Scenario Analysis: How Dish Might Not Be Able To Monetize Its Spectrum Holdings

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We recently revised our price estimate for Dish Network (NASDAQ:DISH) to $79.80 based on the estimated valuation of the company’s spectrum holdings. (See our related article Dish Network Price Estimate Revised To $79.80 Based On Spectrum Valuation.) Dish has made significant investments in spectrum over the past few years and the company is now the fifth largest holder of wireless spectrum in the United States. The spectrum provides Dish with a number of options, such as launching its own nationwide wireless network, partnering with an existing wireless carrier and either leasing or selling the spectrum. We believe that Dish will be able to suitably monetize its spectrum, whichever plan it chooses. That said, there is a possible scenario in which the company fails to monetize this investment. In this piece, we try to figure out how such a scenario might come to pass and what is Dish’s worth without its spectrum.

See our complete analysis for Dish Network

What Might Lead To Dish Not Making Money Off Of Its Spectrum?

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Dish currently owns licenses to more than 80 Megahertz (MHz) of spectrum, including 40 MHz of AWS-4 spectrum, 10 MHz of H-Block spectrum and 25 MHz of AWS-3 spectrum. [1] We estimate the pre-tax fair value of Dish’s spectrum holdings to be around $39 billion. The AWS-4 and H Block spectrum bands are adjacent to each other and can be paired together, which is highly desirable. Another desirable aspect is that each band covers every territory in the United States. However, both bands are subject to certain interim and final build-out requirements by the Federal Communications Commission (FCC). Dish must provide reliable signal coverage and offer service to at least 40% and 70% of the population in each area covered by the AWS-4 licenses by March 2017 and March 2021 respectively. [1] Similarly, Dish must build out coverage in at least 40% and 75% of each area covered by the H-Block licenses by April 2018 and April 2024 respectively. Dish’s license authorization can be terminated in each area it fails to meet these build-out requirements. However, Dish has not even begun building out its coverage in any of these areas as of now.

The company’s best bet of reaching these build-out requirements is to partner with a carrier already having an operational network. However, Dish failed in its earlier attempts to acquire a telecommunications company when the company made unsuccessful attempts to acquire Sprint (NYSE:S) and Clearwire. [2] [3] There has been considerable speculation over the past few years about which carrier Dish will acquire to get its operations up and running, the most recent linking Dish to T-Mobile, but it remains to be seen whether a deal will materialize. [4] Meanwhile, the build-out requirement dates for the spectrum continue to inch nearer. If Dish fails to reach a deal and does not develop its own network, there might come a time when the FCC clock runs out for Dish. In that scenario, Dish might have to sell at a huge discount or even worse, completely relinquish the spectrum to the FCC.

Dish recently acquired 25 MHz of the AWS-3 wireless spectrum in an FCC auction which concluded on January 29, 2015. [5] The company spent close to $10 billion at the auction but also received a discount of 25% from the FCC under the small business program. However, this discount has not gone down well with others. FCC commissioner Ajit Pai has stated that the discount received by Dish “makes a mockery” of the program and has requested an investigation into Dish’s tactics. [6] Rival carriers such as AT&T (NYSE:T) and Verizon (NYSE: VZ) have alleged that Dish coordinated its efforts with its bidding entities in order to bid up prices and give the impression that there is more demand in the market than there actually was. [6] [7] Dish for its part has maintained its innocence on the matter and says it did not distort prices. [8] However, the FCC has stated that it will conduct a review of all winners to ensure eligibility compliance as well as look into the discounts meant for small businesses. [6] [9] The FCC could resort to take action against Dish if it sees any evidence of the rules being twisted. The possibility of the FCC altogether cancelling the spectrum licenses is a remote one but the commission has taken a very pro-competition stance of late and could decide to make an example of Dish in order to prevent any further manipulations.

What Happens If Dish Loses Its Spectrum

Currently, Dish offers video services and satellite Internet service, though it isn’t as fast as the Internet services from wired providers. We continue to believe that with the spectrum Dish owns, it should either build its own infrastructure or partner with an existing carrier to provide wireless services. With an efficient wireless network in place, Dish could easily deliver faster Internet service. The company will also be able to compete better in the saturated U.S. pay-TV market by offering a viable bundling option in which it can combine its satellite-TV service and wireless spectrum to offer consumers a single subscription. None of this would come to fruition if Dish loses its spectrum licenses.

Without its spectrum, Dish’s biggest segment will be its pay-TV business. Pay-TV penetration is currently very high, with more than 85% of the U.S. TV households subscribing to at least one pay-TV service. Given the saturation level and slowdown in the housing market, it is difficult to see a significant increase in the number of the U.S. pay-TV subscribers. Moreover, fierce competition between satellite, telcos and cable operators, and the rise of alternative video platforms, is adding to the woes of pay-TV operators. Assuming a scenario in which Dish’s spectrum is either relinquished to the FCC or sold at  cost without profit, the lack of a viable growth oriented and sustainable business will hurt Dish’s prospects. Currently, we value Dish at $79.80 with its spectrum holdings contributing 58.4%. Removing the spectrum holdings from the equation, Dish’s price estimate falls 56% to $35.13.

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Notes:
  1. Dish’s SEC Filings [] []
  2. Dish Billionaire Ergen Lets Sprint Go To SoftBank And Its Billionaire CEO, June 19, 2013, Forbes []
  3. Dish bows out of battle with Sprint over Clearwire, Jun 26, 2013, Reuters []
  4. T-Mobile CEO Says a Deal With Dish Network Would Make Sense, February 27, 2015, TheStreet []
  5. AWS-3 AUCTION RESULTS: AT&T leads with $18.2B, Verizon at $10.4B, Dish at $10B and T-Mobile at $1.8B, January 30, 2015, Fierce Wireless []
  6. AT&T Says Dish’s Tactics Distorted Spectrum Auction, February 20, 2015, Wall Street Journal [] [] []
  7. Verizon Says Dish Bidding Tactic Distorted FCC Spectrum Auction, February 27, 2015, Wall Street Journal []
  8. Dish Chairman Ergen Defends Strategy in FCC Airwave Auction, February 23, 2015, Wall Street Journal []
  9. FCC to Address Small-Business Discounts in Spectrum Auction, March 18, 2015, Wall Street Journal []