By Thomas Gryta, Ryan Knutson and Shalini Ramachandran
Dish Network Corp. ran away with nearly half of the wireless licenses sold in a record setting government auction, leaving a large slug of the scarce resource in the hands of a company that so far has no ability to offer cellphone service.
The satellite TV broadcaster, working with partners including mutual fund giant BlackRock Inc. and employees of private-equity firm Madison Dearborn Partners, topped wireless market leader Verizon Communications Inc. for licenses in New York, Chicago and Boston; won 702 of the more than 1,600 licenses on offer; and placed $13.3 billion worth of bids, topping all rivals except AT&T Inc.
In what appeared to be an unprecedented move, Dish also secured all of its winning bids through entities that qualified for a 25% discount set aside by the Federal Communications Commission for small businesses. As a result, Dish and its partners will only owe about $10 billion, saving more than $3 billion that otherwise would have been paid to the government.
The aggressive showing deepens the intrigue around Dish Chairman Charlie Ergen's intentions for the wireless business. Dish and Mr. Ergen have amassed a trove of valuable wireless spectrum the past several years, but the company doesn't have a cellphone network or an agreement with another carrier that would allow it to start selling wireless plans.
The moves also have raised grumbling about Dish's access to bidding credits. Former FCC officials said big companies have set up entities to try to take advantage of similar discounts in the past, but on a much smaller scale, and regulators sometimes disallowed them after the fact. Dish may be in perfect compliance with the rules, however, one of the former officials said.
Roger Sherman, chief of the FCC's Wireless Telecommunications Bureau said in a blog post Thursday that bidders would be reviewed to make sure they complied with the rules.
Dish declined to comment on its performance in the auction, citing FCC anticollusion rules that don't lift for several more days. "The auction's success is a win for the FCC, the American Taxpayer, the Public Safety community and small business," the company said in a statement.
The auction that closed this week was the first major sale of spectrum by the FCC in six years. It drew an enthusiastic response from the industry, pulling in $44.9 billion in bids, twice the total from the last auction, in 2008. AT&T topped the bidding, spending $18.2 billion for 251 licenses. Verizon committed to pay $10.4 billion for 181 licenses, and T-Mobile US Inc. paid $1.8 billion for 151. Sprint Corp. didn't participate.
AT&T paid the most for a single license: $2.8 billion for one of the main licenses for the New York City area. Three main licenses in the area were bought by Dish for $3.4 billion. Many of the licenses Dish acquired were for one-way uplink airwaves, which are less attractive and weren't aggressively sought by other carriers.
Dish could try to make money of its growing pile of spectrum in a number of ways: Build a network to offer wireless service, partner with an existing carrier, lease it to others who might need it, or treat it as a financial asset and sell it when it appreciates.
There are risks as well. Another major auction is planned for 2016, and new competitors like Google Inc. and Cablevision Systems Corp. are eyeing the wireless business.
Former Republican FCC Commissioner Rob McDowell, who stepped down in 2013, said Mr. Ergen told him and other officials of his vision of becoming a wireless carrier while he was on the commission.
"I think his strategy is built around a confidence that spectrum will only become more valuable going forward," Mr. 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."
Dish won its licenses through entities called SNR Wireless LicenseCo and Northstar Wireless. Filings with the FCC describe both as a "very small business" with revenue below $15 million. Northstar has an address in Fairbanks, Alaska, and SNR in Falls Church, Va. Filings indicate Dish owns 85% of each.
Dish and its affiliated entities were bidding aggressively in the auction, staying active into the late rounds in 19 of the 20 most expensive licenses. Often more than one Dish entity was bidding, and they frequently each bid the same amount in the same round on the same license. In one of the major New York licenses, both Dish entities bid the winning amount of $1.32 billion.
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 has to build out to at least 70%.
Mr. Ergen has said that selling the spectrum to another carrier or building out a wireless network from scratch would be relatively unlikely options.
Major corporations have previously won small business credits. In a 2000 auction, the old AT&T's wireless division backed Alaska Native Wireless LLC, an Anchorage-based entity that filed for a small business credit. Salmon PCS LLC, which also won a small business credit as a bidder in that auction, was backed by Cingular Wireless. Doyon Communications, which participated alongside Dish in the latest auction, was also a backer of Alaska Native Wireless.
The credits were set up by a 1994 law to make sure some spectrum licenses are awarded to entities controlled by women, minorities and small businesses. Over the years, one former FCC official said, "the larger guys got smart" and set up partnerships with entities that qualified.
Stephen Wilkus, who worked at Alcatel Lucent as a wireless engineer for 27 years, quit a year ago to take part in the spectrum auction. After putting together a partnership that included some family members as investors, some with a controlling interest in other companies, he was advised by three different attorneys that he wouldn't qualify for small business credits. Given that, he was irked to see entities related to Mr. Ergen, a billionaire, obtain that same credit.
Mr. Ergen has pursued a variety of avenues into the wireless business over the past three years, so far without success. He tried to buy the carrier MetroPCS, which ultimately merged with T-Mobile, and made an unsuccessful bid in 2013 for Sprint, losing out to Japan's Softbank Corp.
Finding a way into wireless is crucial, because the days of heady growth in the company's core satellite TV business are numbered. Pay TV operators are battling rising costs and the onset of "cord-cutting," as consumers drop connections in favor of more affordable online video options.
Kate Linebaugh contributed to this article.
Write to Thomas Gryta at firstname.lastname@example.org, Ryan Knutson at email@example.com and Shalini Ramachandran at firstname.lastname@example.org
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