July 12, 2007
WHY THE NETWORX CONCEPT FAILED IN MEMPHIS BUT WORKS NEARLY EVERYWHERE ELSE. THE REASON. POLITICS AND POLITICIANS
Watchdog has been doing some research on Networx and here are my thoughts.
Memphis Networx -- Chronology of Events and Impetus for Concept
Origins 1997-98
Legislation was passed by the U S Congress to begin deregulating electric utilities in a manner similar to the way natural gas utilities were deregulated in the late 70’s / early 80’s. MLGW along with electric utilities across the country began to look for ways to bring more value to their customers and communities. One idea was to utilize existing infrastructure and know how to provide communication services of various sorts to the communities served.
At the same time, the FCC commissioned a study which reported that certain U. S. citizens were being underserved by existing communications companies. These citizens were primarily the rural and the inner city urban poor. The FCC issues guidelines suggesting that the states encourage competition to existing communication companies.
Other studies compared various U.S. cities with respect to high speed high capacity data transfer -- broadband communication services. The City of Memphis was considered a Tier 3 city and was not standing up very well in comparison to not only the large cities such as New York, Chicago, Dallas, and Atlanta -- but also to smaller cities such as Columbus, Ohio, Palo Alto, Ca, etc.
This issue was discussed by MLGW executives during planning sessions during this period and noted as an issue worth more review. Also, changes were made in State and Federal law allowing Electric utilities to enter the communication business.
Catalyst for Action 1998
One of MLGW”s construction contractors, A&L Underground and its principal owner, Alex Lowe, had taken notice of the same issues and proposed that MLGW and A&L look jointly at developing a high speed communication network for Memphis and Shelby County. MLGW executives noted that though they had interest, any such arrangement must be subjected to a competitive selection process. MLGW also noted that a reasonable business plan must be in place before MLGW could go forward to get necessary approvals. A&L asked to do a preliminary analysis and business plan development at A&L’s cost, but with access to MLGW’s staff and facilities data to conduct the study. MLGW agreed subject to the requirement for a competitive proposal if MLGW were to go forward and allowing other potential partners the same time and access during that competitive process.
The concept study and business plan development were done by Arthur D. Little & Assoc. and did indicate the potential for a successful business. Requests for proposals were issued, 8-10 responses were received, three were reviewed in detail, and the A&L proposal was accepted as being the best overall proposal, based largely on the in depth study done by Arthur D Little. Most of the other responses were very conceptual in nature even though time was allowed in the proposal process for a more in depth analysis.
Organization and Approval Process 1999-2001
After selection of A&L Underground as the preferred partner, much of 1999 was spent developing a more detailed business plan, agreeing upon an appropriate structure for an organization with partners with different investing objectives, different tax concerns, and public vs. private oversight guidelines. The selected structure was a Limited Liability Corporation ”LLC” with an operating agreement which included clauses which described trigger points and courses of action for either party to exit the agreement.
The MLGW approved the proposal and appropriated $20 million for investment in August, 1999. Members of the board at that time were Netters, Graves, Jalinek, Franketta Guinn and Olin Morris. The City council approved the project as part of the budget process in late 1999. John Bobango who served as Chairman of the Utility committee was provided an in depth briefing and other members of the council were briefed as their interest dictated.
Application was made to the Tennessee Regulatory Authority in November, 1999. An approval process which should have taken two months was drawn out for approximately 18 months because of intense opposition by Time Warner. MLGW and A&L Underground spent in excess of $2 million on legal fees and associated costs which should never have been needed. Ricky Wilkins was the attorney for networx). Time Warner also applied intense political pressure locally, in Nashville and in Washington.
At approximately the same time, a group of prominent Memphis businessmen formed a group know as the Memphis Angels. Their objectives were to make investments with the potential for high returns, but also of benefit to the greater Memphis community. The group included: Frederick W. Smith, Robert B. Blow, Thomas M. Garrott, J. R. Hyde III, William B. Dunavant, and Willard Sparks. MLGW and A&L had already agreed that a strong approach would be made to include minority investors. A group of minority investors formed a partnership called Memphis Broadband and joined the Memphis Angels to buy out the A&L Underground position in Memphis Networx. They included Archie Willis III, Luke Yancey III and Bridget Chisholm, Gloria J. Thomas, Fred Jones, Jr, George M. Jones, Bennie Marshall, Gilbert I Noble, Alvin & Carla Ray, Dr. Sandra Reed, Anthony Tate, Darrell K. Thomas, Jesse H. Turner, Jr., Dr. Phillip & Ritchie Bowden, Tyrone Burroughs, Elliot Perry, Charles L. Ewing, Sr., Dr. Lovelace Gipson, Herbert Hillard, Dr. B. L. Banks and Lee Jackson and a number of other investors amounting to about $1.1 million dollars (approximately 22@$50,000+ each). The operating agreement was again structured to recognize the different objectives of the parties and options for exiting the arrangement.
The business plan was refined as well with input from McKinsey and Company. Memphis Networx had been seen as a common carrier or provider of “wholesale” service rather than a retail provider. Related offerings such as “off site data backup” were added.
The new partners agreed to the original objectives of serving the entire county rather than just downtown and the Poplar the business corridor. There were also provisions for a portion of the profit to go to providing expanded communication service to underserved parts of the community.
With the involvement of the Memphis Angels, the approval process moved forward with approval in mid 2001.
Business Start-up 2001-03
Construction of the network began in September, 2001. The 100 mile plus loop was completed on time and under budget. Customers began to be added in late 2002. The role and public statements by political leaders such as Mayor Herenton, Ricky Peete, and Joe Brown was the real obstacle to finalizing sales. Joe Brown was persuaded by Time Warner. John Farris was a lawyer for Time Warner and lobbyist. John Farris is the son of Bill Farris who was head of the state democrat party. John Farris was active in the democrat party for a time and the Farris family made a lot of money off cable in Memphis. He was with Time Warner. Dean Dayo of Time Warner also opposed networx. The Tennessee Regulatory Authority chairman was Sara Kyle, Senator Jim Kyle’s wife. Though Mayor Herenton had written a letter supporting the project and the Council unanimously approved the project, critical statements, probably motivated by a competitor, causes the loss of many customers and causing greater effort and business concessions to land others. This political rhetoric also hindered efforts to add other investors. In spite of these obstacles, customers included UT Medical Group, Allenberg Cotton, Enterprise National Bank, Managed Hosting Solutions, Xspedius Communications, Infutero/Informed Medical Networks, and Transnetyx. The Memphis Networx system was the only communication system to withstand the windstorm of 2003 (Hurricane Elvis) without interruption.
In 2003, MLGW sought and the Board and Council approved an additional $12 million in investment Memphis Networx on the part of MLGW. Networx had initially been projected to become “cash flow positive” in late 2004/early 2005. Political opposition had now delayed these projections to late 2005/early 2006.
Recent Developments 2004-07
Little is know about Memphis Networx since Joseph Lee became President and CEO of MLGW. Though the President of MLGW was designated as a board member of Networx and though Lee was quoted as expressing support and enthusiasm for Networx, it appears he never participated in Board meetings and did not manage the MLGW investment at all. There are reports that CEO Mark Ivie was forced out and that the sales force was drastically reduced. In spite of this, Networx was reported to be cash flow positive, but not generating enough profits to grow with future needs. The person in charge at Memphis Networx is reported to be from Colorado, the location of the firm formed a few months ago which was selected and recently approved by the MLGW Board as successful bidder for Networx.
Questions
Prior to 2004, all operating agreements between private investors and MLGW included at least three options in the event either party wanted to sell. The options for MLGW (either party) included: accepting the new partner, agreeing to sell, purchasing the other parties interests.
1. What are the provisions of the current operating agreement? When and by whom was it approved?
2. Why was there no public discussion of the options available to MLGW rather than sell for cents on the dollar? Was there private discussion between the parties?
3. Why did MLGW representatives on the Board allow the sales force to be decimated thus essentially assuring failure?
4. Why and how was Mark Ivie forced out? Is there any prior relationship between the current CEO at Networx and the successful bidder?
5. Were Joseph Lee and Odell Horton active on the Board of Memphis Networx? Is Ricky Wilkins involved in the sales negotiations or contractual documents? Is Reginald French involved with the purchasing entity in any manner?
6. Why are the 22 minority investors so quiet and not objecting to this forced sale. Are they somehow involved in the deal? Have they been promised something by the new buyers?
Other Tennessees Communities
Laws were changed in Tennessee in the late 90’s to allow Municipal utilities such as MLGW to enter the communications business. The Chattanooga Electric Power Board offers full telephone service in addition to Broadband and internet service. Covington Electric offers cable service. Morristown offers a rage of communication services. The difference between these communities and Memphis -- stable knowledgeable management and ethical political leaders, even if some opposed the initial effort.
Many utilities are already looking at the next stage of leveraged assets -- carrying communication services over electric power line BPL or Broadband over Power Lines. Will Memphis be left behind?
Of Special Note
Legislative/Regulatory
1. Public Power Provides Community Broadband Services
More than 2,000 communities across the country have created public power systems-not-for-profit electric utilities that are owned by the communities and the people they serve. Public power systems share a common purpose-to provide adequate, reliable service at a reasonable price. They are locally owned and operated, giving citizens a direct voice in utility decisions through public meetings, the ballot box, and open policy board meetings. Across the country, not-for-profit utilities have an established track record of delivering affordable services. Nearly 500 of them have already celebrated 100 years in business, with 70 percent of all public power systems serving communities of less than 10,000 people.
Along with supplying electric power, public power systems build and maintain advanced, fiber optic communication networks. They rely on sophisticated networks to monitor their electric systems and generation plants, and to provide voice and high-speed data communications between non-contiguous facilities.
Numerous public power systems have leveraged these communication assets to provide broadband network services to local businesses and households. This is a natural extension of the utilities' role for the community in maintaining and operating communication infrastructure. With a skilled and mobile workforce, public power systems can construct, maintain, and operate a complex communication system. They have 24/7 call and monitoring centers, professional customer service departments, as well as an existing relationship with the customer.
The minority investors have been promised something by the new buyers.
Mlgw has three options.
Agree to sell.
Buy out other investors.
Enter into an agreement to accept the new people as a partner.
Here is some research on the networx buyers.
Did some research....
The company that is looking to buy Memphis Networx, Communications
Infrastructure Inc is co-founded by a guy named John Scarano. He is a
former executive of ICG Communications a company that has been in bankruptcy
and was at near death at the time it was purchased by Level 3
Communications. (sound familiar?)
Information on ICG Communications.
I did a search on ICG (Level 3) at the Denver Post and I think that Level 3
bought it and laid off everyone immediately after.
Here is the SEC link for John Sacrano at ICG.
When I checked the Denver secretary of state it showed that CII has only
been in business for seven months. (see attached).
The timeline goes like this:
In May 2006, ICG is purchased by Level 3 Communications and is immediately
downsized to almost non-existence. John Scarano, with ICG, (and probably
other executives) start Communications Infrastructure Inc in November of
2006 and make a bid on Memphis Networx in ? 2007.
I wonder if CII was put together for the sole purpose of buying Networx and
who is on the board of directors? They may not be new to the game but I can assure the Company is.
WHY THE NETWORX CONCEPT FAILED IN MEMPHIS BUT WORKS NEARLY EVERYWHERE ELSE. THE REASON. POLITICS AND POLITICIANS
Watchdog has been doing some research on Networx and here are my thoughts.
Memphis Networx -- Chronology of Events and Impetus for Concept
Origins 1997-98
Legislation was passed by the U S Congress to begin deregulating electric utilities in a manner similar to the way natural gas utilities were deregulated in the late 70’s / early 80’s. MLGW along with electric utilities across the country began to look for ways to bring more value to their customers and communities. One idea was to utilize existing infrastructure and know how to provide communication services of various sorts to the communities served.
At the same time, the FCC commissioned a study which reported that certain U. S. citizens were being underserved by existing communications companies. These citizens were primarily the rural and the inner city urban poor. The FCC issues guidelines suggesting that the states encourage competition to existing communication companies.
Other studies compared various U.S. cities with respect to high speed high capacity data transfer -- broadband communication services. The City of Memphis was considered a Tier 3 city and was not standing up very well in comparison to not only the large cities such as New York, Chicago, Dallas, and Atlanta -- but also to smaller cities such as Columbus, Ohio, Palo Alto, Ca, etc.
This issue was discussed by MLGW executives during planning sessions during this period and noted as an issue worth more review. Also, changes were made in State and Federal law allowing Electric utilities to enter the communication business.
Catalyst for Action 1998
One of MLGW”s construction contractors, A&L Underground and its principal owner, Alex Lowe, had taken notice of the same issues and proposed that MLGW and A&L look jointly at developing a high speed communication network for Memphis and Shelby County. MLGW executives noted that though they had interest, any such arrangement must be subjected to a competitive selection process. MLGW also noted that a reasonable business plan must be in place before MLGW could go forward to get necessary approvals. A&L asked to do a preliminary analysis and business plan development at A&L’s cost, but with access to MLGW’s staff and facilities data to conduct the study. MLGW agreed subject to the requirement for a competitive proposal if MLGW were to go forward and allowing other potential partners the same time and access during that competitive process.
The concept study and business plan development were done by Arthur D. Little & Assoc. and did indicate the potential for a successful business. Requests for proposals were issued, 8-10 responses were received, three were reviewed in detail, and the A&L proposal was accepted as being the best overall proposal, based largely on the in depth study done by Arthur D Little. Most of the other responses were very conceptual in nature even though time was allowed in the proposal process for a more in depth analysis.
Organization and Approval Process 1999-2001
After selection of A&L Underground as the preferred partner, much of 1999 was spent developing a more detailed business plan, agreeing upon an appropriate structure for an organization with partners with different investing objectives, different tax concerns, and public vs. private oversight guidelines. The selected structure was a Limited Liability Corporation ”LLC” with an operating agreement which included clauses which described trigger points and courses of action for either party to exit the agreement.
The MLGW approved the proposal and appropriated $20 million for investment in August, 1999. Members of the board at that time were Netters, Graves, Jalinek, Franketta Guinn and Olin Morris. The City council approved the project as part of the budget process in late 1999. John Bobango who served as Chairman of the Utility committee was provided an in depth briefing and other members of the council were briefed as their interest dictated.
Application was made to the Tennessee Regulatory Authority in November, 1999. An approval process which should have taken two months was drawn out for approximately 18 months because of intense opposition by Time Warner. MLGW and A&L Underground spent in excess of $2 million on legal fees and associated costs which should never have been needed. Ricky Wilkins was the attorney for networx). Time Warner also applied intense political pressure locally, in Nashville and in Washington.
At approximately the same time, a group of prominent Memphis businessmen formed a group know as the Memphis Angels. Their objectives were to make investments with the potential for high returns, but also of benefit to the greater Memphis community. The group included: Frederick W. Smith, Robert B. Blow, Thomas M. Garrott, J. R. Hyde III, William B. Dunavant, and Willard Sparks. MLGW and A&L had already agreed that a strong approach would be made to include minority investors. A group of minority investors formed a partnership called Memphis Broadband and joined the Memphis Angels to buy out the A&L Underground position in Memphis Networx. They included Archie Willis III, Luke Yancey III and Bridget Chisholm, Gloria J. Thomas, Fred Jones, Jr, George M. Jones, Bennie Marshall, Gilbert I Noble, Alvin & Carla Ray, Dr. Sandra Reed, Anthony Tate, Darrell K. Thomas, Jesse H. Turner, Jr., Dr. Phillip & Ritchie Bowden, Tyrone Burroughs, Elliot Perry, Charles L. Ewing, Sr., Dr. Lovelace Gipson, Herbert Hillard, Dr. B. L. Banks and Lee Jackson and a number of other investors amounting to about $1.1 million dollars (approximately 22@$50,000+ each). The operating agreement was again structured to recognize the different objectives of the parties and options for exiting the arrangement.
The business plan was refined as well with input from McKinsey and Company. Memphis Networx had been seen as a common carrier or provider of “wholesale” service rather than a retail provider. Related offerings such as “off site data backup” were added.
The new partners agreed to the original objectives of serving the entire county rather than just downtown and the Poplar the business corridor. There were also provisions for a portion of the profit to go to providing expanded communication service to underserved parts of the community.
With the involvement of the Memphis Angels, the approval process moved forward with approval in mid 2001.
Business Start-up 2001-03
Construction of the network began in September, 2001. The 100 mile plus loop was completed on time and under budget. Customers began to be added in late 2002. The role and public statements by political leaders such as Mayor Herenton, Ricky Peete, and Joe Brown was the real obstacle to finalizing sales. Joe Brown was persuaded by Time Warner. John Farris was a lawyer for Time Warner and lobbyist. John Farris is the son of Bill Farris who was head of the state democrat party. John Farris was active in the democrat party for a time and the Farris family made a lot of money off cable in Memphis. He was with Time Warner. Dean Dayo of Time Warner also opposed networx. The Tennessee Regulatory Authority chairman was Sara Kyle, Senator Jim Kyle’s wife. Though Mayor Herenton had written a letter supporting the project and the Council unanimously approved the project, critical statements, probably motivated by a competitor, causes the loss of many customers and causing greater effort and business concessions to land others. This political rhetoric also hindered efforts to add other investors. In spite of these obstacles, customers included UT Medical Group, Allenberg Cotton, Enterprise National Bank, Managed Hosting Solutions, Xspedius Communications, Infutero/Informed Medical Networks, and Transnetyx. The Memphis Networx system was the only communication system to withstand the windstorm of 2003 (Hurricane Elvis) without interruption.
In 2003, MLGW sought and the Board and Council approved an additional $12 million in investment Memphis Networx on the part of MLGW. Networx had initially been projected to become “cash flow positive” in late 2004/early 2005. Political opposition had now delayed these projections to late 2005/early 2006.
Recent Developments 2004-07
Little is know about Memphis Networx since Joseph Lee became President and CEO of MLGW. Though the President of MLGW was designated as a board member of Networx and though Lee was quoted as expressing support and enthusiasm for Networx, it appears he never participated in Board meetings and did not manage the MLGW investment at all. There are reports that CEO Mark Ivie was forced out and that the sales force was drastically reduced. In spite of this, Networx was reported to be cash flow positive, but not generating enough profits to grow with future needs. The person in charge at Memphis Networx is reported to be from Colorado, the location of the firm formed a few months ago which was selected and recently approved by the MLGW Board as successful bidder for Networx.
Questions
Prior to 2004, all operating agreements between private investors and MLGW included at least three options in the event either party wanted to sell. The options for MLGW (either party) included: accepting the new partner, agreeing to sell, purchasing the other parties interests.
1. What are the provisions of the current operating agreement? When and by whom was it approved?
2. Why was there no public discussion of the options available to MLGW rather than sell for cents on the dollar? Was there private discussion between the parties?
3. Why did MLGW representatives on the Board allow the sales force to be decimated thus essentially assuring failure?
4. Why and how was Mark Ivie forced out? Is there any prior relationship between the current CEO at Networx and the successful bidder?
5. Were Joseph Lee and Odell Horton active on the Board of Memphis Networx? Is Ricky Wilkins involved in the sales negotiations or contractual documents? Is Reginald French involved with the purchasing entity in any manner?
6. Why are the 22 minority investors so quiet and not objecting to this forced sale. Are they somehow involved in the deal? Have they been promised something by the new buyers?
Other Tennessees Communities
Laws were changed in Tennessee in the late 90’s to allow Municipal utilities such as MLGW to enter the communications business. The Chattanooga Electric Power Board offers full telephone service in addition to Broadband and internet service. Covington Electric offers cable service. Morristown offers a rage of communication services. The difference between these communities and Memphis -- stable knowledgeable management and ethical political leaders, even if some opposed the initial effort.
Many utilities are already looking at the next stage of leveraged assets -- carrying communication services over electric power line BPL or Broadband over Power Lines. Will Memphis be left behind?
Of Special Note
Legislative/Regulatory
1. Public Power Provides Community Broadband Services
More than 2,000 communities across the country have created public power systems-not-for-profit electric utilities that are owned by the communities and the people they serve. Public power systems share a common purpose-to provide adequate, reliable service at a reasonable price. They are locally owned and operated, giving citizens a direct voice in utility decisions through public meetings, the ballot box, and open policy board meetings. Across the country, not-for-profit utilities have an established track record of delivering affordable services. Nearly 500 of them have already celebrated 100 years in business, with 70 percent of all public power systems serving communities of less than 10,000 people.
Along with supplying electric power, public power systems build and maintain advanced, fiber optic communication networks. They rely on sophisticated networks to monitor their electric systems and generation plants, and to provide voice and high-speed data communications between non-contiguous facilities.
Numerous public power systems have leveraged these communication assets to provide broadband network services to local businesses and households. This is a natural extension of the utilities' role for the community in maintaining and operating communication infrastructure. With a skilled and mobile workforce, public power systems can construct, maintain, and operate a complex communication system. They have 24/7 call and monitoring centers, professional customer service departments, as well as an existing relationship with the customer.
The minority investors have been promised something by the new buyers.
Mlgw has three options.
Agree to sell.
Buy out other investors.
Enter into an agreement to accept the new people as a partner.
Here is some research on the networx buyers.
Did some research....
The company that is looking to buy Memphis Networx, Communications
Infrastructure Inc is co-founded by a guy named John Scarano. He is a
former executive of ICG Communications a company that has been in bankruptcy
and was at near death at the time it was purchased by Level 3
Communications. (sound familiar?)
Information on ICG Communications.
I did a search on ICG (Level 3) at the Denver Post and I think that Level 3
bought it and laid off everyone immediately after.
Here is the SEC link for John Sacrano at ICG.
When I checked the Denver secretary of state it showed that CII has only
been in business for seven months. (see attached).
The timeline goes like this:
In May 2006, ICG is purchased by Level 3 Communications and is immediately
downsized to almost non-existence. John Scarano, with ICG, (and probably
other executives) start Communications Infrastructure Inc in November of
2006 and make a bid on Memphis Networx in ? 2007.
I wonder if CII was put together for the sole purpose of buying Networx and
who is on the board of directors? They may not be new to the game but I can assure the Company is.
posted by watchdog at
3:37 PM
7 Comments:
Hi Joe,
Good discussion here. Clark said that Joseph Lee was involved with the Networx board but he suggested that Lee remove himself in order to focus on other aspects MLGW.
Also, MLGW doesn't necessarily run Memphis Networx. It has its own board, comprised of MLGW representatives, and its own management team.
That management team made some highly questionable decisions that materially impacted Networx as much as the market shift that rendered utility networks less attractive as CLECs.
A good question is whether the public/private nature of Networx somehow prevented or inhibited MLGW's reps from fully disclosing the poor shape of Networx to MLGW's management and board.
By
Richard Thompson, at 8:25 PM
Correction to the John Scarano bit. Someone at Mediaverse Memphis indicated that he purcahsed the company when it was on the verge of bankruptcy, grew it, and then sold it.
By
Anonymous, at 9:16 PM
networx investor blow
http://www.societyofentrepreneurs.com/members/bio.asp?ID=77
By
Anonymous, at 9:53 PM
CII is a $200-Million venture created by a handful of telecom executives and backed by investment firms like Columbia Capital, M/C Venture Partners, Oak Investment Partners, Battery Ventures, and Centennial Ventures.
By
Anonymous, at 10:04 PM
Thats fine and all. My question is will CII pull a fix-her-upper and sell Networx at a whopping profit? How embarrassing for Memphis if that happened and would prove watchdog's point that Networx was simply mismanaged.
By
Anonymous, at 11:49 PM
networx investor blow founded columbia capital owner of cii
http://www.societyofentrepreneurs.com/members/bio.asp?ID=77
CII is a $200-Million venture created by a handful of telecom executives and backed by investment firms like Columbia Capital, M/C Venture Partners, Oak Investment Partners, Battery Ventures, and Centennial Ventures.
By
Anonymous, at 8:24 AM
Great post. How much money did the Memphis Angels put up and how much will everyone get when Networx is sold?
Does Networx fiber "backbone" have the ability to offer telephone, data, and television to homes and businesses? Does it have the ability to offer internet hot spots for wireless access? Does it have the ability to become the base for a wireless meter reading system?
Someone should be holding a public conference of unbiased experts to find out what is the value of this asset. How did MLG&W become a minority owner? Did the Angels put up capital after the initial agreement and how much?
By
city watch, at 3:45 PM
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