Businesses’ taking advantage of regulatory loopholes is nothing new, and that is probably one reason why fewer than one in five people have much, if any, confidence in big business to act in the public interest. But DISH Network’s brazen abuse of the Federal Communications Commission’s incentives for small businesses at a recent spectrum auction — to the tune of $3 billion, at taxpayers’ expense — was enough to make even a Dickensian villain squirm.
First, some context: The Federal Communications Commission (FCC) is responsible for managing the use and sale of the nation’s wireless spectrum. Think of it as the invisible real estate on which service providers build their mobile networks. When authorized by Congress, the FCC conducts spectrum auctions, which can generate huge revenues as wireless players compete to buy the spectrum they need to provide better services for their customers.
The FCC recently completed an auction of Advanced Wireless Services (AWS-3) spectrum, which drew in a record-breaking $45 billion in revenue. While most companies involved in the bidding put their own money on the line, DISH Network, a satellite-TV provider, put in yours — at least in part.
Using multiple shell companies to qualify for “designated entity” (DE) discounts, DISH Network effectively shaved off more than $3 billion in payments that otherwise would have been made to the government. Now, get this: DE status is reserved for small businesses — not market behemoths like DISH Network.
The DE program was created at Congress’s direction more than 20 years ago. It offers qualifying small companies a taxpayer-funded credit equal to 25 percent of the purchase price to help them compete against their larger counterparts when bidding for spectrum. In other words, through the subsidy, small businesses pay only 75 cents on the dollar, giving them a leg up on competitors with assumedly deeper pockets. As Senator Kelly Ayotte (R., N.H.) and FCC commissioner Ajit Pai wrote recently in the Wall Street Journal, “It was a well-intentioned program to help the Davids compete with Goliaths.”
One would have a hard time imagining a scenario in which DISH Network, valued at $35 billion, falls in with the Davids, not the Goliaths. Yet, that’s exactly what the giant put over on federal regulators.
Only months ahead of the auction, DISH Network purchased about 85 percent of two smaller entities — Northstar Wireless and SNR Wireless. Judging by their bidding behavior, an observer would never guess how small they are; Northstar and SNR bought more spectrum, for more money, than all other bidders but AT&T. Although neither had recorded any gross revenues before, the two “very small businesses” (as they’re classified by the FCC) managed to have enough cash on hand to place bids in excess of seven times those of T-Mobile.
It doesn’t take a forensic accountant to see that DISH Network, with annual revenues in the range of $14 billion, perverted the bidding process by creating shell companies, funding them lavishly, and then utilizing the FCC’s DE program to grab “small business” subsidies at taxpayers’ expense. The FCC should immediately reform or abandon its DE program to prevent this type of egregious behavior.
DISH Network’s bidding strategy — including whether it intentionally drove up the price of spectrum in certain markets to enhance the value of its current spectrum holdings (and thus increase its stock price) — is something authorities should closely examine and thoroughly investigate. Even so, given the complexity of that strategy, it will take a long time to unravel. What is certain is that, at a minimum, DISH Network took taxpayers for a $3 billion–plus ride. Legitimate small businesses will suffer as a result.
DISH Network effectively shut out smaller competitors and small businesses by using the very tools created to help them. After moves like these, it’s no wonder Americans are losing faith in big business.
— Steve Forbes is chairman and editor-in-chief of Forbes Media.