DISH Faces a Troubling Issue With the FCC

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For DISH Network (Nasdaq: DISH  ) , the FCC holds the cards to a profitable future. Over the past few years, the satellite television provider has aggressively attempted to build a national 4G network to compete with the telecom giants. To date, this initiative has cost the company a staggering $3 billion and management claims it has another $6 billion  ready to go. Unfortunately for DISH, FCC Chairman Julius Genachowski submitted a proposal to limit the power of the network which the FCC believes will interfere with public owned spectrum. Without the blessing of the federal organization, DISH's long effort to enter the mobile network scene may fall short and leave the company and investors high and dry.

As directed by Congress, the FCC is readying to auction the so-called "H Block" spectrum. As DISH's current proposal stands, their network would, according to the FCC, interfere with the H Block frequencies and diminish the value of the spectrum when it goes to auction in the near future.

In a press release on Monday, the FCC said, "In  arguing that the commission should destroy the value of the H Block, DISH is seeking to take a public asset worth potentially billions of dollars and turn it into a private windfall."

Pretty strong words coming from the regulating horse's mouth.

DISH, of course, disagrees with these allegations. The company believes its proposal wouldn't interfere with the H Block frequencies, and yet are willing to alter their plan to further satisfy the FCC.

The seemingly negative sentiment toward DISH's efforts comes in the immediate wake of a seemingly positive endorsement from the same Julius Genachowski just a week  earlier. Genachowski supports DISH's overall effort to create a wireless network, as he believes it will create new and much-needed competition in the wireless space -- one that is essentially a duopoly operated by Verizon (NYSE: VZ  ) Wireless and AT&T (NYSE: T  ) . The FCC's endorsement is in line with previous actions, such as last year's block of the merger between AT&T and T-Mobile. Between Verizon and AT&T, six of 10 wireless contracts are out  of play, which could stifle competition in the space.

With Genachowski's approval of the plan came the aforementioned power limits, which DISH immediately rebuffed. DISH management is strongly against the limits because users wouldn't have access to high enough speeds for high data applications -- such as uploading photos and surfing the Web.

If it sounds complicated, that's because it is. And it has been my complaint regarding DISH's efforts for some time.

Risk-based capital
For a relatively large public company, DISH took a substantial risk in applying billions of dollars toward a initiative that faces fierce regulation, not to mention competition. In the meantime, DISH's satellite TV competitor, DirecTV (Nasdaq: DTV  ) , has been focusing the bulk of its capital on expanding the fish-in-the-barrel-like Latin American pay-TV market. DirecTV has been consistently adding hundreds of thousands  of subscribers to its services, generating lots and lots of cold hard cash.

As the U.S. pay-TV market continues to mature and approach saturation, and with the ever-creeping gains of streaming entertainment services, satellite and cable companies alike have been looking elsewhere to drive revenue growth. I liked DirecTV's approach -- sticking to the core business that relies on low-margin subscriber acquisition followed by higher-margin, long-term upselling efforts. DirecTV's average revenue per unit (ARPU) in the United States continues to rise at compelling levels, soaking more and more out of the company's substantial subscriber base. Latin American ARPU is much lower, because of subscriber acquisition and installation costs, as well as foreign currency issues. Over time, though, the market is expected to follow a similar pattern to that of its northern neighbor.

DISH, on the other hand, has focused wholly on its 4G network -- exciting growth-hungry investors who believe the investment will ultimately pay off in spades, but discouraging to a contrarian, stick-to-the-basics investor such as myself.

Even DISH management acknowledges the high level of risk in its billions invested in spectrum acquisition: "it's  a venture where success is by no means assured."

Looking forward
None of this is to suggest that the large capital outlay will yield anywhere close to a total loss for DISH. The spectrum itself is very valuable, regardless of whether DISH succeeds in launching its wireless network. And, with Chairman Genachowski's support of the overall effort, it is unlikely DISH will go home empty-handed.

But when it comes to regulation and an impossibly competitive industry, I am a wary investor. I will forever prefer the predictable business model, the cash-generator, and the boring, recurring revenue driver.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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