Ergen's Ace In The Hole?

A year ago, it would not have been unreasonable to wager that Dish Network
chairman Charlie Ergen would fold his hand, take his remaining chips and leave the TV-distribution table for

With heavy subscriber losses, a potentially crippling patent-litigation case nearing a conclusion and a depressed
stock price, the future looked bleak for Ergen, a former professional blackjack player, and the satellite-
TV provider he founded more than 30 years ago.

Flash forward almost a year, and Ergen, thought to have finally played out his hand, is holding some of his
strongest cards ever — renewed customer growth, a highly favorable patent settlement with digital video recorder
maker TiVo and access to thousands of hours of content, via Dish’s purchase of video-rental giant Blockbuster.

And he may be holding an ace: a swath of wireless spectrum that could solve one of satellite TV’s most pressing
problems — providing a viable wireless-broadband service.

“There is a tendency historically with Dish, because they have not been that communicative with the Street, to assume
that when the business temporarily hits a speed bump that they are going to disappear,” Pivotal Research Group
principal and media and communications analyst Jeff Wlodarczak said. “Realistically, what has really surprised people
is the resiliency.”


Englewood, Colo.-based Dish managed to bounce back
from three consecutive quarters of subscriber losses in
2010 — when it shed a total of 204,000 customers, almost
wiping out a 237,000 customer first-quarter gain — adding
58,000 net new customers in the first quarter of 2011. At
the same time its stock, which languished in the $18 range
last July, has increased by more than 70%, closing at $30.98
per share on July 6.

In May, Dish removed one of the biggest overhangs on
its stock, the patent lawsuit with TiVo. The suit, which
centered on Dish’s digital video
recorder technology, could have
potentially cost the satellite giant
as much as $2.5 billion, according
to some analysts, mainly in the
form of replacing set-top boxes.
According to that settlement, Dish
agreed to pay TiVo a total of $500
million over the next six years.

It’s all a big change from last
year, when analysts and Ergen
himself were questioning how
long Dish would be able to survive.
The stock was depressed — it
was trading in the $18-to-$20-pershare
range in November, shortly
after it released disappointing third-quarter results. On a
conference call with analysts last November, Ergen said
that if he were a budding entrepreneur looking to get into
the TV business today, he wouldn’t spend the $3 billion
Dish did over the years to launch satellites.

He did offer some hints on that call as to how he believed
Dish would remove itself from that particular quagmire,

“We have to figure out how we can do things differently
and how we can compete,” Ergen said on the Nov. 5 conference
call. “And I think that really boils down to strategy,
and I have a lot of confidence in our ability as a company to
strategically adapt to what’s going on long-term.”

In recent months, that strategy began to emerge. Ergen
and Dish in the past six months have invested roughly $3
billion on wireless spectrum that could logically be the
foundation for its own satellite-broadband network; purchased
video rental icon Blockbuster for about $320 million;
and hired a new CEO — former Sirius Satellite Radio
honcho Joe Clayton — who has not only embraced Wall
Street, but has injected a new enthusiasm for the business
that may have been in short supply in the previous

The result has been a 58% increase in Dish Network’s
stock price since Jan. 3 and a return to positive subscriber
growth. Last week, Dish emerged as the highest and only
bidder for TerreStar Networks’ 20 Megahertz of wirelessbroadband
spectrum, off ering $1.375 billion.

Although AT&T and satellite manufacturer Space Systems/
Loral have voiced objections to the TerreStar deal,
Dish was the only bidder. The bankruptcy court approved
the transaction last Thursday (July 7).

“I don’t think someone else is going to step up to the
plate,” Wunderlich Securities media analyst Matt Harrigan,
a longtime Ergen watcher, said.

The addition of Clayton in May also appeared to send
a signal to Wall Street that Dish, which has kept its cards
close to the vest for much of its history, is beginning to take
a more open approach in getting its story out to the masses.

“I think they’ve turned the corner on TiVo; I think
they’ve turned the corner on operations,” Wlodarczak
said. “Now is the time, the business has righted itself, that
you can bring in a guy like Joe who is much more communicative,
and give him a mandate to tell the story. The stock
has responded, but still it looks too cheap to me.”

Neither Ergen nor Clayton would comment for this story,
citing through a spokesperson the pending nature of
Dish’s spectrum deals. But Ergen has said in the past that
a broadband offering is a distinct possibility.


On a conference call with analysts in May to discuss firstquarter
results, Ergen said that if Dish were to build out
the wireless spectrum, it would likely do so with a partner.
While he didn’t reveal who that partner would be, most
analysts believe that Sprint Nextel is a likely candidate.

“I think it is unlikely that we would do something to
wireless without somebody who is more of an expert in
that business than we are,” Ergen said on the May conference

With the TerreStar spectrum, its existing holdings and
the 20 MHz it is expecting to glean through its purchase
of DBSD North America, another bankrupt wirelessbroadband
company that Dish agreed to buy earlier in
the year for $1.4 billion, as well as the roughly 6 MHz
it bought as part of the 700-MHz spectrum auction in
2008, the satellite giant will control about 46 MHz of
wireless spectrum. That puts them close behind national
carriers like Sprint (50 MHz), T-Mobile (50 MHz), Verizon
Communications (88 MHz) and AT&T (82 MHz).

The risk is huge. Other satellite operators, such as
DirecTV with DirecWay, have attempted a satellite broadband
service and failed. And earlier this year, Qualcomm
scrapped a mobile broadband-video service called FLO TV
after its business model collapsed. Qualcomm ended up
selling FLO TV’s 18 MHz of spectrum for about $1.9 billion
to AT&T in December.

Harrigan said that whether Dish builds out the spectrum
itself, takes on a partner or exits the business altogether
is anyone’s guess. But the satellite giant is in an
enviable position, he added, in that it has already spent
a big portion of the funds needed to create a wireless
broadband offering.

“I think the incremental capital investment on this
would probably have to be relatively scalable,” Harrigan
said. “He’s spent a big wad already, but the worst of it by
far has been incurred.”

Harrigan added that if Dish were to go ahead with creating
a satellite broadband offering, it wouldn’t be alone for
long. Any moves would likely accelerate efforts by Direc-
TV to create a 4G wireless offering with Verizon Wireless.

Wlodarczak agreed, but added that building out a 10
Megabits per second to 15 Mbps high-speed data service
would help solidify Dish’s market position, especially in
rural markets where the main broadband competition is
digital subscriber line service from phone companies.

“At the end of the day, if he does a buildout, he’ll partner,
it will be a smart buildout and it will enhance his platform,”
Wlodarczak said. “If he elects to say this will be too
difficult and too expensive, in a couple of years he flips the
spectrum to someone who needs it. And spectrum values,
I would imagine, will only go up over time.”


Wlodarczak likens Ergen’s recent moves to those of another
Denver multichannel-industry icon, Liberty Media
chairman and cable legend John Malone. Malone, who
basically created the modern cable industry through
Tele-Communications Inc. and Liberty Media, stepped
back from day-to-day operations years ago to focus on
big picture strategy.

And the analyst compared Dish’s recent deals to Malone’s
acquisition of a large stake in Sirius XM Radio in
2009 and its bid to take over book retailer Barnes & Noble
in May.

“He [Ergen] needed to get the business righted, he needed
to get past TiVo and now I think he’s getting much more
strategic,” Wlodarczak said.

Even as Dish’s stock increases, it’s unclear how long
Lady Luck will stay with Ergen, given the risks. Harrigan
estimated that with Blockbuster and the spectrum deals
(including the 700-MHz spectrum block it bought in 2008)
and Dish is in for close to $5 billion already, or about 40%
of its total market capitalization of $14 billion.

“I wouldn’t say he’s betting the company in the sense
that Dish wouldn’t be financially viable if this doesn’t
work, but certainly, in terms of the shareholders getting
any return over the next five years, he’s sure as heck betting
the company,” Harrigan said.