Events: Dish 2Q14 Conference Call April 2015

Dish Network

Events: 2Q14 Conference Call 

April 6, 2015


DISCUSSION

I am currently in the middle of a lengthy spectrum project but wanted to quickly highlight a very key interchange between Craig Moffett and Charlie Ergen on DISH’s 2Q14 Conference Call. I believe the marketplace grossly underestimates the power of long-term thinking – of which Ergen has in spades – and continues to lag Ergen’s long-term vision for DISH’s participation in the mobile wireless explosion that continues unabated. I’m biased, but the following is brilliance in motion, in my opinion…

INTERCHANGE

Moffett – “Hi, Charlie, I just want to make sure I understand your vision a little bit better. You’ve talked a lot about OTT and the interaction of OTT video and wireless, and you were just talking about it a couple of minutes ago. Is it your vision that the wireless business is a bundling opportunity in that it allows you to be more competitive with a bundle, or it is a vision that says I need to be vertically integrated into content delivery over my own proprietary network in that – so unlike a Netflix that is network-agnostic, for example, that you’d be building something that is truly network-specific over wireless. Is that latter description your vision for what you want to do with video?”

Ergen – “It could be both, it could be both of your scenarios, but certainly if you could – if you had your own wireless network that you could control, that you could give a quality of service to customers that was consistent, that took their home experience and made it exactly the same on all their devices no matter where they are and at the same time from an advertising point of view took that mobile content and your mobile content will be two ways. One will be broadcast and one will be peer-to-peer. And you might advertise differently on both of those. But when you get into the mobile world, you’re on smart devices. And those smart devices, they know who you are; they know where you are through GPS. They have your credit card information and it’s your wallet, it’s interactive so you can actually purchase something. That changes the dynamics for the ecosystem in terms of what amount of money both DISH and the content providers can get because suddenly we’re in the mobile business.

“And I’ve said this before, but I think Facebook two years ago was 0% of their revenue was in mobile. And last quarter it was 62%; two years it went from 0% to 62%. Very little of our content providers’ revenue today is in the mobile side of the business. And so once we can – once we have enough – if we have enough bandwidth and an efficient enough network, particularly enough downlink, then you can offer a great experience in the mobile side. And that’s where most of the data is going to be. Data is not going to be in a voice call or a text. So that’s why people built their networks, but that’s not the way we built our network.

So that’s why virgin spectrum in 20 megahertz chunks is so valuable. And it gets more complicated than that. But we think it will be important to pay for a subscription to TV, get pay-TV, get it wherever you are, get it on all your devices, and get ads that are streamed to you that are meaningful to you. Five years from now, you’re just not going to see an ad of an airplane flying with some music saying – branding ad that says fly the friendly skies; nobody’s going to say that. The ad is going to say book a ticket, push the button and book a ticket. That’s going to be a better ad. You’re not going to have a Starbucks ad with somebody sitting behind talking about we brew coffee, you’re going to just push the button to say what size cappuccino do you want. So advertising is going to change and the difference in advertising revenue is dramatic compared to the linear television experience we have, and I think that advertising model is going to change. And so I think you have to be part of that.

“And the wireless network, it’s not just what I said about video. The other thing about wireless networks is the number of devices, the number of things that will be connected to the network is going to grow by 10 times what it is today – every car, every pet, every child, every refrigerator, every camera, every security system, every watch, every machine is going to be connected wirelessly to a network. And so today you’re seeing growth in wireless on tablets, that’s where most of the growth is coming for. But in the future, it’s going to be all those other devices. Let me take a big step back.

“What you really have going forward in our vision is, in the palm of our hand, you’re going to have all the information in the world in the palm of your hand no matter where you are. It’s a computer, it’s not a phone anymore, it’s a computer. And it fits in the palm of your hand and it’s getting faster and smarter and better every day. And you’re going to have all the world’s information. I sit with my kids and somebody’s debating something, who won the 1956 election, and somebody says Eisenhower and somebody says somebody else and somebody just punches it and they say, well, it was Eisenhower.

“I mean every piece of information, every piece of video is going to be available that you’re going to have access to and it’s going to be great for productivity. Your heart’s going to be monitored. So we can reduce healthcare cost. It’s just – everything is going to be connected in a wireless fashion. And most people look at the world as it is today and they say, but I look at it as everything is going to be connected no matter – in my lifetime the only way you’re going to get connected is through wireless spectrum. Someday there will be some other way to do it. They will be able to do photons, there will be some other way to do it, but in my lifetime, it’s going to be wireless and you’re going to want to be connected and you’re going to be happy to pay for it. And right now in the United States, there’s four companies that can do it.”

Moffett – “That’s very helpful. If I could just ask one follow-up, though, as it relates to that, though, so you talk a lot about spectrum comps, which I guess are an appropriate valuation methodology if you’re going to be selling your spectrum. But I’m trying to reconcile how you think about the value of the spectrum as a commodity versus the present value of what you do with it if you put it to work, because it sounds like what you’re describing is putting it to work rather than in a transaction.”

Ergen – “Yeah. You’ve asked the fundamental question, Craig. You asked it, I think, the way we look at it. We look at the fundamental value, the floor value is what you could sell it for. So we’re going to have an auction, whatever that auction goes for multiple (sic) [multiply] (45:14) by two, that’s the floor value. Then we look at it as business people and Joe and his team and we look at that and say, unless we can build a business that’s more valuable than the core value, we’re a seller. But if we can build a business long term that’s actually more valuable than the core value, then we’re going to go do that.

“So we bid for a satellite spectrum auction back in 1998, the first one. We believed that the value of the business we could build with that spectrum was more than the $670 million that actually went for. We would look at it, I’ll make it up. If you said our spectrum was worth $50 billion and we could sell it for $50 billion, we’d look at that on the one hand, and on the other hand, we’d say can we take that spectrum and build a business that’s more than $50 billion. If we could, then we wouldn’t sell it. And if we couldn’t, selfishly, selfishly as a shareholder we’d sell it.

“And so we don’t – we believe today, based on where we see wireless going that we can build – we certainly believe we can build a business today more than the value that we get in the marketplace for our spectrum today. Based on whatever – even if you put 100% of our value in spectrum, it’s about – what’s that, $30 billion? That’s, I don’t know, $1, what’s that, $2 a megahertz downlink spectrum, less than that. We think we can build a business more valuable than that. That’s our – we may be wrong, we may be naïve, we may be arrogant. But we’re pretty sure we can build a – for those shareholders who want to stay in a long time, we will build a business more valuable than that.

If the spectrum is worth $50 billion, could we build a $50 billion business? We think we can, but we’re less confident of that than we are at $30 billion.”

QUICK VALUATION

Using Ergen’s $50B upper-end value for DISH’s spectrum portfolio (which excludes the AWS3 auction spectrum), BMO’s net DBS valuation of $3.433B ($16.039B DBS less $12.606B Adj. Net Debt) and 463MM shares outstanding, DISH is worth approximately $115 today.

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