How Charlie Ergen turned a satellite TV provider into a spectrum powerhouse, and what he might do next

Phil Goldstein220px; height: 52px; border-width: 0px; border-style: solid; margin: 1px;" width="220" />

Dish Network (NASDAQ: DISH) is spending around $10 billion to acquire a wide range of spectrum licenses in the FCC's now-completed AWS-3 spectrum auction. That spectrum, combined with the wide-ranging spectrum licenses that Dish already owns, will turn Charlie Ergen's company into a spectrum powerhouse. 

But it's still not clear what Ergen's Dish is going to do with all of its airwaves.

Before we dive into what happens now following the AWS-3 auction, it's worth taking a moment to step back and recount how Dish, under Chairman Charlie Ergen, built itself up into one of the five largest spectrum holders in the U.S. wireless market.

In 2008, Dish was a satellite TV operator with 13.5 percent market share of the pay-TV market, behind rival DirecTV's (NASDAQ: DTV) 17.4 percent market share. That was when Ergen started moving into the wireless industry:

  • Dish's EchoStar purchased 700 MHz E Block spectrum in 2008 in the FCC's auction of those radio waves.
  • In the summer of 2011 Dish spent $2.77 billion to acquire 40 MHz of S-band satellite spectrum from bankrupt TerreStar and DBSD North America.
  • Then, in December 2012, the FCC voted to let Dish use its satellite spectrum for terrestrial use, a major windfall for Ergen. Dish's 40 MHz of spectrum, dubbed AWS-4, runs from 2000-2020 MHz (for the uplink) and 2180-2200 MHz (for the downlink). However, the FCC said Dish must cover at least 40 percent of the population in areas covered by its AWS-4 spectrum with a wireless network in the next four years (the end of 2016), or face penalties. Further, the FCC said Dish must cover at least 70 percent of that population within seven years.
  • Dish tried and failed in the spring of 2013 to acquire Sprint (NYSE:S), losing a bidding war to SoftBank. Dish also tried to acquire Sprint partner Clearwire, which Sprint ultimately bought. Both deals would have netted Dish troves of spectrum.
  • In February 2014, Dish paid $1.564 billion to acquire the 10 MHz H Block in the 1900 MHz PCS band in an auction--Dish was the only major bidder in the auction. Impressively, Dish also managed to get the FCC to agree to let Dish use the 2000-2020 MHz band in the H Block for downlink operations instead of uplink operations. The H Block is a block of paired airwaves that runs from 1915-1920 MHz (for the uplink) and from 1995-2000 MHz (for the downlink).
  • Finally, Dish is also trying to gain control of bankrupt LightSquared's L-band spectrum.

And now, thanks to Dish's 85 percent ownership in AWS-3 bidding entities Northstar Wireless and SNR Wireless, the company will get even more spectrum. Notably, it will also get that spectrum on the cheap--both Northstar and SNR will receive 25 percent small-business discounts from the FCC because they are "designated entities." Northstar and SNR spent a combined $13.32 billion in gross bids but that number will be lowered to around $10 billion due to the discounts. Dish's American AWS-3 Wireless, its wholly-owned, direct-subsidiary bidding entity, did not win any spectrum in the auction.

So what did Dish, via its designated entities, win in the AWS-3 auction? Lots of paired spectrum in major markets. 

In total, Northstar won 345 total licenses (out of 1,614 up for grabs) and SNR won 357. Together they won seven licenses in the highly coveted 10x10 MHz J Block (out of 176 total), mainly in secondary markets (though SNR won the J Block in Minneapolis, Charlotte, N.C., and Cincinnati, Ohio.)

Northstar won the 5x5 MHz I and G Blocks in New York, the G Block in Los Angeles, the 5x5 MHz H and I Blocks in Chicago, the G Block in Dallas, and the I Block in Boston, and many other paired spectrum blocks in large markets. Meanwhile, SNR Wireless won the H Block in New York; the G Block in Atlanta, Boston, Chicago, Philadelphia, and Washington, D.C.; and many other paired spectrum blocks in large markets.

What is Dish going to do with all of that spectrum? That's been the question ever since Dish started buying up airwaves. In August, Ergen said this about the company's wireless ambitions, according to a Seeking Alpha transcript: "I think our dream would be to compete in the marketplace, bring a better product to consumers, be disruptive, be innovative and enhance the video business that we have today." He noted that more and more people are going to view video on mobile devices via over-the-top content models and that Dish would look to launch a new service that "hopefully is incremental to the business today, hopefully has a different advertising model than the way we do it today with DVRs, and hopefully, it leads to a mobile business or wireless business that's incremental revenue to our content partners."

Should we take that at face value? Perhaps we should. But there are reasons to doubt that's what Dish wants to do with its spectrum.

Here are some thoughts on what Dish might do next, from least likely to most likely:

  • Dish could buy its way into wireless by acquiring or merging with T-Mobile US (NYSE:TMUS). T-Mobile parent Deutsche Telekom clearly would like to unload its U.S. unit, but a deal with Dish seems unlikely since DT's asking price might be too high for Ergen--after all, Dish's bidding entities now owe the FCC $10 billion for spectrum.
  • Dish could partner with Sprint to have Sprint host Dish's spectrum on its multi-mode base stations. Dish and Sprint are already partnering on fixed TD-LTE service on a trial basis. Would Dish want to take that nationally? Potentially, but then why would Dish have spent so much on AWS-3 spectrum when it could already do that with its existing airwaves? Either way, Dish is now buying into an ecosystem that other carriers will invest in (AT&T and Verizon both purchased huge blocks of AWS-3 spectrum, meaning that they will now start buying network infrastructure and handsets that can use the spectrum).
  • Dish might lease its spectrum as excess capacity back to wireless carriers, a model that the FCC's AWS-3 auction rules allow. Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note that "we continue to believe that Dish's attractive spectrum portfolio should accrete in value over time towards the overall price/MHz-POP paid in the AWS-3 auction. Given our expectations for delays in the [600 MHz incentive] spectrum auction, Dish's spectrum arsenal represents the most attractive, available spectrum in the near-to mid-term."

TMF Associates analyst Tim Farrar told me that for the most part Dish "focused on the key cities, where the expectation is Verizon (NYSE: VZ) and AT&T (NYSE: T) are most capacity constrained and therefore have the most need to get access to additional spectrum."

"The whole point here is that he [Ergen] is his basically trying to force Verizon or AT&T to buy or lease some of Dish's spectrum," he added. "No way this is a precursor to [Dish] building something out."

If Dish wanted to build out a network, why not invest $10 billion in network infrastructure to do so? Farrar, who accurately predicted that Dish's designated entities would win more than $9.6 billion in spectrum, said Verizon and AT&T are the only companies in a position to pay Dish what Ergen thinks his spectrum his worth. A deal with Verizon would be more likely since AT&T spent $18.2 billion to get a nationwide 10x10 MHz footprint of AWS-3 spectrum--AT&T is also working to close its $48.5 billion purchase of DirecTV.

However, Sprint could undermine a deal between Dish and Verizon by selling its excess 2.5 GHz spectrum, something Sprint CEO Marcelo Claure indicated in early January that Sprint was open to doing. "Is Sprint going to do a deal with Verizon to sell them 2.5 [GHz spectrum] and leave Charlie stuck?" Farrar said. "I think the answer to that is very likely, yes. Because Charlie has just cost everyone $20 billion in terms of extra money they didn't need to bid on spectrum if Dish hadn't been so aggressive."

Ergen has built Dish into a major player in the wireless industry by cobbling together a massive, diverse spectrum portfolio via financial, legal and regulatory wheeling and dealing. Now the question is whether he can do anything with all of that spectrum.--Phil

Article updated Jan. 30 at 9 p.m. ET to reflect that Dish is currently unlikely to gain control of LightSquared's spectrum. 

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