How DISH Could Win The PCS-T-Mobile Prize

Oct. 3.12 | About: DISH Network (DISH)

The key to understanding the merger talks among Metro PCS (PCS), T-Mobile (OTCQX:DTEGY), Sprint (NYSE:S) and DISH Network (NASDAQ:DISH) is that almost everyone wants out.

UPDATE: Reuters is reporting that PCS and Deutsche Telekom (OTCQX:DTEGY) have a deal to combine with MetroPCS getting $1.5 billion in cash plus 26% of a new, publicly-traded entity.

FT Deal Reporter says that while PCS is looking for multiple bids, T-Mobile owner Deutsche Telekom is looking for a "currency" that will help it deal with the company's debt load.

Remember that DT tried to sell T-Mobile before, to AT&T (NYSE:T), but that fell through on antitrust grounds. The idea that it's the buyer in this case thus seems ludicrous. Instead, it's more likely to be looking for some publicly-traded entity that it can then sell its way out of slowly. PCS is also a seller in this scenario, and apparently a very interested seller given the fact that it's also talking merger with two other parties.

One of the biggest lies in technology today is that spectrum is a license to print money. It is, in fact, a license to spend money, and a quick look at the balance sheets of the spectrum holders in this case illustrates the point. As Deal Reporter notes Sprint and T-Mobile, which are the big spectrum owners, both "have a considerable amount of debt."

That's an understatement. The cost of building out a national wireless phone network has long exceeded the free market price customers will pay for voice access. The only way to make money in that business is with captive customers - monopoly customers - who will pay what are, in effect, monopoly rents. For all practical purposes the mobile market in the U.S. is a duopoly with two players - Verizon (NYSE:VZ) Wireless and AT&T. Competing on price with the duopoly is a strategy that has failed.

For competition to continue the game has to change.

Enter DISH. They bought Blockbuster, a name brand that competes with Netflix (NASDAQ:NFLX), and they are building out a wired Internet platform to compete in that market. At the same time they are interested in selling wireless in rural areas, again via satellite, and they have a competitive play in the satellite broadcasting business.

A wireless Internet footprint would complete the picture, making the company the only one capable of delivering bits via all three modalities - satellite, wireless, and wired. Pumping existing content through that channel, rather than just selling phone services, could make DISH a more powerful player against cable, especially with highly mobile consumers, who might access Blockbuster and the Internet via WiFi in a hotel, via wireless on the road, and via satellite from home. Those would be captive customers, buying not telephony services but broadband video Internet, on a profitable monthly subscription.

If the model can be made to work - wires and satellite supporting wireless with higher-priced monthly subscription fees - DISH might eventually be in a position to take out Sprint and emerge as America's third "phone" company. Just remember that it's not about telephony, but about broadband Internet, and ultimately it's about video.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.