DISH Network(NASDAQ:DISH) was a surprise winner in the just-completed U.S. government auction of wireless spectrum.
The satellite television company grabbed 702 of the more than 1,600 licenses offered and outbid Verizon(NYSE:VZ) for licenses in New York, Chicago, and Boston, according to The Wall Street Journal. In total, DISH placed $13.3 billion worth of bids, topping all other bidders except AT&T(NYSE:T).
While that made the company a clear victor, the motive for claiming so much wireless spectrum in the first place is less apparent. Unlike the other bidders, the pay-TV provider does not offer a wireless service. Buying this much spectrum, though, suggests the company might be looking to change that.
Moving into telephone services would make sense for DISH as its chief satellite TV rival, DIRECTV, is in the process of merging with AT&T. How DISH gets there remains a question.
DISH could partner with (or buy) Sprint or T-Mobile
Two of the bigger losers in the spectrum auction were Sprint(NYSE:S), which did not participate, and T-Mobile(NASDAQ:TMUS), which came in fourth with $1.8 billion in purchases. As the No. 3 and 4 U.S. wireless companies, respectively, both Sprint and T-Mobile risk falling further behind Verizon and AT&T when it comes to network capabilities.
Joining up with DISH -- whether through a merger or a partnership -- would be mutually beneficial. The satellite company could market phone service to its 14 million customers, and the partnering wireless carrier could sell TV service to its 50-plus million subscribers.
Adding the spectrum licenses should make DISH a more attractive companion to Sprint and T-Mobile. The combined company would be stronger in the wireless world and give DISH an answer to any bundling offered by a merged AT&T and DIRECTV.
DISH could launch its own wireless service
DISH could also use its new licenses to launch its own wireless service, something company chairman Charlie Ergen has expressed interest in doing in the past. The company has amassed more than 45 megahertz of wireless spectrum over the last few years in various auctions and through private deals, according to CNET's Marguerite Reardon.
Former FCC Commissioner Robert McDowell told the Journal that Ergen told him and other officials that he wanted DISH to become a wireless carrier.
"I think his strategy is built around a confidence that spectrum will only become more valuable going forward," McDowell said. "The market might be telling us ... that with the explosion of the Internet of everything, where wireless connectivity will be the oxygen, spectrum that was thought of before as being junk is now incredibly valuable."
Ultimately, DISH must use the spectrum (or sell it to another company), or the company will lose rights to it. Under FCC requirements, DISH has to offer wireless service to 40% of the population covered by its older spectrum licenses within three years. By March 2021, it would have to build out to at least 70% coverage, according to the Journal.
The clock is ticking.
Wireless spectrum could be an investment
While DISH might have acquired the spectrum for leverage in potential deals with the Sprint, T-Mobile, or even Verizon, the company could also simply sell it at a profit. Just the threat of entering the wireless space might help the company negotiate better deals with wireless carriers.
The rising need for spectrum, driven by increasing consumer use of video and the emerging Internet of Things, will likely make these licenses an appreciating asset. Even before this latest auction, analysts valued DISH's spectrum holdings at $25 billion, Barron's reported. At the time of that valuation, July 2014, DISH had a total stock market valuation of $30 billion.
"If I think there's one place that analysts get it wrong and the marketplace gets it wrong, it's probably in valuing our spectrum," Barron's quoted Ergen as saying in May 2014.
This latest auction proved that true -- prices have only increased, making existing holdings even more valuable. If rates continue to climb, Ergen's best bet might be to sell and return some of the profits to shareholders.
Daniel Kline has no position in any stocks mentioned. He planned to bid $1 in the spectrum auction in case the FCC chose to use Price is Right rules. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.