What do people dream about when they dream of DISH?

There are some that may wake with a scream in a tangle of sweat-soaked sheets, haunted by images of finding themselves forever chained to Charlie Ergen, perhaps sharing a vital organ with him, perhaps finding him with his hand on the plug that powers their entire network, an expectant smile on his face.

We sympathize with the people that suffer these dreams.  We imagine they are causing restless nights in places like Seattle and Bonn, and in a large penthouse apartment on the upper west side.  It is not them that we are concerned with here.  Here we are focused only on happy dreams.

What do the people who own DISH’s stock dream of?

They used to dream of a quick sale to Verizon or AT&T, at some spectrum value that was close to the value realized in the AWS-3 auction.  Short dreams, delivering a quick jolt of pleasure, like the dreams of adolescent boys.  Some still dream of this.  And it could still happen.  There isn’t much to say about these dreams.  Their meaning is plain.  Most people who dream of DISH now, have dreams that are more complicated.  They might go something like this…

DISH builds a network beneath its 100MHz of spectrum.  The network is entirely 5G, which means DISH’s spectrum would be more productive than the existing carriers.  Verizon and T-Mobile have a similar amount of spectrum to DISH, but it is spread across 2G, 3G and 4G, while DISH deploys all its spectrum with 5G.  The improvement in spectral efficiency with an all-5G network might give DISH 45% more capacity than Verizon and T-Mobile on the same quantum of spectrum. In a fully utilized network, DISH’s cost per unit of capacity would be just 45% of Verizon and T-Mobile’s.

This would assume the cost of running DISH’s network was the same as Verizon and T-Mobile’s, but DISH’s network would be much cheaper to run for two reasons.  First, DISH would have a single network, all deployed with state-of-the-art equipment.  Verizon and T-Mobile have two decades worth of equipment spread across at least three networks (ranging from 2G to 5G), using equipment from perhaps a dozen vendors.  Second, DISH would build a “virtualized network” with most of the intelligence housed in a handful of data centers, resulting in lower equipment, utility and labor costs.  Together, these factors could drive network opex and capex that is less than 40% of Verizon and T-Mobile’s (bear with us here, we are describing a dream).

Between more capacity and a lower network cost, DISH could have a cost per unit of capacity that is between a quarter and a third of Verizon and T-Mobile’s.  The potential for disruption is plain.  Let’s imagine that Verizon and T-Mobile have a cost per unit of $1, on a fully loaded network.  DISH’s cost would be just $0.33.  DISH could make a 50% gross margin while pricing its capacity at $0.66, and Verizon and T-Mobile could never match them.

More accurately, Verizon and T-Mobile couldn’t match DISH’s unit costs for a very long time.  Long enough for DISH to fill its network at their expense, causing financial distress.  AT&T is in a slightly better position than Verizon and T-Mobile, with 60% more spectrum, but they wouldn’t be able to match the kind of pricing DISH could offer either.  We haven’t bothered to mention Sprint; they would be the first to fold as a standalone company.

The wireless carriers are all trapped in a classic innovator’s dilemma.  They can transition their spectrum over to 5G too, but they have 300 million subscribers with handsets that aren’t 5G capable today, that would need to be transitioned first.  Some of those subscribers still use good old Motorola StarTACs, and not because they are retro-cool.  It takes time.  And money.  The old network equipment could all eventually be pulled out and replaced with a single state-of-the-art virtualized network, but this takes time and money too.  There is a reason the carriers are still running 2G networks, despite deploying their first 3G equipment in 2002, more than 17 years ago.

So why aren’t investors worried about this?  Two reasons. 

Some will dispute the savings associated with a brand-new network deployed with a single standard, and virtualized.  They might claim that the running cost is only 10-20% lower.  And they might claim that the spectrum efficiency advantage is only 10-20%, and it is narrowing steadily as more and more spectrum is allocated to more efficient standards.  Fine.  DISH’s cost per unit of capacity might be $0.75 compared to Verizon and T-Mobile at $1.  DISH will still be in a position to disrupt the industry.

Others will point out that DISH doesn’t have the money to build the state-of-the-art 5G network and absorb the operating losses that would ensue.  DISH pegs the network cost at $10BN.  Our analysis suggests this is reasonable, perhaps even high, but let’s say it is $20BN to avoid controversy.  Let’s say there are another $20BN of operating losses over ten years it might take to build and fill the network.  Let’s add another $10BN for shits-and-giggles.  $50BN.  And ten years.

Who would fund it?  Two kinds of people.

First, anyone with a long investment horizon might fund it.  There is almost $1 trillion in enterprise value in the US wireless market today, just among the service providers.  Let’s say that gets cut in half and DISH gets a quarter of what is left.  That is $125BN for DISH.  After investing $50BN, investors would still make $45 billion in profit.  That may be good or bad, depending on how much of the $50BN goes in as debt or equity and which piece they own.  That is one scenario.  In another scenario, they might own a strong player in a three-player connectivity market.  If the market consolidates down to just three players because of the havoc DISH wreaks, it could still be a $1 trillion market and DISH could have 33% of it.  Now that is something worth playing for.

Second, anyone with a product or service that is delivered over a network, that has $50BN in cash lying around, might fund it.  They would have two interests in seeing a new network get built.  First, if consumers’ connectivity costs fall, the amount they can spend on products and services that ride on that connectivity rises.  We see this today.  As consumers cut pay-tv bills, they spend more on broadband and the value of broadband businesses rise because broadband providers have more wallet to chase.  Second, it would accelerate investment in infrastructure.  The wireless carriers would have to increase spending rapidly to stay competitive.   We could think of a few companies that deliver products and services over networks that have $50BN to invest.

How does T-Mobile’s acquisition of Sprint affect this dream?  Not the way you would expect…

Let’s assume there are 10MM Boost subs on offer, and some spectrum, and an MVNO.  The subs and the MVNO don’t advance the mission described above at all.  At least not directly.  The spectrum would, but modestly.  Another 20 – 40MHz of spectrum would lower DISH’s cost per unit of capacity further, once fully utilized, but the difference between DISH’s cost and the wireless carriers is already so great that the impact from the additional spectrum isn’t that material.  Still, more spectrum and a lower cost is always good, and taking assets away from a future competitor is always good.

The deal could help DISH indirectly, in two ways:

First, if it allows DISH to cut a new deal with the FCC around buildout requirements, it could be transformative to DISH’s prospects.  It would be much easier for DISH to secure a tenant, partner, or funding for a network build if its ownership of the spectrum was not in question.  If the buildout issue is erased, DISH would likely see a sharp rise in its own value, making it easier for the company to raise capital to fund at least a portion of the build itself (we wrote on this topic in more detail in a prior post HERE).

Second, the Boost subs will generate cashflow, which will help fund DISH’s ambitions.  The cashflow will be small in the context of the funding required, but I guess every little bit helps.  If nothing else, it helps DISH service its debt while it looks for the capital it needs to build the new network.

There are two things not being discussed in the press that would be wildly more valuable to DISH, if they were part of the deal:

First, would be a deal for T-Mobile to deploy DISH’s spectrum, which would lower the deployment cost considerably.  T-Mobile has to touch every one of the 85,000 towers it plans to keep, if the acquisition is approved.  They will deploy 800MHz and 2.5GHz on the old T-Mobile towers, and 600MHz, 700MHz, AWS-1 and AWS-3 on the old Sprint towers.  Deploying DISH’s spectrum, while they are deploying their own, could drive considerable savings for DISH.

To take it a step further, T-Mobile and DISH could share passive infrastructure, driving opex savings too.  In fact, they could even share active infrastructure, driving even greater opex savings.  Carriers have done this in other markets.  We doubt T-Mobile would go for network sharing, either passive or active, but if they did, it would make DISH that much more disruptive, while reducing the amount of capital required to launch the business.

Second, would be a nationwide roaming deal (in addition to the MVNO).  If DISH plans to use its capacity to go after the retail market, they will need access to capacity in areas where they don’t have a network, at least for a few years while they complete the build.  The better the deal, the more DISH can concentrate resources on the areas with the greatest capacity demand, while relying on the roaming deal to cover the more expensive to cover areas where consumption is lower.

It is not clear to us that DISH would go after the retail market.  They may be best served by wholesaling their capacity to others.  If they can offer solid network performance, and a competitive price, they would undoubtedly have interest from the cable companies.  They would have interest from other MVNO providers, like Tracfone.  If they price capacity below the cost of the wireless carriers, they may become customers of DISH too (at least some of them).  This would be a much simpler business model, potentially with much higher returns on capital, which should trade at a much higher multiple.  Since we are dreaming, this could be as good a business, trading at similar multiples, to the towers.

Why would T-Mobile move forward with a deal that creates a disruptive new entrant? 

They may not.  The negotiations are clearly proving difficult, and T-Mobile’s acquisition of Sprint may still fall apart precisely because T-Mobile won’t accept terms that make DISH too dangerous, and either DISH or the DOJ won’t move forward without those terms.  If T-Mobile does move forward with a deal that leaves DISH in a position to upset the market, it would be for one of two reasons.

First, T-Mobile might conclude that DISH will threaten the market with or without T-Mobile’s help, and T-Mobile is far better off facing that threat with the capacity and scale they get from Sprint.  Imagine a scenario where T-Mobile walks away from Sprint only to see DISH launch a network funded by Amazon.  Worse still, imagine a scenario where an Amazon funded DISH acquires Sprint.

Second, the acquisition leaves T-Mobile in an even stronger position with a lower cost per unit than DISH.  T-Mobile would start with close to 300MHz of spectrum.  160MHz of the spectrum is 2.5GHz, with the potential for much higher throughput than lower bands when deployed with 5G.  T-Mobile wouldn’t have the same network cost advantage as DISH, but the capacity advantage could give them a cost per unit of capacity of just $0.20, compared to Verizon’s $1 and DISH’s $0.33.

Anyone who expects a cozy three player market, with T-Mobile having that kind of cost advantage and an empty network…has a different view of T-Mobile’s economic incentives to us.  Of course, T-Mobile would love to be the only one with a huge cost advantage over the incumbents in a position to take share from them, but they are better off sharing this advantage than foregoing all advantage.

Conclusion

We don’t envy the lawyers, bankers and executives siting around the table(s) in DC trying to get this deal done.  Between the two US wireless carriers, and their two foreign parents, DISH, the DOJ, and the state AGs, all with different interests, it must tough.  I imagine it being a bit like a pitch, with five teams on the field, all playing different games.  And while the teams on the field are playing soccer, rugby, lacrosse, field hockey and American football, Charlie Ergen is flying above on a broomstick playing Quidditch.

If a deal gets done, it will almost certainly be good for T-Mobile and Sprint, and it will very likely be good for DISH.  It will equally almost certainly be bad for Verizon and AT&T.  A deal ought to get done given that T-Mobile, Sprint and DISH all benefit tremendously, and the DOJ and the FCC seem to want it.

The remainder of the Global Weekly Review can be found HERE along with all past and future reports.  Our updated valuation comp sheets can be found HERE.