How Dish Network scammed the spectrum auction for $3 billion

The FCC’s series of public spectrum auctions are being celebrated as a wild success, with bids totaling some $45 billion.

However, hidden in the midst of all this public gain was a financial tactic executed by the Dish Network that operated just this side of the law. It enabled the company to reduce its bid by up to $3 billion by claiming a 25 percent “small business” of what is called a “designated entity” discount. How did a $34 billion corporation do this?

This theft of the commons was reported by New York Times writer Steven Davidoff Solomon, who wrote this week that, “... Dish’s strategy for the spectrum auction comes across as among the most brazen, least civic-minded act by a corporation in years.” Think about that statement set against a background of massive bank frauds and tax avoidance schemes.

Although Dish gets an F in citizenship, it may be in line for an award in conniving. Its method was complex and knowledgeable.

1. Dish Network Corporation formed Northstar Wireless, retaining 85 percent ownership.
2. The other 15 percent was bought by Doyon, an Alaska Native regional corporation, for $120 million. Doyon was created in the 1970s as part of a federal government settlement of native land claims.
3. Doyon is at this point the largest private landowner in Alaska with at least a dozen profit-making ventures including oil drilling.
4. Doyon would not seem to be a “very small business,” and would not be except that some dozen companies organized under the Alaska Native Claims Settlement Act have their revenue (except from gambling) exempted. So, by law it has no revenue and is a very small business indeed.
5. So, by bidding through Doyon, DISH gets the 25 percent bidding credit.

Wait, there’s more. According to Solomon:

“The rest of Dish’s winning bids — worth about $5.5 billion — were done under a partnership with John Muleta, the former chief of the F.C.C.’s wireless telecommunications bureau, and relied on similar loopholes. As a former government official, Mr. Muleta has no real revenue and so meets the test of being a ‘very small business’.” Muleta became a very rich man.

However, Muleta is a pauper compared to Dish founder, chairman and CEO Charles W. Ergen who, according to Forbes, is worth more than $22 billion.

It’s not as if this dodgy maneuver was unanticipated. “The ‘small firm’ exemption has been known to be a problem at the F.C.C. for years,” wrote Solomon. “The Congressional Budget Office in 2005 wrote a report highlighting how it was used mostly by big companies instead of the small firms it was intended to benefit.”

Some of Dish’s competitors were also aware of Ergen’s shenanigans. In a February 20th AT&T Public Policy Blog, Vice President Federal Regulatory Joan Marsh delivered a harsh rebuke to Dish Network’s bidding for spectrum.

Not only did Dish rig the financial side, but it wound up with very saleable spectrum which Marsh believes that company has no intention of using. Marsh wrote:

“Given the demands being placed on wireless networks today, the industry simply cannot afford to have significant spectrum resources sitting idle on the sidelines.  Auctions should be designed to ensure that licenses go to those willing to deploy networks – not speculators or stockpilers.  The FCC has continued to strengthen build requirements but perhaps more is needed to ensure that new capacity is put to use quickly for American consumers.”

All around a bad deal for the American public.

Response to spectrum auction off the charts (Speed Matters, Jan. 22, 2015)

How Loopholes Turned Dish Network Into a ‘Very Small Business’ (NY Times, Feb. 24, 2015)

Lessons From Auction 97 For Future Auctions (Joan Marsh, AT&T Public Policy Blog, Feb. 20, 2015)