Ergen’s Dish Wireless Bet in Jeopardy Amid Industry Deals

Dish Network Corp. (DISH) Chairman Charlie Ergen, a former professional poker player, has bet the satellite TV provider’s future on a shift into the wireless business. That wager is in jeopardy as the U.S. mobile industry consolidates.

Ergen scooped up wireless licenses through acquisitions last year and has been sitting on the sidelines ever since as he waits for U.S. regulators to define rules so Dish can put its airwaves into use. Dish, the second-largest U.S. satellite TV provider, has been planning to offer wireless Internet service in partnership with existing mobile operators.

In the meantime, dealmaking is transforming the industry. This month, Japan’s Softbank Corp. (9984) agreed to take control of Sprint Nextel Corp. (S) for $20.1 billion and Deutsche Telekom AG (DTE) said it will combine its T-Mobile USA with MetroPCS Communications Inc. (PCS) Those deals take four possible partners off the market for as long as 12 months, Ergen said.

“If the timing is too soon, you spend a lot of money and sometimes you run out. If timing is too late, the market runs away from you,” Ergen, 59, said in an interview. “There always has to be an option to exit the business if we’re not able to get into the business on time, and that window is closing.”

The delays have Ergen thinking through backup plans. He may have to sell off the wireless licenses even if he gets approval to use them. And Dish may instead take another run at merging with DirecTV (DTV), a deal proposed and blocked by regulators in 2002.

Dish fell 1.4 percent to $35.48 at the close in New York. The shares have gained 25 percent this year. DirecTV declined 0.5 percent to $50.88 and has advanced 19 percent this year.

LTE Technology

Dish, based in Englewood, Colorado, had initially sought to build a wireless network from scratch, aiming to become the first company to use so-called long-term evolution, or LTE, technology. The U.S. Federal Communications Commission’s long approval process, driven in part by interference issues with spectrum owned by the now-bankrupt LightSquared Inc., has eliminated that opportunity as other companies, including Verizon and AT&T, have adopted LTE, Ergen said.

No company will do a deal with Dish before the FCC sets rules on what spectrum can be used for terrestrial service, said Ergen, who, with a net worth of $10.9 billion, is the world’s 84th richest person, according to the Bloomberg Billionaires Index.

“That’s what’s frustrating about the process, which has now taken more than 18 months and counting, because the window is shrinking,” Ergen said.

FCC Denial

Sprint and Clearwire Corp. (CLWR), of which Sprint owns 50.3 percent, have both failed to turn a profit for five consecutive years because they mistimed the market, Ergen said.

It’s been more than seven months since the FCC denied Dish’s attempt to quickly offer wireless service bundled with its TV product and more than 20 months since Dish announced it purchased satellite spectrum from bankrupt DBSD North America Inc. for $1.4 billion. Dish later bought more spectrum from bankrupt TerreStar Networks Inc.

Dish should hear from the FCC by the end of the year, Julius Genachowski, the agency’s chairman, said at a news conference Oct. 17.

“It is a priority,” Genachowski said.

Ergen said Sprint and Deutsche Telekom remain potential partners. He said he prefers not to sell Dish’s spectrum to a company such as AT&T, although he will if there are no other alternatives. Selling the airwaves, for which Dish paid about $3 billion, would position the company with “more cash but in the same mature business it’s already in,” Ergen said.

Cable Competitors

Dish won’t partner with Verizon, even if it’s “smart business” because the largest U.S. wireless provider struck a deal to market products from rival cable companies, including Philadelphia-based Comcast Corp. (CMCSA) and New York-based Time Warner Cable Inc. (TWC), Ergen said.

“They made peace with cable, and we’re not a peace company,” Ergen said. “It just wouldn’t be any fun.”

Investors looking for a quick return shouldn’t invest in Dish, Ergen said. The company’s plan is to rely less on the mature TV business for growth and more on an industry where data consumption is expected to increase 18-fold from 2011 to 2016, according to the Cisco Visual Networking Index.

“If you think long term, if I can’t invest your money efficiently, and I have to just buy back my stock or pay a dividend to you, I shouldn’t be your guy,” Ergen said. “If you want next quarter’s earnings, don’t invest in Dish.”

DirecTV Deal

Entering the wireless field may be unwise, Craig Moffett, an analyst at Sanford C. Bernstein & Co., said in an interview. Sprint, Clearwire and T-Mobile’s troubles competing with AT&T and Verizon are largely due to the structure of the industry, Moffett said. It costs billions of dollars to build a network, requiring companies to entice millions of customers to stand a chance at turning a profit.

“The wireless business may seem like a sexy growth opportunity at first glance, but the reality is, only two companies are earning cost of capital,” Moffett said. “For a new entrant today to come into the industry and earn an attractive rate of return is a very, very tall order.”

Dish may be able to build up its customer base by reviving a plan to merge with DirecTV, Ergen said. Ten years ago, regulators blocked a deal between the largest satellite television providers for anti-competitive reasons, saying millions of rural customers would have only one choice for TV.

National Pricing

AT&T and Verizon have offered TV service since 2002 and the Internet has given consumers new ways of watching video. While many Americans living in rural areas would still only have Dish and DirecTV as live-TV options, safeguards can be put in place to prevent price gouging, Ergen said.

The company could offer so-called “national pricing,” where rural customers get the same offers as in more competitive urban areas, Blair Levin, a fellow at the Aspen Institute, who previously worked for the FCC as the executive director of the Omnibus Broadband Initiative, said in an interview.

Dish’s wireless aspirations could be the catalyst to getting a deal approved, Ergen said. Combining DirecTV’s 19.9 million subscribers with Dish’s 14.1 million customers would create the largest U.S. video provider. The combined 34 million households translate into “75 million potential handset users day one” if they also become Dish wireless subscribers, Ergen said.

While Ergen says he hasn’t spoken with DirecTV Chief Executive Officer Michael White about renewing deal talks, both have previously said a combination would be pro-consumer.

Presidential Election

Content providers, such as Walt Disney Co. (DIS) and Viacom Inc., may ask for lower price increases on their programming out of concern of being blacked out, Ergen said. DirecTV and Viacom had a 10-day-blackout in July over affiliate fee increases before reaching a deal. DirecTV says its content fees rise almost 10 percent each year.

“There are clearly long-term synergies there which tell you where Mike’s long-term interests are,” David Dillon, Kroger Co.’s CEO and a DirecTV board member, said in an interview about White.

A deal could be approved by regulators no matter who wins next month’s U.S. presidential election, Ergen said.

“I would be relatively optimistic you could put a deal together if there was a desire with DirecTV that makes sense for the government to approve,” Ergen said. “You’ve got a whole different dynamic than 10 years ago.”

Darris Gringeri, a spokesman for El Segundo, California- based DirecTV, declined to comment on whether a combined company would be interested in pursuing wireless.

Broadband Choice

Dish’s spectrum isn’t “a factor one way or the other” regarding a future combination, White said last month. Ergen says the wireless component may make a deal even more friendly to a Democratic administration than a Republican one, given President Barack Obama’s stance on the need for more competition. Moffett disagrees, predicting a Mitt Romney victory will be the most probable pathway to a deal.

“Charlie’s core selling point is knowing that unlike last time, increased choice in broadband is more important than reduced choice in pay-TV,” Moffett said. “If Romney wins in November, I think DirecTV and Dish are back in front of the Department of Justice within 12 months.”

Romney and White worked together at Bain & Co. in the 1980s. White has said he is supporting Romney for president.

Still, an acquisition would decrease pay-TV competition in regions without cable from two competitors to one, and that’s typically a difficult obstacle to overcome, no matter what the circumstances, Aspen Institute’s Levin said.

“The odds are still slightly against it,” Levin said. “But unlike last time, if they play their cards right, they can get this deal through.”

To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net

To contact the editor responsible for this story: Crayton Harrison at tharrison5@bloomberg.net

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