By Thomas Gryta, Shalini Ramachandran and Ryan Knutson
Dish Network Corp.'s wireless ambitions are facing an expensive
setback.
Federal regulators are poised to reject $3.3 billion in
discounts sought by two small Dish partners during an airwaves
auction earlier this year, people familiar with the matter said,
dealing a blow to the satellite-TV operator, which has been
aggressively accumulating spectrum despite not offering cellphone
service.
After a long review, staff at the Federal Communications
Commission concluded that the $13.3 billion in winning bids by two
companies backed by Dish didn't qualify for the small-business
discounts because their bidding conduct violated the broad spirit
of the auction's rules, one of the people said. FCC Chairman Tom
Wheeler circulated a draft order to the FCC's other four
commissioners on Wednesday, the people said.
At the auction, which ended in January, Dish's affiliates came
away with nearly half of the wireless licenses sold. Their winning
bid total was second only to AT&T Inc. and ahead of Verizon
Communications Inc. But it was two tiny companies--called SNR
Wireless and Northstar Wireless-- with Dish's backing that staked
claims on the licenses, not Dish itself.
A rejection of the discounts would leave SNR and Northstar on
the hook to pay the additional billions. They won't simply be able
to walk away. However, Dish said in earlier filings prior to the
auction with the FCC that it could take over the spectrum entirely,
dropping the complex structures of the designated entities.
A Dish spokesman declined to comment. The company has said it
adhered to the rules and noted that its practices didn't diverge
from those employed by other companies in previous FCC
auctions.
It is unclear how Dish will respond, though many industry
observers expect Dish Chairman Charlie Ergen to take the matter to
court. The FCC's decision could also be a setback in Dish's efforts
to acquire T-Mobile US Inc. Shares of Dish fell 3.4% on
Thursday.
Mr. Ergen has said the company's spectrum holdings are part of a
broader plan to enter the wireless industry to diversify Dish away
from its struggling core pay-TV business.
Auction participants don't typically push for higher prices, but
Dish's position had been more complex. A significant portion of the
satellite broadcaster's value is in the billions of dollars of
wireless spectrum it already holds. That spectrum is similar to
what the government was selling. Their values rose together,
pushing Dish's market value up by $3 billion, or 10%, over the
course of the auction.
At a news conference Thursday, Mr. Wheeler acknowledged that the
FCC had circulated a recommendation but declined to comment
further.
The way Dish and its two affiliates coordinated during the
auction drew complaints from rival bidders, which claimed the
aggressive tactics distorted the results and led to higher prices.
The auction drew $45 billion in winning bids, twice as much in
total bidding as earlier sales of spectrum.
Dish, with $14 billion in revenue last year, also drew the ire
of lawmakers for appearing to take advantage of a program designed
for encouraging small businesses to enter the wireless
industry.
Wireless companies are hungry to gain access to more airwaves to
handle the increasing use of mobile devices for everything from
watching live-streaming sports and YouTube videos, to uploading
photos to Facebook.
Bidding is anonymous during the auction, but Dish and the two
entities stayed in contact with one another because they disclosed
the arrangement to the FCC in advance. That meant there were
instances where rivals saw three distinct bidders when in fact
those were Dish and its partners working together.
On Thursday, the FCC tightened the rules that let Dish's
affiliates claim discounts. The agency placed a cap on the amount
of discounts small businesses can receive, setting a limit of $150
million in next year's auction. The new rules also don't allow
coordinated bidding between related-parties. Previously, the FCC
let companies work together during auctions as long as they
announced their intentions in advance.
The proposed rules "will ensure large corporations can't game
the system, " the agency said in a statement. The rules aren't
retroactive.
In the auction, Dish's entities ultimately accounted for 27% of
all bids placed, more than AT&T and Verizon combined, according
to a Wall Street Journal analysis of the results. Records show the
entities bid for a wide range of licenses--often the same ones--and
stayed active until late in the auction.
Dish provided 85% of the capital in both NorthStar and SNR. In
filings with the FCC, both companies reported revenue of less than
$15 million and said that Dish didn't have a controlling interest
in either firm, two criteria needed to qualify for the small
business discounts.
"If they had gotten a few hundred million of discounts it
wouldn't have triggered nearly the political outcry that it did and
they probably would have gotten away with it," said Jonathan
Chaplin, telecom analyst at New Street Research.
Dish won the spectrum discounts by tapping an eclectic bunch of
partners. A central player was Stephen Hillard, a Texas investor
and fantasy-fiction author. Mr. Hillard put to use his ties to
Alaskan Native American groups to link up Dish with Doyon Ltd., an
Alaskan firm owned by Native Americans that has a controlling
interest in Northstar.
SNR, the other Dish-backed entity, drew former FCC official John
Muleta and BlackRock Inc., the investment firm.
Write to Thomas Gryta at thomas.gryta@wsj.com, Shalini
Ramachandran at shalini.ramachandran@wsj.com and Ryan Knutson at
ryan.knutson@wsj.com
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