Cable: "Cash cow" turned catastrophe?

Imagine driving by a house and immediately falling in love with it. The listing realtor won’t let you walk through it. But you’re already so enamored with the house – and it looks so sturdy and well groomed from the outside – that you don’t see the need to look into it further. So you buy it, on curb appeal.

Then, you walk inside. You look around and quickly realize that while the potential is there, tapping into that potential will take a significant amount of time, energy and money.

That’s similar to what happened when the towns of Mooresville and Davidson purchased the bankrupt Adelphia cable system.

Despite staunch objection from the public, the Town of Mooresville bonded $80 million to purchase the cable system. The Town of Davidson “co-signed” on the loan and guaranteed repayment of its portion of the cost through subscriber fees. The $80 million was supposed to pay for 10,500 subscribers and system upgrades, with extra cash flow for the first couple years. But when it came time to close on the system, the towns discovered they would actually have to pay for more than 15,000 subscribers, which ate into some of the funds earmarked for upgrades.

Now, the Town of Mooresville is between a rock and a hard place. In order to deliver the upgrades that were originally promised – which would bring the system to a level where it can compete with its market competitors and lay fiber to all businesses and new residential developments – MI-Connection is going to need about $12.5 million more. And it is expected to ask Mooresville commissioners to approve that additional funding on June 2. But first, MI-Connection representatives plan to meet with elected officials from the towns of Mooresville and Davidson tomorrow to answer questions. The meeting is scheduled for 6 p.m. in the MI-Connection office on Broad Street.

If the towns approve the additional $12.5 million, it would put MI-Connection “in the game,” making it more competitive in the video-entertainment world and helping it pave a “highway” for fiber optic to commercial and new residential developments. In other words, the additional funding would nudge MI-Connection to a point that it should be able to provide services currently offered by market competitors.

If the towns do not approve the additional $12.5 million, and the promised upgrades are not completed, the taxpayers of Mooresville and Davidson – financers of what appears to be a defunct cable television system – could be left holding the bag.

One question that has arisen is why the towns’ “due diligence,” did not uncover the 4,500 additional subscribers. Also, why didn’t it become clear through that “due diligence” – instead of after the purchase – that the system was in far worse shape than anyone realized?

Many fingers have been pointed at Time Warner, and the bankruptcy courts would not allow the towns to thoroughly inspect the cable system before purchasing it. Instead, the towns relied on the opinions of consultants who offered a “best guess” of what the system was worth. After the purchase, those consultants said the system was in worse shape than they had guessed. What’s bothersome about such an argument is that good business sense dictates that a person doesn’t buy something – especially $80 million worth of something – site unseen.

Town Finance Director Maia Setzer said she transferred more than $5 million from the $80 million in bond funds to “reimburse” Mecklenburg County and the towns of Mooresville and Davidson for their “due diligence work,” including $1.5 million for Mooresville’s earnest money deposit and $1.5 million for the “transition expenses” incurred by Bristol Virginia Utilities (operators of the cable system) and paid initially by Mooresville. The remaining $2 million, Setzer said, was for “several different vendors’ expenses, including the third-party reviews of our consultant’s numbers as required by the Local Government Commission, legal fees and the bankruptcy trustee in addition to the fees resulting from the issuance of debt.”

So, what did the $5 million in “due diligence” buy us? Basically, a video entertainment company with potential … but without enough funds, or long-term vision, to make that potential a reality.

The town attempted to sell the cable’s purchase plan to the public by touting the economic development made possible through fiber optic that MI-Connection would extend to commercial and new residential developments. But without the $12.5 million, fiber optic will likely not be extended to businesses or new homes, and fiber optic to older homes was apparently not part of the original plan.

If the additional funding isn’t granted, what’s MI-Connection’s “Plan B”? Well, at least as of a couple weeks ago, there isn’t one.

Some have suggested that we could simply sell the cable system. But, going back to the house analogy, once you’ve stepped foot through the front door, you can’t “un-discover” what you’ve discovered. Now that we own a dilapidated cable system – and the veil of “bankruptcy-court secrecy” has been lifted – the entire community is aware of the cable system’s shape, and arguably no one in their right mind would buy it in its current condition for the same price we paid for it.

Taking it a step further, it’s been suggested that the towns could “flip” the system, basically fixing it up to the point that it could sell and potentially bring in a profit. But flipping requires an investment. The towns would still have to sink additional money into the system in order to bring it up to market value … just to make our money back.

But there is some good news, according to a recent MI-Connection press release and the company’s April 2008 financial and statistical reporting package. MI-Connection is making money and recently added 37 new channels, free of charge, to its subscribers, although not all subscribers received all 37 channels. Also, customers who call for service are waiting on the phone for shorter periods of time, and many subscribers are reporting faster Internet connection speeds.

MI-Connection ended the month of April with 16,399 subscribers, representing a net gain of 573 subscribers since December … but a net loss of 203 subscribers since March 31. Also at the end of April, MI-Connection had 136 pending installations … and 127 pending disconnections.

How Mooresville commissioners will vote regarding the additional $12.5 million is anyone’s guess.

When the board voted on the original $80 million acquisition of the cable system, three voted for it – Frank Rader, Mac Herring and Chris Carney – while three voted against it – Mitch Abraham, Thurman Houston and Danny Beaver. Mayor Bill Thunberg broke the tie by voting for the $80 million “investment.”

Miles Atkins won Beaver’s seat in November 2007 and was sworn into office a month later, after the original cable vote. But the only time that the cable deal has been brought up publicly since he took office, Atkins voted against it.

Rader and Herring will very likely vote to provide the additional $12.5 million. Houston and Atkins will likely vote against it. Carney and Abraham are the “wild cards.”

Some members of the town board have adopted a behind-the-scenes directive to “protect the mayor” from having to break a tie. It stands to reason, then, that they may be particularly wary about putting the mayor in the position to break another tie regarding cable.

If Abraham is consistent with his “no” vote and Carney is consistent with his “yes” vote, the mayor will have to break a tie again.

But Carney says he is not in favor of providing the additional $12.5 million until certain conditions are met. First, elected officials must not be on the MI-Connection Board of Directors. Second, the company must implement a marketing plan that reaches out to the area’s commercial developments. And third, MI-Connection must hire a business manager to serve as a liaison between the company, its operators (Bristol Virginia Utilities) and owners (the towns).

If Carney and Abraham join Atkins and Houston in voting against the additional $12.5 million, the measure would die. But if Carney votes against the additional funding, the squeeze is on Abraham, who voted against the original $80 million acquisition of the cable system just before he was up for re-election last November, but who could feasibly be a “closet supporter” of the cable deal … or would vote either way just to keep the mayor from having to break a tie.

We can afford to speculate. When it comes time to vote on June 2, town commissioners can’t.

At the end of the day, if the towns weren’t allowed – as part of their “due diligence” efforts – to fully investigate and inspect the cable system, then they should have simply walked away. They should not have gambled with $80 million – and now potentially $92.5 million or more – of taxpayer money based on a hunch or the “best guess” of “consultants.”

But we can’t go back and change what’s been done. We can’t “un-discover” what’s been discovered.

So far, MI-Connection promised a lot and has delivered a little. The company clearly lacks a public relations/marketing plan, and the advertising/marketing it has undertaken has been, frankly, aesthetically lacking. MI-Connection also does not have long-term market intelligence or the ability to make sound market projections beyond 2011 because the “models” used by the company assume too many variables, including growth projections and companies that could feasibly, and without regulation, overbuild.

Mooresville’s board of commissioners must decide if it truly wants to be in the cable television business – and, if any questions exist, it must decide how we can cut our losses. As AT&T is rumored to be laying fiber optic/cable in the Town of Davidson, the town board must ask itself: Is it enough that MI-Connection is keeping its head above water? With today’s technology being out-of-date tomorrow, and with the unregulated ability for other Internet service providers to overbuild and offer more for less, does MI-Connection have what it takes to stay in the game? And if so, for how long? How deep do the Town of Mooresville’s pockets need to be to play in that kind of game? And at the end of the day, is it truly worth it, or are we out of our depths?