In Wake of Heart Transplant, Questions Continue About Chairman’s Health : MCI Faces Changes, Challenges From Rivals
MCI Communications Corp. Chairman William G. McGowan once said that his company’s initials stood for Money Coming In. Recently, insiders have been saying another name is more appropriate: More Change Imminent.
Now, in the wake of McGowan’s heart transplant in April, company officials have suggested another change. “We should change it to Medical Communications Inc.,” joked V. Orville Wright, the company’s new acting chief executive, who has been dogged with questions about the health of both McGowan and MCI. “That’s a business we want to get out of.”
Wright’s remark reflects the intense interest in the second-largest U.S. long-distance company, which centers on whether MCI is at the brink of a permanent change in leadership and what consumers ultimately can expect from long-distance competition. Long-distance rates have dropped by more than 30% since 1984, but the name of the game now is offering something more than just lower prices.
McGowan, 59, suffered a heart attack in December and was released in May from Presbyterian-University Hospital in Pittsburgh after undergoing a heart transplant. It isn’t clear when, or if, he will resume his duties at MCI. Wright, 66, the company’s vice chairman, was called out of retirement to take over the top job until McGowan comes back or the board elects a new chief executive.
Wright says he does not plan to keep the job permanently. “There is not a question of succession,” Wright said. McGowan, a man widely considered to be a street fighter to the core, is coming back, he said. But he conceded: “It’s true none of us know what Bill’s future course will be.”
McGowan’s chutzpah and determination, more than any other individual’s, led to the breakup of American Telephone & Telegraph Co. He turned a small company on the verge of bankruptcy in 1968 into a money machine. MCI more than doubled in size between 1983 and 1986, posting revenue of $3.6 billion last year.
But just as McGowan’s health failed him, Washington’s fourth-largest company reported 1986 year-end losses of $448 million, compared to $113.3 million in profits the year before--the first loss the company has posted in a decade. MCI faces price slashing in the long-distance industry, shrinking profit margins, the continuing need to update its network and a dog fight over large business customers that generate most long-distance revenue.
Way out in front of the pack of AT&T; competitors in the early 1980s, MCI may be losing its market share to US Sprint Communications Co. now that the industry’s big price advantages over AT&T; have disappeared, analysts say. Big discounts given to AT&T; competitors for connections to local telephone networks are largely over now that new technologies enable the companies to offer long-distance service with the same ease of dialing. MCI’s lowest prices are now only 10% less than AT&T;’s, analysts say.
“The basis of winning has shifted from price to quality and product. Unfortunately, MCI created an image in the marketplace early on that it was not the quality product but it was the cheapest product,” said Robert B. Morris III, an analyst with Prudential-Bache Securities. “US Sprint has created in the marketplace the perception of the difference in product.”
Sprint is building a nationwide fiber-optic network that uses thin glass strands to efficiently transmit voice and data signals using light pulses. “They have been able to demonstrate . . . that fiber is the transmission of a new generation,” Morris said. MCI, which uses a mixture of technologies that it says is just as efficient and more cost-effective, first counterattacked by scoffing at fiber optics, then turned around and said it was the first to complete a long-distance call over a fiber-optic line, Morris said. “They have confused the marketplace as to what product it is they are offering, and they validated US Sprint,” he said.
Sprint, a joint venture of GTE Corp. and United Telecommunications Inc., has spent billions of dollars on a new network while losing $800 million last year, but its marketing is working. The payoff could be the No. 2 position in the long-distance industry for the company McGowan likes to call “Splint.”
Merger Benefits
MCI now holds nearly 9% of the $50-billion long-distance market, but Sprint is slowly catching up with MCI and now holds about 5%, according to Northern Business Information, a market analysis group. This year, Sprint’s share of the market will rise to 7%, said Glenn Powers, an analyst with the group. “In the race for No. 2 position, Sprint looks awfully good,” he said.
Just the same, Powers said MCI still has an edge over US Sprint. “MCI has more customers, and the best network is the one in place and working,” Powers said. But the company’s days of dazzling growth are over. “They are making a difficult transition from growth-oriented market share to a cash flow and profit-driven company, and that has got to be a painful one for management,” he said.
Morris said the best alternative is a merger with US Sprint, an idea he said MCI finds intriguing. “In conversations, they have illuminated for me the benefits of a merger, which include complementary customer bases, expanded customer base and a back-up in the network,” he said. MCI, however, denies any interest in a merger. “Our objective is to continue to be independent and drive this industry forward,” Wright said.
But to get through the next decade, MCI will need a different management style than it had in its first 10 years, said James Mason McCabe, an analyst who follows the company for Nomura Securities International. McGowan was known as “Mr. Outside,” a hard-nosed entrepreneur and visionary who fought for MCI on Capitol Hill and in the courts, while Wright was “Mr. Inside,” a manager good at motivating the troops, McCabe said. “Now, you need a more professional management group to run it.”
Management Competition
Howard Anderson, president of Yankee Group, a research firm, says the company likely will be run indefinitely by a “triumvirate” composed of Wright, who spent 20 years at International Business Machines, President Bert C. Roberts Jr., who is “as good an operating guy as MCI is going to get,” and Executive Vice President H. Brian Thompson, a former McKinsey & Co. consultant who is a top-notch strategic thinker. “Orville pulls them all together,” Anderson said.
Ultimately, though, insiders who left the company say it isn’t clear who will get the top job after Wright leaves.
Richard T. Liebhaber, executive vice president in charge of engineering and a 30-year IBM veteran, has been mentioned for the top slot, but insiders who have left the company said the man to watch is Thompson. “He’s probably the most political animal at MCI,” said one former MCI executive.
Thompson recently was promoted to executive vice president and head of national marketing from his position as president of the mid-Atlantic division. Some key company positions now have been filled by men hand-picked by Thompson. But Roberts, who became MCI president in September, 1985, has a strong vote from Wright for the top slot at MCI. “He is certainly a high candidate for that job,” said Wright, who thinks Roberts did a good job of managing the company’s decentralization efforts.
Roberts said he isn’t bothered by the competition because he views managing MCI as a team effort. “We don’t have the traditional management style, and we have never been led by a traditional leader,” he said. “We have always been able to funnel people into slots to meet the next objectives and challenges.”
But analysts say that meeting the challenges, which now hinge on offering new services to big business customers, is going to be tough. The company needs at least a 13% to 15% market share to be truly successful, Morris said. “The way that they have been attempting to achieve it is to just keep hammering away at the market. The problem with that is it’s a slow process.”
The MCI game plan includes sculpting a better regulatory environment that will stabilize long-distance rates and lower what is paid to local telephone companies for connections, while aggressively cutting costs and offering new services, Wright said.
According to Roberts, the company, which has about 1 million business customers, wants to expand the services it offers large accounts. “We do business with more than 400 Fortune 500 companies, but that doesn’t mean we have a big piece,” he said. “We have 4% or 5% penetration and would like to be the strategic provider of telecommunications.”
MCI has been taking advantage of its relationship with IBM, marketing its services in tandem with IBM products to a handful of very large customers who request it, Roberts said. MCI officials say the IBM connection is giving them vital experience with data communications--an area that is growing four times faster than voice communications.
MCI also has been introducing cheaper bulk long-distance offerings that provide more precise billing, as well as private network services and toll-free service. MCI now offers international long-distance service to 55 countries, compared to AT&T;’s 180.
George R. Dellinger, vice president of the market research firm of Washington Analysis Corp., said both the international toll market and “800” services are important to MCI. Each business section is producing between $5 billion to $6 billion in revenue annually, he said.
“MCI could go from $100 million in revenue in 1986 to half a billion in 1990” from international long-distance service, Dellinger said, representing about 10% of the market. “The same is true for 800 service.”
But analysts say MCI can’t be all things to all people and that part of its problem has been too wide a reach. “Are they going to be a quality service provider to large businesses or a cut-rate provider of voice services only?” asked Fritz Ringling, an analyst with Booz Allen & Hamilton. “They can’t be everything to everybody. They have to define their market and that’s what they’ve failed to do.”
The bottom line is that the biggest business customers still trust their large private networks and the more complex task of data transmission to AT&T;, Ringling said. “The largest clients have decided on the whole that AT&T; will be their vendor of choice for large private networks and MCI will be the low-cost alternative.” MCI’s strategy is to use the edge with business customers that has distinguished it with residential customers--lower prices, he said.
The consumers are coming out on top, said Powers. “Consumers look great--whether they are large business consumers or residential consumers,” Ringling said. “It’s a fiercely competitive market where every pricing move by AT&T; is matched and outdone by the competition.”
