Positive Verizon Commentary Masks Negative Implications from Spectrum Supply Shift, by David Dixon

by David Dixon, FBR & Co., edited by Alan J Weissberger (emphasis added in BOLD font)

We believe there is a supply shift in (cellular) capacity spectrum coupled with an increase in spectrum utilization beginning with 150MHz of 3.5GHz LTE spectrum to be auctioned by the FCC in late 2016.

Last week, Verizon CEO Lowell McAdam provided an update on the company’s thoughts on DISH spectrum. More specifically, CEO McAdam noted for the first time that he would be interested in leasing spectrum from DISH, but was also quick to point out that he is not interested in acquiring DISH for access to the spectrum. Many believe this opens the door for more dialogue with DISH that could lead to a deal, but we believe this is simply a wise, short-term insurance option exercised by Verizon as it develops the 3.5GHz ecosystem in parallel. Both Verizon and T-Mobile plan to deploy LTE-Unlicensed (LTE-U) and LTE Assisted Access (LAA) at 5GHz and our checks indicate solid interest in 3.5GHz spectrum for LAA or autonomous use for indoor capacity.

We believe urban network designs are changing and industrywide support of 3.5 GHz is moving quicker than expected, which should continue to weigh on DISH spectrum value.

3.5 GHz support moving quickly. The FCC issued an Order in April 2015 where it proposed to introduce the 3.5 GHz band (currently occupied by the Department of Defense) to create a Citizens Broadband Radio Service (CBRS) with a three-tiered spectrum sharing system on 70MHz of the total 150MHz. Tier 1 access will be made available to radar systems for the U.S. Navy which currently uses this band. Tier 2 will be priority access licensees (PAL) which will likely be wireless carriers who will acquire 10 MHz licenses for a renewable short term through auction (in late 2016). PAL users will agree to protect government users from interference, but receive no protection from government users. Tier 3 provides general authorized access (GAA) to all public users, including carriers, enterprises, or unlicensed users, which suggests utilization will closely match the Wi-Fi ecosystem today. Our checks show the 3.5 GHz spectrum works and the ecosystem is developing very quickly with broad support from carriers and manufacturers of chipsets, handsets, and radios (i.e., T-Mobile US, Verizon, Alcatel, Nokia, Intel, Qualcomm, iconectiv (Ericsson), and Federated Wireless).

Deciphering VZ comments. While DISH spectrum is most aligned with VZ’s spectrum portfolio, we do not believe VZ views wholesale access to DISH spectrum as a long-term solution to capacity management. We think Verizon views a potential spectrum leasing deal with DISH as a nearterm spectrum insurance play as development, testing, and support for 3.5 GHz continues. VZ has been the most aggressive proponent of 3.5 GHz spectrum and is in the forefront of 4G small cell implementation amongst all carriers.

Important Information: FBR is the global brand for FBR & Co. and its subsidiaries.This report has been prepared by FBR Capital Markets & Co. (FBRC), a subsidiary of FBR & Co.FBRC is a broker-dealer registered with the SEC and member of FINRA, the NASDAQ Stock Market and the Securities Investor Protection Corporation (SIPC). The address for FBRC is 1300 North 17th Street Suite 1400, Arlington, VA 22209.All references to FBR & Co. mean FBR Capital Markets & Co. (FBRC) and its affiliates.

Company-Specific Disclosures: FBR acts as a market maker or liquidity provider for the company’s securities: DISH Network Corporation For up-to-date company disclosures including price charts, please click on the following link or paste URL in a web browser: www.fbr.com/disclosures.aspx