Dish Network tries me-too defense of small-business airwave discount

Satellite TV pioneer Dish Network Corp. generates $15 billion in annual revenue, but that didn't keep it from claiming $3 billion in benefits reserved for small businesses in a government auction of wireless spectrum this year.

The Federal Communications Commission has started a probe of the company's tactic and accepts comments through Monday as Dish and its partners roll out a me-too defense: telephone giants AT&T and Verizon Communications have done the same thing.

"We fully complied with the rules, and we used the same rules AT&T and Verizon have used to their benefit," said John Muleta, sole managing member and head of SNR Wireless Co., one of two small businesses that Dish partnered with in order to claim the benefit.

Others aren't so sure. AT&T and Verizon reject the comparison and FCC Commissioner Ajit Pai has called Dish's use of a law intended to aid small companies "an abuse." Sen. John Thune, the South Dakota Republican who is chairman of the Commerce Committee, demanded explanations from Dish, its partners and the FCC.

The reaction reflects the high stakes as companies a including Dish, which wants to stream video on smartphones, acquire airwaves to meet soaring demand for data on mobile devices. The review of Dish's role in the sale that concluded in January with $44.9 billion in bids could result in tighter rules for a sale next year that could be even larger.

The FCC has so far has declined to hand over airwaves to Muleta's SNR and Dish's other partner, Northstar Wireless. Dish owns an 85 percent stake in each that it says is non- controlling.

Dish didn't win any airwaves in the auction. But Northstar and SNR were top bidders in markets including New York and Chicago, and claimed credits that cut their bill to $10 billion from $13.3 billion. At least one commenter, Lynda DeLaforgue, co-director of Citizen Action Illinois, has asked the FCC to withhold the frequencies, citing "Dish's manipulation" of FCC regulations.

The rules, required by Congress, are designed to foster ownership of airwaves by small businesses, rural companies and those owned by women and minorities. They offer discounts on winning bids for businesses with less than $40 million in yearly revenue. Dish reported $14.6 billion in revenue in 2014, and is on track to earn $15.2 billion this year, according to data compiled by Bloomberg.

The Englewood, Colorado-based company has been building an airwaves stockpile as its core video business falters. Chairman Charlie Ergen told investors Monday that Dish and its partners didn't violate any FCC rules.

Top U.S. wireless carriers Verizon and AT&T each reported 2014 revenue of more than $120 billion, with more than 86 million subscribers apiece.

Verizon's small-business partnership in 2005 is "factually different" from Dish's, said Ed McFadden, a Washington-based spokesman. Verizon and its partner couldn't bid on the same airwaves, there was no discount, and there was "no effort to fix prices or intimidate other bidders," McFadden said.

AT&T vice president  Joan Marsh in a Feb. 20 blog post said "one has to go back 14 years" to the 2001 PCS auction to find any "material number" of small- business bidders "related to larger carriers."

Dish's partners SNR and Northstar "simply do not seem like the type of entities that the FCC had in mind" when it set up rules to help small businesses, Marsh said.

The FCC could withhold some or all of the discount, award the airwaves won by Dish's affiliates to the next highest bidder, or restage the entire auction, said Paul Gallant, a Washington-based analyst with Guggenheim Securities.

"I doubt the FCC is looking for any dramatic scenarios like redoing the auction, but I do think they'll conduct an incredibly thorough inquiry," Gallant said.

Discounts will go "only to those applicants who we find are eligible," Roger Sherman, chief of the FCC's wireless bureau, said in a blog post.

Dish spokesman Bob Toevs in an email said the company's approach was publicly disclosed before the auction, and was based on "investment structures that have been approved by the FCC in past wireless spectrum auctions."

In January, the FCC announced that AT&T led the bidding with $18.2 billion in the auction. Verizon and T-Mobile U.S. Inc. ranked among the five biggest winning bidders.

Verizon in a filing called Dish's coordination with SNR and Northstar "collusion" that violates antitrust law and FCC rules.

Dish, SNR and Northstar frequently bid on airwave licenses when other auction participants were active, creating a false perception of heightened interest, Verizon said. After competing bidders dropped out, Dish and the affiliated companies avoided bidding against one another, according to Verizon.

New York-based BTIG analyst Walt Piecyk predicts the agency will award the discounts and the airwaves to Dish's affiliates.

In a note to clients, Piecyk said small companies won airwaves in Los Angeles and Atlanta while in partnership with AT&T in 2001. In 2005, a small company linked with Verizon in an auction bought airwaves in Houston, Seattle and Pittsburgh, he said.

"There's precedent on multiple occasions for this by the dominant operators, AT&T and Verizon," Piecyk said in an interview.

Dish's participation in the auction spurred brisker bidding and higher prices, Piecyk said. The auction exceeded estimates, bringing in $41.3 billion after discounts are applied, according to the FCC.

"Dish was very clever" and "people don't like it," said Harold Feld, senior vice president with the policy group Public Knowledge. "But that doesn't make it illegal."