Dish's road to $3.33B in AWS-3 discounts included a complex web of investments

Dish Network (NASDAQ: DISH) has been criticized for using two designated entities, which are essentially investment vehicles, to secure $3.33 billion in discounts in the FCC's just-completed AWS-3 spectrum auction. According to an investigation by the Wall Street Journal, while the investment structure for the entities is legal, it involves a complex web of investment partners, including a former FCC official.

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.

Importantly, while Dish owns an 85 percent economic interest in both Northstar and SNR, it does not have a controlling interest in either firm. The firms reported less than $15 million in revenue annually, which allows them to get the small business credit. AT&T (NYSE: T) and Verizon Wireless (NYSE: VZ) have used similar designated entity structures in past spectrum auctions.

According to the Journal report and public records, Stephen Hillard, a Texas investor, lawyer, fantasy-fiction author and former jailhouse teacher, was a key member of an eclectic investment group behind Northstar, which is made up of groups tied to Alaskan Native American groups.

Northstar is backed by Doyon Ltd., an Alaskan firm owned by Native Americans with interests in oil and land. Hillard's firm, Council Tree, helped put together a team of investors that let Dish qualify for the 25 percent discount meant for small businesses.

SNR is backed by investment firm BlackRock and Atelum, a firm run by former FCC official John Muleta, who served as the chief of the FCC's wireless bureau from 2003 to 2005 and served as the CEO of wireless firm M2Z Networks after that.

However, Northstar's structure is more complex than SNR's. Doyon has a controlling interest in Northstar--Doyon holds a 40.1 percent of all member interests in Northstar Manager, which is the 15 percent controlling interest in the Northstar bidding entity. Northstar Manager, in turn, is made up of at least eight investment partners, including Caribou Creek Partners, Catalyst Investors, Chugach Alaska Corp. and TFNP Partners (Spectrum) LLC.

Hillard has a long history in wireless. In the 1980s, he started advising Native American companies in Alaska on how to make money on tracts of land they controlled, according to the Journal. Hillard joined Cook Inlet Region Inc., which is owned by Alaskan Native shareholders and has interests in oil and real estate, and eventually became COO of a subsidiary corporation, Cook Inlet Communications.

During the FCC's first spectrum auctions in the early 1990s, when the commission first launched its small-business discount program, Hillard hooked Cook Inlet up with VoiceStream, a predecessor to T-Mobile US (NYSE:TMUS), according to the Journal. Cook Inlet said the bidding entities it used with VoiceStream spent more than $600 million at spectrum auctions since 1995, and Cook Inlet later agreed to transfer those licenses back to VoiceStream for cash and shares.

Hillard teamed up with other Alaskan native corporations, including Doyon, which was founded as part of the Alaska Native Claims Settlement Act of 1971, the Journal reported. Doyon claims to be the largest landowner in Alaska and has interests in oil and gas drilling, among other areas.

In 2000, Hillard's Council Tree investment firm teamed up with Doyon and AT&T Wireless, a predecessor to AT&T. Hillard also worked investment firms Catalyst and executives from Madison Dearborn Partners. According to the Journal, they called their business Alaskan Native Wireless and filed for small-business discounts, and the investment partners won some spectrum in an FCC auction. AT&T says it hasn't used such entities for discounts since 2006, the Journal noted.

An FCC spokesperson has said that the agency "takes seriously its obligation to provide bidding credits only to those entities that are eligible to receive them. Existing FCC rules mandate that before awarding any license or bidding credit, the commission conduct a thorough review of every provisional winner to ensure compliance with eligibility rules."

Republican FCC Commissioner Ajit Pai has called for an investigation into Dish's designated entity partners and said the discount "makes a mockery" of discounts that are intended for small businesses. According to the FCC, for the past 20 years the FCC has had a process to look into the small business credits, and the agency's staff will evaluate SNR and Northstar's eligibility for bidding credits when they submit their long-form applications, which are due by Feb. 13.

Dish has said it "respectfully disagrees" with the criticism of the designated entity program and is confident that it fully complied with the DE rules in the AWS-3 auction, which were approved by the FCC.

According to the FCC, an 85 percent non-controlling ownership interest by an ineligible bidding entity does not, by itself, disqualify an applicant from qualifying as a designated entity.  The FCC will look agreements among the parties--including agreements among Dish, Northstar and SNR--regarding bidding, financial dealings, management, day-to-day operations and network sharing, among other issues. The FCC will also consider post-auction announcements, statements and actions by Dish, Northstar or SNR regarding their relationship. The agency will also look at auction data relating to the bidding activity of Northstar and SNR in determining which company was really in control during the auction.

The WSJ noted that, according to a former FCC official, the bidding entities need to show the agency that a small business is actually exercising control of the entity by providing management and making hiring and firing decisions, for example.

For more:
- see this WSJ article (sub. req.)
- see this Northstar application
- see this SNR application

Related Articles:
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
As AWS-3 auction winds down, attention turns to what happens next

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