Dish could eventually generate $10B per year from wholesaling its spectrum, analysts say

Dish Network (NASDAQ: DISH) could become a wholesale wireless capacity provider, perhaps in partnership with Sprint (NYSE: S), and its spectrum could well be worth more in that scenario than it would be if Dish sold the airwaves, according to a new report from financial analysts. Such an arrangement could eventually net Dish around $10 billion in revenue per year, according to the analysts.

What Dish and its Chairman Charlie Ergen will do with the company's trove of more than 50 MHz of spectrum has been a matter of speculation for years now. Dish faces buildout requirements on its mid-band AWS-4 spectrum that requires the company to cover at least 40 percent of the population in areas covered by its spectrum with a wireless network by the end of 2016, or face penalties.

In a research note, New Street Research analysts Jonathan Chaplin, Spencer Kurn, Zach Monsma and Vivek Stalam wrote that "if wireless data grows and spectrum resources are consumed at the rate we expect, a wholesale capacity business would be about the best business we could dream up. Dish would be a supplier of premium capacity in a supply-constrained industry with very high barriers to entry; they would have tremendous pricing power (pricing would rise every year); they would have relatively low, entirely fixed costs (assuming a network sharing arrangement), with margins akin to a tower company."

The analysts think the spectrum could be worth anywhere from $97 billion to $155 billion. The major problem, as New Street acknowledges, is that "it could take 10 years to get there with a fair amount of capital required and execution risk along the way. We don't doubt that Ergen is willing to make a 10-year bet, and investors buying Dish should be prepared for a long slog. Of course, Dish could sell to Verizon (NYSE: VZ) or AT&T (NYSE: T) immediately after the auction; however, there is a real possibility that they are not willing to pay Ergen's price for the whole asset now, and instead are forced to pay a higher price on a GB by GB basis over time."

Dish already controls 40 MHz of AWS-4 spectrum and 10 MHz of 1900 MHz PCS H Block spectrum. Dish's AWS-4 spectrum runs from 2000-2020 MHz (for the uplink) and 2180-2200 MHz (for the downlink). Dish asked the FCC to let it use the 2000-2020 MHz band for downlink operations instead of uplink as a condition for agreeing to bid the reserve price in the H Block auction. Dish also has 5 MHz of 700 MHZ E-Block licenses in 168 markets.

The New Street analysts reckon that Dish's spectrum accounts for 12 percent of industry capacity. Dish has 45 MHz of downlink spectrum today, out of a total of 321 MHz, they noted. "We assume 25 MHz of downlink spectrum is added to industry downlink spectrum in the AWS-3 auction and a further 30 MHz in the 600 MHz auction, with Dish getting no additional downlink spectrum," they added.

"We assume capacity utilization will approach 100% over time, such that Dish's spectrum will carry 12% of industry traffic when fully utilized," they noted. "If Dish sells all of their capacity at a wholesale rate that is 50% of retail, they would ultimately capture 6% of industry service revenue," or $10 billion annually.

Further, they think Dish "would almost certainly partner with an existing carrier to lower the cost of building and operating a network and to accelerate its entry into the market. Sprint is a likely partner because their network was built to accommodate network sharing and because they have already worked out economic terms for network sharing, but it could be any of the four national carriers."

New Street is assuming Dish will wholesale all of its capacity to others at a wholesale price that is half of retail pricing. That would mean revenue of $10.2 billion and annual EBITDA of $7.7 billion. "For the purposes of this analysis we assume it takes five years to get there; however, if our supply/demand forecast is accurate it could happen more quickly," the analysts added.

The analysts wrote that investors commonly ask why a carrier would host Dish's spectrum--they said that the bottom line is that it would make the network host money.

"In this analysis we have assumed that Dish wholesales 100% of the available capacity; they are not a new entrant that would compete against the established carriers. Even if they were a new entrant, or if they wholesaled capacity to other new entrants, in a four carrier market where two carriers are unsustainably sub-scale, someone will host their spectrum," they wrote. "It becomes a classic prisoner's dilemma where the upside/downside of breaking ranks is different for each of the carriers--if one will do it, then they should all compete to be the one."

New Street thinks Dish would pay the network host $2,500 per site per month, generating $1.5 billion in EBITDA and $1.1 billion in free cash flow for the carrier hosting Dish's spectrum.

"Once a carrier has deployed Dish's spectrum, the switching costs for Dish would be very high," New Street concluded. "As such, we would argue that this should be valued like a wireless infrastructure business also. At a backhaul/tower multiple, this business would be worth $18-30 billion to the host. Even if you assume it only gets a typical carrier multiple of 6x, it would still be worth $9 billion. This would be a much more significant source of value for Sprint or TMUS than for AT&T or Verizon (which is exactly why one of the smaller carriers would do it."

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