Dish looks set to take on the massive risk of becoming an MNO

Charlie Ergen, head of Dish Networks, has stepped down from his CEO role in order to build up the US satellite TV provider’s wireless business. It will be no coincidence that this move comes just weeks after Sprint’s latest attempt to agree a merger with T-Mobile USA fell apart. The failure of those talks opens the way for Dish and Sprint to resurrect their own on-off courtship dance, and agree a spectrum and network hosting deal that could significantly improve the chances of wireless success for both companies.

There are many reasons why Dish and Sprint should get closer – though certainly stop short of a full merger, since both bring significant baggage. Dish has an ailing TV business; while Sprint still has a long road ahead to return to sustained growth after years of churn, and to convince users and shareholders that its ambitious but much-delayed network transformation will deliver results.

Sprint does not need Dish’s varied spectrum assets – though the satellite firm has about 15% of the total currently in play in the US mobile market – since a plentiful supply of airwaves are its only significant advantage over its main rivals. However, as a mobile-only player in a world which now favors the multiplay, Dish would at least bring the potential to cooperate on content deals and to target an extended customer footprint including TV viewers. Meanwhile, Dish would secure access to more high capacity spectrum which could help it to deliver good quality mobile and fixed wireless video services, and keep its TV subscribers happy with unlimited mobile data offerings.

Ergen has always said that Dish would require a network and spectrum partner to make the business case work in mainstream mobile services. The company has amassed a variety of spectrum holdings, but it has never been clear whether it seriously intended to build out commercial networks, or whether it regarded them as tradeable assets.

In March 2016, Ergen acknowledged that Dish had missed the boat in 4G, but committed to being a 5G player. So far, it has only embarked on an NB-IoT roll-out, which is largely to meet FCC deployment conditions attached to some of Dish’s licences (Dish is mandated to achieve 40% signal coverage on the 700 MHz E-Block licences it purchased in 2008 by the end of this year, or reach 70% coverage by March 2020. There are similar terms in the AWS-4 band.)

Billed as a ‘5G platform’ by the company, in fact it is firmly LTE-based and, as a low power wide area network (LPWAN) it requires few base stations to achieve coverage, and limited capacity – and so is the cheapest way to deploy in national spectrum.

However, Ergen’s decision to focus his day-to-day time on wireless (he remains chairman of Dish as well as owning 52% of the company) suggests that the firm is serious about 5G after all. Ergen has promoted COO Erik Carlson to be president and CEO, running the Dish TV and Sling TV operations day-to-day and reporting to Ergen. In a statement, Ergen said: “I have every confidence that under Erik’s leadership our new organizational structure will deliver value for Dish TV and Sling TV and will aid our entry into wireless.” EVP John Swieringa will succeed Carlson as COO.

Dish said last month that it expects to sign its first deals with tower companies early next year to support NB-IoT and that it has already finalized supply agreements with multiple vendors. “We’ve finalized contracts with more than one global vendor for radio access equipment and other associated equipment that goes on towers,” said Tom Cullen, Dish’s EVP of corporate development, in the firm’s November earnings call.

It now has a new urgency to generate value from its wireless investments. The spectrum has been considered by many investors as a rainy day fund, but now the rainy day is here – with falling revenues and profits in its core business – the easy option of selling the airwaves, on which Dish has lavished about $6bn over less than a decade, is not working out. The telcos have shown little interest in acquiring either its spectrum or the whole company, despite repeated rumors of approaches by Verizon or T-Mobile, so a more creative approach to kickstarting new growth must be found. Ergen hinted that a spectrum deal with another company was more likely now that Sprint and T-Mobile had called off their merger talks, but there are no indications of such a transaction being on the table.

That means build-out may be the only way to monetize the wireless assets in the near term. If Dish really could leapfrog the established operators and deploy a 5G network, it would have a few opportunities to improve its fortunes. The most attractive attack would seem to be a two—pronged one. On one hand, secure the low hanging fruit of its own TV base, Comcast-style, with affordably priced mobile and video offerings, leveraging the Sling TV over-the-top division.

On the other, go after sectors which are neglected or underserved by the exising telcos, and so target new revenue opportunities rather than challenging Verizon and AT&T head-on. It could emulate the wholesale-only approach of the other major deployer in former mobile satellite spectrum, Ligado (formerly LightSquared, and another former partner in failed merger talks). To boost that effort, it could harness emerging 5G slicing technologies to leap ahead of the incumbents in supporting network-on-demand services for many vertical sectors. In this area, its NB-IoT build-out could be a useful first step into the Industrial Internet of Things (IIoT).

Ergen himself told investors last year: “I don’t personally see a fifth operator in the United States unless it was something like a neutral host. But I don’t personally think you could start a fifth network unless you are somebody – at least Dish couldn’t. I mean, somebody of scale could, right? These companies that have money overseas that they could buy AT&T and Verizon tomorrow. So the world could change.”

Both these approaches – or indeed, any strategy to build a new network in a crowded market with enormously powerful telcos – would be fraught with risk, and would be a huge investment at a time when the core satellite TV business is generating falling revenues. Its most recent quarterly financial report showed Dish’s satellite TV revenue down by 4.3% year-on-year, with a 9.7% drop in EBITDA. Although Sling TV has 1.68m users, they eat into the traditional profit margins of satellite TV because of the high cost of programming and low consumer prices.

Dish would need to mitigate that risk by attracting strong partnerships. A network hosting deal with Sprint could significantly reduce the cost of roll-out, and such arrangements were originally envisaged by Sprint, when it embarked on its Network Vision transformation program more than six years ago, as a way to offset its costs and bolster its revenues. However, the first company to agree to host its network on Sprint’s infrastructure was LightSquared, which subsequently went into bankruptcy protection amid a bitter row with the GPS industry (it has now re-emerged as Ligado, but without a revival of the Sprint agreement).

For Dish, powerful IoT allies would be needed to boost credibility and ensure that services were well differentiated from those of the telcos, especially AT&T, with its heavy focus on industrial sectors such as automative and enterprise network-on-demand. In particular, Dish has been reported to be getting close to Amazon – in July, it was even said that the retail and cloud behemoth was interested in acquiring Dish or forming a joint venture. The thinking was that Amazon would help fund the build-out of a network in Dish’s spectrum in order to gain control over a mobile network which could be optimized for its own ends, from internal logistics usage to supporting mobile Prime, Echo and Kindle services, or IoT offerings based on the AWS cloud and the Greengrass IoT edge compute platform. This would come at far lower cost than seeking its own spectrum, but with better control than an MVNO or WiFi approach.

For Dish, the investment and the anchor tenant would make the economics work at last, and it could deploy the first US network fully optimized for machine-to-machine purposes, rather than bolted onto a mobile broadband platform and business model. That would justify Ergen’s ambitious talk last year of leapfrogging the incumbents by getting a headstart on 5G, which would be “10 times, 100 times, 1,000 times more efficient” than existing LTE networks, he said, adding: “If you’re going to build, then build it with the latest and greatest, particularly when you get those kind of efficiencies.”

Dish’s original grand plan – to leapfrog the MNOs to LTE-Advanced deployment, and create a network to support its own quad play plus wholesale deals – has hit a series of delays and uncertainties. The FCC, stung by the disaster of LightSquared’s initial bid to build a wholesale LTE network in former mobile satellite spectrum, was more cautious about granting Dish the rights to do this, even though its AWS-4 holdings are further away from the GPS systems which caused LightSquared’s problems. Verizon and AT&T built their own LTE networks so quickly that the breathing room left for newcomers looked increasingly small, and the big guns have made it even harder for Dish with their acquisitions, notably AT&T’s of DirecTV. And a series of potential acquisitions of Ergen’s own fell through – he was trumped by Softbank for Sprint and Clearwire, and also failed to snap up LightSquared or marry TMO.

Would an early 5G entry be any better? Dish would need to get its timing right, as it failed to do in 4G. A new entrant benefits enormously from first mover advantage, but the company would need to heed the cautionary tale of Sprint, which aimed to leapfrog Verizon and AT&T by launching 4G services ahead of anyone else in the US. To do so, it had to use then-available technology, which was WiMAX, only to find its 4G platform sidelined once LTE came to market. Now, Sprint is still struggling to catch up with its rivals in LTE and to cut the ties with WiMAX, and its plans to create a multi-technology infrastructure which would host third parties and a large wholesale business have come to little (though there is still a natural fit with Dish there).

Dish has no existing infrastructure, so an early move to 5G, say around 2020, would be a leap in the dark, relying on expensive equipment. It would also have to be clear that its spectrum assets would be supported by early 5G systems and devices. As with 4G, it would be essential to have a partner on whose sites and infrastructure the new network could run, or the upfront costs would be crippling, and the returns uncertain.