The Combined EchoStar/Dish Still Faces Massive Uncertainty as Financing Options Dwindle

Director

Michael Hodel

EchoStar primarily consists of Dish Network assets following the firms’ merger, which closed at the end of 2023 and left EchoStar as the surviving entity. Dish has made a massive bet on wireless spectrum, spending about $30 billion (more than $100 per EchoStar share) to acquire various spectrum licenses over the past 15 years. The Dish/EchoStar merger pushes the wireless effort toward the enterprise and wholesale telecom markets, which makes sense given the maturity of the traditional smartphone wireless market. Still, the firm faces a highly uncertain future as it seeks to carve out a niche. 

Satellite television still provides about two thirds of the combined firm’s revenue. The business peaked in 2013 at 14 million customers and has declined every quarter since to about 7 million today. The firm’s satellite network is highly efficient at delivering traditional television service, but consumer tastes have rapidly changed in favor of on-demand content delivered over the internet. To its credit, management recognized the shifting television landscape early, sharply cutting investment in customer acquisition and focusing its efforts on more rural areas where competitive alternatives are less available. We expect the television business will continue to generate cash flow but at a declining rate.

Wireless spectrum is EchoStar’s strategy to build a prosperous future, but we are skeptical of this effort. The firm acquired the Boost prepaid business from Sprint, giving it less than 3% U.S. market share. Boost will likely have to compete heavily on price to attract customers, but it will remain at a severe cost disadvantage versus its far larger rivals and its weak balance sheet precludes enduring the heavy losses needed to rapidly acquire customers. 

Using its fallow wireless network along with EchoStar’s satellite assets could enable the combined firm to create unique services for business customers. However, the direction that the business services market will take over the next few years is difficult to predict. Revenue across this industry is in decline, and firms like AT&T and Verizon have solid networks and deep financial resources.

Business Strategy & Outlook

We don’t believe EchoStar holds an economic moat, reflecting our view of the firm’s heavy investment in wireless spectrum licenses over the past 15 years. This investment swamps the value of both the core Dish satellite television business and the EchoStar satellite services businesses, as wireless licenses account for most of the firm’s invested capital base. EchoStar has only minimally put these licenses to use, so they generate no return for the firm today. We are skeptical that it can build a business that generates acceptable returns on investment while competing against three wireless giants that hold far greater resources. 

EchoStar’s earliest forays into the spectrum market were quite savvy, in our view. Dish Network, which merged into EchoStar at the end of 2023, picked up inexpensive low-band spectrum at auction in 2008 (the 700 MHz E block) and acquired two bankrupt spectrum owners in 2011 (the AWS-4 band). In the latter case, Dish worked relentlessly with regulators and technology firms to expand the value of these licenses, producing a large block of fallow spectrum. Dish then picked up another unloved chunk of spectrum in 2014 at a very attractive price (the PCS H block). At this point, the firm likely could have used these assets to extract generous terms from one or more existing wireless carriers. 

Instead, the firm pushed hard to acquire additional spectrum, bidding aggressively in the 2015 AWS-3 auction, spending nearly $10 billion. We believe this purchase was a mistake, adding spectrum at a very high price. Dish followed this purchase with the $6.2 billion acquisition of low-frequency licenses in the 2017 broadcast auction, a more reasonable purchase. But it again ran up spectrum prices in 2022, spending $7.3 billion in the 3.45 GHz auction. Bidding against entrenched competitors that can quickly put spectrum to use is a poor strategy, in our view.

EchoStar now holds a well-diversified portfolio of spectrum assets, but it has a very limited network to utilize that spectrum. While the firm has utilized recent technological advancements that should make it more efficient, the wireless business fundamentally requires scale for success. Setting aside the upfront buildout costs, operating a network of sites entails various fixed costs, including tower rents, utilities, and traffic backhaul. With less than a 3% share of the U.S. wireless market, primarily on its Boost prepaid offering, the cost of operating its wireless network equates to about one third of total wireless service revenue. While EchoStar’s network reaches 70% of the U.S. population, it lacks the site density needed to serve customers well. As a result, the firm relies on wholesale network capacity from AT&T and T-Mobile. These network costs and other service expenses consume another two thirds of wireless service revenue. These types of expenses run well below 20% of service revenue for the three major U.S. wireless carriers.

With the merger of EchoStar and Dish Network, the combined entity will likely shift its emphasis toward the business services and wholesale markets. We estimate consumer and small business internet access services contribute about half of EchoStar’s service revenue, but this business has declined recently as satellite capacity constraints and rival technologies, like terrestrial fixed-wireless and SpaceX’s satellite constellation, have taken market share. Revenue from more complex enterprise services has shown stability, as EchoStar has successfully sold to customers with widely distributed locations like retail chains. Combining broad satellite coverage with the Dish terrestrial wireless network could create unique capabilities, but large-scale applications aren’t apparent to us. The enterprise telecom services market has also been shrinking for two decades. AT&T and Verizon have deep network assets at their disposal, and numerous other firms have the ability to serve more targeted areas, with technology steadily advancing that allows customers to stitch networks together. 

EchoStar’s best option, in our view, is to partner with a cable company looking to enter the wireless business, but these firms have operated as fierce Dish rivals over the past 20 years. In addition, Dish has restricted its ability to sell some of its assets or lease capacity to most U.S. cable companies as part of its agreement with T-Mobile. 

The core satellite television business is efficient at delivering traditional television services. Even with the decline in this business over the past few years, we estimate it generates double-digit returns on invested capital, including the capitalization of customer acquisition costs. However, the television business has shifted dramatically over the past several years as consumer expectations and tastes have changed—the increasing interest in streaming content places terrestrial networks in a much better position than satellites to meet these demands.

None

Economic Moat

EchoStar

EchoStar Corp. engages in the design, development, and distribution of digital set-top boxes and products for direct-to-home satellite service providers. It operates through the following business segments: Hughes, and EchoStar Satellite Services (ESS). The Hughes segment provides broadband satellite technologies and broadband internet services to domestic and international consumer customers and broadband network technologies, managed services, equipment, hardware, satellite services and communication solutions to service providers and enterprise customers. The ESS segment owns and leases in-orbit satellites and licenses to lease capacity on a full time and occasional use. The company was founded by Charlie William Ergen, Candy Ergen, and James DeFranco in 1980 and is headquartered in Englewood, CO.

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EchoStar Corp. engages in the design, development, and distribution of digital set-top boxes and products for direct-to-home satellite service providers. It operates through the following business segments: Pay-TV, Retail Wireless, 5G Network Deployment and Broadband and Satellite Services. The Pay-TV segment business strategy is to be the best provider of video services in the United States by providing products with the best technology, outstanding customer service, and great value. The Retail Wireless segment offers Retail Wireless services as well as a competitive portfolio of wireless devices. The 5G Network Deployment segment business strategy is to commercialize Wireless spectrum licenses through the completion of 5G Network Deployment. The Broadband and Satellite Services segment business strategy is to maintain and improve leadership position and competitive advantage through development of technologies and services marketed to selected sectors within the consumer, enterprise and government markets globally. The company was founded by Charlie William Ergen, Candy Ergen, and James DeFranco in 1980 and is headquartered in Englewood, CO.

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