Echostar has decided to bid in the 700 MHz auction, despite DIRECTV sitting this one out. This raises the obvious question. Is Echostar founder and CEO Charlie Ergen a “brave little toaster,” boldly defying the odds and the nay sayers to reap a well-deserved reward in the end? Or is this another example of the stubborn idiocy that earned the proposed Echostar-DIRECTV merger the distinction of being the first merger in living memory actually rejected by the FCC because he refused to pull it when it became obvious it was doomed?
Actually, I’m betting on the “brave little entrepreneur” scenario, but the jury is still out.
More below . . . .
In last year’s AWS auction, DIRECTV and Echostar formed a joint venture, DBS Wireless, to bid for AWS spectrum. Despite paying the largest upfront of any bidder, they got driven out by the cable cos early in the game. As a result, they spent this past spring and summer furiously lobbying the FCC to get rule changes to help them compete in the 700 MHz auction.
But even at the time, folks had doubts whether DIRECTV and Echostar would play in the 700 MHz auction, either jointly or separately. For one thing, DIRECTV and Echostar increasingly have different business strategies and different issues in front of the FCC. To take one glaring example, Echostar has sought to have conditions placed on the transfer of DIRECTV from Murdoch’s News Corp. to John Malone’s Liberty Media. These things don’t make it impossible for companies to work together; and they continue to work together on common interests such as expanding the availability of spectrum to enhance their video offerings. But you really don’t want to go into a multibillion dollar partnership together when you and your potential partner increasingly have “issues.” Like trying to save a dissolving relationship by getting married and having a baby, it usually ends up with both parties getting screwed and a rather costly divorce.
In addition, with DIRECTV in the midst of the transfer, no one really expected anyone at DIRECTV to authorize spending billions of dollars on the 700 MHz auction and committing the company to spend even more money for years to come. So while no one really expected to see DBS Wireless show up again as a major bidder, the question remained whether Echostar would try to go it alone.
Apparently, it will. Short-sighted investors are (as usual) punishing a company for thinking about making a needed investment for its business. True, if Echostar doesn’t find a way to provide broadband, it can’t compete effectively against cable. But investors would much rather see Echostar acquired by AT&T then see Echostar try to find a real solution. So investors who drove the value of Echostar up on the hopes Echostar would sell out to AT&T are now dumping out of disappointment and a failure to appreciate Echostar’s potential strategy.
Echostar’s strategy is not, as suggested by some, irrational or foolish. It remains to be seen whether licenses will go cheap or dear. I think there will be plenty of aggressive bidders to drive the licenses past their reserve prices, but I may well prove wrong. Echostar may hope to pick up enough spectrum to force a partnership with other winners, or to make itself more attractive as a partner/acquisition target. Or, if I am wrong about the level of interest in the licenses, Echostar may hope to pick up a national footprint on the cheap the way Spectrum Co did in the AWS auction.
Echostar fought hard to get combinatorial bidding on the C Block to make it easier to acquire a national license, so everyone will expect Echostar to make a play there. But Echostar may hope that the aggressive geographic build out requirements for A & B block licenses will scare off the smaller and more rural bidders like U.S. Cellular, creating an opening to build a national footprint that way while pretending to go for C Block. Remember, anonymous biding means no one will be able to tell whether the same party is bidding for all those A&B block licenses, so no one will know if Echostar is secretly building a national license. Yes, this potentially leaves Echostar with some “exposure risk” if it wins a bunch of A & B block licenses but not enough to make a good regional or national footprint. But there is always the secondary market. And with this many major players, odds are good that somebody who lost will pay good money for licenses in a year or two without Echostar ever needing to put a stick in the air. After all, that strategy worked for Aloha. Heck, if Echostar plays it right and things break in a particular way for the telcos, it may make itself even more attractive to AT&T.
Besides, if the reserve prices aren’t met, Echostar can hope for a reauction and another chance to pick up spectrum — this time with the “C Block” split into two 11 MHz blocks, increasing the number of licenses and potentially driving down the price. But to have that chance, Echostar must pay the price of admission by filing a short form now.
So while I don’t expect Echostar to by a major bidder, I don’t think it’s crazy either. It’s making a rational gamble and worth paying a decent admission price for a seat at the table and chance to bet if the odds look good. And Echostar’s founder, self-made billionaire Charlie Ergen, is smart enough to know that while the market may push down stock today because analysts remain focused on the potential cost of buildout, it will rebound tomorrow if his bet pans out.
Stay tuned . . . .