The Consequence: “The stockholders would be in open revolt,” says telecommunications analyst and author Jeff Kagan, who has followed the industry for 25 years. “They’d be calling for the heads of the leadership, that the company take another path, demanding a change in CEO’s.”
Ah, but what if the company were owned not by stockholders, but rather by a couple of small towns in North Carolina?
“Well,” Kagan replies, “that’s too bad.”
Too bad for the company.
Too bad for the towns.
And, no doubt, too bad for the towns’ taxpayers.
But that’s the case for Davidson and Mooresville, owners of MI-Connection, where newly released figures for the fiscal year that ended June 30 show losses of $5.7 million, against total revenue of just $15.3 million. That revenue represented a three percent increase over the previous year, far short of the 20 percent the company had forecast.
More than a year ago, the ink had barely been dry on MI-Connection’s budget for the just ended year before critics scoffed at the 20 percent projection as unachievable.
Turns out the naysayers were the soothsayers.
“We are disappointed with the system’s growth rate for the 2011 fiscal year,” says Davidson Mayor John Woods, the only Davidson elected official running again this fall who voted in 2007 to buy the remnants of the bankrupt Adelphia Cable system.
Considering that one out of every five tax dollars that Davidson property owners pay to the town this year will go directly to bail out the company (compared to one in four last year), Woods won’t be the only disappointed Davidsonian. The town’s cable-connected burden is down just slightly from last year, when Town Manager Leamon Brice overhauled the town’s administration to cut costs, and commissioners approved a $204 annual fee for residential trash pickup to cover Davidson’s share of the company’s loss.
This year’s $2 million allocation puts Davidson’s investment in the TV, Internet and phone company above the $35 million mark, nearly four times the amount of the town’s operating budget.
And MI-Connection is projected to continue losing money beyond next year. With its share of MI-Connection’s long-term debt at more than $30 million (also about the company’s estimated current value) and Mooresville’s obligation at about $60 million, both towns are likely to continue dipping into their operational budgets to support the company, especially considering that investor guarantees make it impossible for Davidson and Mooresville to sell off MIConnection until at least 2017.
“I’m not surprised,” says Alan Breznick, senior analyst with technology research firm Heavy Reading. “Government thinks the marketplace isn’t going to come in fast enough (with technology) and the government thinks it can come in and take over and win. It doesn’t work. It looks like it will work, so they try it. But it doesn’t.”
That’s not to say publicly held companies can’t lose money and survive, Breznick adds. We live in the often red shadows of banking behemoth Charlotte, after all.
“But companies that don’t do well but then recover have done well for a long time before things get bad,” Breznick explains. “If they screw up, they have some time to fix it. But if a company starts out life (in trouble), you don’t have that wiggle room to survive until things get better.”
And, Breznick adds, when it comes to doing the due diligence necessary to justify buying or creating a company, governments simply don’t have the same expertise as the private sector. That’s why neither Breznick nor Kagan are optimistic about MI-Connection’s future as a municipal entity.
“It’s too bad their hands are tied,” Kagan says of the towns’ inability to sell the company for another five years because the bondholders are guaranteed a return on their investment until then. “Their best option would be to sell the company to Time Warner or Windstream or another existing provider.”
Woods, however, while expressing his disappointment with MI-Connection’s performance, continues to run with the bulls when discussing the company’s future.
“MI-Connection is already at work on options that will help to improve that growth rate this fiscal year,” Woods says. “We have full confidence in the MI-Connection Board of Directors and staff.”
Those are words that might sound familiar to Davidsonians. Here are a few more.
From MI-Connection General Manager Alan Hall in September of 2010, predicting that the company would no longer need any help with its operational costs: “The only funds we would need from the towns are for capital expenditures.” The towns have since had to pump more than $10 million into the company’s operations.
From Woods in January of this year: “Our reputation as a first-class, service-oriented organization is spreading, and we look forward to continued growth that will strengthen the financial stability in a troublesome economy.”
And from Woods again, this time this past June: “As MI-Connection continues to penetrate the market, financial stability will be attained and the current drag on the towns’ finances will cease. MI-Connection will stand on its own.”
But it’s that very optimism — seeming to echo endlessly over a river of red ink — that epitomizes the public-versus-private conundrum, Breznick insists.
“For the most part, private investors have an idea what’s going to happen before they invest in a company,” Breznick says. “The government just invests and hopes for the best.”
