MCI Communications Corp., in an echo of its challenge to AT&T; 25 years ago, is planning to enter the local phone business now monopolized by regional carriers.
Washington-based MCI expects to invest as much as $1.5 billion to build local phone connections that would permit business and residential customers to bypass local phone company lines, sources close to the company said Thursday.
Initially, such networks would enable callers to connect directly to long-distance carriers such as MCI and American Telephone & Telegraph Co. without having to go through the local phone company. Virtually all long-distance calls now start and finish over wires owned by regional phone companies, which collect billions of dollars in “access charges” from AT&T; and other long-distance companies for passing the calls along.
Competing services could bring down the price of long-distance calls because long-distance carriers would be able to choose between the regional company and MCI’s service for their switching needs.
Eventually, however, MCI’s networks could be adapted to local service: They could connect calls within a city or metro
politan area, setting up the first direct competition for the seven regional Bell companies and others that hold a monopoly over local phone service.
MCI successfully challenged AT&T;'s former monopoly in long-distance service in the 1970s.
MCI has told institutional investors in recent weeks that it plans to invest in equipment that will carry local phone calls to long-distance lines in about 20 cities within the next two years, one source familiar with the company’s plans said.
A number of small companies now offer this kind of “bypass” service to business customers, but these firms captured less than 1% of the billions spent annually for access to and from local telephone systems.
MCI officials have declined to comment as talk of the company’s interest in local business circulated.
But an MCI spokesman said Tuesday that the company believes it is “vastly overpaying” local phone companies for access to their lines, suggesting that MCI and other long-distance companies were eager to find alternative ways to route their customers’ calls.
MCI will pay some $5.4 billion in access charges this year, about 45% of total revenue, and AT&T; will pay a similar percentage.
News of MCI’s plan, which was first reported in Thursday’s Wall Street Journal, pushed MCI’s stock up $1.50 to $27 per share.
Investors bet that the regional Bell companies would be hurt by the possible competitive threat and bid these stocks lower: Bell Atlantic was off 25 cents to $60.50 per share; Ameritech fell $1.62 to $77.75; Pacific Telesis eased 12.5 cents to $55.125; Southwestern Bell was down $1 to $42.625.
“MCI has been fairly absorbed in building its electronic superhighway,” its national long-distance network, an MCI executive said Thursday. “Now that we have our superhighway built, we are looking more closely at the on-ramps and off-ramps.”
An AT&T; spokesman said greater competition at the local level would be good not only for AT&T; and other long-distance companies, but also for consumers, because competition would create choice, innovation and lower prices.
A small MCI subsidiary, Access Transmission Services, has owned rights-of-way under 200 major American cities since 1990, when it purchased them from Western Union Co.
Several people suggested these rights-of-way would be ready-made pathways for networks of fiber-optic lines that would link office buildings and other high-volume callers directly to MCI’s long-distance network.
But extending this service to residences will be a more complicated undertaking.
Directly rewiring each household with a phone line owned by MCI would be expensive and time-consuming.
Alternatively, some sources say, MCI could create an ad-hoc local phone system by moving calls from one part of town to another over a combination of fiber-optic lines, “wireless” cellular signals and cable TV wires.
Cable TV wires are nearly ubiquitous in most communities and are capable of handling voice as well as video traffic.
Major cable companies, however, are increasingly merging or forming alliances with the huge Bell companies--the very firms MCI is seeking to compete with.
“It’s bizarre and amazing,” said Eric Rabe, a spokesman for Bell Atlantic Corp. “After our merger (with cable TV giant Tele-Communications Inc.), we could wind up (handling) a piece of (MCI’s) business.”
MCI’s interest in the local phone business appears to be a preemptive strike as the telecommunications business enters a period of tumultuous change. With the Clinton Administration’s general endorsement, Congress early next year will consider proposals to knock down the major barriers that have kept phone and cable companies from competing in each other’s markets.
Among those proposals are measures that would allow the seven Bell companies to offer long-distance service.