On the surface, DISH Network's (NASDAQ:DISH) foray into the 5G market seems savvy enough. The speed that 5G connectivity offers will compare to wired broadband connections, and it will usher in the Internet of Things era. Besides, the company's been sitting on a treasure trove of FCC-licensed spectrum. It may as well do something with it.
Not all analysts are convinced that satellite television name DISH is going to be able to break into the wireless market the way its board chairman Charlie Ergen describes, though. Yes, the cost concern brought up by MoffettNathanson's senior analyst Craig Moffett earlier this year has been mostly (though not entirely) answered, but that's far from the only tripwire that lurks ahead. Two other challenges could still prove problematic to DISH's 5G plans.
1. Building the infrastructure isn't the problem
It was a prospect that had been on the radar for years, but only the impending union of Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) made it feasible. If and when the merger of T-Mobile and Sprint is complete, DISH will step up as the fourth competitor the Department of Justice seems to desperately want.
The problem is that DISH Network will be starting from scratch, and it will bear the financial burden of building thousands of 5G connection sites across the nation.
Ergen wasn't and still isn't concerned, suggesting the job could be done for around $10 billion. Craig Moffett disagreed, suggesting in July: "The idea that DISH might spend $10 billion (their own estimate on previous conference calls) and then somehow be finished is, well, just silly." Moffett added, for good measure, "Verizon (NYSE:VZ) spends $15 billion annually to maintain a network that they've already built."
Ergen responded, pointing out that DISH's network will be a virtualized network rather than built around hardware. In other words, it will largely be software-based, making it 40% to 60% less expensive to establish than the types of hardware powering other providers' nascent 5G networks. And, he may well be right about the lower installation costs. As is so often the case, though, a savvy solution to one problem creates another one.
2. Still more unknowns than knowns
For Ergen, one of those other problems is the risk and potential expense of building a wireless network in a new way. Not all experts are convinced it will be cheaper in the end.
Joe Madden, president of Mobile Experts, comments: "The cost would theoretically be low for this kind of network due to the low hardware cost and the higher level of competition for software. ... The remaining question is whether the operating cost will also be as low."
Daryl Schoolar, the principal analyst at Ovum, largely agrees. He commented earlier this year: "There's a sense also that it probably costs you more money on the network services and integration side. You have to spend more money there integrating more disparate vendors together." His ultimate conclusion? "I would caution anybody if they start talking about this really advanced network-cloud, virtualized, you know a string of technology buzzwords. Don't be surprised if they kind of back off some of that as they go through the process, because they may not find that everything out there is as ready as they think it is."
In other words, a virtualized network isn't guaranteed to be a cheaper one.
Starting with (almost) nothing
The other hurdle Ergen sees on the horizon: DISH is going to go toe-to-toe with incumbents like Verizon and AT&T (NYSE:T), both of which are already building 5G networks, and both of which have a sizable customer base.
DISH Network isn't starting from scratch, to be fair. All nine million of Sprint's Boost Mobile customers will become DISH's first wireless customers, assuming T-Mobile and Sprint are allowed to merge. It's also got a seven-year deal in place with T-Mobile to act as a mobile virtual network operator (MVNO), and Ergen's got plans to offer wholesale connectivity as well.
Boost Mobile is a prepaid business though -- by definition -- the least loyal of wireless subscribers. Consumers may end up moving their service to a less-experimental name like Sprint, or even defect to bigger players like AT&T or Verizon. In the meantime, Verizon and AT&T both have wholesale ambitions of their own. And before anything happens, DISH Network has to secure the funding to pay for it all. The latest news on that front is that Ergen only has "high-confidence letters of credit" in hand, from banks rather than prospective distribution and marketing partners.
None of this is to suggest DISH won't be able to build a successful, even profitable 5G network. It is to suggest, however, that turning it into a viable business may not be quite as easy as implied by the picture Ergen is painting. Its opportunity in 5G is certainly not a reason to start making big bets on DISH Network if any investors were looking for what may seem like the quintessential ground floor opportunity. As it stands now, the idea feels more like a wish.