Analysis: Dish's AWS-3 partners bid against each other, potentially pushing up prices by $20B

Dish Network (NASDAQ: DISH) and its bidding partners in the FCC's recently concluded AWS-3 spectrum auction bid against one another in key markets to drive prices up, forcing other carriers to pony up more money, according to a Wall Street Journal report.

The bidding strategy, which is now coming to light two weeks after the auction ended, provides a window into the thinking of Dish and its Chairman Charlie Ergen. Dish, along with other entities that bid in the auction, are barred by FCC rules from discussing the auction until late Friday.

However, a WSJ examination of round-by-round bidding records, documents filed with the FCC and comments Ergen made before the auction suggest that Dish was keenly aware of how it could use multiple bidding partners to work the system and gain spectrum in the process.

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 designated entities and small businesses.

Dish's partners acquired around 25 MHz of spectrum, including 13 MHz of paired spectrum (out of 65 MHz of total spectrum up for bidding, including 50 MHz of paired spectrum). Dish's entities ultimately accounted for 27 percent of all bids placed in the auction, more than AT&T (NYSE: T) and Verizon (NYSE: VZ) combined, according to a WSJ analysis of the results.

Typically, participants in auctions are not pushing to bid prices up, since they will eventually have to make higher payments. However, since the AWS-3 airwaves in the FCC's recent auction are similar in nature to the 50 MHz of mid-band spectrum that Dish already controls, it benefitted Dish to raise the prices in the AWS-3 auction since it would make Dish's existing spectrum portfolio more valuable. Ergen seemed to anticipate this ahead of the auction.

"When we go to auction, we'll see whether that number goes up or down," he said during an August conference call with analysts. "The FCC, I think, is going to be pleasantly surprised."

TMF Associates analyst Tim Farrar told the Journal that Dish and its bidding entities may have boosted the price of the spectrum in the auction by more than $20 billion, which is roughly the difference between the final bids and what the most optimistic analysts had expected ahead of the auction. When taking into account discounts, the auction generated $41.329 billion in net proceeds. AT&T bid $18.2 billion, Verizon bid $10.4 billion, T-Mobile US (NYSE:TMUS) bid $1.77 billion and all other entities produced net total bids of $941 million, or just 2.27 percent of the total.

Dish has said it would like to get into the wireless business and provide an innovative mobile video offering, potentially by partnering with an existing carrier. However, its ultimate goal is somewhat opaque. Analysts have speculated Dish may have purchased the spectrum in the AWS-3 auction in hopes of selling it as excess capacity to carriers like Verizon.

Ahead of the auction, Dish asked the FCC to establish a software connection so Dish could use computers to help analyze the bidding in real time, and asked that the FCC release more granular details about the bidding actions in rounds after they ended. The agency declined the requests.

Dish told the FCC it and its entities would "have knowledge of the other's bids or bidding strategies." FCC rules allow bidders to work together as long as they disclose their plans in advance.

Farrar noted that in the early rounds of the auction in mid-November, Dish's entities were bidding aggressively on many licenses across the country, creating the impression there were more bidders than there actually were. Bidding on the 10x10 MHz J Block of paired spectrum in the New York City area was particularly fierce, and it jumped above $1 billion in four days. Dish's entities appeared to bid against each other on the license on at least three instances, the Journal noted.

For example, on Nov. 19, in round 16, Dish entity SNR Wireless controlled the license with a bid of $1.4 billion. In the following round later that day, Dish's other entity, Northstar Wireless, outbid its counterpart by $300 million. Verizon eventually dropped out of the bidding after it reached $2.4 billion, but AT&T wound up with the block for a price of $2.8 billion. Dish's entities ultimately won three of the four major paired licenses covering New York.

Dish engaged in similar bidding partners in Los Angeles. According to FCC records cited by the WSJ, AT&T never outbid itself in the auction and Verizon did so only once.

New Street Research analyst Jonathan Chaplin contended that Dish's strategy didn't cause prices to rise artificially. He noted to the Journal that Dish outbid a rival in the final stage--not another Dish entity--for nearly every license it won, showing that carriers were willing to pay for the spectrum.

"Dish clearly wrote the instructions to its DEs very well, because in the end there were very few cases where the final winning bid from SNR was topping an existing bid from Northstar or vice versa," Farrar recently wrote in a blog post. "And it does seem that Dish complied with the letter of the rules: even though the FCC still needs to rule on whether the [designated entity] 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)."

For more:
- see this WSJ article (sub. req.)
- see this TMF Associates blog post

Related Articles:
Analysts: AWS-3 auction helps AT&T catch up to Verizon in spectrum ownership in major markets
Dish's road to $3.33B in AWS-3 discounts included a complex web of investments
Dish's $3B in auction discounts 'makes a mockery' of AWS-3 auction, FCC official says
AWS-3 AUCTION RESULTS: AT&T leads with $18.2B, Verizon at $10.4B, Dish at $10B and T-Mobile at $1.8B
IT'S OVER: FCC's AWS-3 spectrum auction ends at record $44.9B in bids