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Morningstar | Dish’s wireless spectrum offers strategic optionality as its satellite pay-TV business declines.

We think Dish is facing trials on multiple fronts. Not only are subscribers cutting the cord, but also lower-priced OTT pay TV bundles are challenging the firm’s primary business. To its credit, management had foreseen these challenges and attempted to pivot via the acquisition of $21 billion of wireless spectrum. However, we’re unconvinced that this bet will pay off as the firm still has yet build out a network or acquire any customers. Dish also risks losing some of its spectrum assets if it doesn’t build out a network by 2020. While management continues to point toward its vague plan of creating an "Internet of Things" network, we note that the network will likely require significant capital expenditures. Additionally, the economic returns from an IoT network are currently highly uncertain as we don’t know of a comparable wireless network without mobile cellular customers that generates excess economic returns. Dish’s satellite pay-TV sub base peaked during the first quarter of 2014 and has suffered net customer declines in every subsequent quarter. Unlike its cable counterparts, Dish is unable to offset the lost video revenue with revenue growth from margin-accretive broadband and business service. Dish has mitigated this impact by launching Sling, the firm’s skinny bundle OTT, offering. However, we believe that the service is cannibalizing its existing base and the subscribers generate less monthly revenue and lower margins compared with traditional satellite subscribers. While Dish management amplified the cash generation from its core business by running a lean operation, we believe secular headwinds will pressure cash flows in the near future.Recognizing the negative pay-TV trends, Dish reallocated its cash flows and the debt capacity of its satellite business to accumulate spectrum assets in an attempt to pivot its business model. Whether Dish monetizes this spectrum by selling or leasing it, or ultimately builds and runs its own network, remains to be seen. With a more accommodating regulatory environment, the chance for a deal passing regulatory muster has risen but we don’t believe that any of the major carriers are spectrum starved.