Dish Networks Might Finally Get the Prize It Always Wanted

While DirecTV gets ready for its seasonal bump with the NFL Sunday Ticket, and AT&T (NYSE: T  ) presses forward with its acquisition of the company, Dish Networks (NASDAQ: DISH  ) finds itself in a predicament of needed action. For the last several years Dish Chairman Charlie Ergen has sought acquisitions that haven't quite panned out, and accumulated assets that remain essentially unused by the company. Therefore, as its enormous 14 million subscribers appear at jeopardy, Ergen may have just received an enormous gift courtesy of Sprint (NYSE: S  ) to solve all of its problems.

The consolidation of mature companies
The U.S. has grown mature in the pay-TV market. Those who want pay-TV have it, and the 19% of late 20 and early 30-year-olds who don't, have no plans to get it. As a result, consumers have seen a great deal of consolidation within this business as companies seek to gain a competitive edge.


For example, AT&T's acquisition of DirecTV combines two companies in matured markets, but makes both more competitive in the pay-TV and wireless industries due to their ability to bundle services and brands. Comcast's (NASDAQ: CMCSA  ) attempted purchase of Time Warner (NYSE: TWC  ) is another such example, one to increase the combined presence in broadband Internet and cable TV services. If successful, the outcome could be lower marketing expenses and less pricing competition in the face of rising content prices.

Therefore, sometimes these mergers work in the favor of consumers and sometimes they don't. One positive is that consumers can get all of their services in one place, but the downside is that a consumer may not agree with the policies of the acquiring company. Specifically, a consumer may have chosen service with Time Warner over Comcast because they didn't like the latter's customer service, but once combined, that user then has no choice, especially if under contract.

1 of the most valuable acquisition assets
With that said, Dish Networks remains one of the largest companies in this arena without a game-changing merger of sorts; even Verizon had a $100 billion plus deal to buy the other half of its Wireless segment. While Dish has tried to acquire Sprint and Clearwire, it has been unsuccessful, and has spent many of its resources on an asset that remains essentially unused.

That asset is called spectrum, a term that may be unfamiliar to most consumers, but is a daily part of the way smartphones are experienced. Spectrum allows data to flow freely from one place to another: Think of it like an interstate.

When there's heavy traffic on an interstate the flow of vehicles will slow, the same applies with data on a spectrum. In recent years data usage has skyrocketed as consumers use their smartphones and tablets in place of PC computers, and therefore the interstate has grown crowded. However, if that interstate is widened, or a new road is built, then traffic can flow freely again. Essentially, it's a busy game for telecom companies, but one that's important in keeping customers happy.

It is this spectrum analogy that explains why massive telecom companies like AT&T, Verizon, Sprint, and T-Mobile have been so attractive as acquisitions and have acquired smaller companies so aggressively in the last few years. These companies need spectrum to keep up with the rate at which newer and bigger vehicles are being added to their interstate.

A door opens for Dish
In other words, Dish has the capabilities to provide a very fast and reliable network to its customers if it had a mobile service, especially if combined with an existing company's spectrum. With AT&T and Verizon being too large, Sprint being owned by Softbank, and T-Mobile being acquired by Sprint, all hope seemed lost.Meanwhile, Dish Networks owns a very large and valuable spectrum. In late-2012 the FCC approved Dish Network's airwaves (spectrum) for cell phone service, which was valued at $12 billion. In addition to this asset, Dish has been acquisitive of spectrum, most recently for $1.56 billion back in March.

However, Sprint recently announced that it would not acquire T-Mobile, due to the high regulatory risk of failure. Albeit, this opens the door for Dish Networks, a company that has a much better shot at acquiring T-Mobile than AT&T does with DirecTV, as both Dish and T-Mobile are much smaller in their respective industries.

In retrospect, the events leading up to this point may have been a blessing in disguise for Dish and its customers. Had it acquired Sprint, Dish would be responsible for its enormous debts, attached to a tarnished brand, and maybe facing the same problem of losing subscribers that Sprint finds itself in today.

However, T-Mobile has grown into a real threat in the wireless industry with its aggressive marketing and improved services thanks to the $6 billion in cash and spectrum it received from AT&T after its failed acquisition attempt. In fact, T-Mobile has had five consecutive quarters of at least 1.5 million net new subscribers, meaning consumers are rushing in the doors to use the carrier.

Foolish Thoughts
Given Ergen's past at aggressively trying to acquire Sprint, and the enormous spectrum that Dish has accumulated, an attempt at purchasing of T-Mobile seems almost inevitable. For consumers, this means mobile and pay-TV all in one place, just like DirecTV and AT&T.

Not to mention, if T-Mobile's service plans are attracting new customers at over a million per quarter, just think of what the addition of a multi-billion dollar spectrum can do to enhance the performance for customers. Overall, this would be a huge win for Dish Networks, T-Mobile, customers, and investors alike.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2014, at 8:28 PM, nellynel7619 wrote:

    Brian couldn't agree with you more. Very well put. I could only imagine what John Legere will be posting if he gets his hand on $12 billion worth of spectrum. It would be a huge win all involved and consumers as well as stated in the article. As a T-Mobile customer I must say this deal gets me very excited. I never wanted the Sprint deal to get approved. Let's see if Charles Ergen can make something happen.

  • Report this Comment On August 15, 2014, at 10:35 AM, Iamore wrote:

    Valuing spectrum is speculative because it depends on what can be done with it. Wayward examples of recent overvaluations include LightSquared's valuation of MMS spectrum and Sprint-Clearwire's valuation of 2.5-2.6GHz band LTE 41 spectrum. Both were once valued much higher than the current valuations of the companies.

    What happened that caused the paper valuation estimates to collapse? Lack of putting the spectrum to use to earn money. In Sprint-Clearwire's case, choice portions of their spectrum had to be put to use under the licensing rules. They chose WiMAX because it was available, LTE wasn't at that time. Since then, Sprint failed to keep up with the pace of conversion to LTE in other bands to the extent it helped stimulate demand for the higher bandwidth spectrum. And S did not innovate the way the spectrum was used, relying on macrocell tower methods used for wider coverage lower frequency bands that has left inconsistent gaps in bandwidth coverage.

    LightSquared never got off the ground due to long standing interference problems with adjoining GPS satellite spectrum.

    DISH has some good and some not so great spectrum to put to use. One way to value it is by what nearby spectrum has gone for. Financial analysts have recently estimated a value for DISH's spectrum north of $1 per MHz/POP. I think that is silly. Some nearby spectrum sold by Cableco spectrum partnership sold to AT&T for around 60c/MHz/POP. DISH's spectrum is worth no more than that due to interference issues with parts of it that will likely limit power levels at the base stations and cause use of wider guard bands.

    More AWS and prized sub 1GHz 600MHz spectrum will be auctioned this year and next. That will provide a new set of metrics to judge the value of DISH's current and the then assembled mix of spectrum. If DISH is successful in obtaining 20-30MHz+ of the 600MHz spectrum, the value of the entire package will likely rise. It now takes a mix of complementary spectrum to build a competitive multiple-service 'network of networks'.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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