Report: Dish's AWS-3 partners might lose out on $3.3B in bidding credits

The FCC may reject bidding credits worth $3.3 billion to two designated entities that were affiliated with Dish Network (NASDAQ: DISH) during the AWS-3 spectrum auction, according to a Wall Street Journal article.

The report, which cited unnamed sources familiar with the matter, said that after weeks of reviews that were initially pushed by FCC Chairman Tom Wheeler, the agency has produced evidence that may make it tough for the FCC to approve the credits. The commission is still likely weeks away from a formal decision, the report said. Wireless carriers, lawmakers and FCC commissioners have criticized Dish, which they argue manipulated the FCC's rules and potentially even the auction itself to unjustly claim the bidding credits.

FCC spokesman Neil Grace declined to comment. The FCC is expected to put AWS-3 bidders' "long form" applications out for comment, at which point others will have 10 days to file a petition to deny the applications.

Dish participated in the AWS-3 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. Both Northstar and SNR bid as so-called designated entities, a designation that receives a 25 percent discount on spectrum purchases. The DE rules are aimed at helping small businesses, rural telephone companies, and businesses owned by members of minority groups and women participate in spectrum auctions. 

Thus, the Dish designated entity partners are seeking $3.3 billion in discounts. New Street Research noted in a research note that in order to qualify as designated entity, a bidder must generate less than $15 million annually over the previous three years, and must not be "controlled" by an entity that does make more than $15 million annually, like Dish. Dish said it believes that the DEs were structured such that Dish does not technically "control" them according to the FCC's rules.

The FCC has yet to grant the licenses to Northstar and SNR, in which Dish holds an 85 percent economic interest. Dish's designated entities bid for 702 licenses, winning 25 MHz of total spectrum including 13 MHz of paired spectrum.

As the Journal notes, if the FCC review finds that Northstar and SNR are ineligible for the credits, they will be forced to pay the difference or risk losing the spectrum licenses. However, Dish has also said in filings with the FCC that it could take over the spectrum if that were to happen, according to the WSJ.

On April 22 Verizon (NYSE: VZ) executives met with FCC officials, including Roger Sherman, chief of the Wireless Telecommunications Bureau, to press the case that Dish broke the law using the strategy it employed during the auction. Verizon said a round-by-round analysis of the auction shows that Dish and the designated entities frequently bid on the same licenses in the same rounds while other bidders were active, which they say created the "false perception that multiple other parties were interested in those licenses." Verizon also said that after competing bidders dropped out, DISH and the DEs avoided bidding against one another. "This conduct is indicative of a bidding ring, intended to drive out competitors and then suppress rivalry among the ring members," Verizon added.

"This result is virtually impossible to explain in the absence of coordination and collusion," Verizon said.

"We are confident that we fully complied with all legal requirements for the AWS-3 auction, including antitrust law and the DE rules, which were unanimously approved by the full Commission," Dish said in a statement to Multichannel News. "Our approach--which was fully and publicly disclosed ahead of the auction--was based on DE investment structures that have been approved by the FCC in past wireless spectrum auctions, including structures used by Verizon. Participation by small businesses through the DE program helped make the AWS-3 auction, on a gross and net basis, the most successful spectrum auction in FCC history."

The FCC is seeking comment on a range of changes to its bidding rules ahead of next year's incentive auction of 600 MHz broadcast TV spectrum. Some of the proposed changes include rules that would specifically block the kind of bidding strategy that Dish employed during the AWS-3 auction.

Earlier this month, the FCC approved the assignment of AWS-3 spectrum licenses to Verizon, AT&T (NYSE: T) and T-Mobile US (NYSE:TMUS), along with several smaller bidders. The AWS-3 band comprises unpaired uplink spectrum in the 1695-1710 MHz band, blocks of paired uplink spectrum from 1755-1780 MHz, and blocks of paired downlink spectrum from 2155-2180 MHz bands. The auction raised a record total of $41.329 billion in net winning bids, with 31 winning bidders winning a total of 1,611 licenses.

For more:
- see this WSJ article (sub. req.)
- see this Verizon FCC filing
- see this Dow Jones Newswires article
- see this Multichannel News article

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FCC's Wheeler vows to fix designated entity rules so that huge companies can't get discounted spectrum
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