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Why Dish Network's Charlie Ergen Wants Sprint Nextel

After buying Sprint, Ergen would offer cheaper mobile data plans

Photograph by Karl Gehring/The Denver Post/Getty Images

After buying Sprint, Ergen would offer cheaper mobile data plans

Dish Network (DISH) Chairman Charlie Ergen, who as a young man was a professional blackjack player, has made more than his share of risky bets over the years. But Ergen’s $25.5 billion bid for Sprint Nextel (S)—a company that’s already agreed to a $20.1 billion merger with Japan’s SoftBank—is a particularly plucky gamble. Ergen’s company is the third-largest U.S. pay-TV provider, behind Comcast (CMCSA) and DirecTV (DTV). Sprint is the third-largest U.S. wireless carrier, trailing Verizon Wireless (VZ) and AT&T (T). The question is whether combining third-place competitors in different industries will create something bigger than the sum of their parts or simply double down on the risks Dish already faces competing against entrenched rivals. “It’s pretty ballsy,” says Scott Schermerhorn, chief investment officer of Granite Investment Advisors. “Once this deal is done, you’re going to own a wireless company that, oh, by the way, happens to have a satellite-TV division to it.”

Under Ergen’s plan, Dish would combine its 14 million pay-TV users with Sprint’s 47 million mobile-phone customers, creating a new pool of subscribers who can get all their video, voice, and Internet services from one place. The idea is to provide viewers with a consistent experience—whether they’re inside their homes using a satellite dish or outside using wireless networks.

Although Verizon Wireless and AT&T already offer a bundle of services, neither has as many TV customers as Dish. Also, they provide TV and broadband in select local markets, while Dish operates nationally. Taking customers from the two companies won’t be easy, says Jaison Blair, an analyst at Telsey Advisory Group. “You’re going up against a terribly powerful duopoly in AT&T and Verizon,” Blair says. “Investing in the No. 3 wireless player is probably not my idea of a great place to generate a return on capital.”

In making his counteroffer, Ergen is challenging Masayoshi Son, the chairman of SoftBank, who sees Sprint as key to a U.S. expansion. Son’s goal is to create the largest mobile-services provider in the world by revenue, surpassing Verizon Wireless and China Mobile (CHL). SoftBank said in a statement that its offer for Sprint will give U.S. customers “superior short- and long-term benefits to Dish’s highly conditional proposal.” SoftBank expects to consummate its deal on July 1.

Ergen says the appeal of the bundled services provided by a combined Dish-Sprint will grow as more people watch video on tablets and smartphones, putting a strain on the big carriers’ networks. The merged companies would be able to offer customers lower prices for mobile data because they will have the spectrum capacity Verizon Wireless and AT&T lack, Ergen says. Even though it doesn’t currently have any mobile customers, Dish has been snapping up wireless spectrum for years to prepare for a move into the market. Those assets, combined with Sprint’s network, would give the new company almost twice as much spectrum as either of the two largest carriers, according to data compiled by Bloomberg.

Dish is subject to Federal Communications Commission rules that require it to provide wireless service to at least 40 percent of the population covered by its spectrum within four years and to at least 70 percent within seven years. While a Sprint deal would help Dish comply with the FCC’s rules, there’s no reason Dish needs to do a deal now, says Telsey Group’s Blair. “Dish could easily wait and sell the spectrum to AT&T or Sprint, who may really need it three years from now,” he says.

If SoftBank raises its bid and winds up with Sprint, Dish could find a similar marriage partner in T-Mobile USA, which is finalizing its own bid to consolidate operations with smaller cellular operator MetroPCS Communications (PCS). That way Ergen would still be able to use his big trove of unused spectrum—while forcing potential rival SoftBank to pay more than it intended for Sprint. Notes Blair: “With Charlie Ergen, you never really know what his end game is.”

The bottom line: By combining Dish Network’s pay-TV customers and Sprint’s cellular users, Ergen aims to shake up the wireless business.

Sherman is a reporter for Bloomberg News in New York.

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