Is There Room for Another Wireless Carrier in the U.S.?

By Markets Fool.com


DISH is ready to trade in the satellite dish for wireless towers. Image source: DISH Network.

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The U.S. wireless industry has grown increasingly competitive, as the four major carriers battle it out with attack ads and hefty promotions. And the industry could be about to get even more competitive. Reports surfaced last week that DISH Network is looking to get into the wireless voice, data, and video space. Yahoo Finance reported it had obtained a "confidential" documentindicating that "Dish is seeking a chief marketing officer to help guide its move into the fiercely competitive wireless space."

Analysts previously speculated that DISH would partner with T-Mobile US or Verizon , and it's not clear whether that's still on the table or if DISH is planning to go it alone. Regardless, DISH has built up a hefty portfolio of wireless spectrum, and it needs to start using it quickly. A portion of that spectrum must be used for wireless service by 2017, or the FCC has the right to claim it and auction it off.

Hedging its bets
DISH lost 134,000 subscribers in the first quarter of the year, during a period that's typically seasonally strong for the industry. Part of the loss could be attributed to its extended blackout of certain channels during a pricing dispute with Viacom during the quarter. The churn rate increased 23 basis points to 1.65%, and gross additions fell significantly year over year.

To offset some of the trouble its satellite TV business is facing, DISH started offering Sling TV, an over-the-top live streaming service including 22 channels for just $20 per month. However, the average revenue per user is well below DISH's pay-TV ARPU of $86.01 per month. In addition, the margins on the product are probably much lower.

What's more, Sling TV is typically reliant on another company to provide the Internet connection to stream content. DISH appears interested in removing that dependency and going straight to consumers with a product that provides wireless data, video, and voice calling while it's at it -- in other words, one service that provides television, phone, and Internet.

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Such a product has the potential to carry much higher margins than Sling TV alone, providing a better hedge to DISH's declining satellite TV business. All four major carriers in the U.S. produce gross margins well above DISH's corporate average. For the trailing 12 months, DISH produced a gross margin of 25%. Wireless carriers produced gross margins between 45% and 60%.

How does it accomplish this?
While the gross margins on wireless service are high, the capital expenditures involved with building out a wireless network are absolutely enormous. In that light, it would make sense for DISH to partner with one of the existing major wireless carriers in a network-sharing agreement.

Verizon might be its best bet, for a couple of reasons. Most importantly, DISH's spectrum holdings are strong where Verizon's are weakest. That's not a coincidence, either, as DISH purposefully outbid the major carriers in the recent AWS-3 auction in areas where the two biggest providers are most capacity constrained. Verizon is also making a major push into more over-the-top video content, so a partnership with DISH would make perfect sense for it.

With regard to T-Mobile, another potential partner, DISH CEO Charlie Ergen had this to say on the most recent earnings call: "We admire what John [Legere, T-Mobile CEO and president,] and his team have done at T-Mobile, and certainly we follow what they do."T-Mobile owns spectrum that's more similar to DISH Network's, compared with Verizon's holdings. That would make it easy to integrate DISH's spectrum into T-Mobile's network. In addition, T-Mobile has more excess capacity than Verizon, which would enable DISH Network to get to market more quickly.

Prisoner's dilemma
Working with DISH Network wouldn't be ideal for any of the wireless carriers. The document Yahoo Finance obtained apparently indicates that DISH plans to use its spectrum to create a full-fledged wireless service with voice calling, not just Internet service. That would mean more competition in an already crowded space. What's more, simply sitting around until 2017 would cause DISH to lose a huge chunk of its spectrum licenses.

But all it takes is one carrier willing to work with DISH to shake up the entire industry. And none of them wants to miss out on the opportunity to tap DISH's vast reserves of spectrum holdings. That creates a prisoner's dilemma that DISH is poised to take advantage of. So even if there's not really room for another wireless provider, DISH will make it. And it could win customers by bundling its Sling TV or satellite service with wireless voice and data to help offset subscriber losses at its main business.

The article Is There Room for Another Wireless Carrier in the U.S.? originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Verizon Communications. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.