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FCC decision on auction discounts may derail Dish’s plans to compete

Charlie Ergen, co-founder, chairman, president and ceo, DISH

In his heart, Dish chairman, president and CEO Charlie Ergen wants to take on AT&T and Verizon. But those dreams may be over, now that the Federal Communications Commission is likely to disallow $3.3 billion in auction discounts claimed by two companies that Dish backed with cash in the recent AWS-3 auction.

“Our bet was, based on the rules of the [AWS-3] auction, that they were set up for us to do exactly what we did to compete with AT&T and Verizon,” Ergen said Wednesday during the company’s second quarter earnings call. “That this is exactly what they want us to do, to be disruptive in the marketplace.”

The FCC is circulating a draft order that would deny $3.3 billion in auction discounts to Northstar Wireless and SNR Wireless, two entities in which Dish has an 85 percent non-controlling interest. In the order, the FCC concludes that Dish does indeed have a controlling interest. Absent the discount, Dish would be on the hook for the $3.3 billion if the companies want to keep the spectrum.

Dish has made a big bet on spectrum to offset the company’s struggling core pay TV business. In the quarter, Dish lost 81,000 pay TV subscribers.

Since the FCC is likely to say “no” to the 25 percent discount, Ergen said that creates “more risk than anticipated,” to go in and compete in the wireless business. “We’ll get pushed more towards a sale or lease of spectrum. We’ll take a little bit of a shorter view,” he said.

Ergen sounded as disappointed as his words during the call even as he declared that he was a “big fan” of FCC chairman Tom Wheeler and a commission that he called the best in 30 years.

“This is a commission that’s thought about competition. One of the most disappointing things is they were encouraging us in the auction to do exactly what we did. For whatever reason, they sided with the big guys,” Ergen said.

“In my heart, the best long game is to go and compete with the big guys, but you’re not going to get there without government support. We’re not that big and it’s too risky,” Ergen said.

Dish hasn’t yet made any decision about what it will do once the order on the discounts is final. Some of the options available to Dish are to pay the $3.3 billion, sue, or turn back the spectrum and pay a 15 percent penalty. “We would have to consult with [our two DE partners],” Ergen said.

The $3.3 billion hit also puts in question Dish’s willingness to bid in the incentive auction, tentatively planned for March 29, 2016. “We’re going to see if we can participate; there’s $3.3 billion of complications,” Ergen said. “That doesn’t mean we won’t participate,” he added.

The FCC’s decision would also hurt Dish’s ability to pursue mergers and acquisitions, or to cut a deal with T-Mobile.

“It’s all based on one decision and one auction. I made a mistake in judgment that this administration, despite the big guys, it would go for competition. And that’s not the decision [the FCC] is going to make,” said Ergen.

The FCC declined comment.