Pai Urges Investigation of Dish's Use of Bidding Credits in AWS-3 Auction

Pai said Dish has annual revenue of almost $14 billion and a market capitalization of more than $32 billion. “Its participation makes a mockery of the DE program,” he said in a written statement. Pai urged FCC Chairman Tom Wheeler to launch an investigation of Dish’s use of bidding credits. Pai noted that in July he dissented from rules that loosened the DE rules for the AWS-3 auction (see 1407240042). “One of my fears was that the FCC was sending the message to big businesses that ‘anything goes,’” he said. “I didn’t expect to be this right.” Pai warned that proposals made by the FCC in October (see 1410140190) will make things worse.

Dish said it disclosed upfront its plans to use DEs and bidding credits in the auction, following a structure that carriers had used in the past. "We respectfully disagree with the criticism of the Designated Entity program, and we are confident that we fully complied with the DE rules in the AWS-3 auction, which were unanimously approved by the full Commission,” Dish said. It also defended the DE program in general.

An FCC spokesman responded to Pai via an emailed statement. “The Commission takes seriously its obligation to provide bidding credits only to those entities that are eligible to receive them,” the spokesman said. “For 20 years, the Commission’s competitive bidding rules have provided flexibility to enable a wide variety of applicants -- including small businesses -- to participate in the auction process, while including safeguards to protect the integrity of its auction program. As part of the auction closing process, the FCC will carefully review winning bidders’ applications before awarding any bidding credits.”

FCC rules have permitted this to happen since the beginning of the auction program, said an FCC spokesman in an email. He said the designated entity must ultimately be the one “calling the shots.” SNR, one of the designated entities, is owned by former FCC Wireless Bureau Chief John Muleta, now the CEO of consulting firm Atelum, according to its Form 175 filing.

A Pai spokesman responded to the FCC spokesman. “Instead of engaging in ad hominem attacks, we urge FCC officials to focus on conducting a top-to-bottom review of what has gone wrong with the DE program and not letting any Fortune 500 company get away with receiving over $3 billion in taxpayer subsidies intended to help small businesses,” the Pai spokesman said.

"It certainly looks like the Dish entities engaged in exactly the kind of abuse that a bi-partisan FCC attempted to prevent when it reformed the DE rules in 2006,” said Fred Campbell, executive director Center for Boundless Innovation in Technology. “No matter what one thinks about the designated entity program generally, Commissioner Pai is right. The FCC should investigate the Dish applications and publish detailed factual findings. If it doesn’t, this sort of DE history will just keep repeating itself." Campbell is former chief of the Wireless Bureau.

The Letter of the Law

Dish seems to have followed the law, said experts in interviews Monday. But they said that won't lessen the questions about bidding credits.

Dish appears to have followed the letter of the law, will get its licenses and will have to build them out following FCC rules, said Recon Analytics analyst Roger Entner. What Dish did shows that the DE program is no longer relevant since small companies can’t put together the many billions of dollars required to launch a network, he said. “DEs have to basically show that they are too poor to be able to pay for the licenses that they are planning to win,” Entner said. “I am just flabbergasted that DE rules still exist and that people are surprised when companies are finding ways around it. The less exceptions there are in auctions, the cleaner the auction, less abuses of the rules and the higher the revenues for the taxpayer. Every carve out, every special rule benefiting someone, reduces what is left over for the Treasury.”

Craig Moffett of MoffettNathanson said most of the questions he has heard about the auction relate to Dish’s use of bidding credits. “The questions ranged from the prosaic -- will Dish really qualify as a Designated Entity eligible for a 25 percent discount? -- to the profound -- has Dish effectively eliminated any chance of ever selling its spectrum? -- to the profane -- put simply… WTF?”

“This is corporate welfare at its worst, plus Tom Wheeler’s P.R. spin machine at its best,” said Berin Szoka, president of TechFreedom. Szoka noted that before the results were released, House Communications Subcommittee Chairman Greg Walden, R-Ore., and Wheeler co-authored an article on the success of the auction. “And Democrats wonder why Republicans don’t trust the FCC?” Szoka said.

Necessary for Competition

Public Knowledge Senior Vice President Harold Feld said there's still good reason to promote broader bidding in auctions. “That this was the only way that Dish could actually compete, with any modicum of success, against AT&T and Verizon, says something about our auction system,” he said. “If you want to have new entrants and you want to have competitors, you need to do something that offsets the advantages enjoyed by the two largest incumbents.” Competitors shouldn’t have to rely on DE credits, he said. “I can’t blame Dish for taking advantage of the tools that were at its disposal.”

“There will be a lot of political pushback from the House and Senate and Republican commissioners,” said telecom and satellite consultant Tim Farrar. “Spectrum and telecom is a political game. If you don’t have any friends, you’ve got a problem.” The FCC is in a difficult situation and could add conditions to Dish’s licenses, he said. “It doesn’t look good to say, ‘Yes, Dish should benefit from $3 billion of credit.’”

Dish drove up auction prices “to make Verizon’s and AT&T’s life difficult,” particularly by bidding in key markets “where they would logically expect AT&T and Verizon to have the biggest constraints on their capacity, and so the most need for spectrum,” Farrar said. Dish wants to force these companies to deal with it to get access to spectrum, said Farrar. “If AT&T and Verizon were going to do a deal with Dish, they would’ve done it before the auction, not after the auction.”

AT&T and Verizon will avoid dealing with Dish and CEO Charlie Ergen, but it could become difficult in the coming years, Farrar said. They might be looking into other options, like next year’s incentive auction or building more cells, like Verizon is doing, he said. AT&T, Sprint and Verizon could avoid Dish together, he said. Sprint wants to sell some of its 2.5 GHz spectrum, Farrar noted an executive from that carrier had said in a blog post. “There’s a natural alignment there,” said Farrar.

“Dish’s role in an otherwise successful auction could result in some egg on the FCC’s face,” said a former FCC legal adviser. “No one thinks of [a] hand-out as being part of the equation to benefit massive companies like Dish. It’s clear they gamed the system and the FCC is left trying to justify why it is giving away billions of dollars to one of the richest people in the country.”

DE credits are a “wonderful idea” in theory, but a “huge rip off” in practice, said a former FCC spectrum official who represents carrier and other clients. Maybe a handful of DEs actually have offered service, but far more common is for DEs to flip a license just ahead of the construction deadline, the lawyer said. There's less willingness to allow bidding credits given Congress’ focus on the unprecedented federal deficit, the attorney said.

The Wall Street Journal, meanwhile, reported Monday that Verizon is close to inking a series of deals to sell assets, including cellphone towers and parts of its wireline business, that will bring in more than $10 billion to help pay for the spectrum it bought in the auction. The story cited unnamed sources. Verizon had no comment.