DISH Network Corp (DISH), Sprint Nextel Corporation (S), and the Game of Three

Here is what you have to know about the DISH Network Corp (NASDAQ:DISH) bid for Sprint Nextel Corporation (NYSE:S).

This is a game of three thing.

Right now AT&T Inc. (NYSE:T) and Verizon Wireless enjoy a virtual duopoly in mobile telephony. Not only do they control 70% of the market between them, but they’ve got the profitable end of the business lined up. Most of their subscribers are on two- or three-year contracts.

But if these two companies have 70% of the market, that means there is room for one more. The release of the Competitive Carriers Association report above began an ongoing scramble to become that third strong competitor. It is assumed that there is no room for a fourth.

Deutsche Telekom’s T-Mobile unit actually started it off, trying to get bought by AT&T Inc. (NYSE:T). It was the government’s refusal to approve that deal that really set things in motion. Suddenly T-Mobile was buying Metro PCS in hopes of scaling up a competitive customer base and Masayoshi Son, who had already muscled into Japan’s duopoly with Softbank, saw his chance and made his own bid for Sprint, which brought in Clearwire, since Sprint Nextel Corporation (NYSE:S) owned a dominant stake in that smaller carrier.

Son’s Choice

This left other spectrum owners on the outside looking in. DISH Network Corp (NASDAQ:DISH) has spectrum, and ambitions, but the train was leaving the station, thus their new bid.

That bid, $25.6 billion, would leave it drained of cash, drowning in debt, but holding the prize. Investors are wise to bid DISH down, way down, on this news because it’s more than a stretch to think they can both take all this spectrum, build it out, and market it effectively against the AT&T Inc. (NYSE:T)-Verizon juggernaut.

Son now has a choice. He can raise his own $20 billion bid for Sprint, in order to take the prize away from DISH. He can negotiate with DISH Network Corp (NASDAQ:DISH) on a new arrangement that would essentially make this a four-way merger – Clearwire, DISH, Sprint Nextel Corporation (NYSE:S) and Softbank. Or he can wait for DISH to waste itself on the rocks of this acquisition, which could mean taking DISH out a few years from now at a much lower price.

The reason I say that is because there is no real game of three. Right now there are two competitors, and while it’s assumed there is room for three, there may not be. Not unless you have the marketing muscle to take share. DISH Network Corp (NASDAQ:DISH) doesn’t.

Game of Four?

Of course, there is another way this could work out, which is the way T-Mobile parent Deutsche Telekom is betting on. That is, two major competitors and two minor ones — AT&T Inc. (NYSE:T) and Verizon holding two-thirds of the market, and the other two holding one-third.

That’s the way it works in Germany, Deutsche Telekom’s home market. It’s a comfortable arrangement that leaves everyone with profits.

But that still leaves Son and DISH Network Corp (NASDAQ:DISH) fighting for a single seat at the table. The best thing for both is to get together in some way, and that’s what I expect will happen. Your best bet in that case may be to short DISH and cover once that arrangement is announced. Just remember that the big profits in this case will only go to the big players. I’d rather hold my fire until after the smoke clears.

Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.