Dish: FCC plans to deny designated entity partners $3.3B in AWS-3 bidding credits

Dish Network (NASDAQ: DISH) confirmed the FCC is poised to deny $3.33 billion in bidding credits to two affiliates that won airwaves in the AWS-3 spectrum auction that ended in January, dealing a financial blow to Dish.

Dish said in a statement its representatives, along with those of Northstar Wireless and SNR Wireless, met yesterday with staff of the FCC's Wireless Telecommunications Bureau to discuss a draft order on the issue that FCC Chairman Tom Wheeler has circulated to the other commissioners. A majority of the FCC commissioners still need to approve the order and it might change before then.

However, the FCC staff found that Dish does have a controlling interest in Northstar and SNR, and therefore Dish's revenues should be attributed to them, which in turn makes Northstar Wireless and SNR Wireless ineligible to receive the 25 percent bidding credits they applied for in the auction as "designated entities" (DEs).

Northstar and SNR are qualified to hold the AWS-3 licenses, according to Dish's account of the meeting with the FCC, and the agency will not designate the matter for a hearing, or refer the matter to the FCC's Enforcement Bureau or the Department of Justice. Every company that sought relief and wanted the FCC to deny Northstar and SNR from getting the licenses or re-auction the licenses will see their petitions denied, Dish said.

According to an FCC filing made by Jean Kiddoo, deputy bureau chief of Wireless Telecommunications Bureau, Dish's statements line up with what the FCC order is proposing. Northstar will be on the hook for $1.96 billion in additional payments, while SNR will need to fork over $1.37 billion. An FCC spokeswoman declined to comment beyond the filing.

Dish holds an 85 percent economic interest in both Northstar and SNR, which had reported revenue of less than $15 million and said that Dish didn't control them. The companies disclosed a joint bidding arrangement ahead of the auction, letting them communicate during the auction.

Other carriers have accused Dish of collusion by communicating with the DEs during the auction. Verizon (NYSE: VZ), for example, told the FCC in April that it thought Dish and its two DE partners engaged in a "bidding ring, intended to drive out competitors and then suppress rivalry among the ring members." Verizon alleged that Dish and the two DEs bid against each other to create a "false perception that multiple other parties were interested in those licenses" and then when other bidders dropped out of bidding, they avoided bidding against each other.

Dish's designated entities made $13.3 billion in gross provisional winning bids and won 702 licenses, winning 25 MHz of total spectrum including 13 MHz of paired spectrum. 

"Dish has a tremendous amount of respect for the FCC commissioners and staff, and we appreciate their hard work on this matter," R. Stanton Dodge, Dish's general counsel, said in a statement. "However, we respectfully disagree with the proposed denial of the bidding credits. Our approach to the AWS-3 auction, which followed 20 years of FCC precedent and complied with all legal requirements, was intended to enhance competition--in the auction and in the marketplace long term. Our investments in NorthStar and SNR helped make the AWS-3 auction the most successful spectrum auction in FCC history, and resulted in more than $20 billion of direct benefit to the American taxpayer."

Last week the FCC passed rules capping, for the first time, the amount of bidding credits small businesses and DEs could get in auctions--the incentive auction will be capped at $150 million. The FCC is also going to prohibit multiple applications by one party and by parties with common controlling interests, which would prevent a replay of Dish's AWS-3 strategy. The rules are not retroactive, however. 

"In any event, the next steps for Dish and the Designated Entities is to file some stays and then a petition for reconsideration," BTIG analyst Walter Piecyk wrote in a blog post. "While the petition [will] likely [be] denied, it might be a necessary step in order to have all arguments voiced before heading to the DC Circuit. After the denial, Dish would likely pay the $3.3 billion, receive full control of the licenses void of any designated entity restrictions, and then decide how to pursue their challenge in a DC Circuit court, which has not proven to be a favorable venue for the FCC in recent years."

However, Piecyk also wrote that "the reality is that if Dish is able to secure a strategic deal with an existing operator in the next year it would have likely had to pay this $3.3 billion anyway in order to secure FCC approval, so all this nonsense is largely a moot point."

In addition, he wrote, "it's important to note that even with the $3.3 billion, Dish paid less for its spectrum than AT&T and Verizon. That is particularly relevant as Dish was able to secure New York and Chicago, while Verizon did not and is subsequently scrambling to backfill its network with small cells."

For more:
- see this Dish release
- see this FCC filing
- see this WSJ article (sub. req.)
- see this Reuters article
- see this Bloomberg article
- see this BTIG blog post (sub. req.)

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