Analysts: Dish's clock is winding down to leverage 'undervalued' spectrum

Dish Network (NASDAQ: DISH) posted quarterly earnings that significantly surpassed analysts' expectations and reported a profit of $410 million, up from $324 million during the same period a year ago.

But the value of the airwaves that may be the key to Dish's future is still uncertain. And the clock is winding down for the company to put that spectrum to use.

Dish lost 281,000 net subscribers in the second quarter, marking a significant downturn from the 81,000 net subscriber losses it posted a year ago. Revenue inched up by .3 percent to $3.83 billion, however.

As the company continues to lose TV customers, though, analysts and investors are increasingly focused on the value of the spectrum Dish has compiled over the last several years. While some believe the upcoming forward auction of 600 MHz airwaves has deflated the value of Dish's spectrum, New Street Research today noted that TV broadcasters' spectrum likely won't be available for wireless use for at least a few more years.

And the nation's two biggest carriers will almost certainly need more spectrum before then, New Street wrote.

"Verizon and AT&T can't retain their current 70% share of industry revenue with just 38% of industry downlink spectrum," New Street analysts wrote. "We don't see a catalyzing event until after the incentive auction, which may drag into 1Q17; however, the odds of a deal soon thereafter have risen in our view."

But MoffettNathanson noted that both of the nation's two largest mobile network operators have limited budgets as they prepare to bid billions in the incentive auction and begin to invest in 5G technologies. The high-frequency spectrum the FCC plans to open up for 5G use may eventually cost as much as the airwaves sold during the AWS-3 auction last year, or as much as the low-band spectrum set to be auctioned off in the coming weeks.

"Of course, there's the not-small matter of limitations of AT&T's and Verizon's balance sheets even if they did want to buy Dish's spectrum. Those stretched balance sheets now face yet another auction, this time of high-frequency 5G spectrum, which was just authorized by the FCC last week," MoffetNathanson wrote. "Carriers will have to pick their shots. None can afford to do it all. Are any likely to sit out 5G in order to buy more mid-band?"

The clock is ticking for Dish to put its airwaves to use one way or another. FCC rules stipulate that the satellite TV provider must achieve 40 percent signal coverage on the 700 MHz E-Block licenses it purchased in 2008 by March 2017, or reach a 70 percent buildout by March 2020. And Dish faces similar mandates for its licenses in the AWS-4 band.

So while the debate about the value of Dish's spectrum continues, the company may have to invest even more money to see a return on its initial investment.

"The bottom line is that unless Dish is willing to sell its spectrum for a 'distressed' price, the delay in the broadcast incentive auction makes it more likely than ever that Dish will have no alternative but to build out a wireless network – and they will have to begin sooner rather than later – even if that buildout is little more than a Potemkin Town designed simply to keep its FCC options open," MoffettNathanson analysts wrote. "The cost of even a sham network would run into the billions… but the cost of not building one would be even greater."

For more:
- see this Wall Street Journal report

Related articles:
FCC OKs sweeping Spectrum Frontiers rules to open up nearly 11 GHz of spectrum
Verizon, AT&T and others can't afford Dish's spectrum: MoffettNathanson
Kerrisdale report on Dish: 'Carriers have plenty of spectrum'
If Dish auctioned its spectrum holdings, 'carriers would show up in size,' Jefferies analysts argue
Dish warns key 5G spectrum 'will be controlled almost exclusively by Verizon' if XO deal approved

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