While on the surface, Dish Network's new mobile virtual network operator (MVNO) deal with AT&T looks like many other similar agreements of the past few years, at least one analyst thinks the transaction is a game changer for the satellite TV company.
In a note to clients Monday, MoffettNathanson principal and senior analyst Craig Moffett noted that the AT&T deal will give Dish the ability to become a Mobile Network Operator/MVNO "indefinitely," potentially letting it off the hook for fulfilling its federally mandated requirements to provide wireless service to the rest of the country after 2023.
"The issue here is duration," Moffett wrote.
Dish has been laying the groundwork for its wireless service for years using its own spectrum and some from other sources -- in 2019 it agreed to buy wireless spectrum and the Boost Mobile prepaid business from T-Mobile for $5 billion -- for what it claims will be a state-of-the-art 5G service based on ORAN technology. The company said its first market will go live in Las Vegas in the third quarter.
Although it already has an MVNO agreement with T-Mobile, part of the larger deal where Dish acquired about $3.6 billion in spectrum licenses and the Boost Mobile prepaid wireless business for $1.4 billion from the carrier, that resale agreement was set to expire in 2027. In addition, T-Mobile plans to shutter its 3G CDMA wireless business on Jan. 1, a move that Dish, which relies on that network for Boost Mobile, has said would be a financial hardship.
According to the latest agreement, AT&T will make its network available to Dish for 10 years, with a two-year transition period, pushing the expiration date to 2033. In a research note, MoffettNathanson media analyst Craig Moffett wrote that is a key part of the deal, because until now it was becoming increasingly doubtful that Dish would be able to meet federally imposed deadlines on its wireless buildout.
Dish is under the gun to make its network available to about 70% of the country by the end of 2025, but Moffett noted that was never really a concern.
“After all, the first 70% of the population lives on just 2.9% or so of the U.S. by landmass,” Moffett noted. “ It has always been what would come after that that mattered.”
Moffett wrote that table stakes for wireless coverage in the U.S. is about 95% of the country.
“Without an MVNO agreement to fall back on, Dish would have to build that out themselves by 2027, when the T-Mobile deal was slated to expire… and the next 25% of the country occupies nearly ten times the landmass of the first 70%,” Moffett wrote.
Moffett added that even if reaching 70% of the population with its network won’t be that hard, it depends on the definition of coverage -- does it mean merely enough to meet minimum Federal Communications Commission requirements, or service that is sufficient enough to satisfy customers?
“The latter definition of coverage is vastly more demanding than the first; it means fill-in facilities in every airport, stadium, convention center, and congested downtown area, and every dead spot along every highway,” Moffett wrote. “Under the T-Mobile agreement, Dish had until 2025 to satisfy the FCC, but only two more years afterwards to satisfy the much more exacting demands of customers. That was always the real challenge.”
While AT&T will reportedly receive $5 billion for its trouble, Moffett believes it has sacrificed its future competitive position for short-term wholesale revenue. Because the Dish deal is similar to the MVNO agreements Comcast and Charter have struck with Verizon, Dish will be able to build out its own facilities in dense areas, which have a low cost and high return, and leave the low density areas, with higher costs and lower returns, to AT&T
“We can’t stress enough what a windfall this is for Dish. And what a terrible decision it is for AT&T,” Moffett wrote, likening the deal to Orange’s 2016 decision to strike an attractive MVNO deal with MasMovil in Spain. “Today, five years later, MasMovil has taken double-digit market share, and Orange is shrinking by more than 10% annually.”
Moffett added that the AT&T deal doesn’t solve Dish’s CDMA problem because AT&T has never had a CDMA network. But that just proves the real impetus for the deal was in its duration.
Not every analyst shares Moffett’s view.
In a research note Monday, JP Morgan media analyst Phil Cusick said that the general consensus among telecom execs is that they want to be the provider of choice when an MVNO moves into the market. Whether AT&T struck a deal with Dish or not, it wouldn’t change that situation.
“...the negative to the industry came when Dish bought spectrum over the last 10 years, or when it agreed to replace Sprint, not today,” Cusick wrote.
Cusick, who downgraded Dish to “underweight” in June, also wasn’t convinced the deal was that big a windfall for Dish.
“We don’t see this as a huge change for Dish’s prospects, but rather that getting a rural roaming deal and longer-term MVNO are each pieces of the puzzle that Dish needed in building a network over time,” Cusick wrote. “It is interesting that Dish shares were off as much as Verizon shares Monday, likely indicating that there was still some hope of Dish selling assets rather than building a network.”
Dish shares were down about 1% (41 cents) on July 19 to $39.04 each. The stock closed at $40.87, up 4.7% on July 20.
Verizon shares were down 1.1% (62 cents) on July 19 to $55.84 per share. The stock closed at $55.62, down 0.4% (22 cents) on July 20.
Some have speculated that the deal really is a precursor for a future combination with AT&T’s DirecTV satellite TV business. Moffett said that is probably unlikely, but in the end won’t matter that much, adding that addressing the 2027 expiration was more important than ensuring the future of the declining satellite business.
Barclays Research analyst Kannan Venkateshwar wrote that there could be several reasons behind doing the deal for AT&T -- one he said, was to limit Dish’s capacity to invest in building out its network by spending big on the MVNO.
“Strategically, the move is also interesting given that the expectation among some investors was likely the opposite i.e. that Dish would be a scaled MVNO service provider to others rather than being an MVNO user itself for the next decade,” Venkateshwar wrote. For AT&T, he said the additional money from the agreement will help provide another cash flow source to get to its goal of $20 billion in free cash flow after its WarnerMedia deal.
But Moffett again pointed out that in giving Dish the breathing room it needs to meet its federal requirements and a network deal that virtually allows it to pick and choose where it can spend the most for the largest return, AT&T has basically breathed new life, wittingly or unwittingly, into Dish.
“Again, the big takeaway here is that AT&T has all but assured Dish’s survival, and as a much more disruptive and dangerous competitor than would otherwise have been the case,” Moffett wrote. “AT&T has been signaling recently that they want more wholesale business when they can get it, so perhaps we shouldn’t be surprised. They clearly decided that the short term gain of additional wholesale revenue was worth that risk. But they’d be well advised to be careful what they wish for. We see their decision to extend this deal to Dish as a catastrophically bad one. Dish and its investors should thank their lucky stars for AT&T’s strategic blunder here.”
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Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.