That seems to be a pretty 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 block licenses (which are now priced at over $3.6B for just these two licenses), and so its possible that DISH’s DEs may now hold in excess of $10B of Provisionally Winning Bids (PWBs) between them.
Its interesting to note that because Ergen is a designated bidder for American AWS Wireless I LLC (the DISH subsidiary), he wouldn’t be allowed to communicate with either SNR or NorthStar during the auction. So they must be bidding in line with instructions he gave them previously, and he can’t change course in the middle of the auction, if bidding has gone well beyond what even he expected. Ergen could have set a limit on the $/MHzPOP that he is prepared to pay for a single license and/or an overall dollar cap on bidding, but it looks like neither of those factors have been affecting the bidding to date. That suggests to me that Ergen is more likely to have imposed an overall dollar cap, which could perhaps be as much as $8B to $10B each, before the 25% discount on the PWBs that each DEs is expected to receive.
A plausible bidding strategy for each DE, which requires no communication after the auction starts (and seems to roughly accord with what happened after DISH likely switched to the unpaired spectrum in Round 17), could then be something like:
Bid in every round until you see high activity in the unpaired spectrum (a sign that DISH has switched away from the AWS-3 blocks), then defend what you have, no matter what the price of each license. When you reach the overall dollar cap, drop the G block licenses first, then the H and I blocks, but keep the J blocks.”
So now the question is whether, with a weekend to think about it, AT&T and Verizon decide to leave Ergen holding the J-block licenses in major cities. Is there a point at which DISH becomes so financially stressed by the burden of spending perhaps $15B on spectrum, that it is in a weaker position after the auction than it was before (e.g. with insufficient resources to bid for T-Mobile or build out its spectrum)?
Does it matter if AT&T and Verizon are unable to deploy as much AWS-3 spectrum in major cities as they wanted? How much leverage can they exert at the FCC if DISH fails to build out these licenses? And should AT&T or Verizon force up the price of the unpaired spectrum to a level which puts the Ergen-led LightSquared reorganization plan in jeopardy? We’ll see in the next few days whether AT&T or Verizon are able to play Ergen at his own game.
UPDATE (11/23): Thinking further about the end-game, it looks to me like the mysterious spin-off of DISH’s spectrum, mentioned briefly by Ergen in the Q3 results call, is the likely way forward if one of the DEs is successful in acquiring a large block of spectrum. DISH could inject its existing spectrum assets into this entity and raise debt against the combined spectrum portfolio. Then (given the FCC rules against selling DE spectrum for at least 5 years), DISH would have a standalone entity it could spin-off to shareholders, and could lease or all of its spectrum holdings to the major operators, just like Grain Management.
UPDATE (12/1): Round 38 saw another apparent “tell” from DISH with the bidding on the New York I block: 2 new bids were submitted for a price of $1.316B, when the identical H block could have been secured for only $1.235B. Its implausible that either Verizon or AT&T would have bid for the I block at this price unless they already held the H block and wanted to double up. But equally well, its impossible for both of them to already be holding the H block, and only the holder of the H block would want to bid a higher price than necessary for the I block. So the only logical scenario under which 2 bids could have been submitted for the I block is if DISH holds the H block and both its DEs were bidding to add the I block, potentially sending a “signal” to AT&T and Verizon that DISH is determined to capture both blocks (and preserving eligibility for both DEs for when the FCC moves to the second stage of the auction). Note also that a similar single bid in Round 40 for the New York H block (after several rounds with no bids) was followed by a double bid in Round 41 (albeit at a lower price than the I block).
If we go back a few rounds then we can see many instances of these paired bids in New York, Los Angeles and a few other major cities. Until now I had assumed this simply to be a sign that DISH was competing with both AT&T and Verizon. However, now I think that quite possibly only one of AT&T and Verizon is competing very actively for the paired spectrum blocks. Most likely that would be Verizon (who can put AWS-3 to use more quickly as supplementary downlink for its AWS-1 holdings), with AT&T perhaps switching to the unpaired uplink B1 block, where DISH appears to be facing unexpectedly intense competition.
Notably, we can also see that there were two bids for the New York J block in Round 36 (after 1 bid in Round 35 and 2 bids in Round 34), followed by a single bid in Round 37 and no other bids thereafter. That sequence may indicate that Verizon finally forced DISH to relinquish the J block in Round 37. However, the fact that DISH’s DEs both appear to have enough eligibility to still be bidding for such a large license (when only one could be the winning bidder in any round) at that stage also suggests that DISH must hold a very significant share of the major city licenses. So the question now is just how far Verizon will need (and is prepared) to go in order to capture the remaining licenses it wants to secure.