Charles Ergen, the billionaire who controls the satellite-TV provider Dish Network, and his company are about to make a cool $3.25 billion — courtesy of the American taxpayer.
This windfall came from a recent successful auction of wireless spectrum that raised more than $40 billion for the American treasury. But it will be $3.25 billion less than it ought to be, if Ergen and his clever lawyers have their way.
The reason is that Dish Network bid for licenses through a newly formed vehicle that claimed to be a “very small business” under the Federal Communications Commission rules and was entitled to a 25 percent discount.
At this point you may be scratching your head. How can Dish, a company with a $34 billion market value, be a “very small business”? Indeed, to qualify for the discount, a very small business must have revenue not “exceeding $15 million for the preceding three years.” Dish in its last full fiscal year had almost $14 billion in revenue.
Through sleight of hand and aggressive use of partners and loopholes, Dish turned itself into that very small business, distorting reality and creating an unfair advantage.
Here is how it worked for $7.8 billion of Dish’s winning bids (it had $13 billion winning bids in all).
A new company, Northstar Wireless, was formed to bid on the spectrum. Dish Network Corp. indirectly owns 85 percent of Northstar Wireless.
But a new company is not enough. After all, anyone could then simply form a new company and save similar billions of dollars. In its rules, the FCC counts the revenue of affiliates and the controlling owners of the bidding entity for purposes of determining whether a business is a very small one.
For the first loophole, the lawyers went to Alaska.
Doyon is an Alaska Native regional corporation, created as part of a federal government settlement of native land claims back in the 1970s.
Based in Fairbanks, Alaska, Doyon has more than “19,000 shareholders, and is the largest private landowner in Alaska,” according to its website. It has at least 12 different operating companies, including one that operates seven drilling rigs on the Alaskan North Shore. Its purpose is to serve the Native American community in central Alaska, and its shareholders are all Native American descendants.
Doyon owns 15 percent of Northstar, a stake it acquired for $120 million; Ergen’s Dish owns the other 85 percent. Even though Dish is the majority owner, Doyon was designated as the manager of Northstar.
Doyon’s control over Northstar is the key to the small-business discount. Dish contends that it lacks control — Doyon has all the votes — and so its own revenue is not included in calculating whether Northstar is a very small business.
Still, you may be wondering how Doyon itself can qualify as a “very small firm.” After all, being the largest landowner in Alaska and an owner of oil rigs must count for something.
And indeed, Doyon’s average annual profit over the last five years has been more than $18 million.
It comes down to what may be the most obscure exemption in the FCC rules.
There are regulations specifically for the dozen or so companies organized under the Alaska Native Claims Settlement Act. For them and other Indian tribes, the agency does not count the revenue from “entities owned and controlled by such tribes or corporations” unless the revenue comes from gambling. And so only Doyon — the holding company — is counted, and it has no revenue for these purposes because all of its money was made in its other companies.
And so, Dish has erected an edifice that it used to reap that $3.25 billion in savings.
By this point, your head may be exploding.
The rest of Dish’s winning bids — worth about $5.5 billion — were done under a partnership with John Muleta, the former chief of the FCC’s wireless telecommunications bureau, and relied on similar loopholes. As a former government official, Muleta has no real revenue and so meets the test of being a “very small business.”
No doubt Dish and its lawyers are high-fiving one other and patting themselves on the back. By giving 15 percent ownership to Doyon at a discounted price, they have saved themselves billions.
Taxpayers, however, may want to ponder what those billions of dollars could have done in the coffers of the government — a new bridge or money for schools, perhaps.
And this is not a new issue. The “small firm” exemption has been known to be a problem at the FCC for years. The Congressional Budget Office in 2005 wrote a report highlighting how it was mostly used by big companies instead of the small firms it was intended to benefit. Moreover, the office found that the program provided little benefit to consumers while providing a big discount to companies. In a 2006 auction, AT&T successfully used this structure with Doyon.
The latest spectrum auction — and the attention it has received — may finally push the FCC to eliminate this exemption. It’s hard to see how it benefits anyone but Dish and Doyon, which both get free money for not doing much of anything.
More immediately, the agency should take a good, hard look at the structure of the arrangement.
Doyon has control over Northstar in its day-to-day operations, but the agreements also require Northstar to be managed according to a five-year business plan agreed to by Dish in advance. No deviation in any material respect can be done without Dish’s approval through a subsidiary. Not only that, but there is a multipage list of things that Northstar cannot do without approval from Dish’s subsidiary. These restrictions include spending more than $2 million, selling the company or paying any executive more than $200,000.
Given Dish’s significant control and the requirement that Doyon cannot deviate from a previously agreed business plan, Dish is having its discount but still getting effective control. Though the FCC may have passed on this issue without scrutiny before, this instance would seem to provide grounds to challenge the exemption claim.
In a blog post after the auction, Roger Sherman, the current chief of the FCC’s wireless telecommunications bureau, wrote that the agency would “thoroughly review and scrutinize each application” to make sure it “has complied with the commission’s bidding credit rules.”
Ajit Pai, an FCC commissioner, followed up by saying that Dish’s bid made a “mockery” of the exemption and called for further investigation.
Dish has been busy trying to defend itself, arguing in a presentation to the agency that this program “helps increase auction revenue” by allowing more parties to bid.
You have to laugh, because even if true, this credit was never intended to help companies like Dish bid and earn them billions.
Muleta has turned into a very rich man overnight. Doyon put up only $120 million and now owns 15 percent of an entity worth almost $8 billion. Ergen, who is worth more than $22 billion, according to Forbes, is even richer. If the FCC wants to encourage more bidders, it would seem that other, fairer ways are possible.
In a statement, Doyon defended the strategy, saying its participation in the auction helped push up the prices “three times more than was expected.”
“We followed the designated entity (‘D.E.’) program rules and did what Congress intended: create competition,” Aaron Schutt, the president and chief executive of Doyon, said in the statement. “By any measure, the D.E. program delivers solid value for the American taxpayer.”
Muleta did not respond to an email request for comment. A representative of Dish directed me to a conference call with analysts earlier this week in which Ergen argued that Dish “went by the rules” and that by bidding, it created more value for the government.
In an era when banks and oil companies are at times publicly vilified as not being good corporate citizens, Dish’s strategy for the spectrum auction comes across as among the most brazen, least civic-minded act by a corporation in years. The involvement and enrichment of Muleta, a former government official, only makes it worse. Manipulating the system this way may win points with shareholders and lawyers, but it will serve only to fuel the public’s cynicism over large corporations and government.