,
subscriber management, inventory management and billing and installation
functions that are necessary to operate our Rainbow DBS business. We cannot
assure you that we will be able to maintain relationships with reliable third-
party vendors on terms that are acceptable to us, if at all. In addition, we may
not be able to provide these services to our customers or have these functions
performed with the appropriate quality standard or oversee the service quality
effectively. Our business would be materially adversely affected if we are
unable to offer quality service to our customers and to have these functions
performed satisfactorily.
Our current subscriber management and billing system and our manual
inventory tracking methods are adequate given the current scale of our
operations but need to be, and are in the process of being, upgraded to support
growth in our business.
The configuration of our subscriber management and billing system prior to
October, 2004 did not allow us to automatically track payment delinquencies or
to extract aggregate data and reports on the specific consumer offer or
promotion that applies to our customers in an accurate and timely manner. In
September and October, we made changes to the system that we believe will solve
the problem.
Prior to September, 2004, we did not have a perpetual inventory system that
allowed us to track our subscriber equipment throughout our distribution system
in an orderly and timely fashion. In September, we began using our subscriber
management and billing system's inventory control module to track movement of
our subscriber receivers to and from our warehousing vendor and our installation
contractor. This now enables us to track our subscriber receivers, which
constitute most of our inventory. We are
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currently in the process of implementing a new automated, perpetual inventory
system from an outsider provider, which will provide automated costing and
tracking of inventory.
In preparing our financial statements, we have implemented manual controls
and procedures (including performing physical inventories) to compensate for the
limitations of these systems. Based upon our levels of revenues, subscribers and
inventory since we began our DBS operations, these system limitations have not
materially affected our ability to accurately report on our operating results or
assets. However, these manual controls and procedures would not be adequate for
our business if we are successful in significantly increasing our revenues and
adding a significant number of subscribers.
All of the system upgrades are expected to be in place before the date of
the Distribution. However, we cannot assure you that we will not experience
problems with the upgrades and systems we put in place. In addition, our new
inventory system will still not be an ideal solution and will require us to
continue to maintain manual controls over our inventory until we are able to
implement a more sophisticated system, currently targeted for 2005.
On September 25, 2004 Rainbow 1 suffered the loss of one solar array
circuit out of the 24 solar array circuits on the satellite. The solar array
circuits use solar energy to recharge the satellite's batteries and are
therefore critical to the satellite's power supply. Loss of solar array circuits
can create potential power related problems for the satellite, including
possible reduction in the useful life of the satellite and possible inability to
obtain full use of all of the satellite's transponders. The satellite was
designed with more solar array circuits than the minimum needed to allow the
satellite sufficient power to utilize its transponders
Standard definition and high-definition are two formats of displaying
digital television, with high-definition television offering more enhanced
vertical and horizontal resolution and higher quality stereo sound as compared
to standard definition television. High-definition channels display pictures
that contain significantly more detail, resulting in much "crisper" pictures.
When we transfer to MPEG-4 standard definition compression, over time we will
nearly double our capacity to deliver standard definition programming.
Similarly, with the transition to MPEG-4 for high-definition we will increase
our high-definition capacity by 50%. For example, once the MPEG-4 conversion for
both standard definition and high-definition is fully implemented, using
capacity on both Rainbow 1 and Americom-6 we could offer up to 109
high-definition channels and 330 standard definition channels, or some mix of
the two formats. The actual allocation of channels between standard definition
and high-definition has not yet been decided.
We originally contemplated transferring to MPEG-4 compression technology in
the first quarter of 2005 for standard definition programming and in the fourth
quarter of 2005 for high definition programming. That timing is now under
review. We currently anticipate that we will obtain additional capacity from
further advances in MPEG-2 technology beginning in the first quarter of 2005. We
now expect to transition to MPEG-4 compression no earlier than September 2005
for standard definition programming and sometime early in 2006 for high
definition programming.
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The additional transponder capacity we have acquired through our lease on
Americom-6 will give us the capability using MPEG-2 compression to offer 27
high-definition and 116 standard definition channels, or some similar
combination of standard and high-definition channels.
30
<PAGE>
and to meet its 15-year design life. If the satellite lost additional solar
array circuits it may result in an inability to use one or more of its
OUR SUBSCRIPTION PLAN
We are currently offering programming packages ranging from $49.90 to
$89.90 per month. Under our basic offer, consumers who want these packages have
two options for acquiring the home equipment needed to receive the programming.
The first is to pay a $199 installation fee and a monthly equipment charge of
$9.50 per month per receiver. Alternatively, the consumer can choose to purchase
the equipment and related installation for $499. Under this option each
additional receiver costs the subscriber an incremental $299. With both options
the subscriber is charged a $5.00 per month fee for each activated receiver they
have installed. The basic equipment options do not require consumers to
subscribe to the service for any minimum period of time. Consumers who activated
the service prior to August 1, 2004 when the new pricing was implemented
continue to receive the programming at the price in effect when they originally
subscribed.
Currently we are offering two promotions that reduce the cost to the
consumer of initiating the service. Our primary promotion reduces by $150 the
$199 equipment installation fee that is charged to subscribers who elect the
monthly equipment fee option or the $499 equipment installation fee for those
who elect to purchase their equipment, and, in either case, the subscriber must
commit to retain the service for one year. The second promotion, which requires
no minimum time commitment from the subscriber, offers subscribers who elect to
purchase their equipment our most extensive programming
package -- VaVaVoom -- free for three months. Under this second promotion
subscribers electing the monthly equipment fee option receive our VaVaVoom
package for three months at $1 per month and there are no monthly equipment
charges during that three month period.
Consumers who requested service after August 1, 2004 were offered several
programming packages; an entry level package at $49.90 per month, four premium
movie PlusPaks at $19.90 per month per
52
<PAGE>
package, an adult premium channel, Playboy HD, for $19.90 per month, or the
entry level package plus the four premium movie PlusPaks for $89.90 per month.
The entry-level package includes:
- 21 new and exclusive high-definition channels from Rainbow including 10
channels of high-definition movies;
- over 50 of the most-watched cable channels;
- 18 commercial-free digital music channels;
- local off-air digital broadcast channels, where available; and
- a two-year, in-home service plan.
Until the offer changes, customers who sign up for the entry-level service
can also receive all the recognized, non-premium, high-definition cable channels
as part of the package with no additional charge through December 2004.
Subscribers may also purchase one or more premium multiplex movie service
PlusPaks for $19.90 per month. The PlusPaks are:
- HBO -- nine channels, two of which are in high-definition;
- Cinemax -- nine channels, two of which are in high-definition;
- Showtime -- nine channels, three of which are in high-definition; and
- Starz!/Encore -- nine channels, three of which are in high-definition.
Customers can also order VaVaVoom, an all inclusive package, for $89.90 per
month that includes both the entry level package and the four premium multiplex
movie services.
We may from time to time offer different pricing packages on a promotional
or test basis and we may change our base offer from time to time.
transponders or shorten its useful life.
The satellite has adequate transponders to service a maximum of 13
frequencies in contiguous United States, or CONUS, mode or up to 12 frequencies
in spot beam mode and one in CONUS mode. CONUS mode transmits programming to the
entire contiguous United States, while spot beam mode uses smaller, focused
satellite beams to cover a limited geographic region. Outside the selected area
in the spot beam mode, the signal is undetectable and will not interfere with
the reuse of the same frequency in a distant spot beam. We currently have
deployed the satellite's transponders in CONUS mode for all 13 frequencies.
Through MPEG-2 digital compression technology we can transmit 3 high-definition
channels and 7 standard definitions channels from each transponder.
Transponders on the satellite may be subsequently redeployed into spot beam
mode at any future time, providing us flexibility in the future. The spot beam
capability of the satellite permits flexibility in capacity utilization and
could allow efficient use of our limited frequency allocation to provide a
significant amount of local and regional programming. This use of spot-beams
could enable us to provide service to over 125 local markets with non-digital
local broadcast signals. This would, however, reduce the number of video
channels that could otherwise be offered on a national basis.
The lease became effective on October 1, 2004 but we have not yet
determined how or when we will use the transponder capacity on Americom-6 in our
DBS business. Until we begin using Americom-6 we are attempting to lease our
transponder capacity to others on a short-term basis but we do not expect to
earn significant revenues and we will not offset our lease costs. Because of the
orbital positions of the Americom-6 satellite and our existing Rainbow 1
satellite, which is located at its 61.5 (degree) W.L., a subscriber will be
unable to access the signal from both satellites with a single 18" antenna of
the type we have installed and are currently installing but both could be
accessed with a single elliptical satellite antenna that will be approximately
35" wide by 20" high or with the 18" antenna plus a second antenna that would
receive the signal from Americom-6. The size and other specifications of the
second antenna have not yet been determined and may depend in part on how we
decide to use the transponder capacity on Americom-6. Rainbow DBS has not
finalized its plans for implementing the use of the new satellite capacity, for
the installation of the new larger antennas for new customers or for the switch
over of existing customers to the new larger antennas or the addition of a
second antenna. We have placed an initial order for 5,000 of the new larger dish
antennas. We have not yet specified, or sought proposals from manufacturers,
with respect to the second antenna configuration. We are not yet providing the
new larger antenna or installing additional antennas so we do not know how much
customer resistance to the larger antenna size or to a second antenna we will
encounter. See also "Risk Factors -- Risks Relating to Our Rainbow DBS
Business -- Customers May Not Find Our Services to be Attractive."
I have taken various statements from the amedment filing. You make your own conclusions about it.
1 - MPEG-4 will not have happen until last quarter of 2005 for SD channels and 2006 for HD channels
2 - 35" wide by 20" high the specification of the elliptical dish. No plans yet when to use that orbital location. 5,000 of them have been initially ordered.
3 - Operational budget of VOOM DBS 661.2 million.
4 -WE HAVE EXPERIENCED OPERATING LOSSES AT RAINBOW DBS AND EXPECT TO DO SO FOR
THE FORESEEABLE FUTURE
5 -As of September 30, 2004 we had approximately 26,000 activated customers, with an additional 1,250 customers awaiting installation.
6 - Customers delinquency. Never paid.
7 - No Local offering main reason customers decided to deactivate
8 - 2 TPs were given an extension until March 31, 2005
9 - Updating/Upgrading Billing and Inventory Management.
10- Rainbow 1 on 9/25/04 suffered the loss of one solar array
circuit out of the 24 solar array circuits on the satellite
Read and draw your conclusions and I know we'll get a lot of the naysayers saying "I told you so the building is going down".
Source
OUR RAINBOW DBS BUSINESS
Our Rainbow DBS business began operations in October 2003 with the
introduction of our VOOM(SM) service, which carries a larger number of
high-definition channels than any other satellite provider or cable television
system. As of September 30, 2004, the VOOM(SM) service offering included 36
channels in high definition, including 21 currently exclusive VOOM(SM) channels,
over 80 standard definition channels and 18 audio channels. As of September 30,
2004 we had approximately 26,000 activated customers and an additional 1,250
customers awaiting installation.
Our goal is to be the premier source for high definition programming and to
exploit that position to develop a successful DBS business. During the first
year of our Rainbow DBS operations we have sought to develop a better
understanding of the market for satellite-delivered programming, and high
definition content in particular. We have also worked to overcome start up
issues particularly with respect to equipment, installation and operations.
Finally, we have tested, and continue to test, a variety of pricing, promotion
and marketing plans to develop the most effective strategy to attract and retain
subscribers to our service. This testing is likely to continue into 2005. During
this time we will focus our attention on developing a successful strategy rather
than driving rapid subscriber growth. It is possible that at various times
during this period we may lose more customers than we add. A particularly
important decision for us will be finding the right balance between a broad,
national marketing effort and an effort that is more targeted to the specific
markets in the country which we believe are most promising. There can be no
assurance that our efforts will be successful.
Our Satellite Transmission Capacity. The VOOM(SM) service is transmitted
by our Rainbow DBS satellite, Rainbow 1, that was constructed by Lockheed
Martin, successfully launched in July 2003 and delivered to its 61.5(degree)
W.L. orbital position. From this orbital position, the satellite provides
coverage to the contiguous United States, provided customers have a line of
sight to the satellite.
In addition, on April 23, 2004, we entered into an agreement with SES
Americom, Inc. to lease 13 transponders as of October 1, 2004 and three
transponders as of January 1, 2005 on its Americom-6 satellite, which is located
at 72(degree) W.L. We have not yet determined how or when we will use the
transponder capacity on Americom-6 in our DBS business. Because of the orbital
positions of the Americom-6 satellite and our existing Rainbow 1 satellite,
which is located at its 61.5(degree) W.L., a subscriber will be unable to access
the signal from both satellites with a single 18" antenna of the type we have
installed and are currently installing but both could be accessed with a single
elliptical satellite antenna that will be approximately 35" wide by 20" high or
with the 18" antenna plus a second antenna that would receive the signal from
Americom-6. The size and other specifications of the second antenna
2
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have not yet been determined and may depend in part on how we decide to use the
transponder capacity on Americom-6. The Company has not finalized its plans for
implementing the use of the new satellite capacity, for the installation of the
new larger antennas for new customers or for the switch over of existing
customers to the new larger antennas or the addition of a second antenna.
Our Rainbow DBS business received authorization from the Federal
Communications Commission, or FCC, to construct, launch and operate five fixed
service, Ka-band communications satellites that could be used to provide
additional services, including data and video applications. Rainbow DBS also
invested $85 million, and owns a substantial interest in an entity that holds
licenses from the FCC to provide multichannel video distribution and data
service (MVDDS) in 46 metropolitan areas in the United States. These areas
include the New York City market, although it is uncertain whether the entity
may exploit that license in light of FCC cross-ownership restrictions. Rainbow
DBS believes that these frequencies could be used in conjunction with its
satellite services to provide local broadcast signals or other services. In July
2004, our Rainbow DBS business was the winning bidder in an FCC auction of
Ku-band DBS frequencies at two orbital locations over the Pacific Ocean.
Although it has no current plans for these orbital locations, Rainbow DBS
believes that these locations could be used to provide DBS services to Hawaii
and the West coast of the United States including parts of Alaska.
Our Rainbow DBS business faces a number of challenges and risks. The most
significant of these are discussed under "Risk Factors -- Risks Relating to Our
Rainbow DBS Business" and include the risks that a sufficient number of
customers may not find our service to be attractive in order to permit us to be
successful, that we expect to incur operating losses for the foreseeable future
and may never achieve or sustain operating profits or cash flow breakeven, that
we need significant additional funding in this business which may not be
available and that our owned satellite and leased satellites could experience
operating problems.
RNS distributed approximately $1,366.1 million of the net proceeds from the
$600 million term loan borrowing and the $800 million Notes offerings to Rainbow
Media Enterprises. We, in turn, distributed approximately $704.9 million to our
existing parent company, Rainbow Media Holdings LLC, or "RMH", which used those
funds to repay all of its borrowings under its credit facility. The facility was
cancelled concurrent with the repayment and the guarantees of such facility that
had been issued by AMC, WE and IFC were discharged. We will use the remaining
portion of the funds distributed to us by RNS of approximately $661.2 million to
invest primarily in Rainbow DBS and, to a lesser extent, in certain developing
Rainbow Programming businesses.
PIRACY OF OUR CONTENT AND THE IMPACT OF PERSONAL VIDEO RECORDERS COULD
NEGATIVELY AFFECT OUR PERFORMANCE
Piracy of our content by means of interception of cable and satellite
transmissions or Internet peer-to-peer file sharing and the impact of personal
video recorder "ad-stripping" functions on advertising sales and network
branding could negatively affect our performance.
RISKS RELATING TO OUR RAINBOW DBS BUSINESS
WE HAVE EXPERIENCED OPERATING LOSSES AT RAINBOW DBS AND EXPECT TO DO SO FOR
THE FORESEEABLE FUTURE. WE CANNOT BE CERTAIN THAT WE WILL ACHIEVE OR SUSTAIN
OPERATING PROFITABILITY OR POSITIVE CASH FLOW FROM OPERATING ACTIVITIES
During the first and second quarters of 2004, our Rainbow DBS business
experienced operating losses of approximately $36.0 million and $61.6 million,
respectively, on revenues in those periods of $1.0 million and $2.7 million,
respectively. Our ability to operate our Rainbow DBS business successfully and
our ability to achieve acceptable financial performance cannot be assured.
Successful performance will depend largely upon our ability to establish and
retain a very large customer base with a viable price structure and to
effectively manage our costs and control subscriber "churn," which is the rate
at which subscribers terminate service. The principal challenge for our Rainbow
DBS business is to attract a sufficient subscriber base to reach and exceed a
break-even point and to do so with subscriber acquisition and other costs that
are within our funding capabilities. We cannot assure you that we will be
effective with regard to these matters. Our financial performance will affect
the market value of our common stock and other securities. Due to the
substantial expenditures necessary to complete construction, launch and
deployment of our direct broadcast satellite and introduction of our Rainbow DBS
service to consumers, our Rainbow DBS business has sustained significant losses
and will continue to sustain significant losses for the foreseeable future.
We will need to continue to invest funds in our Rainbow DBS business to
support its operations, including funding the shortfall between revenues and
expenses. If we are unable to rapidly grow the number of subscribers to our
VOOM(SM) service and do so without incurring unexpectedly high subscriber
acquisition costs, we may not be able to obtain sufficient funding to continue
to operate our Rainbow DBS business. Rainbow DBS will also have significant
funding requirements as it seeks to meet milestone obligations associated with
FCC authorizations to launch five Ka-band satellites and to build out the
infrastructure needed to capitalize on FCC authorizations to provide
multichannel video distribution and data services, or MVDDS, in 46 metropolitan
areas in the United States. Similarly, significant funding will be required to
meet FCC milestone obligations relating to Ku-band frequencies at two new
orbital
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locations for which Rainbow DBS was the successful bidder at a July 2004
auction. We may be unable to raise the necessary financing to fund all of these
costs.
CUSTOMERS MAY NOT FIND OUR SERVICES TO BE ATTRACTIVE
Ultimately our success will depend upon our ability to convince a large
number of consumers to order our service and thus attract a sufficient
subscriber base to reach and exceed a break-even point, and to do so with
subscriber acquisition and other costs that are within our funding capabilities.
We have no history of being able to do this. Through the end of September 2004,
we had attracted fewer subscribers than we anticipated and have lost more
subscribers than we expected. As of September 30, 2004 we had approximately
26,000 activated customers, with an additional 1,250 customers awaiting
installation. Our number of subscribers declined in each of August and
September, 2004. Since our launch in October 2003 through the end of September
2004, approximately 32% of the customers who had activated our service
subsequently terminated the service. In August and September, 2004, our churn
rate -- the number of disconnected customers divided by the average number of
activated customers during the month was 11% and 9%, respectively. We did not
deactivate any accounts for nonpayment prior to October, 2004. If we had
deactivated accounts that were 90 days or more past due at the end of each
month, the churn rates would have been 16% and 13%, in August and September,
respectively, and our cumulative disconnects as a percentage of customers who
activated the service since we began operations would have been 39% through the
end of September.
To be successful, we must increase substantially and continuously the rate
at which we add new customers. We experienced an upward trend in new customer
additions in April, May and June, 2004. However, the rate at which we added new
customers declined in July, August and September. We believe that this decline
is attributable primarily to our decision to scale back direct advertising
beginning in June, when it became apparent that we could not efficiently install
a growing number of customers, and to our decision, effective August 1, 2004, to
increase our consumer pricing and to eliminate our "no-money down" equipment
rental program. Unless we are able to reverse this trend and grow our customer
base quickly and significantly, we are unlikely to have a successful DBS
business.
WE HAVE A LIMITED PERIOD IN WHICH TO ESTABLISH OUR BRAND AND A LARGE CUSTOMER
BASE
We are currently offering more high-definition programming than any other
cable or satellite provider. While we hope to continue to develop new
high-definition offerings, some of which may be exclusive to us, we expect that
at some point high-definition programming will largely replace standard
definition offerings as the prevalent form of programming for all providers.
Accordingly, we will have a limited period of time in which to exploit our
high-definition programming advantage to establish our brand and a large base of
subscribers. There can be no assurance that we will be able to do so.
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WE COULD BE ADVERSELY AFFECTED BY HARDWARE AND SOFTWARE PROBLEMS
Following the launch of our VOOM(SM) service in October 2003, we
encountered operational problems with our satellite receivers. We believe that
most of these problems have been eliminated but, because our hardware and
software are new, we continue to encounter operational issues that need to be
addressed and resolved, and we expect that we will continue to encounter
problems in the future. In particular, it is likely that we will face
operational issues when we transition our compression technology from MPEG-2 to
MPEG-4, which is expected to occur no earlier than September 2005 for standard
definition programming and sometime early in 2006 for high definition
programming of 2005.
WE HAVE EXPERIENCED INSTALLATION PROBLEMS
In May 2004, as the number
of scheduled installations began to ramp up as a result of our increased
marketing efforts, we found that our installation infrastructure could not
provide timely installation. As a result, in June we began to scale back our
direct marketing efforts in order to reduce our backlog of customers awaiting
installation and thereby reduce the time between receipt of an order and
installation. Over the past several months we have been reassessing our
logistics and installation infrastructure to be able to handle an increase in
installation volume. To be successful, we will need to have the capability to
quickly install numbers of customers significantly in excess of the number of
installations that created problems for us in June and July.
WE FACE RISKS ASSOCIATED WITH THE CREDIT OF OUR CUSTOMERS
Our success depends upon our ability to collect monthly programming and
other charges from our customers. Because we offered free service until March
31, 2004 and because we offered a "no-money down" equipment rental option until
August 1, 2004, we have a large number of installed customers who have never
made any payments to us or who are otherwise not current in their payments to
us. Our existing subscriber management and billing system does not allow us to
track payment delinquencies in an accurate and timely manner. We are in the
process of upgrading that system to permit us to do so. In October 2004, we
began to terminate service to customers based upon payment delinquency.
There can be no assurance that our churn rate will decrease
over time to an acceptable level. Our churn rate has increased sharply in recent
months. We believe this increase is primarily due to (i) disconnects by
customers who took advantage of our "no money down" offer and subsequently
terminated the service; (ii) disconnects by customers who were not satisfied
with the availability of off-air signals; and (iii) disconnects by customers who
did not receive all of the cable channels they expected to receive. Since we
first began to disconnect customers in October for nonpayment, our churn rate
for October will be disproportionately high because we will be disconnecting
customers who would have been disconnected in August and September based upon a
policy of disconnecting customers who are 90 days or more delinquent in payment.
Our business model
assumed that customers would receive their local signals through the off-air
antenna that was included in our basic equipment package. We have found that
this is not always the case, particularly in areas where off-air signals are
weak, in areas where the local stations are not provided in digital format all
day or at all or at consistent power levels, and in cases where there are
particular customer problems such as inadequate line of sight to the signal or
poor installation. We have found through surveys of customers who deactivate the
service that poor reception of local signals is a significant cause of our
higher than anticipated churn rate.
OUR BUSINESS DEPENDS SUBSTANTIALLY ON FCC LICENSES THAT CAN BE REVOKED OR
MODIFIED
We have a license to transmit on 11 frequencies on our Rainbow 1 satellite
at the 61.5(degree) W.L. orbital location, which expires in 2013, as well as
authorizations to operate earth stations to control and communicate with the
satellite. These authorizations are renewable by the FCC. We also hold special
temporary authority ("STA"), to transmit over two additional DBS frequencies at
61.5(degree) W.L. The FCC has not yet adopted rules for the permanent assignment
of these channels, and we cannot predict when or if the FCC will permanently
assign them. The STA runs for a period of 180 days and may be extended. The
initial STA expired on April 5, 2004, and the first renewal of the STA expired
on
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October 2, 2004, but we have applied for an extension and under FCC rules may
continue to transmit under the STA during the pendency of the extension request.
We will have use of the two channels until the earlier of March 31, 2005, the
permanent assignment of the two channels, or an FCC order requiring Rainbow DBS
to vacate the two channels. If the FCC has not permanently assigned these
channels by March 31, 2005, we may apply to extend our STA for an additional 180
days. The STA is subject to several restrictive conditions and limitations
regarding our use of the frequencies.
WE RELY ON THIRD PARTY VENDORS TO PROVIDE THE INFRASTRUCTURE FOR OUR DBS
BUSINESS
We do not have the in-house capacity to provide the customer care,
subscriber management, inventory management and billing and installation
functions that are necessary to operate our Rainbow DBS business. We cannot
assure you that we will be able to maintain relationships with reliable third-
party vendors on terms that are acceptable to us, if at all. In addition, we may
not be able to provide these services to our customers or have these functions
performed with the appropriate quality standard or oversee the service quality
effectively. Our business would be materially adversely affected if we are
unable to offer quality service to our customers and to have these functions
performed satisfactorily.
Our current subscriber management and billing system and our manual
inventory tracking methods are adequate given the current scale of our
operations but need to be, and are in the process of being, upgraded to support
growth in our business.
The configuration of our subscriber management and billing system prior to
October, 2004 did not allow us to automatically track payment delinquencies or
to extract aggregate data and reports on the specific consumer offer or
promotion that applies to our customers in an accurate and timely manner. In
September and October, we made changes to the system that we believe will solve
the problem.
Prior to September, 2004, we did not have a perpetual inventory system that
allowed us to track our subscriber equipment throughout our distribution system
in an orderly and timely fashion. In September, we began using our subscriber
management and billing system's inventory control module to track movement of
our subscriber receivers to and from our warehousing vendor and our installation
contractor. This now enables us to track our subscriber receivers, which
constitute most of our inventory. We are
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currently in the process of implementing a new automated, perpetual inventory
system from an outsider provider, which will provide automated costing and
tracking of inventory.
In preparing our financial statements, we have implemented manual controls
and procedures (including performing physical inventories) to compensate for the
limitations of these systems. Based upon our levels of revenues, subscribers and
inventory since we began our DBS operations, these system limitations have not
materially affected our ability to accurately report on our operating results or
assets. However, these manual controls and procedures would not be adequate for
our business if we are successful in significantly increasing our revenues and
adding a significant number of subscribers.
All of the system upgrades are expected to be in place before the date of
the Distribution. However, we cannot assure you that we will not experience
problems with the upgrades and systems we put in place. In addition, our new
inventory system will still not be an ideal solution and will require us to
continue to maintain manual controls over our inventory until we are able to
implement a more sophisticated system, currently targeted for 2005.
On September 25, 2004 Rainbow 1 suffered the loss of one solar array
circuit out of the 24 solar array circuits on the satellite. The solar array
circuits use solar energy to recharge the satellite's batteries and are
therefore critical to the satellite's power supply. Loss of solar array circuits
can create potential power related problems for the satellite, including
possible reduction in the useful life of the satellite and possible inability to
obtain full use of all of the satellite's transponders. The satellite was
designed with more solar array circuits than the minimum needed to allow the
satellite sufficient power to utilize its transponders
Standard definition and high-definition are two formats of displaying
digital television, with high-definition television offering more enhanced
vertical and horizontal resolution and higher quality stereo sound as compared
to standard definition television. High-definition channels display pictures
that contain significantly more detail, resulting in much "crisper" pictures.
When we transfer to MPEG-4 standard definition compression, over time we will
nearly double our capacity to deliver standard definition programming.
Similarly, with the transition to MPEG-4 for high-definition we will increase
our high-definition capacity by 50%. For example, once the MPEG-4 conversion for
both standard definition and high-definition is fully implemented, using
capacity on both Rainbow 1 and Americom-6 we could offer up to 109
high-definition channels and 330 standard definition channels, or some mix of
the two formats. The actual allocation of channels between standard definition
and high-definition has not yet been decided.
We originally contemplated transferring to MPEG-4 compression technology in
the first quarter of 2005 for standard definition programming and in the fourth
quarter of 2005 for high definition programming. That timing is now under
review. We currently anticipate that we will obtain additional capacity from
further advances in MPEG-2 technology beginning in the first quarter of 2005. We
now expect to transition to MPEG-4 compression no earlier than September 2005
for standard definition programming and sometime early in 2006 for high
definition programming.
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The additional transponder capacity we have acquired through our lease on
Americom-6 will give us the capability using MPEG-2 compression to offer 27
high-definition and 116 standard definition channels, or some similar
combination of standard and high-definition channels.
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and to meet its 15-year design life. If the satellite lost additional solar
array circuits it may result in an inability to use one or more of its
OUR SUBSCRIPTION PLAN
We are currently offering programming packages ranging from $49.90 to
$89.90 per month. Under our basic offer, consumers who want these packages have
two options for acquiring the home equipment needed to receive the programming.
The first is to pay a $199 installation fee and a monthly equipment charge of
$9.50 per month per receiver. Alternatively, the consumer can choose to purchase
the equipment and related installation for $499. Under this option each
additional receiver costs the subscriber an incremental $299. With both options
the subscriber is charged a $5.00 per month fee for each activated receiver they
have installed. The basic equipment options do not require consumers to
subscribe to the service for any minimum period of time. Consumers who activated
the service prior to August 1, 2004 when the new pricing was implemented
continue to receive the programming at the price in effect when they originally
subscribed.
Currently we are offering two promotions that reduce the cost to the
consumer of initiating the service. Our primary promotion reduces by $150 the
$199 equipment installation fee that is charged to subscribers who elect the
monthly equipment fee option or the $499 equipment installation fee for those
who elect to purchase their equipment, and, in either case, the subscriber must
commit to retain the service for one year. The second promotion, which requires
no minimum time commitment from the subscriber, offers subscribers who elect to
purchase their equipment our most extensive programming
package -- VaVaVoom -- free for three months. Under this second promotion
subscribers electing the monthly equipment fee option receive our VaVaVoom
package for three months at $1 per month and there are no monthly equipment
charges during that three month period.
Consumers who requested service after August 1, 2004 were offered several
programming packages; an entry level package at $49.90 per month, four premium
movie PlusPaks at $19.90 per month per
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package, an adult premium channel, Playboy HD, for $19.90 per month, or the
entry level package plus the four premium movie PlusPaks for $89.90 per month.
The entry-level package includes:
- 21 new and exclusive high-definition channels from Rainbow including 10
channels of high-definition movies;
- over 50 of the most-watched cable channels;
- 18 commercial-free digital music channels;
- local off-air digital broadcast channels, where available; and
- a two-year, in-home service plan.
Until the offer changes, customers who sign up for the entry-level service
can also receive all the recognized, non-premium, high-definition cable channels
as part of the package with no additional charge through December 2004.
Subscribers may also purchase one or more premium multiplex movie service
PlusPaks for $19.90 per month. The PlusPaks are:
- HBO -- nine channels, two of which are in high-definition;
- Cinemax -- nine channels, two of which are in high-definition;
- Showtime -- nine channels, three of which are in high-definition; and
- Starz!/Encore -- nine channels, three of which are in high-definition.
Customers can also order VaVaVoom, an all inclusive package, for $89.90 per
month that includes both the entry level package and the four premium multiplex
movie services.
We may from time to time offer different pricing packages on a promotional
or test basis and we may change our base offer from time to time.
transponders or shorten its useful life.
The satellite has adequate transponders to service a maximum of 13
frequencies in contiguous United States, or CONUS, mode or up to 12 frequencies
in spot beam mode and one in CONUS mode. CONUS mode transmits programming to the
entire contiguous United States, while spot beam mode uses smaller, focused
satellite beams to cover a limited geographic region. Outside the selected area
in the spot beam mode, the signal is undetectable and will not interfere with
the reuse of the same frequency in a distant spot beam. We currently have
deployed the satellite's transponders in CONUS mode for all 13 frequencies.
Through MPEG-2 digital compression technology we can transmit 3 high-definition
channels and 7 standard definitions channels from each transponder.
Transponders on the satellite may be subsequently redeployed into spot beam
mode at any future time, providing us flexibility in the future. The spot beam
capability of the satellite permits flexibility in capacity utilization and
could allow efficient use of our limited frequency allocation to provide a
significant amount of local and regional programming. This use of spot-beams
could enable us to provide service to over 125 local markets with non-digital
local broadcast signals. This would, however, reduce the number of video
channels that could otherwise be offered on a national basis.
The lease became effective on October 1, 2004 but we have not yet
determined how or when we will use the transponder capacity on Americom-6 in our
DBS business. Until we begin using Americom-6 we are attempting to lease our
transponder capacity to others on a short-term basis but we do not expect to
earn significant revenues and we will not offset our lease costs. Because of the
orbital positions of the Americom-6 satellite and our existing Rainbow 1
satellite, which is located at its 61.5 (degree) W.L., a subscriber will be
unable to access the signal from both satellites with a single 18" antenna of
the type we have installed and are currently installing but both could be
accessed with a single elliptical satellite antenna that will be approximately
35" wide by 20" high or with the 18" antenna plus a second antenna that would
receive the signal from Americom-6. The size and other specifications of the
second antenna have not yet been determined and may depend in part on how we
decide to use the transponder capacity on Americom-6. Rainbow DBS has not
finalized its plans for implementing the use of the new satellite capacity, for
the installation of the new larger antennas for new customers or for the switch
over of existing customers to the new larger antennas or the addition of a
second antenna. We have placed an initial order for 5,000 of the new larger dish
antennas. We have not yet specified, or sought proposals from manufacturers,
with respect to the second antenna configuration. We are not yet providing the
new larger antenna or installing additional antennas so we do not know how much
customer resistance to the larger antenna size or to a second antenna we will
encounter. See also "Risk Factors -- Risks Relating to Our Rainbow DBS
Business -- Customers May Not Find Our Services to be Attractive."
