Dish Network Price Estimate Revised To $79.80 Based On Spectrum Valuation

We recently increased our price estimate for Dish Network (NASDAQ:DISH) from $67.50 to $79.80, primarily due to a revision in the estimated value of Dish’s spectrum holdings. Dish has made significant investments in spectrum over the past few years and is now the fifth largest holder of wireless spectrum in the United States. Dish currently owns licenses to more than 80 Megahertz (MHz) of spectrum and we estimate the pre-tax fair value of Dish’s spectrum holdings to be around $39 billion. Dish can now move forward with a number of options, such as launching its own nationwide wireless network, partnering with an existing wireless carrier or either leasing or selling the spectrum.

See our complete analysis for Dish Network

Our Valuation Of Dish’s Spectrum Holdings

There is a looming spectrum crunch in the U.S. wireless industry, given the increasing data needs of mobile customers. Realizing this spectrum crunch and the associated opportunity, Dish Network has been strategically amassing spectrum. The company amassed 40 MHz of AWS-4 spectrum when it acquired TerreStar and DBSD North America out of bankruptcy in 2011 for a combined sum of less than $3 billion. We estimate the pre-tax value of the same spectrum to be close to $22.2 billion at $1.73 per MHz-Pop. (See our calculation methodology – Dish Network – Price per MHz/Pop for AWS-4 Spectrum Analysis) The AWS spectrum supports LTE and can be used by wireless phones and other mobile devices for voice, messaging and data services. Most smartphones are AWS-enabled and can communicate using this spectrum. It should also be noted that there is a significant difference in the value of downlink spectrum as opposed to uplink. The Federal Communications Commission (FCC) has conditionally allowed Dish to use all of its AWS-4 spectrum for downlink purposes, increasing the value of Dish’s spectrum.

The demand for spectrum can also be gauged from the recent AWS-3 auction conducted by the FCC, which concluded on January 29, 2015 and raised a total of $44.9 billion. ^[1] AWS-3 is a mid-band spectrum with qualities of both, low band and high band spectrum, which can help wireless carriers provide better connectivity. 65 MHz of said spectrum was auctioned, which included 50 MHz of paired spectrum and 15 MHz of unpaired uplink spectrum. Spectrum is considered paired spectrum if it has two associated blocks of different frequency bands. In this combination, one band can be used as the uplink spectrum and the other band can be used as the downlink spectrum. Dish acquired 25 MHz of the AWS-3 wireless spectrum in the FCC auction which included 13 MHz of paired spectrum and 12 MHz of unpaired spectrum. The company spent close to $10 billion at the auction but also received a discount of 25% from the FCC as it applied as a designated entity. After factoring in the discount, the actual price for the spectrum acquired by Dish was over $13.3 billion. We believe that the price discovered through the auction process is close to the fair value of Dish’s AWS-3 spectrum. That said, we note that the company’s aggressive bidding strategy, and its use of multiple parties, has provoked an FCC review of the auction process of uncertain duration. ^[2]

Dish has also acquired 10 MHz of the H Block Personal Communications Service (PCS) spectrum in an FCC auction which concluded on February 27, 2014. The company was the winning bidder for all 176 wireless spectrum licenses in the H Block auction with an aggregate bid of $1.564 billion. (Read More – Dish Network Sweeps H-Block Spectrum Auction For $1.56 Billion) The H Block spectrum band is adjacent to, and can be paired with, Dish’s AWS-4 licenses, which is highly desirable. Another desirable aspect is that the spectrum covers every territory in the United States. Accordingly, we believe that Dish’s H-Block PCS spectrum is worth $3.2 billion at $1.00 per MHz-Pop. (See our calculation methodology – Dish Network – Price per MHz/Pop for H-Block Spectrum Analysis)

Using our estimates, the combined pre-tax value of Dish’s H-Block spectrum along with its AWS holdings comes close to $39 billion and we have incorporated this value into our price estimate.

How Spectrum Can Help Dish’s Pay-TV Business

Currently, Dish offers video services and satellite Internet service, though it isn’t as fast as the Internet services from wired providers. We continue to believe that with the spectrum Dish owns, it should either build its own infrastructure or partner with an existing carrier to provide wireless services. With an efficient wireless network in place, Dish could easily deliver faster Internet service. The company will also be able to compete better in the saturated U.S. pay-TV market by offering a viable bundling option in which it can combine its satellite service and wireless spectrum to offer consumers a single subscription. Pay-TV penetration is currently very high, with more than 85% of the U.S. TV households subscribing to at least one pay-TV service. Given the saturation level and slowdown in the housing market, it is difficult to see a significant increase in the number of the U.S. pay-TV subscribers. Moreover, fierce competition between satellite, telcos and cable operators, and the rise of alternative video platforms, is adding to the woes of pay-TV operators. Other pay-TV providers have benefited immensely by offering bundled services and Dish needs to come out with its own variant in order to remain competitive.

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1. AWS-3 AUCTION RESULTS: AT&T leads with $18.2B, Verizon at $10.4B, Dish at $10B and T-Mobile at $1.8B, January 30, 2015, Fierce Wireless [↩]
2. On this read The Wall Street Journal‘s “AT&T Says Dish’s Tactics Distorted Spectrum Auction,” February 20, 2015. [↩]