[March 29, 2009]

St. Louis Post-Dispatch David Nicklaus column: Charter completes its long slide from 'wired world' to bankruptcy court

(St. Louis Post-Dispatch Via Acquire Media NewsEdge) Mar. 29--Back in the go-go 1990s, no investor was more sought after or more admired than Paul Allen. When the billionaire co-founder of Microsoft made Charter Communications the centerpiece of his "wired world" strategy, most people imagined a bright future for the local cable company.

Despite investing billions of dollars in technology and acquisitions, however, Charter has never turned a profit. On Friday, it filed for Chapter 11 bankruptcy, officially pulling the plug on Allen's old vision.

It's not Allen's first bankruptcy -- he also had invested in Metricom, a wireless Internet company that went broke in 2001, and RCN, a cable company that filed Chapter 11 in 2004. But it is his biggest, wiping out much of the $8 billion that Allen spent to buy and expand Charter.

Under a deal with creditors, Allen will keep a 35 percent voting interest in the reorganized company. Other shareholders will get nothing, and lenders have agreed to forgive $8 billion of Charter's $21 billion in debt in return for ownership stakes.

It's an ignominious fate for a company that once earned superlatives from Wall Street. Charter's initial public offering in November 1999 was the fourth-biggest in U.S. history at the time. The shares, which first sold for $19, surged quickly to $27 before beginning their long slide toward zero.

Ironically, Allen was right about the wired future. Broadband connectivity has become essential for both businesses and consumers, and companies such as Google are making money from it. Allen's strategy of owning both wires and content, however, has been a bust.

He's not alone, of course, in making a bad media-related bet. The inflated price that Time Warner paid for America Online still stands as a high-water mark for cockeyed Internet optimism. Other media companies, including CBS, Viacom and most of the newspaper industry, have had to write down the value of properties for which they overpaid.

"In entertainment and media companies there was a megalomania that said you had to keep buying and buying," says Hal Vogel, chief executive of Vogel Capital in New York and author of a book on the economics of entertainment.

Other big cable companies are struggling with debt, too, but Vogel places Charter in a class by itself. "They're way out in their own galaxy somewhere," he adds. "Their balance sheet was so out of balance that there's no way they could avoid this outcome." The problem with Allen's investment in Charter was that he was buying old technology that needed upgrading. And he bought it just as cable was losing its monopoly. Competition from satellite TV, and later telephone companies, meant that cable operators could no longer hold onto customers while offering mediocre service at ever-escalating prices.

The combination of a voracious technology appetite, a heavy debt load and an eroding customer base caused Charter to report net losses that totaled $16 billion over the last decade. Management problems didn't help: Four executives were indicted in 2003 on fraud charges, to which they later pled guilty.

Now, a bankruptcy reorganization should let Allen and Chief Executive Neil Smit put all of that behind them. The new vision, instead of building a wired world, is simply to make money by providing reliable TV, Internet and phone service.

For the sake of Charter's employees, let's hope the new vision is more realistic than the old one.

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Copyright (c) 2009, St. Louis Post-Dispatch Distributed by McClatchy-Tribune Information Services.

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