01.29.15

The NextWave of Charlie’s strategy…

Posted in DISH, Financials, Operators, Regulatory, Spectrum at 5:43 pm by timfarrar

The AWS-3 auction has finally closed today, after lasting far longer and attracting much higher bids than anyone thought possible. So now we are confronted with a flood of headlines saying the auction “has raised” $44.9B.

Of course that is not true. The total of Provisional Winning Bids is $44.9B. But look carefully at the FCC’s own blog post about the auction results. This blog post indicates the auction raised $7B for public safety, $300M for research, $115M for grants, funding for relocation (estimated at a total of $5.1B before the auction), plus “more than $20 billion” for deficit reduction.

So by my count that totals $32.5B. How can that be when the winning bids totaled $44.9B? The answer is that total amount raised will be reduced by any discounts accruing to Designated Entities, who are entitled to a 25% discount. And we know that Ergen is backing two DEs (SNR and NorthStar) in the auction. While the FCC is not going to give an exact figure for the amount raised, until they announce the winning bidders tomorrow (Friday), why wouldn’t the FCC have trumpeted “more than $30B” or even “more than $25B” raised for deficit reduction if they could make that statement? (Note: Walt Piecyk believes it is because the original 2012 legislation projected $20.4B would be available for deficit reduction).

If the amount raised for deficit reduction is less than $30B then that puts the DE discount at more than $2.4B, implying the DEs won more than $9.6B of PWBs and spent more than $7.2B net. If the amount raised for deficit reduction is less than $25B then that puts the DE discount at more than $7.4B, implying the DEs won more than $29.6B of PWBs and spent more than $22.2B net. And no-one has come up with a plausible case for any DEs other than those backed by Ergen to have billions of dollars available to spend on spectrum.

So it looks like Ergen is going to come out with what’s very likely more than $10B in PWBs and perhaps even $20B+ in PWBs before his 25% discount. That would be a severe disappointment to those who believe that there is unprecedented demand for spectrum, because the result will have been dictated by Ergen’s desire to corner the spectrum market, taking advantage of a windfall discount granted him by the FCC. It would certainly contradict the consensus of Wall St analysts, who apparently can’t conceive of Ergen actually wanting to bet the company on buying up spectrum.

UPDATE (1/30): The FCC has now released the full results, confirming that the final total of net winning bids is $41.3B, with $3.3B of the $3.5B in DE discounts accruing to SNR and NorthStar (i.e. DISH). That means that the amount raised for deficit reduction is less than $30B (actually just under $29B) and we are certainly set for a battle over whether DISH’s “small business” discount is warranted. The results also basically confirm my guesses about the double bidding in Round 36 and elsewhere, where SNR and NorthStar both bid for the license, but their opposition was AT&T, not Verizon as I (and others) thought at the time.

Of course, Ergen’s discount is going to raise massive protests from Verizon and AT&T and its interesting to note that the FCC blog post also stated that “Our team in the Wireless Bureau will thoroughly review and scrutinize each application to assure that granting each license is in the public interest and, where applicable, that each applicant has complied with the Commission’s bidding credit rules.”

Even if Ergen is successful in retaining his discount (and if he doesn’t then the whole auction may fall apart) then this result (as I predicted back in November) may lead Sprint to ally with Verizon and AT&T to isolate DISH and make sure no-one needs to lease Charlie’s spectrum. After all, we’ve already seen Sprint’s CEO indicate he is looking to sell off some of the 2.5GHz spectrum.

Recently we’ve also see Ergen demanding LightSquared pay him off in cash, in exchange for agreeing to the bankruptcy plan, and if he is going to spend $10B or more for AWS-3 spectrum, then that cash may be needed to fund the DEs.

UPDATE (1/30): DISH also won most of the unpaired uplink spectrum in the AWS-3 auction, so it may not need LightSquared’s spectrum (which in the near term most likely consists of unpaired uplinks) in any case.

Will Charlie’s all-in bet pay off? What will be the next piece of his strategy to monetize the spectrum? DISH won’t be able to give any details until after the downpayment deadline (10 business days after the results are announced). But we will have plenty of time to speculate, and tomorrow should be a very interesting day.

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