Dish Networks’ Ergen Holds Spectrum Cards as Jackpot Shrinks

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By Tim McElgunn

Dish Network Corp. chief Charlie Ergen is known as a gambler. But he might have waited too long to cash out billions of dollars in spectrum licenses.

Ergen has been accumulating spectrum since 2008, acquiring companies that held licenses and buying licenses in Federal Communications Commission spectrum auctions. Dish has invested $15 billion to amass one of the largest spectrum hoards in the industry, Bloomberg Intelligence data show.

Spectrum Ownership

But the regulatory and technological ground is shifting under Ergen, making it tougher for him to find a buyer for the licenses that offers enough cash. If he can’t, Dish’s choices would be embarking on a difficult and expensive network-building effort or leasing the spectrum to another company—which would be far less lucrative. The difference between selling and leasing the spectrum is at least $10 billion, Bloomberg Intelligence estimates.

The company’s bargaining position looks weaker than when it last tested the market for its licenses, Bloomberg Intelligence analyst Joshua Yatskowitz said. “As time goes on, Dish’s options get more limited,” Yatskowitz said. “It certainly looks like they are in a worse position than two years ago.”

After missing an interim deadline March 7, the company faces an FCC “use it or lose it” final deadline of March 7, 2020. That’s when wireless services have to be up and running across 70 percent of the markets covered by its licenses. If Dish misses those targets, it will automatically lose the licenses for any areas not yet served.

But although Dish filed a plan describing the rationale for building a network with the FCC, Yatskowitz and other analysts are generally skeptical that it will proceed because the company lacks the necessary expertise and would be pouring billions into a project with an uncertain return.

In an emailed response, Dish spokesman John Hall told Bloomberg BNA, “We are not commenting beyond the FCC filing.” Dish and its subsidiaries submitted the “Consolidated Interim Construction Notification” March 23, explaining their vision for building a next-generation wireless network. The FCC’s spectrum licensing rules require interim and final notifications to be filed within 15 days of construction deadlines.

If Dish decides not to build, it will disappoint technology suppliers that had hoped Dish would build a new national mobile wireless network to compete with AT&T Inc., Verizon Communications Inc., T-Mobile US Inc. and Sprint Corp. But it would also bring some competitive certainty to the market.

Any company that buys or leases Dish’s spectrum will face the same 2020 FCC deadline to use or sell it. Under such a tight deadline, there is less chance that a new competitor, such as a cable company or a large technology company like Alphabet Inc.'s Google that lacks an existing network and other necessary resources, would use the spectrum to build a network from scratch.

That leaves the wireless operators, who have the expertise and market power to drive production of new equipment needed to use the airwaves and put the spectrum to use quickly. With the threat of a new Dish-backed competitor receding, those companies are freer to decide whether to purchase or lease Dish’s spectrum based on their own strategic needs rather than on what Ergen is going to do.

Changing Spectrum Calculations

Technology advancements have made Dish’s spectrum holdings less valuable to potential buyers than they were a few years ago. Operators now can use spectrum they don’t have to pay for and increase the amount of spectrum available for fixed and mobile broadband wireless in the future. With more options, potential buyers are likely to drive a harder bargain and be more willing to walk away from a potential deal if they can’t get Dish to agree to their offers.

In the near-term, wireless operators will be able to expand into free airwaves that have, until recently, been reserved for nonlicensed uses, such as Wi-Fi, Bluetooth and other noncellular technologies. LTE for unlicensed (LTE-U) technology allows licensed operators to shift some of their data traffic onto unlicensed airwaves while keeping expensive network operations systems essentially unchanged. The FCC approved the first LTE for unlicensed (LTE-U) devices in February. Wireless operators are expected to launch services using LTE-U technology as early as this spring, despite continued opposition from other users of unlicensed spectrum, including Microsoft Corp. and Google.

New Frontiers

The FCC voted in July 2016 to open a large swath of previously restricted high-band wireless spectrum for licensed and unlicensed use. The airwaves opened up by the “Spectrum Frontiers” vote are well-suited to handle the same types of advanced “internet of things” and high-speed mobile data services that Dish says it might deliver if it builds its own network. According to the FCC’s 2016 report and order, “We are making available over four times the total amount of licensed spectrum currently available for mobile.”

And the commission might further expand access to new airwaves. When the Spectrum Frontiers rules were first proposed in 2015, now-Chaiman Ajit Pai and fellow Republican Commissioner Michael O’Rielly criticized that proposal for not opening up enough spectrum.

The FCC has not set a date for the Spectrum Frontiers auction but the report, and industry forecasts, point repeatedly to 2020 as the expected start of the “5G revolution.”

Spectrum sharing—allowing private-sector access to airwaves now used exclusively by government agencies—is also moving forward. Proponents point to cognitive radio and other new technologies that would allow public and private use of the same airwaves. Cognitive radio technology allows devices to detect interference and adjust their signals to reduce or avoid it.

Shifting more spectrum from public to private uses has broad support in Congress and at the FCC. The Senate Commerce, Science and Transportation Committee approved the bipartisan MOBILE NowAct (S. 19) Jan. 24 to allow commercial access to at least 255 megahertz (MHz) of radio wave spectrum now held by federal entities. That measure can now head to the full Senate for debate and a possible vote.

At the FCC, O’Rielly has said multiple times that, in his view, the federal government must decrease its spectrum “footprint.” In the Spectrum Frontiers order, he said, “I also do not agree that any sharing paradigm with the federal government should be extended” into the spectrum bands designated in the order.

The FCC’s incentive spectrum auction repurposed a whole new swath of airwaves licenses for wireless operators, giving them another source for spectrum that didn’t involve buying anything from Dish, which was among the companies eligible to bid.

Doing More with Less

LTE-U is not the only technological solution to relieving wireless traffic jams in more populated areas. Operators can also support more users with their existing spectrum licenses by installing limited-range radios called “small cells” on rooftops and lightpoles. That allows operators to add capacity when and where needed.

In a March 6 research note, MoffettNathanson LLC senior research analyst Craig Moffett said that, despite following its competitors in rolling out an unlimited wireless data plan—and promoting it by offering high-definition video—“Verizon appears to have concluded that the path forward for network advantage is no longer through spectrum purchases.” Verizon now claims to have deployed more small cells than any of its peers.

Dish last shopped its licenses in 2015 and has had limited opportunities since to strike a deal. Dish and most of its potential deal partners have been restricted by FCC auction rules from engaging in any substantial merger or other transactional discussions during the quiet periods imposed over the full length of auctions. In its recent FCC filing, Dish said, “The company has been subject to the Commission’s anti-collusion rules for over 660 days since 2013" and only able to discuss possible deals in the gaps between auctions.

When Dish has been permitted to discuss selling or leasing its licenses, Yatskowitz said, potential buyers balked at the price tag. As the FCC network-build deadline gets closer, Dish’s bargaining position has weakened.

Merger Prospects Dim

Selling the whole company is another possibility but, despite expectations of easier merger approval in a Republican administration, Ergen’s prospects for an advantageous merger might have diminished. Combining Dish with AT&T or Verizon likely remains impossible.

AT&T owns DirecTV, Dish’s only satellite TV competitor. Even if AT&T still has an appetite for buying another satellite provider, combining the two companies would create a satellite TV monopoly and, in many communities, would reduce the number of Pay TV competitors from three to two. In rural areas without cable companies where AT&T provides the only telephone service, a merger would leave only one pay TV provider. Such market concentration would almost certainly run afoul of federal antitrust measures designed to ensure fair competition for consumers.

For Verizon, Dish’s spectrum hoard would guarantee a very long administrative review by the FCC, which is often fatal to mergers. Even if approved, “spectrum screen” rules limiting how much spectrum one company can control in a given market would force a combined Dish and Verizon to sell off many of its licenses.

And, while Dish would have likely been approved to buy Sprint in 2013 had SoftBank Corp.not made a more attractive offer, neither of those deals would have reduced the U.S. wireless market from four national operators to three. With Pai replacing Democrat Tom Wheeler, the former chairman who staunchly defended the four-operator status quo, analysts think approval for T-Mobile buying Sprint is now much more likely. Given that antitrust officials typically follow the FCC’s lead in telecom mergers, and both T-Mobile and Sprint are likely to prefer merging together over either one merging with Dish, the last of Dish’s likely merger partners will be off the table.

To be sure, spectrum remains the lifeblood of the wireless industry, so Ergen won’t walk away empty-handed. But it no longer looks like he holds a hand good enough to break the bank.

To contact the reporter on this story: Tim McElgunn in Cherry Hill, NJ at tmcelgunn@bna.com

To contact the editor responsible for this story: Keith Perine at kperine@bna.com

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