According to some media reports, Verizon (
) is interested in buying Dish Network's (
) wireless spectrum. Dish has been amassing spectrum over the past
few years and has ambitions to enter the wireless arena. The U.S.
pay-TV market is saturated and Dish sees wireless as its next
growth driver. It controls 40 MHz on the AWS-4 band and 10 MHz of
the 1900 MHz PCS H Block.
We estimate that the pre-tax value of Dish's AWS-4
spectrum is close to $21 billion
; so, should Dish sell its valuable spectrum? While selling the
spectrum will boost Dish's cash on hand, it will leave the
satellite company with only its U.S. pay-TV business in a saturated
market, and uncertainty regarding what its growth engine would be.
We continue to believe that Dish should either build its own
infrastructure or partner with an existing carrier to provide
wireless and bundled pay-TV services. As far as Verizon is
concerned, it makes sense for the company to acquire more spectrum
for better data services in urban areas. Neither Dish nor Verizon
has confirmed the report so far. However, it is an interesting
development, and we are eager to see how the events unfold.
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Why Is Dish's Spectrum So Valuable?
We estimate Dish's spectrum value at $1.73 per MHz-POP. The
January 2014 deal between T-Mobile and Verizon for the transfer of
some AWS and PCS spectrum licenses can be used as an indicator for
the current value of such spectrum licenses. We applied a similar
price per MHz-POP to Dish's spectrum to arrive at its estimated
spectrum value. The total population figure for the spectrum
coverage that T-Mobile sold to Verizon was 55 million, with 10 MHz
of spectrum and a price paid of $950 million. This translates to a
price of $1.73 per MHzPop. We then applied the same price per
MHzPop to Dish's spectrum to arrive at its spectrum value.
While the deal between T-Mobile and Verizon was for two
different bands of spectrum - 700 MHz and AWS PCS spectrum - the
700 MHz valuation is not applicable to Dish as its airwaves are of
higher frequency (AWS-4). Therefore the value of AWS and PCS
spectrum that was sold by T-Mobile makes more sense for Dish's
spectrum. It should also be noted that there is a significant
difference for the value of downlink spectrum as opposed to uplink.
Dish currently has 50 MHz of downlink spectrum, which is closer to
what Verizon holds, and Verizon has more than 100 million customers
on that spectrum. Additionally, Dish's AWS-4 spectrum's physical
characteristics make it well-suited for LTE. Accordingly, we
believe that it could fetch a similar price per MHz-POP to the
aforementioned deal should it be sold.
Why Dish Shouldn't Be Selling
Verizon's management has stated that it isn't interested in
buying a satellite company. However, buying the spectrum from Dish
could be a good move. There will be an auction for 600 MHz spectrum
next year but the guidelines for that auction make it difficult for
larger players to acquire more spectrum. For instance, the FCC will
withhold around 30 MHz of spectrum for smaller players. It thus
makes sense for Verizon to acquire Dish's spectrum and avoid the
FCC auction next year.
As far as Dish is concerned, the spectrum sale will boost the
company's cash balance. However, it would leave the satellite
company operating in a saturated market with no other major growth
driver. Other pay-TV operators have alternative growth
engines: Comcast (
) and Time Warner Cable (
) have broadband, while Dish's satellite rival DirecTV (
) has a significant presence in the Latin America pay-TV market.
The U.S. pay-TV market is saturated, with pay-TV penetration
currently at more than 95% of U.S. TV households. Given the
saturation level and the slowdown in the housing market, we are
unlikely to see a significant increase in the number of the U.S.
pay-TV subscribers. The pay-TV industry is seeing fierce
competition between cable, satellite and telcos. Additionally,
alternative video platforms such as Netflix (NFLX) are adding to
the woes. Dish was able to add only 1,000 net pay-TV subscribers
during 2013, compared to the addition of approximately 89,000 video
subscribers during the prior year. In this competitive environment,
Dish sees the bundling potential as a growth opportunity and it
could go on to build the planned wireless network.
While the U.S. wireless market is also highly saturated, demand
for services (mostly data services) continues to increase and
consumers are willing to pay for mobile connectivity. That said,
the company still has a long way to go before it can truly reap
benefits from its spectrum. It should be noted that Dish must
connect 40% of its spectrum by 2017, according to the agreement
with the FCC. If Dish fails to make use of its spectrum in time, it
will go back to the FCC. Acquiring an existing carrier would give
Dish a ready-to-use infrastructure for its spectrum and in a short
period of time. Last year, Dish made an unsuccessful attempt to
acquire Sprint (S). It might now try to acquire T-Mobile U.S. given
the limited time in hand. We believe that Dish will be better off
making use of the spectrum either by acquiring or partnering with
an existing carrier, or building its own network rather than
selling an asset of immense future value to Verizon or any other
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