We recently increased our price estimate for Dish Network (NASDAQ:DISH) from $50 to $64, primarily due to our estimate of the valuation of the spectrum that Dish has amassed over the past few years. Dish owns 40 MHz of AWS-4 spectrum (2000 MHz – 2020 MHz and 2180 MHz – 2200 MHz). This spectrum is unencumbered by any threat from the military, the GPS community or net neutrality proponents. We estimate that the value of this spectrum is in excess of $21 billion. While the pay-TV industry is saturated, Dish’s wireless plans appear to be a step in the right direction. Below we take a brief look at our revised estimates.
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Dish’s Spectrum Boosts Valuation
We estimate Dish’s spectrum value at $1.73 per MHz-POP, which translates into an overall spectrum valuation of over $21 billion. The term “MHz-POP” is defined as the number of megahertz associated with a license multiplied by the population of the license’s service area. The January 2014 deal between T-Mobile and Verizon for the transfer of some of AWS and PCS spectrum licenses can be used as an indicator for the current value of such spectrum licenses. We applied a similar price per MHz-POP to Dish’s spectrum to arrive at its estimated spectrum value.
Dish Network has been aggressively acquiring wireless spectrum for a while in order to enter the wireless space. In 2011, Dish acquired bankrupt DBSD and Terrestar for their spectrum. Both acquisitions were part of the company’s initiative to build a wireless service offering voice, video and high-speed Internet, both at home and for mobile devices. Last year the company made an unsuccessful attempt to acquire Sprint (NYSE:S), ultimately losing out to Japanese telco Softbank.
Currently, Dish offers video services and satellite internet service, though it isn’t as fast as the internet services from wired providers. With a wireless network in place, Dish could deliver faster Internet service wirelessly. The company wants to compete better in the saturated U.S. pay-TV market by offering a viable bundling option, with which it can combine its satellite service and wireless spectrum to offer consumers a single subscription.
Additionally, earlier this year Dish won the bidding for H-block wireless broadband frequencies in all 176 U.S. markets auctioned off by the FCC. This gives Dish another 10 megahertz of spectrum, taking its total spectrum holdings to 50 megahertz. It should be noted that H-Block is a 10 MHz block of paired airwaves that runs from 1,915-1,920 MHz (for the uplink) and from 1,995-2,000 MHz (for the downlink). Dish’s 40 MHz of AWS-4 spectrum is adjacent to a portion of the H-Block airwaves. Late last year, the FCC extended the deadline for Dish to complete a national wireless broadband network. The FCC also gave the company flexibility in how it can use wireless frequencies for downlink and uplink. 
The U.S. pay-TV market is saturated, with pay-TV penetration currently at more than 90% of U.S. TV households. Given the saturation level and slowdown in the housing market, we are unlikely to see a significant increase in the number of the U.S. pay-TV subscribers. The pay-TV industry is seeing fierce competition between cable, satellite and telcos. Additionally, alternative video platforms such as Netflix (NASDAQ:NFLX) are adding to the woes. Dish was able to add only 1,000 net pay-TV subscribers during 2013, compared to the addition of approximately 89,000 video subscribers during the prior year.  In this competitive environment, Dish sees the bundling potential as a growth opportunity.
While the U.S. wireless market is also highly saturated, demand for services (mostly data services) continues to increase and consumers are willing to pay for mobile connectivity. That said, the company still has a long way to go before it can truly reap benefits from its spectrum. Having amassed the spectrum, Dish can move forward with a number of options, such as leasing or selling some or all of the spectrum, launching its own nationwide wireless network, or partnering with an existing wireless carrier.Notes:
- Dish Gets FCC Nod For Flexibility Of Frequencies; Will Bid For H-Block Auction In Jan 2014, Trefis, Dec 27, 2013 [↩]
- Dish Network’s SEC Filings [↩]