FCC denies Dish partners $3.3B in bidding credits in AWS-3 auction

As expected, the FCC voted unanimously to deny $3.33 billion in bidding credits to two Dish Network (NASDAQ: DISH) affiliates that won airwaves in the AWS-3 spectrum, but it's still unclear how Dish will respond. 

The decision, which Dish indicated nearly a month ago was likely, brings to a conclusion, for now, a saga that has captured the attention of the wireless industry since the auction ended in January. Dish Chairman and CEO Charlie Ergen said that the unresolved decision over the bidding credits was a "the most complicating factor" in deal talks with T-Mobile US (NYSE:TMUS), which apparently faltered earlier this summer.

"Small businesses require an on-ramp into the mobile marketplace to provide more choices for consumers," FCC Chairman Tom Wheeler said in a statement. "Our competitive bidding rules were designed to do just that -- give bona fide small businesses an opportunity to acquire valuable spectrum. Today, our review of two winning bidders in the recent AWS-3 auction has concluded that they in fact are not eligible for bidding credits. I'm proud that our thorough, fact-based analysis ensures that bidding credits only go to the small businesses our rules aim to serve."

Dish participated in the AWS-3 auction through three entities: American AWS-3 Wireless, Northstar Wireless and SNR Wireless. American AWS-3 Wireless is a wholly-owned, direct-subsidiary bidding entity for Dish, and it did not win any spectrum in the auction, though it did make bids.

An unnamed FCC official told The Wall Street Journal that the agency's staff examined the complex arrangements and financial connections between Dish and the DEs. The FCC staff found that Dish does have a controlling interest in Northstar and SNR, and therefore Dish's revenues should be attributed to them, which in turn made Northstar Wireless and SNR Wireless ineligible to receive the 25 percent bidding credits they applied for in the auction as designated entities (DEs). The FCC also found the management services agreements between Dish and the entities also showed Dish had control, the official said.

Dish holds an 85 percent economic interest in both Northstar and SNR, which had reported revenue of less than $15 million and said that Dish didn't control them. The companies disclosed a joint bidding arrangement ahead of the auction, letting them communicate during the auction. Other carriers have accused Dish of collusion by communicating with the DEs during the auction.

Dish's DE partners already have paid about $10 billion and must pay the remaining $3.3 billion within 30 days. Northstar and SNR can file a request for reconsideration or make a judicial appeal within 30 days of the FCC's decision.

Northstar is on the hook for $1.96 billion in additional payments, while SNR would need to pay $1.37 billion.

Dish's designated entities made $13.3 billion in gross provisional winning bids and won 702 licenses, winning 25 MHz of total spectrum including 13 MHz of paired spectrum. 

Dish said in a statement that while it "has a tremendous amount of respect for the FCC commissioners and staff, and we appreciate their hard work on this matter" it is "respectfully disappointed" with the decision. Dish said it followed the FCC's rules and precedents, and that its investments in Northstar and SNR "helped make the AWS-3 auction the most successful spectrum auction in FCC history, and resulted in more than $20 billion of direct benefit to the American taxpayer."

"We will the review the order when it becomes available, as we consider our options going forward," Dish said.

Ergen has said the company had three options: refuse to purchase the spectrum and pay a penalty; pay the additional $3.3 billion; or sue the FCC to overturn the decision. Ergen also said earlier this month that if the FCC were to deny the credits, it would send "a pretty strong signal that you're probably not going to get into the marketplace in a competitive way as a new entrant." He also said that would mean Dish would be more likely to sell or lease its trove of airwaves, which includes 40 MHz of mid-band AWS-4 spectrum, 10 MHz of 1900 PCS H Block spectrum and 6 MHz of 700 MHz spectrum.

FCC Commissioner Mignon Clyburn said that while she agreed Dish had the power to control Northstar and SNR, "it is unfortunate this finding will likely mean that the small businesses, who obviously lacked bargaining power when negotiating these agreements, will not be able to retain their licenses." Under the FCC's rules, she said in a statement, if the agency denies a DE application, "the only available remedy is for the applicant to pay the amount of the bidding credit" and that if the DEs in this case are denied the credits, Dish will be required to make the payments, and the DEs must transfer all of their AWS-3 licenses to Dish. "This does not advance the public interest goals of promoting economic opportunity and competition and disseminating licenses among a wide variety of applicants," she said.

For more:
- see this FCC statement
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article

Related articles:
Dish's Ergen: Decision on bidding credits was a 'complicating factor' in T-Mobile talks
Dish: FCC plans to deny designated entity partners $3.3B in AWS-3 bidding credits
Dish's stock falls after reports that T-Mobile talks have stalled, $3.3B in AWS-3 bidding credits will be rejected
FCC passes rules on spectrum auction bidding intended to thwart replay of Dish's AWS-3 strategy
Dish's Ergen tells DBJ: 'We're not feeling any pressure' to make a deal