It is Time for DISH to Make a Move?

Imagine you have a congested commute. Every day, you sit on a crowded two-lane highway, which was clearly not built to accommodate the traffic on it. Yet, a few years ago, the government sold land it owned right next to that highway to a private entity, with the provision that it be used to add an extra lane within a couple of years in order to increase capacity. That owner has been sitting on that land, seeing its value steadily increase, but has neither built that needed extra lane, nor sold/leased it to someone who would. The more cars there are and the less additional land there is to build on, the worse it’s going to be for commuters.

That has been DISH’s strategy in wireless. Poker-playing Charlie Ergen is clearly winning at the game of “spectrum hold ‘em”. DISH holds 50 MHz of downlink and 20 MHz of uplink spectrum in highly desirable mid-tier bands. Even though nearly 100% of the company’s revenue comes from its pay TV business, its spectrum holdings are valued at $35-50 billion, representing some 80% of the company’s current valuation. Ergen’s poker playing acumen has extended to exploiting the rules and finding loopholes. For example, DISH cleverly used its spectrum assets to lower its tax bill and found a way to push out the FCC’s build requirements on some of its spectrum holdings from 2016 to 2019 (yet the company did have its hand slapped to the tune of $3 billion for setting up shell ‘Designated Entities’ in the AWS-3 auction).

At the same time, given the ~50% annual growth rate in wireless data usage fueled, in part, by aggressive price cutting, network capacity is becoming a defining currency in the wireless business. Sprint’s 2.5 GHz holdings are its greatest asset and potential differentiator. T-Mobile’s aggressive pricing and video offers such as Binge On are possible because it has more aggregate network capacity per subscriber than AT&T and Verizon. It’s a fascinating juxtaposition. AT&T and Verizon have 75% share of wireless subscribers and the lion’s share of industry profitability. But Wall Street analysts are generally negative on them because of the foreseen costs in capacity acquisition (spectrum) and capital expenditures that will be required over the next several years to meet demand.

DISH holds a lot of the cards here. I doubt they really want to build out a network themselves. We certainly don’t need a fifth facilities-based wireless network, given there are no other countries where even four facilities-based operators are all healthy and profitable. Some have speculated DISH could use its spectrum to build out a competitor to broadband. That would fill a gap in DISH’s portfolio. But while data demand is surging in wireless, it is in fixed broadband as well, where the average Netflixing household is consuming 100 GB of data or more, with UHD on the way. There is no way a wireless network could meet that capacity.

The timing could be right to make a move. The incumbent operators and other potential wireless wannabees are preparing for the 600 MHz auction, which is scheduled to start in March, 2016. An acquisition of some of DISH’s spectrum or some sort of lease deal would change the 600 MHz spectrum picture quite dramatically. Verizon, the most likely suitor here, is not going to overspend in the auction and then go back to the well to do a major deal with DISH at the level of valuation Charlie Ergen would like. T-Mobile is also in the mix, though its capacity situation is better than Verizon’s (at least for the medium term).

The other possibility is some sort of merger or acquisition, likely involving DISH, T-Mobile, and Sprint in some form. I can also see a scenario where DISH acquires T-Mobile and Comcast or Verizon ultimately acquires Sprint.

The irony in all of this is operators must come up with billions of dollars for the auction, while DISH sits on a trove of un-utilized capacity. I am pretty sure Tom Wheeler, Chairman of the FCC, is not thrilled about how expertly DISH has gamed the system. Certainly, DISH is not the first company to buy and hold spectrum as a tradeable asset, in the same way a developer accumulates land. It actually might be in DISH’s best interest to hold the spectrum for another year or two, until the capacity situation is even more dire. This is just a case of what’s good for DISH and its shareholders might not good for consumers or the health of the wireless industry.

Looking at the current balance sheets and margins of AT&T and Verizon is not likely to elicit much sympathy from regulators or customers. But the fact that effectively not one analyst on Wall St. has had a buy recommendation on either of these companies for some time should be a warning signal.

In the meantime, there’s some 70 MHz of spectrum that is “shovel ready” and could be used to relieve network congestion, keep prices reasonable, encourage new business models and potential new entrants, and further U.S. leadership in wireless services.

It’s time for DISH’s spectrum to be put to work.