Regulators to deny Dish discounts in spectrum auction, to tune of $3B

Dish Network may see $3.3 billion tacked on to the price it paid for spectrum in a recent government auction.

The satellite TV provider has confirmed that it met with Federal Communications Commission officials on Wednesday to discuss FCC Chairman Tom Wheeler's proposal to deny a credit the commission gave to two of Dish's affiliates in the last spectrum auction, which ended in January.

Wireless spectrum is the airwaves that carry text messages, voice calls, streaming video and Internet content to mobile devices. It's the lifeblood of the wireless industry. Dish has been amassing large amounts of wireless spectrum through auctions and other private transactions in recent years. And it emerged as the second-highest bidder in the FCC's so-called AWS-3 auction, which generated a record $45 billion in revenue for the federal government.

But Dish, which currently has no wireless network of its own nor any public plan for using its licenses, has come under fire since the auction concluded for working with smaller partners to take advantage of a 25 percent discount on the licenses it bought as part of a government program specifically designed to help small businesses acquire wireless spectrum licenses.

Now the FCC has determined that Dish did not qualify for the discounts, because it owns controlling interest in the two smaller affiliates, Northstar and SNR. In spite of its 85 percent stake in each of these companies, Northstar and SNR claim that Dish does not control the affiliates. The FCC disagrees with this assessment, according to Dish's statement.

Northstar and SNR will be allowed to keep the licenses they won in the auction, but they'll be required to pay full price, according to Dish. The FCC will not take any additional action against Northstar, SNR or Dish, according to Dish's statement. And it will also not refer the matter to the Department of Justice, Dish said.

The FCC's slap on the wrist comes as the agency approves the $49 billion merger between Dish's satellite TV rival DirecTV and broadband giant AT&T. Dish's chairman, Charlie Ergen, has made no secret about his desire to expand his business into the wireless market. But it remains unclear what the company's strategy actually is. Dish has reportedly been in talks to merge with wireless provider T-Mobile. But so far no deal has been announced. In 2013, Dish made a bid for Sprint but lost out to SoftBank, which ended up buying Sprint for $21.6 billion.

As build-out deadlines for Dish's existing spectrum licenses approach, it's still unclear what the company's plan is for entering the wireless market. But experts agree the additional $3.3 billion Dish may be forced to pay likely won't affect plans the company has in the works.

"Does it hurt to pay $3 billion extra? Of course," said Roger Entner, a principal analyst with Recon Analytics. "But in the big picture, I don't think it will impede their ability to buy or partner with T-Mobile or anyone else. And I don't think it will affect their participation in future spectrum auctions."

The FCC must officially vote on the proposal to deny the discount to Dish. If the proposal is passed by all five commissioners, Dish is likely to fight it in court. In his statement, R. Stanton Dodge, Dish's general counsel, said the company disagrees with the FCC's conclusion, and he defended Dish's approach to the auction, stating that the company "followed 20 years of FCC precedent and complied with all legal requirements." He added that Dish's approach to the auction was meant to enhance competition in the wireless market.

"Our investments in NorthStar and SNR helped make the AWS-3 auction the most successful spectrum auction in FCC history, and resulted in more than $20 billion of direct benefit to the American taxpayer," Dodge said.

Meanwhile, the FCC has already taken steps to reform the program it believes Dish exploited in the previous auction. Last week, regulators passed rules that cap the amount of discounts small businesses could receive in future auctions. The agency also changed other policies to ensure that large companies, such as Dish, don't take advantage of credits meant for smaller competitors.