As it moves ahead to build out its planned 5G wireless service, Dish Network is facing a new dilemma after T-Mobile said it would decommission its 3G CDMA network service on Jan. 1, 2022, a move that could effectively cut Dish-owned Boost Mobile's prepaid wireless business off at the knees.
Dish revealed in its 10-K annual report that T-Mobile would discontinue the CDMA network. T-Mobile sold Boost Mobile to Dish in 2019 for about $1.4 billion in a side deal related to T-Mobile's purchase of Sprint for $26 billion.
In the filing, Dish said the decommissioning would have a “material adverse effect” on its wireless business. Dish must either migrate Boost’s 9 million customers more quickly to the network Dish hasn’t built yet, purchase an enormous amount of new handsets to allow Boost customers to access T-Mobile’s 4G network or suffer a torrent of wireless customer defections. Dish appeared, during a conference call with analysts to discuss Q4 results, to be gearing up for the defection scenario.
“It’s hard to upgrade, to go from a phone that works great and works in their territory, and then go to another phone that won’t even work on our network, because we’re 5G,” Ergen said. “So then we have to upgrade them again. So if you run the numbers on that, there would be significant fallout from that, in my opinion.”
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Boost Mobile has about 9 million customers, so providing new handsets to those customers would be a logistical nightmare. Ergen said it might even be impossible to execute.
“I don’t even think we could get the supply of the phones that we would need,” Ergen said. “You can’t order phones and not know that you can move the phones, and the supply is somewhat limited for the kind of phones we might need for that. So that’s a material risk that’s out there on Boost.”
Boost has been losing subscribers already, shedding about 363,000 customers in Q4 and 212,000 in Q3. But the service has very high EBITDA margins compared with other wireless businesses. Boost Mobile's wireless profit margin was 16.3% in Q4, higher than the 10% margin for similar prepaid services like Tracfone, and more than five times the 3% margin some analysts expect for the 5G wireless service when it becomes available.
On the call, Ergen said Boost Mobile's profitability likely was not sustainable, a fact exacerbated by T-Mobile’s plans to decommission the network.
“Unfortunately, the revelation about having to migrate its customers off CDMA so quickly suggests a very challenging year ahead, both for subscribership and for costs,” MoffettNathanson principal and senior analyst Craig Moffett said in a research note.
Aside from providing a steady wireless revenue stream while it moves to build out its 5G network -- Boost revenue was about $1.2 billion in Q4 -- the prepaid service was supposed to serve as a springboard for the larger postpaid offering once it was launched. According to Moffett, Boost was expected to provide a retail brand, store locations and a customer base that could eventually be converted to Dish’s 5G network.
Dish might be able to get some relief from the federal government, or at least more time to migrate customers. Asked on the call if he had contacted the Federal Communications Commission about T-Mobile’s CDMA shutdown, Ergen said he hadn’t spoken to the agency personally, but it is possible one of his staff may have. He said he believed T-Mobile’s decision to discontinue the CDMA service was anti-competitive. He noted that Boost customers are “economically challenged,” and that removing one of their options to access affordable wireless services, especially during a pandemic, seems to go against the motivation for allowing Dish to buy the service in the first place -- which was to maintain a fourth national wireless provider.
“We are one of four providers,” Ergen said. “Washington picks winners and losers, and they make policy that affects people one way or the other. And we’ve had some good luck, we’ve had some bad luck with that, as have others.”
