DOJ on spectrum and fourth carrier

What’s new: the DOJ made some surprising comments on the importance of a fourth carrier and the dangers of the three national carriers acquiring more spectrum in its decision on USM (decision here). Please see Blair’s note for the definitive view on regulatory implications (here). We provide some quick thoughts on implications for Wireless Carriers and Cable in this brief note.

We disagree with the DOJ

We think it is unlikely that the market can support four successful national mobile network operators (MNOs). If four carriers were to flourish, it probably would mean higher prices for consumers, not lower prices.

Simply put, current industry revenues spread across three assets generate an adequate return. If the same revenues are spread across four assets, the aggregate return would fall below the cost of capital. Prices would have to go up, or one carrier would be on a path to failure.

There was a window when this might not have been true. Dish managed to assemble a spectrum portfolio well below the market cost of spectrum, and we thought they would build a network well below the cost of other carriers. That window is closing and, depending on what the FCC decides in its two proceedings, it might be closed.

The best outcome for consumers is a competitive end market leveraging fewer networks. As in four competitors leveraging three networks. We are seeing this in a number of markets in Europe. The answer is fewer networks with network sharing or strong mobile virtual network operators (MVNOs).

In the US, Cable is the fourth operator.

Implications for EchoStar

The language in the DOJ decision is clearly negative. Our thesis hinges on the company being able to sell its spectrum to the three national carriers. If EchoStar can’t sell spectrum to the three national carriers, we don’t think they will get full value from other buyers.

We don’t think the current DOJ view will stand for two important reasons:

The evidence won’t support it: the DOJ last did a full review of the mobile market in 2019, when it approved the T-Mobile / Sprint deal. The facts have changed considerably since 2019. If EchoStar is seeking to sell its spectrum portfolio because they haven’t been successful as an operator, that will be the single most important fact.

We suspect that in a full review the evidence will show that the market can’t support four networks, and that a better route to ensuring low prices for consumers is to ensure strong end-market competition either through network sharing or strong MVNOs.

It’s not the DOJ’s decision: the DOJ doesn’t have jurisdiction over spectrum license transfers outside of a merger. This is the FCC’s domain. Carr didn’t share the DOJ’s view on the need for a fourth carrier in 2019, and he doesn’t now. We are fairly certain that this FCC will have no issue with EchoStar selling licenses to the three national carriers. We believe Carr actively wants this.

The DOJ does need to approve the sale or lease of 600MHz and AWS-4 spectrum by EchoStar to the three national carriers as part of the consent decree[i]. The consent decree expires on September 11^th, 2026, after which only the FCC is required to approve spectrum transfers. However, if EchoStar sought a sale before the expiry of the consent decree, we suspect a full review by the DOJ would support approval.

Impact to EchoStar: we believe they will be able to sell their spectrum to the three national carriers if building a successful business proves impossible. We believe there will be sufficient bidding tension to ensure that the portfolio receives full market value. See this report for our most updated thinking on the value of EchoStar’s equity in the context of a spectrum sale (Full report; Slides from accompanying call; Replay of call).

The counterargument: opponents of a spectrum sale to the national carriers will claim that mobile prices have risen sharply since the T-Mobile / Sprint deal. Our response: “exactly!” EchoStar operating a fourth mobile network has had no impact on mobile prices over the last six years.

More importantly, Cable has had a far more profound impact on competition. Cable’s push into wireless triggered a push by the wireless carriers into fiber that has driven huge investments in infrastructure. It also triggered an aggressive push into FWA.

Today, as a consequence of Cable’s presence in the mobile market, households can get a mobile product that is equal to Verizon’s at roughly half the price. They can also get a broadband product from mobile carriers at roughly half of what Cable charges.

Implications for Cable

This will all come to a head at an interesting moment.

We believe Comcast and Charter’s current MVNO expires early next year and negotiations for a new one will kick off later this year if they haven’t started already. Uncertainty over EchoStar’s fate will ensure that the Cable companies have adequate leverage to secure the same economic terms they have today, or better.

The three national carriers want to buy EchoStar’s spectrum. They don’t want EchoStar to continue independently. The only thing worse than that would be the sale of the spectrum to an alternative company that would operate a competing network.

Cable has two cards to play.

First, EchoStar selling spectrum depends on them failing as a carrier. If Cable signed an MVNO with EchoStar it would significantly improve EchoStar’s prospects of surviving as a network operator. Verizon would stand to lose a lot of revenue and cash flow. We suspect Cable would prefer to stay with Verizon – it is simpler – but not at any price.

Second, Cable will have a strong voice in an analysis of competitive dynamics in mobile by the DOJ or the FCC. The biggest risk to the three national carriers being allowed to buy the spectrum stems from Cable saying they are willing to buy it. We suspect they have no interest in buying spectrum at market prices, but if they can buy it cheaply because the three national carriers can’t bid…maybe. Conversely, if they are unwilling to buy the spectrum, even at a discount, and if they express the view that a fourth network is untenable, this will provide strong evidence in favor of approving a sale to the big three.

Given the range of outcomes, Verizon will have a strong incentive to give Cable a good MVNO. AT&T and T-Mobile will also.

And a good MVNO for Cable provides the strongest prospect of robust competition in the end market.

Implications for carriers

The three national carriers need EchoStar’s spectrum to feed the steady growth in consumption on mobile networks. Most of EchoStar’s spectrum can be immediately deployed on existing networks at no incremental cost, making it more valuable than new bands that will take five years or more to clear and will require new network equipment. The carriers benefit from scenarios that result in EchoStar selling spectrum.

The status quo is neutral. EchoStar’s Boost business has had no impact on the three national carrier’s mobile businesses so far. If Boost continues to compete with little impact, the carriers are no better or worse off.

A sale of spectrum to anyone other than the three national carriers would be a bad outcome.

[i] “Dish commits not to sell its AWS-4 and 600 MHz spectrum for at least six years without the prior approval of both the DOJ and FCC. For that same period of time, Dish further commits not to lease, directly or indirectly, “to any of the three largest wireless providers, or any combination thereof, traffic accounting for more than 35% of the network capacity on its 5G network without prior FCC approval.”