Editor’s Corner—Apparently Charlie Ergen isn’t bluffing

graph of Dish's spectrum assets
Dish owns significant spectrum holdings. (Cowen)
Mike Dano

CHARLOTTE, N.C.—Charlie Ergen’s Dish Network has committed up to $1 billion over the next two years to build a nationwide NB-IoT network, and this week Ergen said that work is just the first phase of the company’s eventual plan to spend around $10 billion building a full-blown 5G network.

But the real news here is that Charlie Ergen appears to actually be serious about all this.

See, up until this week, most analysts viewed Dish’s eventual wireless endgame as a sale of its massive trove of spectrum. That assumption made sense considering how valuable Dish’s spectrum holdings appeared to be.

Indeed, Dish has spent roughly $20 billion over the past decade amassing a significant spectrum portfolio stretching from 600 MHz to AWS-4. The company today owns roughly 95 MHz of low- and mid-band spectrum, according to the Wall Street analysts at Cowen, which valued those holding at around $30.2 billion.

Over the years, as Dish invested more and more money in purchasing spectrum, most analysts believed that Ergen’s eventual plan was to “age” the company’s spectrum holdings so that eventually it could sell those licenses at a significant premium.

Verizon, most agreed, was the most likely buyer.

"Supply/demand analysis is inherently simplistic,” wrote the analysts at Wall Street Research firm New Street Research in 2015. “Verizon will run out of capacity before others will. If usage continues to grow, they will need significantly more spectrum or they will lose share."

Verizon executives even acknowledged that Dish owned the kind of low- and mid-band spectrum that works well in wireless.

"We like the higher band like AWS. We've said that all along that Charlie [Ergen] is sitting on very good spectrum," former Verizon CFO Fran Shammo said in 2015. "It's very good for capacity … higher frequency spectrum is capacity and that's really what we need at this point in time."

As recently as this month, Wall Street analysts maintained a general opinion that Ergen’s plan to build a NB-IoT network was essentially a way for the company to meet the FCC’s spectrum build-out requirements and retain ownership of its spectrum licenses, rather than to actually enter the wireless industry with a nationwide network.

“Our modeled FCF [free cash flow], which factors in the phase 1 IoT network buildout (which we continue to believe is being built primarily to ease the shot-clock requirements), provides plenty of time for Dish to manage debt maturities and ‘age’ the spectrum and find the appropriate buyer and valuation,” wrote the analysts at Cowen earlier this month.

But Ergen didn’t seem to be in a selling mode during his appearance this week at the WIA’s Connect (X) trade show here.

"One of the things I think we're pretty good at is partnering with people who know more than we do, And, so, many people in this room already know that we have signed some national lease agreements with tower companies. We’re working on permitting and designing that RF network,” Ergen said, adding that the company has already ordered radios ordered from several vendors and expects to start network testing in the fall.

And, Ergen said, after Dish finishes its NB-IoT network, the company would pivot into the construction of a 5G network for IoT applications, an undertaking he said could cost $10 billion or more.

Although Dish executives made similar comments about their work during the company’s recent quarterly conference call with executives, the fact that Ergen attended the WIA show—a trade show specifically for tower and network building companies—may well reflect Ergen’s real intentions to create a new provider of nationwide 5G wireless services.

“The notion that Dish actually plans to build a network is underscored by Ergen’s disclosure—we believe for the first time—that Dish has begun to enter into real, and long-term, tower lease commitments (these initial contracts have been separately confirmed to us by our sources in the tower industry),” wrote the Wall Street analysts at MoffettNathanson following Ergen’s appearance at Connect (X).

Tower lease agreements are long-term contracts that essentially tie Dish to its build-out commitments, and thus could significantly complicate any sale of the company’s spectrum. Moreover, the trajectory of the wireless industry appears to have overtaken a sale of Dish’s spectrum. Although the FCC’s AWS-3 auction raised a whopping $45 billion in bids in 2015, the agency’s 600 MHz auction last year didn’t garner any interest from AT&T or Verizon. Instead, those companies appear to have set their sights on millimeter-wave spectrum from the likes of FiberTower and XO. And with Sprint and T-Mobile seeking approval for their merger plan, there don’t seem to be many buyers for Dish’s spectrum licenses anymore.

Not surprisingly, the MoffettNathanson analysts warned that Ergen’s apparent determination to actually build a 5G network could represent a significant concern for Dish investors.

“This is, to put it mildly, very problematic for valuation,” they wrote.

Specifically, the analysts noted that Dish’s satellite TV business is already worth less than its debt, and any wireless play by the company would hit a market crowded with players that’s already showing signs of slowing.

Of course, the one big factor hanging over all of Dish’s spectrum efforts is the idea that Ergen is playing the long game. Ergen is a former professional card player, and famously built Dish’s satellite TV business from almost nothing.

“We’re one of the few companies that can think long term,” Ergen said this week, noting that Dish doesn’t have a clear, Wall Street-style 5-year calculation from where it is now in wireless to a clear return on investment. “We’re confident,” he added. “I don’t think we’re cocky or arrogant about it.”

“Ergen is a consummate poker player,” wrote the analysts at MoffettNathanson. “So perhaps all of this is simply a way to ‘force’ the issue of a spectrum sale before he enters into even more tower leases and before his FCC buildout deadlines expire (indeed, it was precisely for this reason that we reluctantly moved off of our long-standing Sell-rating, at least for Dish equity, a few months ago). But Occam’s Razor—the simplest explanation—requires that, when Charlie Ergen says ‘yes, we are building a network,’ it makes sense to believe him.”

If Ergen isn’t bluffing, the U.S. wireless industry may well gain a completely new provider—one that could completely upset the market’s current dynamics. – Mike | @mikeddano