MCI: With IBM at Its Side, Firm’s Odds Improve : Acquires Muscle to Compete With AT
William G. McGowan is sitting at his desk eating breakfast alone. The television is tuned to a morning news broadcast, and a desk-top computer is printing out overnight messages from field offices around the country. This is as quiet as his days get.
The chairman of MCI Communications, the nation’s second-largest long-distance telephone company, is busily mapping out his company’s new alliance with IBM--which was announced June 25 and shook the telecommunications industry.
For McGowan, who founded MCI in 1968 and has run the company ever since, the agreement brings him closer to a long-sought goal--to be taken as seriously as AT&T; in the nation’s top corporate suites.
And for MCI, which is barely one-thirtieth the size of IBM, the link to the computer giant is akin to being blessed with corporate holy water. “It gives us credibility in the marketplace,” McGowan says. IBM will buy a 16% interest of MCI with an option to buy as much as 30%. In turn, MCI will buy Satellite Business Systems, a smaller competitor that specializes in communications systems for businesses, from co-owners IBM and Aetna Casualty & Life.
“We’re calling the new company IBMCI,” quipped Howard Anderson, a telecommunications consultant with the Yankee Group in Boston.
Anderson believes that “IBMCI” will pose its most serious threat to the local telephone companies that were divested from AT&T; last year and reorganized into seven independent regional holding companies. He points out that MCI’s voice transmission capability, combined with the SBS satellite data network, will enable the beefed-up MCI to build communications networks linking regional corporate offices, bypassing local phone companies altogether.
MCI has a long way to go to catch up with AT&T.; But all the other competitors lag even further and, with deregulation, McGowan predicts that a number of companies will fail.
“The next two or three years will be a significant factor in determining the success of companies,” he said. “There are not going to be all that many players.”
Major shares of the residential long-distance market will be decided by next year, when “equal access” is available in most of the country. With equal access, customers can reach the long-distance carrier of their choice simply by dialing “1.”
MCI and other AT&T; competitors got a lift recently when the Federal Communications Commission ruled that such customers who do not exercise their right of choice must be assigned to one at random instead of automatically becoming customers of AT&T.; MCI can transmit calls almost everywhere in the country, either with its own network or with lines leased from AT&T; and other phone companies.
MCI, like AT&T;, now provides credit cards for travelers. It offers MCI Advantage--a microprocessor installed at the customer’s premises that automatically dials access numbers and authorization codes. And it has agreements with American Express and Sears, Roebuck & Co. so that customers can sign up for MCI’s long-distance services through them.
Business Customers Vital
But to McGowan, it is the business customer who is vital, and the winner of the battle to serve the nation’s biggest corporations will probably be the company that can offer the most sophisticated and versatile voice and data networks for the lowest price. McGowan is counting on the IBM alliance to make MCI as strong as anyone in this arena, including AT&T.;
Although SBS has never turned a profit, McGowan hopes that the newly acquired company, many of whose 200,000 customers are businesses, will provide MCI with a major boost. Although 400,000 businesses, including 407 of the Fortune 500 companies, are already numbered among MCI’s 2.5 million customers, McGowan admits that his company has “deep penetration” of only a dozen of its business accounts.
McGowan has had his eye on the business market ever since he founded MCI in 1968.
“MCI is not in the residential telephone business,” he wrote in the 1973 annual report. “MCI’s business is business communications of all kinds, including private line transmission services and facilities individually designed to meet each customer’s information transfer requirements on a comprehensive systems basis.”
MCI, founded in Chicago, grew out of a company called Microwave Communications. In its early days, it provided contractual services such as engineering to 17 regional companies that sought to provide local business communications.
Changed Direction
A combination of FCC rulings and advancing technology changed MCI’s direction dramatically.
In 1968, the FCC said non-Bell equipment could be connected to the AT&T; network. Soon after, the commission opened the intercity market, until then an AT&T; monopoly, to competition. Simultaneously with the regulatory rulings, advances in satellites, fiber optics and computers presented AT&T;’s competitors with opportunities to challenge the industry giant.
As a fledgling company, MCI tried to win business by undercutting AT&T;’s long-distance rates. MCI was in business only a few years when it turned to the courts to challenge AT&T; and federal regulators in an effort to open up competition in the long-distance market.
In a 1974 suit, MCI charged that the giant telephone monopoly had cost it $5.8 billion by denying it access to needed long-distance telephone connections. A jury ultimately awarded MCI $600 million, which, under antitrust laws, was tripled to a $1.8-billion award--the largest on record. AT&T; appealed and won a retrial, and a jury in May set damages at only $37.8 million and ordered an award of $113.4 million.
MCI won a major victory against the FCC in 1978, when the Supreme Court let stand a lower court ruling that the commission had improperly barred MCI from providing Execunet, its regular long-distance service. The FCC had contended that Execunet had exceeded the authority granted to MCI by the commission to offer limited, point-to-point long-distance service.
And later that year, the Supreme Court let stand a lower court order requiring AT&T; to give MCI immediate access to its local exchange facilities. MCI had proposed expanding its long-distance service from 18 to 30 cities, but AT&T; said any expansion should wait until the FCC completed a study on long-distance competition market.
MCI became profitable in 1976, and, in 1982, its stock was the most actively traded on any exchange. In the early 1980s, MCI was one of the nation’s fastest-growing companies, and its revenues soared from $95.2 million in 1979 to $506.4 million in 1982.
In 1984, MCI had revenues of $1.96 billion, up from $1.52 billion in 1983. But its net income dropped sharply, to $59.2 million (25 cents a share) in 1984 from $202.9 million (88 cents a share) in 1983.
MCI attributed the lower earnings to a heavy capital investment of $1.2 billion in 1984. In addition, rising costs for connecting MCI circuits to the AT&T; network consume 12% of its revenues. Profits suffered when MCI was forced to cut some long-distance rates in response to reductions by AT&T.; Moreover, the performance of MCI Mail, a nationwide electronic mail delivery service established two years ago, has not met expectations.
Personifies Company
As much as any corporate chief executive, McGowan personifies his company. When not traveling, he works in his corporate suite on the top floor of MCI’s Washington headquarters. His office is reached by ascending an impressive curved staircase of dark wood and shiny brass.
McGowan routinely begins his 12-hour day at 7:30 a.m. He drives himself in either his Mercedes or his Dodge van from his nearby town house overlooking the Potomac River, which he renovated to include an elevator with six stops and a rooftop greenhouse where he grows not exotic flowers but corn.
“Bill is the visionary of the business,” said Gerald Taylor, who joined MCI in 1969 as its sixth employee and now heads Denver-based MCI West, one of seven regional units formed this year when McGowan decided to decentralize the company’s management. “He’s never really been the operating guy. He looks at the big picture and maneuvers things.”
McGowan grew up in Scranton, Pa., the son of a union organizer. A Harvard MBA, he became a consultant who specialized in turning around failing businesses. His career included working with Mike Todd as the assistant producer of the film “Around the World in 80 Days.”
Today, he said, his biggest challenge “is putting these two entities (MCI and IBM) together.” Apart from the advantages--an infusion of IBM funds and SBS customers--there will be the hurdles of reconciling the distinct management styles of MCI and IBM.
MCI’s style is decidedly eclectic. “You’ll see a lot of different management styles in our company,” Taylor said. “Bill has never liked bureaucracy. He reorganizes the company every few years just to shake things up.”
Some MCI employees, afraid that IBM someday will assume total control of MCI, have begun joking about conservative white-collar dress codes that the computer giant might impose. One MCI executive said with a laugh: “One woman came to work the other day in saddle shoes and a school uniform, saying she was getting ready to work for IBM.”
