That did not stop the satellite company from using a loophole to help it save over $3 billion on the $13.3 billion it spent in the federal government's just-completed wireless spectrum auction. DISH's tactics were legal, but they did not sit well with Federal Communications Commission Commissioner Ajit Pai, who issued a statement calling upon FCC Chairman Tom Wheeler "to immediately launch an investigation into these multi-billion dollar subsidies."
A company with $32B market cap, $14B annual rev, 14M customers has no business getting spectrum bidding credits meant for small businesses.— Ajit Pai (@AjitPaiFCC) February 2, 2015
What did DISH do?
Instead of bidding directly on the spectrum, DISH placed its bids through a number of subsidiaries. Its winning efforts were made through entities called SNR Wireless LicenseCo and Northstar Wireless, according to The Wall Street Journal. "Filings with the FCC describe both as a 'very small business' with revenue below $15 million," the paper reported, adding that DISH owns 85% of each company.
Because these small entities were the technical winners of the spectrum auction, they qualify for a 25% discount under the FCC's designated entity program. Designated entity was designed to help smaller companies compete against larger carriers. Pai thinks DISH's efforts, while legal, represent a misuse of the intent of the rule.
"Dish, however, has annual revenues of almost $14 billion, a market capitalization of over $32 billion, and over 14 million customers," he wrote. "Its participation makes a mockery of the DE program."
Pai called for a review of DISH's bid to determine whether the discount should apply, but that is actually unnecessary because all winning bids are subject to FCC review before sales are finalized.
DISH does not agree
This type of strategy has been used before, but not on this scale. DISH, as you might imagine, does not think it did anything wrong and released a statement on its website defending its actions:
We respectfully disagree with the criticism of the Designated Entity program, and we are confident that we fully complied with the DE rules in the AWS-3 auction, which were unanimously approved by the full Commission. The DE program has been successful in providing much smaller entities the ability to access stronger capital structures, which has facilitated their meaningful participation in an auction process from which they would otherwise be precluded. Our approach — publicly disclosed ahead of the auction — was based on DE investment structures that have been approved by the FCC in past wireless spectrum auctions, including structures used by AT&T (NYSE:T) and Verizon (NYSE:VZ).
DISH might be violating the intent of the DE rules, but the company made its intention to use this method known before the auction and the FCC did not take any steps to close the loophole.
Change the rules
It's hard to fault DISH for employing a strategy that benefits the company and its shareholders, even if that benefit comes at the expense of the Federal Government. Pai, however, is correct in calling for an overhaul of the rules that made this possible.
There's no world in which DISH is a small company, and it should not have been allowed to use a workaround to obtain a discount intended for small companies. But if what DISH did was legal and proper at the time of the auction, it should be allowed to proceed with these purchases.
That's a very expensive lesson for U.S. taxpayers who will have lost out on $3 billion in revenue, and it's a loophole that must be closed.
Daniel Kline has no position in any stocks mentioned. He is actively looking for a $3.3 billion tax loophole. 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.