Dish Network Forced to Give Up $3.5 Billion in Spectrum. Now What?

By Adam

Charlie Ergen, the CEO of Dish Network , isn't afraid to be aggressive when it comes to accomplishing his strategic goals. Earlier this year, he backed several small affiliate companies to bid in the FCC's AWS-3 spectrum auction in order to receive the small-business discount for the $13.3 billion worth of spectrum the company walked away with. Those discounts, which totaled $3.45 billion, have been rescinded by the FCC since Dish isn't exactly a small business.

Image source: Dish Network.

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Dish's affiliates have decided to forfeit $3.45 billion worth of spectrum and pay a fine of $513 million. That spectrum will be reauctioned at some point in the future, and Dish will be responsible for paying the difference between the price it agreed to pay and the final auction price.

Now what?Losing that spectrum was certainly a setback for Dish Network, but the company isn't competing with carriers for superior networks. Dish's spectrum holdings are more of an investment than a capital expenditure necessary to support its core business. There's a limited amount of usable radio spectrum and the demand for spectrum is constantly rising as more people connect to cellular data networks. Therefore, Dish is looking to acquire spectrum whenever it can get a bargain.

At the beginning of next year, the FCC will auction off spectrum licenses previously held by over-the-air television broadcasters. This spectrum -- in the 600 MHz band -- is immensely valuable because it's capable of traveling long distances and penetrating buildings.

The FCC is reserving 30 MHz of spectrum for businesses with little to no licenses for low-band spectrum similar to the 600 MHz band. T-Mobile will be the only major carrier bidding on that reserve, which opens up the opportunity for Dish to come in and buy some spectrum at a bargain price.

T-Mobile's CFO recently told analysts that he thinks the company will only have to spend $1 billion to $1.5 billion to get what it needs at the spectrum auction. T-Mobile likely won't be bidding as much in regions where it already has some low-band spectrum, and that budget indicates it's only interested in a small portion of the 30 MHz reserve. He did note that T-Mobile can spend up to $10 billion if it has to without damaging its credit rating.

Dish could end up paying less than the $3 billion it has left over to replace the spectrum it lost from the FCC's ruling.

What's it going to do with all of that spectrum?A large portion of Dish's spectrum licenses come with a clause from the FCC. Dish must provide wireless service to 40% of the population covered by its spectrum by 2017, and 70% by 2020. Without any current plans to build out a wireless network, the clock is ticking for Dish.

Dish may decide to resume merger talks with T-Mobile, which started this summer. T-Mobile's growing network coupled with Dish's massive spectrum holdings could create a strong competitor to bigger carriers like Verizon -- which also has a pay-TV business.

Dish may also try to license or sell some of its spectrum to Verizon, which has expressed interest in its holdings in the past. Dish purposely bid for spectrum in areas where Verizon's portfolio was thin during the AWS-3 auction, and it will likely repeat a similar strategy in the upcoming incentive auction.

Meanwhile, Dish is fighting the FCC in court to get back the spectrum it lost after the government agency ruled against it. If it wins, Dish will get to keep its spectrum without having to pay any extra. If it loses, Dish could possibly buy it back when it goes up for auction again.

Dish's hand could be forced in the near future if it can't figure out how to deploy its spectrum and monetize it. Ergen seems intent on bidding on spectrum licenses to increase the value of Dish's own holdings so it can maximize return when it comes time to monetize them through sale, license, or acquisition.

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