Dish Network Corp.'s wireless ambitions are facing an expensive setback.

Federal regulators are poised to reject $3.3 billion in discounts sought by two small Dish partners during an airwaves auction earlier this year, people familiar with the matter said, dealing a blow to the satellite-TV operator, which has been aggressively accumulating spectrum despite not offering cellphone service.

After a long review, staff at the Federal Communications Commission concluded that the $13.3 billion in winning bids by two companies backed by Dish didn't qualify for the small-business discounts because their bidding conduct violated the broad spirit of the auction's rules, one of the people said. FCC Chairman Tom Wheeler circulated a draft order to the FCC's other four commissioners on Wednesday, the people said.

At the auction, which ended in January, Dish's affiliates came away with nearly half of the wireless licenses sold. Their winning bid total was second only to AT&T Inc. and ahead of Verizon Communications Inc. But it was two tiny companies—called SNR Wireless and Northstar Wireless— with Dish's backing that staked claims on the licenses, not Dish itself.

A rejection of the discounts would leave SNR and Northstar on the hook to pay the additional billions. They won't simply be able to walk away. However, Dish said in earlier filings prior to the auction with the FCC that it could take over the spectrum entirely, dropping the complex structures of the designated entities.

A Dish spokesman declined to comment. The company has said it adhered to the rules and noted that its practices didn't diverge from those employed by other companies in previous FCC auctions.

It is unclear how Dish will respond, though many industry observers expect Dish Chairman Charlie Ergen to take the matter to court. The FCC's decision could also be a setback in Dish's efforts to acquire T-Mobile US Inc. Shares of Dish fell 3.4% on Thursday.

Mr. Ergen has said the company's spectrum holdings are part of a broader plan to enter the wireless industry to diversify Dish away from its struggling core pay-TV business.

Auction participants don't typically push for higher prices, but Dish's position had been more complex. A significant portion of the satellite broadcaster's value is in the billions of dollars of wireless spectrum it already holds. That spectrum is similar to what the government was selling. Their values rose together, pushing Dish's market value up by $3 billion, or 10%, over the course of the auction.

At a news conference Thursday, Mr. Wheeler acknowledged that the FCC had circulated a recommendation but declined to comment further. Earlier this year, Mr. Wheeler told FCC staff to study the matter closely, saying something didn't smell right, the Journal previously reported.

The way Dish and its two affiliates coordinated during the auction drew complaints from rival bidders, which claimed the aggressive tactics distorted the results and led to higher prices. The auction drew $45 billion in winning bids, twice as much in total bidding as earlier sales of spectrum.

Dish, with $14 billion in revenue last year, also drew the ire of lawmakers for appearing to take advantage of a program designed for encouraging small businesses to enter the wireless industry.

Wireless companies are hungry to gain access to more airwaves to handle the increasing use of mobile devices for everything from watching live-streaming sports and YouTube videos, to uploading photos to Facebook.

Bidding is anonymous during the auction, but Dish and the two entities stayed in contact with one another because they disclosed the arrangement to the FCC in advance. That meant there were instances where rivals saw three distinct bidders when in fact those were Dish and its partners working together.

On Thursday, the FCC tightened the rules that let Dish's affiliates claim discounts. The agency placed a cap on the amount of discounts small businesses can receive, setting a limit of $150 million in next year's auction. The new rules also don't allow coordinated bidding between related-parties. Previously, the FCC let companies work together during auctions as long as they announced their intentions in advance.

The proposed rules "will ensure large corporations can't game the system," the agency said in a statement. The rules aren't retroactive.

In the auction, Dish's entities ultimately accounted for 27% of all bids placed, more than AT&T and Verizon combined, according to a Wall Street Journal analysis of the results. Records show the entities bid for a wide range of licenses—often the same ones—and stayed active until late in the auction.

Dish provided 85% of the capital in both NorthStar and SNR. In filings with the FCC, both companies reported revenue of less than $15 million and said that Dish didn't have a controlling interest in either firm, two criteria needed to qualify for the small business discounts.

"If they had gotten a few hundred million of discounts it wouldn't have triggered nearly the political outcry that it did and they probably would have gotten away with it," said Jonathan Chaplin, telecom analyst at New Street Research.

Dish won the spectrum discounts by tapping an eclectic bunch of partners. A central player was Stephen Hillard, a Texas investor and fantasy-fiction author. Mr. Hillard put to use his ties to Alaskan Native American groups to link up Dish with Doyon Ltd., an Alaskan firm owned by Native Americans that has a controlling interest in Northstar.

SNR, the other Dish-backed entity, drew former FCC official John Muleta and BlackRock Inc., the investment firm.

Write to Thomas Gryta at thomas.gryta@wsj.com, Shalini Ramachandran at shalini.ramachandran@wsj.com and Ryan Knutson at ryan.knutson@wsj.com

Access Investor Kit for AT&T, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US00206R1023

Access Investor Kit for DISH Network Corp.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US25470M1099

Access Investor Kit for Verizon Communications, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US92343V1044

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

DISH Network (NASDAQ:DISH)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more DISH Network Charts.
DISH Network (NASDAQ:DISH)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more DISH Network Charts.