US Sprint Sets Double-Barreled Sights on MCI and AT
On the premise that three heads are better than one, US Sprint expects to start operation July 1 as the nation’s third-largest long-distance carrier, merging the networks, customers, employees--and hefty debts--of GTE Sprint and US Telecom.
A troika composed of top executives from the two parent firms--two from GTE and one from United Telecommunications--is guiding the 50-50 partnership. The new company will also have three headquarters locations--in Burlingame, Calif., home of GTE Sprint Communications, presently the third-largest carrier after AT&T; and MCI; St. Louis, home of US Telecom, fifth largest; and Reston, Va., home of GTE Telenet Communications, a specialist in data transmission.
The new venture’s ambitious goal is to exploit what will be the nation’s first all-optical-fiber, all-digital telecommunications network, now under construction with a 1987 completion date, to unseat MCI in the $48.7-billion long-distance telecommunications market still dominated by American Telephone & Telegraph.
As 1985 ended, AT&T; Communications--an AT&T; subsidiary--still controlled 78.9% of a market that until recent years its parent had served as a tightly regulated monopoly, according to the Yankee Group, a Boston-based consulting firm. Yankee estimates that AT&T;’s market share will shrink modestly to 75.7% by the end of this year.
Behind AT&T;, mergers are rapidly changing the face of the competition.
Yankee ranks MCI a distant but advancing second to AT&T; with 6.2% of the market. But MCI this year completed acquisition of Satellite Business Systems--a venture originally undertaken by IBM, Aetna and Comsat (which later dropped out). By 1987, the combined operation should account for 7.4% of the market.
In third place, GTE Sprint had a 2.7% share of the market as the year began. Since its transformation into US Sprint will not begin until July 1, it is difficult to estimate what market share the new entity will command. However, Yankee projects a 3.2% share for GTE Sprint and a 1.1% share for US Telecom--up from 0.7% last year; simply combining those figures, which makes no allowance for either synergism or confusion, would create a 4.3% market share. Wedged between the US Sprint merger partners in fourth place is Allnet Communications Services. That company emerged late last year through the merger of Chicago-based Allnet and Lexitel, a regional carrier based in Birmingham, Mich., which has become the new company’s headquarters.
From there the so-called other carriers fragment into scores, even hundreds, of small regional “resellers.” These are companies that lack their own facilities but piece together networks by leasing transmission capacity wholesale from such carriers as AT&T; and MCI and reselling what phone people call POTS--plain old telephone service--mainly to residential customers and small businesses. Together, these resellers accounted for 10.4% of the market last year.
“Banding together has been a good idea,” Amy Francis of Yankee Group said of the mergers. “It increases the customer base and the capital they have to work with.”
But Francis and other analysts remain highly skeptical at this point about the likelihood that US Sprint will be able to live up to the ambitious goal that the troika has set for itself of achieving a 10% share of the market by 1990 and ousting MCI from second place.
“Neither GTE Sprint nor US Telecom has yet made money in the long-distance business,” Francis said, “and MCI has.”
Indeed, noted Joel D. Gross, who follows utilities for Dean Witter, the venture’s merged indebtedness will total $3.2 billion, though US Sprint intends to capitalize the partnership at 65% equity and 35% debt. Combined 1985 revenues were $1.6 billion (compared to $2.9 billion for MCI), which resulted in a combined operating loss, after taxes, of $403 million.
The partners have committed $1.2 billion to continue construction of its all-fiber network this year. “One of US Sprint’s challenges over the next two years,” Gross said, “is going to be how well it can operate and make the transition from three networks--United Telecom’s, GTE Sprint’s and the new fiber network--into one network.”
Fiber optics, the magnet that attracted GTE and United Telecommunications into partnership, are tiny strands of flexible glass that carry laser-generated pulses of light, providing ultra-rapid, static-free transmission and much greater capacity than standard copper telephone wire. One hair-thin strand of optical fiber can carry 8,000 conversations at once; bundled into a half-inch cable, the strands can handle the voice messages carried by copper cable as thick as a telephone pole.
“Over time and once they get their act together, US Sprint will turn the corner and start to make money,” Francis predicted. “They should always be a good solid third. The partners are a good complement.”
US Sprint’s “office of the president” is composed, alphabetically, of J. David Hann, president of GTE Telenet; Donald G. Prigmore, president of GTE Sprint, and Charles M. Skibo, president of US Telecom.
Prigmore and Hann said during a visit to Los Angeles last week that no opposition to the merger has yet been filed by regulators or the Department of Justice. Consequently, plans are well advanced to launch US Sprint on July 1.
The new entity will begin operation with 10,200 employees divided among seven geographical divisions corresponding to the regions created when AT&T; was divested of its local telephone companies--Pacific, with headquarters in San Francisco, home of Pacific Bell; West, with headquarters in Denver; Southwest, Dallas; Midwest, Chicago; Atlantic, Washington; Southeast, Atlanta, and Northeast, New York. An eighth division will handle national accounts from Atlanta.
US Sprint expects that its all-fiber network will allow it to “leapfrog” over MCI and AT&T;’s “hybrid” networks, offering customers the highest quality and most secure means of telecommunications. “As long as you have a hybrid network, you’ll never have the quality,” Prigmore said.
The new venture will abandon its own non-fiber facilities as the new network triples in size from 5,000 miles at the outset of the partnership to 15,000 miles at year’s end, reaching 80% of the nation’s population. A year later, the network will reach into each of the nation’s local service areas, Hann said. The new venture will offer a full range of telecommunications services, including toll-free, dial-800 service and its own telephone operators.
“We’ll grow our market share rapidly,” Prigmore maintained, “because of the services, the quality of transmission and our prices--plus customers gained through possible future acquisitions.”
