11.18.14

The game Charlie plays…

Posted in DISH, Financials, Operators, Regulatory, Spectrum at 9:53 am by timfarrar

After the AWS-3 auction reached its reserve price of $10.066B for the 50MHz of AWS-3 spectrum (1755-1780MHz uplink/2155-2180MHz downlink) in Round 12, the most notably feature of the auction so far has been in the high level of bidding activity for the largest cities, such as New York and Los Angeles. As shown in the table below, in the first 12 rounds, there were up to 8 bids per round for the three main (BEA) licenses in these cities, implying that multiple players other than the major operators (AT&T, Verizon and T-Mobile) were bidding.

By now it would have been expected that the three operators would sort themselves out and bid on a self-selected subset of licenses (e.g. AT&T for 20MHz in H+I, Verizon for 20MHz in J and T-Mobile moving to the smaller CMA G-block license as it did successfully in the AWS-1 auction in 2006). However, it appears that this has all been disrupted by DISH’s desire to drive up the price. DISH has presumably concluded, logically, that the major operators will have to buy the New York and LA licenses (plus a few other places such as Chicago, Washington, Boston, San Francisco and Dallas) whatever the cost, so has been bidding simultaneously across all of the main licenses in these cities.

Uniquely amongst the participants, DISH is also part of three separate bidding consortia: American AWS-3 Wireless I LLC, Northstar Wireless, LLC and SNR Wireless LicenseCo, LLC. Given Ergen’s interest in pushing up the price that the operators have to pay, it would not be in the least surprising if all three have been bidding simultaneously against one another for all of these licenses. The resulting higher level of bidding activity would potentially sway the decisions of AT&T, Verizon and T-Mobile, making them think they face more competition from each other than is actually the case, and thereby persuading them to bid more than they originally expected. After all, if AT&T thinks Verizon wants all 50MHz and Verizon thinks the same about AT&T, they are both likely to bid more aggressively, since both will think they had underestimated how valuable the spectrum is.

What happens next? DISH could potentially have instructed each bidding consortium to cease bidding at the same level, minimizing the risk that it would be stuck with licenses it didn’t actually want. That wouldn’t require any coordination, merely setting a near identical budget/price limit for each of the three consortia. Then I’d expect a sharp drop in bidding activity, probably later today or tomorrow, when DISH reaches its desired price point (to provide a high comparable for its other spectrum holdings) and probably switches to buy the 1695-1710MHz unpaired uplink block, where to date the price has lagged significantly due to a lack of competitive bidding. Recall that this unpaired uplink block is one of the best comparables for LightSquared’s valuation (where Harbinger is arguing that the 20MHz of uplink should be worth up to $5B), and so its clearly in DISH’s interests for the end price to be little more than the $580M reserve price (for 15MHz of spectrum).

Of course, DISH is in a win-win position: if Verizon, AT&T and T-Mobile bid up the price of AWS-3 then Ergen can claim his AWS-4 spectrum is worth even more, but if they call his bluff and leave DISH owning the key licenses in major cities (that will be needed as part of any AWS-3 rollout), then Ergen can demand interoperability for his current AWS-4 spectrum as a condition of selling the spectrum to those operators.

If this is actually what is happening, then I’d expect criticism of how the FCC has enabled DISH to game the system (by participating in multiple consortia), just like there was criticism of their decision to auction off the H-block earlier this year in what some likened to a “retail sale” to DISH. However, the result will be the opposite to the H-block, which only just reached the reserve price, because in this case the auction revenue will be significantly higher than expected. Nevertheless, I’d expect mobile operators to be even less enamored of DISH than they were already, because Ergen will have just cost them billions of dollars they didn’t want to spend, just like he cost Masa Son billions of dollars by forcing him to raise the price that Softbank paid for Sprint and Clearwire last year.

UPDATE (11/20): It seems that I may have been right, because the FCC announced on Tuesday afternoon that the reserve price of $10.066B was met for the paired spectrum blocks at the end of Round 13:

At the conclusion of Round 13, the provisionally winning bid amounts, net of any applicable bidding credit discounts, for the paired 1755-1780/2155-2180 MHz licenses (the licenses in Blocks G, H, I, and J) exceeded $10,0660,326,600, thus meeting the aggregate reserve price for these licenses in Auction 97.

However, at the end of Round 12, the total of Provisionally Winning Bids (PWBs) in these bands was already $10.375B. The PWB is calculated before bidding credits (of 25% for a small business) are applied. Thus holders of bidding credits must have held sufficient licenses for the total of net bids to still be below the reserve price (i.e. had bids with the 25% discount valued at more than $311M). That means these small bidders held licenses valued at more than $1250M at the end of Round 12.

Two of the three DISH entities (SNR and Northstar) both sought 25% bidding credits (despite apparently having credit agreements with DISH to fund their bids) so it appears likely that they were bidding aggressively throughout this period. Then we apparently saw DISH move its own bids over to the unpaired spectrum in Round 17, leading to a reduction in the number of bids for the large metro licenses. Given their use of bidding credits, it would not be at all surprising if SNR and Northstar emerge still holding billions of dollars of spectrum, funded by DISH, and it would be logical to take this approach (if DISH buys the unpaired spectrum at close to the reserve price, then it would have gained no benefit from using bidding credits, since the reserve price has to be met by the net bids). Of course the availability of bidding credits will probably also be a cause for further criticism of DISH’s apparent moves to game the system by pushing up the prices paid in the auction.

5 Comments »

  1. Wireless Auction Attracts Whopping $24 Billion in Bids So Far | Re/code said,

    November 19, 2014 at 2:33 pm

    [...] up to help increase the value of the nearby airwaves licenses that Dish owns. Analyst Tim Farrar speculated yesterday that it looks like Dish has been bidding up the licenses via several bidding groups in [...]

  2. Why Dish Network Wants Higher Spectrum Prices, in AWS Auction » said,

    November 20, 2014 at 7:50 am

    [...] Why Dish Network Wants Higher Spectrum Prices, in AWS Auction An article by IPCarrier    No Comments Typically, would-be acquirers of new mobile spectrum would prefer to pay lower prices. Sometimes, though, a bidder might actually act to increase overall prices. That appears to be the case for the on-going U.S. auction of AWS spectrum. [...]

  3. TMF Associates MSS blog » No limits Denver hold-em… said,

    November 23, 2014 at 8:42 am

    [...] good summary of what Charlie Ergen has told SNR and NorthStar, the Designated Entities (DEs) which appear to be doing a lot of the bidding in the AWS-3 auction. We’re still seeing multiple bids on the New York and Los Angeles J [...]

  4. TMF Associates blog » What’s Charlie’s game now? said,

    August 29, 2016 at 3:45 pm

    [...] in November 2014, I published my analysis of what was happening in the AWS-3 spectrum auction to scorn from other analysts, who apparently [...]

  5. TMF Associates blog » The biggest loser… said,

    December 22, 2016 at 12:14 pm

    [...] caused it to spend far more than either DISH or Verizon (which was either smarter or just read my blog post on what was happening). Again AT&T spent at least $5B more than necessary in the [...]

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