06.20.19

Charlie may be wrong, but he’s not stupid…

Posted in DISH, Operators, Regulatory, Spectrum at 9:39 am by timfarrar

The news that DISH is negotiating to buy Boost and other assets, which T-Mobile and Sprint may be forced by the DoJ to dispose of as a condition to approving their merger has been met with near universal derision from commentators. Some suggest that Ergen is “holding out for a big payday from a hoard of idle spectrum he assembled over the past decade” and the purchase would allow him to “seek more time [from the FCC] while waiting for Verizon or Google or somebody to sweep in and buy him out of his big spectrum bet”, while others say “We’re not sure why that deal is sensible for anyone involved. Dish, remember, already has more spectrum than they know what to do with; what they lack is money and ground facilities, and the deal described on Friday wouldn’t deliver either one. Instead, it would make both problems worse.” Some even note that DISH itself told the FCC in May that “a standalone Boost would not provide ‘meaningful competition’”.

But what no-one seems to be able to explain is why, despite all these issues, DISH would therefore be pursuing a deal to acquire these assets. Does everyone believe that Charlie Ergen is stupid? Or that he’s desperate, and its all just a bluff with a weak poker hand? That’s ludicrous on its face, since both the FCC and the other wireless carriers would simply call that bluff: if he does nothing then the FCC will refuse to renew his wireless licenses next year, and we have known for almost 5 years that Verizon and AT&T don’t want anything to do with his spectrum, after he cost them $5B+ each by manipulating the AWS-3 auction outcome to push up the prices by bidding through three entities simultaneously.

It’s been obvious for most of the last year that Ergen has a plan to get something out of a T-Mobile/Sprint merger. He doesn’t hire expensive economic experts and consultants to submit lengthy analyses simply to block a deal (as an aside, 10 years ago I was an expert witness for DISH in the DBSD bankruptcy, where DISH was ultimately successful in securing the spectrum assets). So what does he want? Boost is not that important, though getting some of Sprint’s 2.5GHz spectrum (which DISH tried to buy from Clearwire back in 2013) might be helpful, and a hosting agreement is even more critical.

After all, DISH already had an agreement lined up with T-Mobile to host the network it planned with Google back in 2015-16. And it’s very likely that some 2.5GHz spectrum is on offer, because the sale would hardly have attracted much interest from cable operators, who (as new entrants) would need to acquire significant amounts of spectrum, if all they gained was some 800MHz and 1.9GHz spectrum without much of a roadmap to 5G. So for the mooted $6B+ price tag, with a valuation of less than $3B for Boost, it is conceivable that DISH could acquire perhaps 20-30MHz of spectrum, depending on the mix of urban and rural areas and whether it is leased (EBS) or owned (BRS). I’d guess DISH might take more leased EBS spectrum at a lower price, since that is likely to gain in value now the band is going to be restructured by the FCC and overlay spectrum will be auctioned.

Even so, if all DISH secured was some assets from T-Mobile and Sprint, then critics are correct to observe that it is almost inconceivable that DISH alone could become a meaningful fourth competitor in the mobile market. Unless DISH has a major partner lined up behind the scenes, then it is setting out on a doomed path, and as I noted, Ergen knows this and is not stupid. He’s said previously on multiple occasions that a full scale wireless buildout would cost $10B and that he wouldn’t do that without a partner. Indeed he’s hinted at partnership interest from “unexpected places” in recent months.

It looked like DISH might have had a deal lined up with Amazon at the end of the incentive auction in April 2017, but it appears that Amazon was considering three multi-billion dollar investments in parallel at that time (DISH wireless, Slack and Whole Foods) and selected Whole Foods as the initial priority. But there’s no suggestion that Amazon permanently ruled out such a deal, and with Amazon reported to have taken its own look at Boost a few weeks ago, it is eminently possible that Amazon could be a silent and unreported partner for DISH in this effort. That certainly seems far more plausible than Amazon and DISH being rival bidders for these assets.

So can Ergen pull this off? DISH appears to be in the lead for now, and a sale to DISH appears to be the preferred outcome from the DoJ’s perspective. Incidentally that’s another strong reason to believe DISH already has a major partner like Amazon essentially lined up, since its hard to believe Ergen wasn’t asked that question in his meeting with Pai and Delrahim last week. And although there are possible alternatives like Rakuten, in the current political climate it’s likely that the DoJ’s preference would be for DISH to partner with another American company.

Another argument raised by some who don’t believe a DISH-Amazon partnership is likely, is that they think T-Mobile wouldn’t want to enable such a potentially threatening competitor. But as I titled this post, it is certainly possible that Ergen is wrong, in that it won’t be that easy for a new entrant to break into the market, even in partnership with Amazon, and that 5G won’t mark a revolution in how wireless is used, so churn will continue to be low. In those circumstances it would make a lot of sense for T-Mobile and Sprint to complete their merger, and deploy their 2.5GHz spectrum to add capacity at much lower cost. What no-one should assume is that Ergen is stupid and is making an irrational multi-billion dollar bet on either a doomed standalone strategy or a spectrum sale to AT&T or Verizon.