Networx Down

Why is Memphis throwing away $29 million?

| June 21, 2007

Let's begin with a very simple statement of facts: MLGW, Memphis' taxpayer-owned public utility, has invested somewhere in the neighborhood of $30 million in a fiber-optic system called Memphis Networx. It has co-owned Networx for eight years with a group of prominent Mid-South business leaders incorporated under the name Memphis Broadband LLC. MLGW is now selling its share in Networx for $994,000 to Communications Infrastructure Investments (CII), a telecom-savvy holding company in Denver, Colorado.

To be more accurate, CII is paying $11.5 million for the company and the majority of its assets. After debt retirement, the private investors get to split $2 million among them while the city of Memphis gets a hard rock to suck on. To date, MLGW's accounting for this unprecedented mishandling of rate-payer money amounts to little more than an official "oopsie." Yet somehow, public outrage seems minimal.

If people are confused, it's little wonder. Networx has always been something of a mystery, and media coverage of the hastily announced sale has been skeletal at best, conflating at every turn the interests of the private investors (profit) with the public concern and the historic function of a civic utility (sustainability and service). Reports of the sale have further confounded the issue by questioning the wisdom of MLGW's initial entrance into the telecom industry, rather than exploring the circumstances surrounding its hasty, financially devastating exit. Again, let's take things slowly.

Memphians don't know what Networx is, and it's tempting to suggest that's by design. The company was never intended to be a service provider, though it sold itself to the city with fairy tales about bringing high-speed communication to underserved areas and — as one member of the City Council put it — "the Internet to poor people." If our civic leaders had bothered to read the fine print, they would have known that the company's promises were predicated on Networx turning a profit. And, from a net perspective, it never did.

So what exactly is Memphis Networx? Pretend that the market for drinking water is fragmented, with many different providers each claiming to have the tastiest, cleanest, best water. The problem is, they don't have a way to get their product to the customer. The providers don't want to cut their profits by spending the capital to install a better delivery system, so the city builds its own pipeline and rents that system to the providers, who in turn sell water to the citizens. Some of the providers sue the city, fearing that it will become a competing water provider with an unfair advantage over the private sector. Replace the word "water" with "digital technology" and you'll have a rudimentary understanding of what Memphis Networx does.

Memphis Networx is a loop of 144 high-speed fibers running underneath the entire city. In addition to the subterranean fiber, Networx' major physical assets include a secure, earthquake-proof data center with a satellite hookup and a pair of 2,000-gallon diesel generators in case the power goes out and a lot of high-tech gadgetry.

So what went amiss? According to MLGW commissioner and Networx board member Nick Clark, the technology and business plan began to fail in 2002, but that's merely a signpost pointing the way to the current precipitous juncture.

Private venture capitalists and public utilities have a very different set of expectations. Public utilities plan over a 50-year horizon, according to Herman Morris, who was president of MLGW when Networx was created in 1999. Venture capitalists expect to see a return in three to five years. To that extent, Networx was handicapped out of the gate when the licensing process was drug out over 18 months by telecoms like Time Warner, which wanted to prevent Memphis from obtaining a competitive edge in the industry. By the time Networx was fully launched in 2001, the telecom-industry boom was nearing collapse. But the problem cuts deeper.

Networx could have started out on a better foot by doing some of the good things it promised, like bringing Internet connections to underprivileged neighborhoods. The profits wouldn't have shown up right away, but such a move would have given the company a civic-oriented face. It would have built brand awareness and pride within the community. But all of these positive developments were predicated on eventual profits. However, big bonuses for executives were not tied to profits, and neither were generous housing expenses, instantly vested retirement plans, or fat, private-sector salaries. And all of this rampant spending was going on back when MLGW still owned an 80 percent share in the company it couldn't watchdog or control.

In June 2005, MLGW president Joseph Lee, who was no fan of the Networx deal, put his personal reservations aside and lobbied the city to put more funds into the company.

"We don't believe that having a $32 million stake in [Networx] and failing to get a $6 million loan guarantee should result in us losing such a strong equity position," he said, stressing the value of the Memphis utility's majority share in the public/private telecom venture. But the City Council, unable to see where all the money had gone, refused to provide Networx with additional finances. At that point, MLGW's 80 percent share dropped to 49 percent, and Networx became virtually invisible. As projected, however, Networx posted its first, miniscule profit for the 2005 business cycle. The news went largely unheralded.

Clark admits that he's harbored concern for Networx' fiscal health for over two years. Why didn't he say anything about it? Because "that information was not required to be publicly revealed."

Responding to mild, if somewhat misdirected, criticism posted by media critic Richard Thompson at mediaverse-memphis.blogspot.com, Clark wrote, "The very act of publicly commenting on the financial stresses of a venture capital entity can have the adverse consequences of causing the opposite of what is in the best interest of the rate-payers." So instead of commenting, and potentially scaring off, a few Networx customers, Clark and MLGW CFO John McCullough kept mum.

Clark recently released all of Memphis Networx' financial summaries to the media, but the broad numbers don't retroactively explain even half the story. Clark was simply playing by the rules as they were established on day one. What's private is private, and what the private side does with the public's money is also private.

What's frustrating is that there were provisions in the Networx operating agreement that would have allowed MLGW to break off its relationship with Memphis Broadband to seek other partners or operate the network independently with greater transparency and oversight. Based on the current deal, MLGW could have paid the private investors $2 million and become its sole owner. In debt, yes. In dire need of capital, yes. But also subject to the same open-financial-records policy as any other taxpayer-owned entity.

All that is history now. But it is imperative that Memphians — and their government representatives — understand that dumping Networx at a $29 million loss would be a big mistake. Two independent sources have confirmed that Memphis' telecom property was a major factor in enticing ServiceMaster to relocate much of its operations here. Although that doesn't show up on Networx' ledger as a profit, it's a significant return on the city's investment, and there's more where that came from. It's also difficult to place a value on the streamlined linking of Memphis' fire and police departments, and the benefits and savings that might be realized by using Networx' data center to centralize more of the city's sprawling IT network. Businesses are going to continue to require data security and storage. Across the country, broadband will expand, and in broadband-poor cities like Memphis, it will expand spectacularly.

There are many questions remaining to be answered concerning the Networx deal: Why did the company obliterate its sales staff? Who is COO Dan Platko, and why does he live in Atlanta (or Denver, depending on whom you ask or which online networking tools you trust). Why weren't local investors given first dibs on the deal? But the biggest question is a simple "why." After scraping its way to near sustainability and surviving to the point where broadband is a necessity and municipal wireless is catching on, why sell Networx now?

Tags

Comments (4)

Showing 1-4 of 4

Chris has asked all the right questions, and drawn all the right conclusions. The Flyer better pay him what he's worth, or it's going to find a national publication (Bloomberg, WSJ, Forbes, etc.)swooping down to snatch him away. If Networx were a public company, there's little doubt lawsuits would have been filed by now challenging the sale, the initial investment, the sweetheart deal for the private investors and the management of the company. Funny thing is, MLGW IS a public company (in the literal sense of that term), though you wouldn't know it the way it's been (and is being) run.

report   
Posted by M. Aussenberg on 06/21/2007 at 2:37 PM

Gaddy, none of those other guys would tolerate my occasionally Shakesperian spelling. Besides, I'm not sure wher Bloomie stands these days (rimshot). And I'm pretty happy among my peeps. But thanks

report   
Posted by Chris Davis on 06/21/2007 at 4:04 PM

I just ran across this article through a google search and had laugh when I read the name of Dan Platko mentioned. I worked with Dan @ one of the many former employers' he's had and he was a joke. Maybe a beter description would a "snake in the grass" This guy was all about the money and would run anyone down who was in his way of making it. Dan's specialty is moving from one company to the next, usually with his telecom buddies in tow, destroying a company and making huge salaries and bonuses in the process. A real son of a gun....

report   
Posted by Brian on 10/17/2007 at 9:01 PM

too funny, I also found this doing a google search on Mark Ivie and Dan Platko. I knew Platko and Ivie as a former customer of MN. You are spot on about Platko - he is the biggest snake I have ever met, all about the sale, nothing about customer service, and worse on his employees. Ivie - I've never figured out what happened to him; he seemed to fall apart in '05 just when they started to turn a small profit. His plans were larger than just a county-wide fiber plant - much larger - but he couldn't keep things together as a chief executive long enough to make any of it happen. What a waste of taxpayer money, but don't be surprised when they resurface at some point in Networx's future - Chris is dead right about the "insider trading" going on with this deal.

report   
Posted by Charlie on 12/27/2007 at 6:13 PM
Showing 1-4 of 4

Add a comment