Dish's spectrum conundrum: Make $40B-$44B now or up to $155B later

Mike Dano

Dish Network's (NASDAQ: DISH) spectrum licenses right now could be worth as much--or possibly more--than the spectrum licenses owned by Sprint (NYSE: S) or T-Mobile US (NYSE:TMUS). Dish's spectrum position, bolstered by the incredible increases in Americans' demands for wireless service, makes Charlie Ergen's Dish an incredibly powerful player in the U.S. wireless market.

But how exactly will Dish cash in on that position?

First, let's look at Dish's spectrum holdings. A new report from Wells Fargo sheds some light on the value of Dish's spectrum portfolio, and how it compares with the ones from the nation's Tier 1 wireless carriers. According to Wells Fargo, Dish's full spectrum license collection is likely worth a total of between $40 billion and $44 billion. That figure includes Dish's 700 MHz, AWS-4 and H Block licenses, as well as the AWS-3 licenses the company won in the FCC's recent spectrum auction. (However, those AWS-3 licenses are somewhat in question because they are tied to Dish via the company's two designated entities (DEs)--Northstar Wireless and SNR Wireless--which could pay around $10 billion in the auction for 702 licenses. Both regulators and Dish's rivals have blasted Dish's use of DEs--and the 25 percent small business discount they are to receive--as unfair.)

It's also worth noting that Dish's spectrum portfolio could be worth as little as $28.1 billion or as much as $56.7 billion, Wells Fargo said, depending on buyers' eagerness.

To put the value of Dish's spectrum portfolio into perspective, Wells Fargo notes that Verizon's total spectrum portfolio could be worth between $78 billion and $88 billion, and AT&T Mobility's portfolio could be worth between $72 billion and $80 billion. The firm said Sprint's licenses are likely worth between $46 billion and $52 billion, and T-Mobile's are likely worth between $35 billion and $41 billion.

To be clear, the value of spectrum continues to be a moving target. Low-band spectrum in general covers large geographic areas, while high-band spectrum can transmit larger amounts of data--and thus spectrum buyers might only be looking for spectrum licenses that fit in with their overall network rollout strategy. Further, the value of spectrum is directly tied to demand from actual users, and demand is a hard metric to calculate. But the rising value of spectrum was clearly on display during the FCC's recent AWS-3 spectrum auction, which raised almost $45 billion in total gross bids--double even the highest forecasts before the event.

Moreover, the value of Dish's spectrum portfolio isn't exactly a secret. Dish's stock has been steadily rising during the past two years, even as the pay-TV market slows. And in November 2014, Dish's stock popped from around $63 per share to a high of $79 per share when investors witnessed the massive bids being placed in the FCC's AWS-3 auction. Dish's stock has since leveled off at around $70 per share (way up from the $57 per share price it recorded at the beginning of 2014).

Nonetheless, Wells Fargo's analysis of the value of Dish's spectrum helps to underscore Ergen's remarkably clever spectrum strategy. Ergen's first real taste of spectrum came through EchoStar's relatively minor purchase of E Block licenses for $700 million in the FCC's 700 MHz spectrum auction in 2008. Ergen's spectrum strategy became clearer in 2011 when the company spent $2.77 billion to acquire 40 MHz of S-band satellite spectrum from bankrupt TerreStar and DBSD North America. In December 2012, the FCC voted to let Dish use its satellite spectrum for terrestrial use, a major windfall for Ergen. Then, in 2014, Dish was the only bidder in the FCC's H Block spectrum auction, essentially walking away uncontested with 10 MHz for around $1.6 billion.

Now, following the close of the AWS-3 auction, Dish commands an average of around 80 MHz of spectrum nationwide, putting it just behind T-Mobile in terms of spectrum depth. (Sprint leads in this calculation due to its extensive 2.5 GHz licenses, while AT&T comes in second place, Verizon comes in third, and T-Mobile comes in fourth.)

So what will Dish do with its massive trove of spectrum? Based on Wells Fargo's calculations, the company could make a tidy profit if it sold its spectrum licenses to another company. Verizon is probably the most likely buyer in this scenario, considering it is in need of spectrum and has the financial wherewithal to make a purchase.

But a separate evaluation of Dish's spectrum from the analysts at New Street Research shows that Dish could create a business worth $155 billion if it embarks on a wholesale strategy.

"DISH's spectrum accounts for 12% of industry capacity. We assume capacity utilization will approach 100% over time, such that DISH's spectrum will carry 12% of industry traffic when fully utilized," the New Street analysts wrote. "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 $10BN annually. Assuming similar network sharing economics as LightSquared obtained, this could result in $8BN in EBITDA and $4.5BN in [free cash flow]. At an infrastructure multiple, this business could be worth ~$100–155BN at full utilization."

Of course, building a wholesale business in wireless would be challenging, to put it mildly. Dish would have to fund the construction of a nationwide wireless network using several spectrum bands that are not currently supported by the world's network equipment and handset vendors--and then it would have to convince the likes of T-Mobile and Verizon to buy its excess capacity.

If that strategy sounds familiar, it should--that's pretty much the same business model LightSquared launched with in 2010. In fact, LightSquared in that year promised it would cover around 92 percent of the U.S. population by 2015, and that it would look to ink wholesale deals with the likes of T-Mobile, Leap Wireless and MetroPCS.

And where is LightSquared today? Emerging from bankruptcy, apparently with the intention of returning to its initial wholesale strategy.

"I am excited to get back to work, alongside our world-class leadership team, to the business of deploying our spectrum for the benefit of the American people," said LightSquared CEO Doug Smith, according to Bloomberg.

So the real question for Dish's Ergen is whether to cash out now and probably earn a decent payback on his spectrum collection strategy, or to bet big by embarking on a wholesale effort. There's no telling what he'll ultimately do.

"I think in management, we try to stay away from preconceived notions. We are happy to negotiate with people before the ground rules are set," Ergen said on Dish's most recent earnings conference call, according to a Seeking Alpha transcript of the event. "Rather you try to talk to people about you can improve their business and improve your business and both shareholders come out in a win-win situation. That's a much productive way to talk about things." --Mike | @mikeddano

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