Dish's $3B in auction discounts 'makes a mockery' of AWS-3 auction, FCC official says
As the dust settles on the now-completed AWS-3 spectrum auction, one FCC commissioner is blasting the discount that Dish Network's (NASDAQ: DISH) two designated bidding entities are to receive. FCC Commissioner Ajit Pai said the discount "makes a mockery" of discounts that are intended for small businesses.
Pai, one of two Republicans on the five-member panel, called upon FCC Chairman Tom Wheeler "to immediately launch an investigation into these multi-billion dollar subsidies" Dish is to receive. He noted that one financial analyst, New Street Research analyst Jonathan Chaplin, was quoted as saying that Dish "just created $3.3 billion worth of value [for itself]. Now we will see if they get away with it or not."
"For the sake of the FCC's integrity, American taxpayers, and genuinely struggling wireless entrepreneurs, I hope not," Pai said in his statement.
Dish participated in the auction through three entities: American AWS-3 Wireless, Northstar Wireless and SNR Wireless. American AWS-3 Wireless is a wholly-owned, direct-subsidiary bidding entity for Dish, and it did not win any spectrum in the auction, though it did make bids. Northstar Wireless and SNR Wireless, however, made $13.3 billion in gross provisional winning bids, but they are to pay around $10 billion because they both qualify for the FCC's 25 percent discount for small businesses. Dish owns an 85 percent economic interest in both NorthStar and SNR.
MoffettNathanson analyst Craig Moffett pointed out that Dish was actually the largest bidder in the auction when measured by the quantity of spectrum purchased, rather than the price paid. "Dish acquired 25 MHz of spectrum, or about 39% of the entire quantity auctioned," he noted.
The FCC defended its stance on designated entitites. "The Commission takes seriously its obligation to provide bidding credits only to those entities that are eligible to receive them," an FCC spokesperson said in a statement. "Existing FCC rules mandate that before awarding any license or bidding credit, the Commission conduct a thorough review of every provisional winner to ensure compliance with eligibility rules. For 20 years, the Commission's competitive bidding rules have provided flexibility to enable a wide variety of applicants--including small businesses--to participate in the auction process, while including safeguards to protect the integrity of its auction program. As part of the auction closing process, the FCC will carefully review winning bidders' applications before awarding any bidding credits."
Dish disclosed its joint bidding arrangements with NorthStar and SNR ahead of the auction, and said they would qualify as designated entities and the discount. Dish said it "respectfully disagrees" with the criticism of the designated entity program and is confident that it fully complied with the DE rules in the AWS-3 auction, which were approved by the FCC.
"The DE program has been successful in providing much smaller entities the ability to access stronger capital structures, which has facilitated their meaningful participation in an auction process from which they would otherwise be precluded," Dish said in a statement. "Our approach--publicly disclosed ahead of the auction--was based on DE investment structures that have been approved by the FCC in past wireless spectrum auctions, including structures used by AT&T and Verizon."
Pai noted that in July 2014 he dissented from an FCC decision to loosen its rules on designated entities that provides the small-business discounts. "We must change course, and soon, by closing loopholes that allow big businesses to rip off the American people to the tune of billions of dollars," he said.
Chaplin wrote in a research note that Dish's designated entities "will almost certainly face challenges; we expect these to be resolved in due course, as relevant filings will likely be made by the end of March."
BTIG analyst Walter Piecyk noted in a blog post that although Dish has an 85 percent economic interest in both NorthStar and SNR, Dish does not control the entities. He also noted that in the past AT&T and Verizon Wireless (NYSE: VZ) have received approval for equivalent designated entity structures.
"It is possible that complaints will be filed and blogs will be written about why the FCC should not issue the spectrum to the designated entities, in which Dish owns an economic stake," Piecyk wrote. "However, the fact is that the same structures have been approved in the past for both AT&T and Verizon, who have long been considered the dominant players in the market and who now generate over 80% of industry EBITDA and control the majority of low-band spectrum. It seems odd that anyone would believe that it's OK to approve designated entity structures used by AT&T and Verizon, but deny Dish which has a long stated purpose to inject competition in the market."
TMF Associates analyst Tim Farrar wrote in a blog that it does seem as though Dish
"complied with the letter of the rules: even though the FCC still needs to rule on whether the DE discount should be granted, it seems unlikely the FCC would want the auction to descend into chaos (which could theoretically result in a re-run)."
However, he wrote that it is "clear that the rules for future auctions will need to be rewritten significantly--I would expect severe restrictions on DE discounts and common ownership of different bidding entities at the very least. Indeed, it will now be very difficult to come up with a workable structure to advantage smaller operators like Sprint (NYSE: S) and T-Mobile (NYSE:TMUS) in the incentive auction next year."
Each winning bidder must have on deposit with the FCC enough funds to cover the down payments on its winning bids by 6 p.m. Eastern Time on Feb. 13. By 6 p.m. on Feb. 13, winning bidders must submit both a properly-completed long-form application and make sure the FCC has on hand accurate ownership information for the bidding entity. The FCC will review long-form applications to determine whether licenses can be granted. Final payments are due by 6 p.m. ET on March 2.
- see this WSJ article (sub. req.)
- see this Pai statement (PDF)
- see this BTIG blog post (reg. req.)
- see this TMF Associates blog post
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Article updated Feb. 2 at 2 p.m. ET with a statement from Dish Network and at 5 p.m. ET with a statement from the FCC.