Implications of Expected FCC Limits on DISH’s AWS-4 Spectrum

BACKGROUND

The FCC recently indicated it was leaning towards limiting DISH’s use of its 40 Mhz of AWS-4 spectrum it acquired from Terrestar and DBSD North America to prevent interference with the H-block which runs from 1915 MHz to 1920 Mhz and 1995 MHz to 2000 MHz. DISH’s spectrum currently runs between 2000 Mhz and 2020 MHz on the uplink.

The proposed order would shift the establishment of the AWS-4 spectrum up 5 MHz to 2005 to 2025 MHz to avoid interference with the adjacent H-block . An adverse FCC decision would further complicate DISH’s entry, not only by impairing 25% of its uplink spectrum, but also by forcing it to restart the slow approval process of its LTE network and possibly complicating its efforts to obtain hardware for the system. DISH chairman, Charlie Ergen indicated to the Wall Street Journal that this was a potential “Game Changer” that puts all options on the table including bringing in a partner or selling the spectrum entirely.

ANALYSIS

Its important to keep in mind that Charlie Ergen was a professional poker player before starting DISH. He knows how to take calculated risks, and it appears this is the game his is playing with the FCC.

The DISH Perspective

DISH is in a bind. It’s having difficulty competing against high-speed two-way cable systems and new entrants such as Verizon’s FiOS. Consequently, it has begun to slowly lose customers. At this point there are two primary options for EchoStar to stabilize and grow – 1) Partner with a telco company that could give it a two-way service and operating synergies (and to whom it could provide a video service); 2) start its own telecom service.

Both DISH and DIRECT have tried various alliances with wireline telcos in the past but none of them seem to have worked for a multitude of reasons. Moreover, the wireless companies do not seem to have expressed a strong interest in a partnership with DISH. This leaves DISH with the possibility to starting a new wireless company. DISH has acquired significant spectrum holdings and technology that position itself to do just that, but without making long-term commitments that are hard to unwind. This makes it hard to decipher if DISH actually intends to enter the wireless market or if its just threatening to enter so as to engage the major wireless providers to consider an alliance.

However the more the wireless industry consolidates, the harder it will be to acquire smaller players and other assets needed to build a major new entrant. Consolidation also allows the large players to achieve greater economies of scale and gain greater leverage over distribution channels and suppliers. This cements their dominant position and compounds the challenges of a new entrant such as DISH to enter the market. But its not clear DISH has another viable alternative.

The FCC Perspective

While, from the Wireless industry’s perspective, keeping DISH out of the industry would be a welcome relief against a significant competitive threat, the FCC undoubtedly sees it differently. The FCC probably views the risk that DISH does not enter the market is a bad omen for additional competition and new services. At the same time it wants to maximize the value of all spectrum, including the H-block.

The wireless industry is rapidly consolidating – As we’ve noted before, in the past 12 months the following major wireless industry transactions have reshaped the industry: Verizon’s purchase of Spectrum Co, signaling the probably end of the cable industry’s interest in entering the industry; T-mobile’s acquisition of MetroPCS and Sprint taking a majority stake in Clearwire. And there is significant market speculation about Leap wireless combining, possibly with AT&T. T-Mobile USA COO recently indicated that the “four major players could go down to three.” Additionally, many industry insiders are speculating about significant additional consolidation within the tier two players over the next year or so.

The FCC is very aware of the need for competition to keep prices down. In the wireless industry globally, one of the best predictors of low prices is the number players in the market. One of the best predictors of innovation is the presence of emerging players who often take risks and attempt do things differently. Moreover, as discussed in a previous posting wireless industry acquisitions potentially put pressure on the spectrum auction process and spectrum valuations, possibly jeopardizing the FCC’s ability to get appropriate bids from wireless operators in certain markets.

Given its resources, its spectrum assets and potential synergies, no entity is positioned to enter the industry and shake things up than DISH. Charlie Ergen started DISH on a shoestring, launching its first satellite in 1995 and competing against GM backed DIRECTV and the cable industry. This forced greater competition and an acceleration of the digital cable rollout. The FCC need DISH once again, but they also know his options are limited. The poker game continues.