DISH Network (DISH +0.00%) CEO Charlie Ergen had some realistic but sobering news for investors during the company's second-quarter earnings call.
Though the company had a good quarter, reporting a revenue increase to $3.83 billion, compared with $3.69 billion for the corresponding period in 2014, trouble with the Federal Communications Commission may scuttle a major plan. Ergen told investors during the call that a proposed FCC ruling will probably cause DISH do drop plans to enter the wireless industry.
Ergen told investors and analysts on the call that the uncertainty the FCC is causing would make it "virtually impossible" for the company to pursue those plans or to make a major acquisition.
Why pay more for the same drill? That's screwy. Get the same channels for less with DISH. http://t.co/FhNIJ6RIzV pic.twitter.com/saA3BOJhy5
— DISH (@dish) June 26, 2015
DISH has built its business around marketing lower prices. Source: DISH's Twitter feed
What did the FCC do?
The agency revoked $3.3 billion in small-business discounts DISH had claimed in the recent auction for wireless spectrum. The decision scuttled a clever plan the company had that used affiliates it owned to place the winning bids in the auction.
Because the winning entities were technically small businesses and not DISH, the company claimed the discounts. The FCC, which had allowed similar moves in previous auctions, called foul and issued a ruling requiring DISH to pay the full price. Essentially, the FCC declared that the company's action violated the spirit of the rules. That forces DISH to still complete the purchases, but at the full price without the discounts.
DISH, of course, plans to contest the ruling, which puts its immediate financial future in limbo.
What this means for DISH
The FCC ruling puts DISH in a position in which it can't spend any significant money because it may have to come up with an extra $3.3 billion to pay for wireless spectrum. That means the company can't make the investment that would be required to launch a wireless company.
Because of the FCC decision, Ergen told investors that any effort by his company to enter the wireless market will probably come as a partnership with an existing player. The CEO also said that uncertainty caused by the ruling will also force the company to reassess making a deal to acquire or merge with T-Mobile (TMUS +0.28%).
Ergen called the potential $3.3 billion expense the "most complicating factor" from DISH's perspective in reaching a deal with T-Mobile, The Wall Street Journal reported. The CEO explained that if DISH has to pay full price for the airwaves it won, "then you've got less to work with, and it certainly would complicate M&A in a way you couldn't do it."
It's not all bad
While the potential loss of the discount puts DISH's immediate plans to merge with T-Mobile into limbo, it may also be a blessing in disguise. The FCC may be stopping DISH from entering a wireless market where prices are being pushed down, making margins ever slimmer.
It's probably unfortunate that the potential T-Mobile deal won't happen, because that would have given the company easy entry into the wireless space. The two companies also would have been very logical cross-marketing partners.
That said, even without the FCC complicating matters, there was no guarantee T-Mobile would have completed the merger/acquisition. And had the company entered the wireless space on its own, it would have faced an uphill battle to gain market share in an industry where prices are being pushed down.
The FCC decision, if it holds, may even save DISH money. Instead of spending billions to enter the wireless market, the company can now use the spectrum it holds to leverage the best partnerships possible with the existing players in the space.
That could let the company become a wireless force without having to actually build a network. It will take a while to recoup $3.3 billion, but not buying T-Mobile and not becoming a wireless provider on its own could prove to be the smart thing in the long run.
