When Davidson and Mooresville were preparing to buy the local cable TV system two years ago, they pledged not to raise rates for 12 months. The system has stuck to that promise, effectively freezing rates at 2006 levels. Now, 18 months after the deal that created MI-Connection, a rate increase is on the way.

See a chart of the new rates below.

The Mooresville-based company is informing customers in letters arriving in mailboxes this week that monthly cable TV rates will rise an average of 9.3 percent on July 1. The system blames higher programming costs, including one unforeseen new expense: monthly payments to local broadcast stations.

The price hikes range from 6.7 percent for basic cable (channels 2-25, primarily broadcast, shopping and government channels) to 9.4 percent for the “expanded basic” package (channels 2-73 and 78, including cable-only sports, news and specialty channels), to from 8.4 to 11 percent for the company’s top-end digital TV packages.

MI-Connection won’t raise prices for other services, including sports or movie add-on packages, high-speed internet access, or its recently-launched local telephone service.  And discounts on the new rates are available through promotions, such as “triple play” packages that include TV, internet and telephone – a package that MI-Connection officials note wasn’t available under the system’s previous ownership.

Evan Webster, MI-Connection’s board chairman and a member of the Davidson Town Board, said the rate increase follows the addition of more than 100 channels over the past year, upgrades to cable lines and other equipment, and improvements in customer service. The system is better now than when the towns acquired it, he said.

“It’s been 18 months and we’re providing more value. If you look at the system we had on Dec. 18, 2007 (when the towns bought it) and look at the system today, we have more channels and the system is in better shape than it’s been in years,” Mr. Webster said Friday.

The price hike comes as the company struggles to grow amid a weak economy, a slowdown in growth in new households, and intensified competition. That competition is coming from satellite providers as well as telephone companies and other cable companies that are extending lines onto MI-Connection’s turf.

MI-Connection currently has 13,200 TV subscribers, Mr. Webster said. That’s down about 5.7 percent from the 14,000 it started with in December 2007. The network covers Davidson and Mooresville as well as Cornelius and some unincorporated areas of Iredell and Mecklenburg counties.

PROGRAMMING COSTLIER

Paul Reilly, MI-Connection’s marketing and public relations manager, said price increases are needed because of higher costs for programming and new business expenses.

“We’ve added more than 100 channels in less than a year,” Mr. Reilly said. “Much as we wouldn’t like it, each of those channels comes at a cost.”

Channels cost an average of 6 percent more than they did when MI-Connection was formed, he said. And together with the cost of the new channels added, MI-Connection’s programming expenses are up 19 percent, he said.

MI-Connection buys programming through the National Cable Telecommunications Consortium, a cooperative with about 13 million cable customers nationwide. The consortium gives small systems like MI-Connection the leverage to obtain rates similar to those negotiated by the nation’s largest system operators – such as Time Warner or Comcast, Mr. Webster said.

Another factor in the July 1 price hike is an expense not foreseen when the towns bought the system: so-called “re-transmissions fees.” These are per-subscriber fees that over-the-air broadcasters have begun charging cable companies for the right to carry their programming. Disputes between cable firms and broadcasters have been bitter at times as the cable industry tries to adjust to the new fees. In March, a battle between Time Warner Cable and local TV stations in Charlotte nearly resulted in the disappearance of the broadcasters from Time Warner’s system. (See our April 1 Biz Notes column, with an item entitled “New cable operator cost: TV station fees.”)

The new fees cost MI-Connection $26,000 a month, or about $312,000 annually – money that wasn’t in MI-Connection’s original business plan, Mr. Webster said. The fees go to stations include Charlotte network affiliates WSOC, WCNC, WBT and WCCB.

FASTER INTERNET, NEW SERVICES

MI-Connection’s recently completed system upgrade has helped keep the network state-of-the-art – it’s equal to or better than what other competitors in the region have, Mr. Webster said. It also has allowed for new or improved services, among them Video on Demand (VOD), telephone service, and faster internet speeds.

Although no price increase is planned for internet customers, Mr. Webster said they should already be seeing faster speeds thanks to the upgrade. And the company is overhauling its internet lineup by introducing even faster speeds – with downloads of up to 20 megabits per second, versus the current max of 6 mbps. Upload speeds are also increasing.

One of the main factors in the higher speeds is MI-Connection’s effort to reduce the number of homes sharing an internet line. Specifically, that has meant increasing the number of “nodes,” equipment that connects a group of homes with the headquarters, or “head end.”

When MI-Connection bought the system, its cable network had too many homes on each node – as many as 800, Mr. Webster said. Now, “any one node has fewer than 225” homes passed. And the network now has higher capacity fiber-optic cable connecting each node with the head end.

Video on Demand allows users to watch movies, television shows and other programming, in some cases for free and in other cases for a fee. (See our May 22 report, “Cable system finishes upgrade, adds video-on-demand.”)

BACKGROUND

Davidson and Mooresville paid about $60 million for the system and immediately began a $22.5 million upgrade. The work has replaced cables and equipment, increased the system capacity and added new equipment at MI-Connection’s Mooresville headquarters.

The upgrade has allowed the company to expand the channel lineup by more than 100 channels, to speed up internet connections and to add new products such as telephone service and Video on Vemand.

The system had been long overdue for an upgrade. Officials say it had been neglected under former owner Adelphia Communications. That Pennsylvania company went bankrupt in 2004 and its top officers were caught in a financial scandal involving company money.

The upgrade itself is being paid for with money Mooresville and Davidson borrowed. The company’s cash flow remains sufficient to cover interest and principal payments on the debt, Mr. Webster said.

DOCUMENTS

MI-Connection letter to customers announcing the rate increase. (PDF, requires free Adobe reader software)

MI-Connection press release about the rate increase and fact sheet on new Internet speeds. (PDF.)

PREVIOUS COVERAGE

See all our previous coverage of MI-Connection in our “Cable TV” category.