Billionaire Ergen's Job Change Points to Costly Network Plan

(Bloomberg) -- Charlie Ergen’s relinquishment of his CEO title to focus on wireless strategy is a signal that his Dish Network Corp. is dead serious about building its own network, a plan that once seemed unlikely.

A costly construction project to create a data network from scratch was once seen as a last resort for Dish, which owns about $39 billion worth of wireless airwaves and has to use at least part of them by the Federal Communications Commission’s March 2020 deadline. Many analysts had expected Ergen to sell the spectrum, to join forces with a current wireless carrier to build a network, or to work with a “tenant” such as Inc. or Facebook Inc. to provide services to their customers.

The possibility of lining up a partner remains open, but the window for such dealmaking is closing fast. With the FCC’s deadline looming, Dish probably has to develop a build-out plan and start construction by the end of 2018, Scott Goldman, an analyst at Jefferies Group LLC, said in a phone interview. If Dish doesn’t meet the cutoff date, it could be in trouble, as the FCC “appears to have little patience for granting an extension after all this time,” Craig Moffett, an analyst with MoffetNathanson LLC, said in an email.

“It is becoming clearer than ever that the path forward for Dish Network is to build a network rather than to sell its spectrum,” Moffett said.

More Expensive

Earlier this year, Moffett had been projecting that Dish would need to invest $2.6 billion to $4 billion through 2020 to complete a network. But a likely delay in getting access to some airwaves means it will now be “vastly more expensive” for the company to build one that would satisfy FCC rules, he said. If Dish doesn’t start using the airwaves, it could lose the rights to them.

Dish could cut costs by building a so-called narrowband network that provides internet connections to various devices but not full mobile services like AT&T Inc. or Verizon Communications Inc. But, “it’s not clear that a narrowband network would comply with FCC requirements, nor is there a viable revenue model associated” with it, Moffett said in an email.

Partnerships Possible

Ergen might still strike deals with partners to shoulder at least part -- if not all -- of the burden. T-Mobile US Inc. may be looking to beef up its spectrum holdings since its merger talks with Sprint Corp. unraveled earlier this year. Verizon Communications Inc. could need additional airwaves as well, Goldman said, although the company recently signaled it’s not looking for acquisitions.

The wireless companies may need more capacity to meet their users’ growing data needs. But deals with Dish no longer seem like a sure bet.

“The investment community has shifted a bit -- it’s somewhere in the middle between selling spectrum and building,” Goldman said. “Most people still think the ideal situation would be to sell the spectrum. The investment community is a bit more split now than it has been before.”

Though Ergen abdicated his role as chief executive officer, he will remain Dish’s chairman, the Englewood, Colorado-based company said in a statement Tuesday. Chief Operating Officer Erik Carlson took over as CEO, but he will continue to report to Ergen.

Ergen made a similar move in 2011, stepping down as CEO while the company digested its Blockbuster and airwaves acquisitions, only to return to the role in 2015. This time, he has little time to spare to make important decisions.

“I think they still have a lot of options,” Goldman said. “They are still sitting on a treasure chest of spectrum.”

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