Dish's Bidding Strategy in AWS-3 Auction Said To Raise Big Questions for FCC

Dish indirectly captured the second most AWS-3 spectrum of any player in the auction, behind AT&T, but at a discounted price through DEs Northstar and SNR Wireless (see 1501300051). AT&T, T-Mobile and Verizon have made filings reporting on meetings at the FCC to discuss Dish’s bidding strategy. Accomplishing what Dish needed to achieve in the AWS-3 auction “was a big strategic piece” of “where we needed to go,” Dish Chairman Charlie Ergen said on a Feb. 23 earnings call (see 1502230038).

“We’re entering here into a gray area,” Dish activity was not necessarily against FCC rules, but questionable nonetheless, said Roger Entner, analyst at Recon Analytics. Dish and the DEs acknowledge they coordinated their bidding, he said. Dish's coordinating with either DE may have been permissible, Entner said, but: “The moment Dish has a second entity and it tells both of them how they should bid and they bid against each other, that may be a violation.”

FCC precedent allows two entities to coordinate bidding, said a former agency spectrum official. “Where is the line when it becomes anticompetitive, collusive, harmful behavior?” the official asked. “That’s what the FCC is going to have to decide.”

The FCC is expected to release as early as next week the accepted for filing public notice, which would allow other parties to file a petition to deny against any of the provisionally winning bids in the auction, industry officials said. But the FCC has historically held companies to a high standard in determining whether they have standing to challenge a bid, said lawyers who have represented clients in FCC auctions.

Verizon thinks that Dish and the two DEs engaged in “double and triple bidding” and so “created the false impression that there was more competition for certain licenses than was actually the case, and may have caused small bidders to exit the auction,” Verizon said last week in a filing in docket 14-270. By jointly bidding on the same licenses, Dish and the DEs also were able to “park their eligibility” without the risk of being the winning bidder on a larger number of licenses, “which provided an inherent advantage over other bidders,” Verizon said.

AT&T cited similar concerns about Dish’s bidding behavior. “The Dish entities acting in concert triple and double bid licenses in the auction nearly 4,000 times,” AT&T said in a Feb. 20 blog post. “During one round of the auction, because of their triple bidding tactics, the Dish entities collectively had close to $30B in bids while their actual financial exposure was only 1/3rd of that.” AT&T said it had been called in by FCC staff to discuss Dish's bidding strategy in the auction.

Commissioners Ajit Pai and Mike O’Rielly have raised concerns about Dish’s use of bidding credits in the auction (see 1502020039 and 1502030040).

Dish Network publicly disclosed its use of DEs before the auction, a Dish spokesman emailed. “We respectfully disagree with the criticism of the Designated Entity program, and we are confident that we fully complied with the DE rules in the AWS-3 auction, which were unanimously approved by the full Commission.” Dish’s approach was based on DE investment structures that the FCC approved for past wireless spectrum auctions, “including structures used by AT&T and Verizon,” he said. “The DE program has been successful in providing much smaller entities the ability to access stronger capital structures, which has facilitated their meaningful participation in an auction process from which they would otherwise be precluded.”

The spokesman referred to Dish’s Feb. 23 ex parte notice in docket 12-268, which said investment in DEs is a “longstanding practice” used by wireless carriers. “DE participation did not create ‘shadow demand’ as AT&T suggests,” Dish said. “The presence of DEs in the AWS-3 auction kept the bidding truly competitive, and demanded that all participants pay what the spectrum was worth to them.” Dish would support the commission’s consideration of possible rule changes for the DE program, but “meaningful DE participation is necessary for a successful” incentive auction, it said. “There should be little, if any, justification for the FCC to do anything but issue the licenses [to Dish] without delay, as mandated by legislators,” said BTIG Research analyst Walter Piecyk in February.

Goldin Associates Managing Director Armand Musey said Dish’s bidding strategy falls into a “gray area,” but it's hard to see a scenario where the FCC would take action. The agency “will most likely take this as a lesson to tighten up the rules going forward,” Musey said. “I can’t see them saying ‘Dish you can’t have that spectrum’ or reopening the auction.”

“The Dish subsidy is baffling to broadcasters," said a lawyer who represents broadcasters. "Just last year, the FCC curiously held that one local TV station owns another if it sells just 15 percent of its advertising time. Yet now the suggestion is that Dish doesn't control AWS-3 entities when it actually owns 85 percent of them. There seems to be inconsistency in FCC regulation across industries, to say the least."