- Dish Network's (NASDAQ:DISH) Charlie Ergen may not be holding on to all those airwaves after all, saying on today's earnings call that the company may have tosell or lease spectrum after an expected order that would waive $3.3B in discounts from the AWS-3 auction.
- The FCC's stance also rippled through to M&A, he suggested, representing thebiggest impediment to a discussed merger with T-Mobile that stagnated: "From our perspective, the discount was the most complicating factor."
- Ergen was complimentary about the FCC, but said it was picking winners and losers and that if the company's credits are ultimately denied, it sends a "pretty strong signal you are probably not going to get into the marketplace as a new entrant."
http://www.multichannel.com/news/wireless/dish-mulls-throwing-spectrum-towel/392764
http://www.fiercewireless.com/story...complicating-factor-t-mobile-talks/2015-08-05
Google's Project Fi: Who Gets Hurt?
Aug. 4, 2015 12:02 PM ET | 8 comments | About: DISH Network Corporation (DISH), GOOG, GOOGL, Includes: AAPL, S, T, TMUS, VZ
Summary
- Google's Project Fi and recent FCC actions may signal the beginning of a larger shift in wireless.
- The impact on mobile incumbents and Fi's partners is analyzed, along with the latest news on Apple's prospects in this space.
- However, the biggest impact may be felt on a company Dish that I had long hoped would be disruptor in its own right.
My first article on the Project Fi MVNO (mobile virtual network operator) detailed the opportunity for Google (NASDAQ:GOOG) (NASDAQ:GOOGL). This article will look at what the shift which that initiative signals for the wireless industry, and the impact on several select stocks, and Dish Network (NASDAQ:DISH) in particular.
New Competition
Apple (NASDAQ:AAPL) is already rumored to be investigating the options for offering its own MVNO (though, on Tuesday, the company denied the report), and the latest iPhones already offer WiFi calling. By some accounts, the planning is in the very early stages, whereas Fi is already actively serving customers. However others have claimed that Apple and is already testing the service and noted that the SIM cards in the iPad Air 2 and iPad mini 3 already include the ability to switch carriers. It's not clear whether or not this can be done in mid-call, on the fly, though. As discussed in part 1, the important thing about Fi is that it offers a "network of networks" and switches between them seamlessly. Another new Apple development being discussed is iCloud Voicemail; it would include features such as voice mail transcription, which has been offered by Google Voice for years. Regardless of what actually materializes, perhaps the most important thing abut Fi is the competition it isalready spurring.
The Incumbents
As a result, other wireless providers, with their cash cow business models, are the obvious choices for road kill here. However, I think there's a lot to differentiate on in terms of investment decisions. The big two, Verizion (NYSE:VZ) and AT&T (NYSE:T) obviously have the most to lose, since they each have roughly double the number of wireless subscribers as Sprint (NYSE:S) or T-Mobile (NYSE:TMUS), Google's current partners. However, given the long-term nature of this industry shift, the high yields and more diversified business models of the big two, VZ and T are poor outright short candidates. Here are some company-specific notes:
- Verizon: having the broadest network coverage area may help insulate Verizon, particularly in less populated areas. However, in busier areas, customers report that network congestion often results in missed calls even when signal is present. This is where Google's WiFi calling and "network of networks" may really shine in comparison. Historically, Verizon has mademore per customer than any other carrier, but the it is already seeingpricing pressure from conventional competition. Furthermore, the company now has a serious debt load (12.5 debt to equity ratio) since buying the remaining 45% of its wireless business from Vodafone (NASDAQ:VOD). I had said that if that transaction occurred, I wouldn't want to own either company, and that's all the more true now.
- AT&T: since the iPhone was offered first on AT&T, and many of those customers are grandfathered into data plans, AT&T probably has anuncommonly large percentage of iPhone users. This may partially shield the company from direct Fi competition for a while, since it seems likely that Apple devices would be just about the last to ever to be offered with the program. Perhaps Ma Bell will even pull a repeat performance, by serving as the network behind Apple again, but if Apple were to lock itself into a single network vendor at this point, it would likely be at very favorable terms for Apple. Furthermore, the practices and subsidies that have lead to AT&T's captive market have hurt as much as they have helped AT&T much, and are ending anyway. Even if they were not, I view Apple as a (slowly) decaying shield, and I think we've seen the first evidence of that in its recent report. Some will argue that AT&T remains a hold, rather than a sell/avoid because of the 5%+ dividend, but there are better yield options to be found with increasing rather than declining secular growth trends.
Somewhat perversely, it may actually be Google's partners, T-Mobile and Sprint, that eventually feel the biggest impact from Fi. Both rely on appeal to more budget-conscious consumers and yet have little that improves their services over what's being offered by Fi, at a generally better price and certainly more flexible terms.
- Sprint: Sprint has been bleeding cash and just reported revenue miss to go along with the resignation of its CFO. Even so, I'd disqualify S as short candidate due to the backing of Softbank, and the mathematics associated with shorting very low-priced stocks. The company's latest plan is called "All-In" pricing, and it offers unlimited voice, text messaging and data for ~$80 per month, with a 2 year contract and $36 activation fee. This might seem competitive to consumers used to relying exclusively on LTE, but I see it is a last ditch effort to lock in customers in advance of a new wave of competition.
- T-Mobile: Similarly T-Mobile has been showing subscriber growth, and in the most recent conference call, described the partnership with Google as "very profitable." Nonetheless, I think it will be even more vulnerable than Sprint because many of its customers value the international compatibility that Fi also provides. T-Mobile has been looking to join or partner with other providers and participation in Project Fi may be only the first step in a much longer evolution. If it were not for those prospects, TMUS would lack only a quantified time table for industry progress to be a viable short.
More importantly, unlicensed spectrum, such as WiFi, has proven itself to be inherently more competitive and innovative than the licensed spectrum that carriers use, and the FCC seems to finally be waking up to this reality. The next spectrum auction has already been delayed, largely to consider opening up more spectrum for such unlicensed uses. Google has already hasimmediate plans for this spectrum, and even the grander, long-term designs are already starting to show progress. An open internet is allowing consumers to reduce cable companies to "dumb pipes". I think increasing use of unlicensed spectrum may do the same thing to wireless providers. To the extent that this trend towards making WiFi and other unlicensed spectrum use ubiquitous continues, the best short candidates may be those who have amassed large and unused spectrum licenses.
The Most Threatened
Dish Network is just such a company. Up to $25b of the company's ~$30b market cap is in its spectrum leases. That's over 80% of the company's value! Furthermore, time is against Dish with regards to justifying that valuation, in that it must put 40% of its spectrum into use by 2017 and 70% by 2020. Most analysts, including me, thought Dish would partner in that endeavor, but that will become progressively harder as the market shifts towards being more efficient by using unlicensed spectrum. The FCCdisallowing spectrum discounts worth more than 10% of Dish's market cap may be just the first tremor in a larger shift from how wireless communications were historically (mis)managed at the national level. If such policies were to change to truly benefit consumers, that would put Dish's spectrum strategy at serious valuation risk. Dish is a very innovative company, and thus a very dangerous short, but in my view there is little doubt that it has even more to lose than the current wireless incumbents.
Dish Network reports earnings on the Aug. 5th and has a forward PE of nearly 40. The company is profitable and appears well-capitalized, with Quick and Current ratios both over 2; so does not look like a typical short opportunity orbalance sheet analysis. However, those ratios are skewed by the spectrum valuation, which appears to be counted in the Other Current Assets category, and outweigh the rest of Dish's assets by a factor of ~5! The Debt to Assets ratio of 0.63 versus Debt to Equity of 6.3 further highlights the spectrum valuation issue that I'm harping on. It's hard to say when or how the market might revalue these Dish's spectrum, but it's not looking like the industry is poised to move in a direction that would be positive for shareholders.
Summary
I've long said that the wireless industry in the United States is ripe for disruption. Incumbent mobile providers are saddled with debt and face difficult choices going forward. Even Google's partners, which are being forced to evolve, may not necessarily be able to do so in ways that benefit their shareholders at current prices. That situation will make it even harder for those with unused licensed spectrum to monetize their assets effectively. In particular, the changes that are sorely needed in U.S. mobile markets don't seem to be benefiting Dish. Its time and options are running out.
http://www.technewsworld.com/story/82342.html?google_editors_picks=true
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