We have some idea what the future holds for Sprint and T-Mobile now that the U.S. Department of Justice has approved their merger. Now what about Dish Network (DISH +0.00%)?
Dish was the beneficiary of the assets Sprint and T-Mobile had to give up to earn regulatory approval, becoming the fourth major wireless network (AT&T and Verizon Communications are the others). But what does this mean for Dish and its investors?
There are a lot of questions and challenges ahead -- some good, some bad, some ugly.
Dish Network has an opportunity in front of it, but it won't come without challenges.
The good
As part of the deal, Sprint and T-Mobile had to offload their prepaid wireless businesses to Dish, including Boost Mobile, Virgin Mobile, and Sprint's prepaid brand. Through those prepaid carriers, Dish will add about 9.3 million wireless customers. The wireless business could be a good fit packaged with its satellite and streaming TV businesses, similar to AT&T.
Dish would also acquire 14 MHz of Sprint's spectrum, which is the infrastructure required to transmit mobile data. That 14 MHz would be added to the roughly 100 MHz of spectrum that Dish already has been accumulating over the past few years. By comparison, according to a 2018 report by Fierce Wireless, AT&T has about 179 MHz, Verizon has 114 MHz, T-Mobile has 107 MHz, and Sprint has 204 MHz. Further, Dish would have access to T-Mobile's towers for seven years until it builds out its own 5G broadband network.
Dish chairman and co-founder Charlie Ergen plans to aggressively grow these flagging prepaid business, which should provide some immediate revenue for Dish as it builds out its network.
Ergen is confident Dish can compete. "With four, there's always somebody that will be a rabble rouser," he said. "Somebody will say, 'I don't have enough market share. I've only got 9 million subs and want 10 million.' That person is going to be more aggressive. The guy who's got 100 million, he's just going to hope he holds on to them."
The bad
To be a true major wireless provider, Dish will have to invest at least $10 billion to build out its own 5G network. But analyst Craig Moffett of MoffettNathanson, a leading media and communications industry research firm, says that's a low estimate, adding that Verizon pays $15 billion annually to maintain its network. Also, the 5G network, when it is built out in 2023, will only cover 70% of the country, which is far short of the 97% 5G coverage that T-Mobile has promised within three years after the merger. Verizon and AT&T both currently cover 98-99% of the country and both have already started rolling out 5G.
Until the Dish network is built out, there will only really be three major players, which is bad for consumers. Also, if Dish fails to put its promised network into place by the June 14, 2023, deadline, the company will have to pay the U.S. Treasury up to $2.2 billion.
Aside from the massive investment, Dish must excel at something it's never done -- operate a nationwide mobile network. And it will have to go up against three entrenched competitors. That's a huge challenge that many doubt Dish can pull off, but Ergen embraces it. He told analysts on the company's second-quarter earnings call that he was insulted at the notion that Dish couldn't compete in this space.
"I can remember in 1991 when we first sold digital compression, and we started building our satellites then -- and we still have a digital compression lab. And we said we think digital compression is going to work. That's the new architecture of how video is going to be delivered," Ergen said. "Everybody in cable, everybody in broadcast ... every analyst said digital compression can't work."
The ugly
The Sprint/T-Mobile merger is not a done deal. It still faces legal challenges, which are expected to be sorted out by the end of the year. If the deal falls through, it will be an ugly mess for all involved, especially Dish. The company is dealing with a decline in subscribers for satellite TV -- its core business -- and it saw revenues decline in the second quarter, missing analysts' estimates.
Dish's main competitor, DirecTV, is also struggling, and parent company AT&T is under pressure to unload it. Dish has been rumored as a potential buyer, so that's clearly one direction it could take. Dish could even make a move into the mobile space without the merger -- it has been stockpiling spectrum for years, since it made a failed play to buy Sprint in 2013. Dish has invested more than $21 billion in spectrum and is committed to start building out its 5G network starting next March, so it just may push forward if the deal falls through. But right now, that's not an option Dish wants to think about.
The outlook
Dish's stock price is up more than 33% so far this year even after an initial drop on the announcement. The company has been clearly transitioning toward a mobile future, accumulating spectrum for several years now; that's the right move, given the state of the satellite TV business. In addition, Dish has enjoyed growth in its streaming TV service, Sling, and that could be a good fit with mobile.
How successful a wireless player Dish can be remains to be seen. Dish has a big challenge in front of it, which is likely one reason its stock is trading around a P/E ratio of 12, lower than those of its competitors. The next few quarters could be tough; analysts estimate lower earnings through 2020. But once the prepaid mobile businesses from Sprint and T-Mobile come on board, and with the continued growth of Sling, Dish could be well positioned as it prepares to build out its network and transition to the mobile business.
