MCI Vows to Fight for Local Phone Business : Industry: Company to spend $2 billion to build big-city networks to vie with Bell firms. Battle could last years.
MCI Communications Corp., the feisty upstart that ended AT&T;’s monopoly in long-distance telephone service, announced Tuesday a multibillion-dollar plan to bring competition to the local telephone business.
MCI said it would spend $2 billion over the next several years building local telephone networks in major cities, including Los Angeles, as part of a seven-year, $20-billion investment program that will also include major upgrades to the MCI long-distance network and new wireless communications facilities.
Like the earlier struggle over long-distance service, the battle over local telephone competition promises to be a long and tangled affair, involving a host of complex technical and regulatory issues. It will likely be at least five years--and possibly much longer--before most telephone customers can choose among local phone companies, though large businesses should benefit from competition much sooner.
Unlike the last time around, though, MCI is now a powerhouse, and it has some very potent allies on its side: part-owner British Telecom, the cable television industry, and even onetime nemesis AT&T.; All are eager to take a piece of the $90-billion-a-year local phone business that’s now controlled by massive regional Bell operating companies.
“In the absence of competitive pressures, the regional Bell operating companies have not lived up to their responsibilities to provide local access at reasonable prices,” said MCI Chairman Bert Roberts. “This is an historic assault on the local exchange monopolies.”
The regional Bell companies, including San Francisco-based Pacific Telesis, greeted MCI’s announcement with derision, declaring that they would be happy to have competition in the local phone business just as soon as they are allowed to compete in the long-distance business. The Regional Bell Operating Companies, “RBOCs” in industry argot, are barred from long distance by the court order governing the break-up of the old Bell system.
“MCI today announced that it is in favor of competition in every market but its own,” Bell Atlantic President James G. Cullen said in a statement. “MCI/BT insists that even while it offers local telephone services, companies like ours should not be permitted to enter the long-distance oligopoly controlled by MCI/BT, AT&T; and Sprint.”
Yet Bell Atlantic, like many other companies in the increasingly incestuous high-tech world, has countervailing interests as well. Following its acquisition of cable giant Tele-Communications Inc., it likely will compete with other regional Bell companies in providing local phone services.
“MCI is the first one out of the starting block, but others will follow,” says California Public Utilities Commissioner Norman Shumway. More than 100 companies have already expressed an interest in offering phone services in California, Shumway said.
Currently, local phone service is regulated by state public utilities commissions, and only New York, Illinois, Massachusetts and Washington permit competition for most local services. Some regulators and consumer activists fear that open competition would result in big price breaks for large business customers but would ultimately raise costs for residential phone users.
Many states, including California, are moving toward a more liberal regime. The California PUC recently took a major step in opening up the market for toll calls within local calling areas--so-called “local long-distance”--and hopes to have the local phone business completely liberalized within three years.
Legislation now pending on Capitol Hill might speed the process even further, overriding the state rules and opening up competition in both local and long-distance telephone and cable television markets across the country.
The driving force behind MCI’s local service strategy is not merely a desire to carry calls between neighbors. Rather, MCI and other long-distance companies are looking for ways to drastically reduce the fees they must pay the local phone companies to handle the local portion of long-distance calls.
About 45% of the price of a long-distance call currently goes to cover these costs, known as “access charges.” Further, the long distance firms see the RBOCs as competitors on a variety of fronts over the long run, and they don’t want to be dependent on them.
“The (long-distance) carriers absolutely, positively must get off the RBOC networks as quickly as they can,” said Robert C. Atkinson, senior vice president for Teleport Communications Group Inc. Teleport, controlled by a group of cable operators, including Tele-Communications Inc., is the largest of an expanding group of companies that is pioneering local service competition in major cities across the country.
Teleport, MFS Communications and other local service competitors currently offer a way for large corporate customers to connect directly to long-distance carriers. Such services can cut long-distance charges and reduce dependence on the local phone network, but they are only economic for large locations and they cannot in most cases provide local calling.
Initially, MCI will focus mainly on access services for corporate customers, running cables into office buildings via a massive network of ducts that it acquired from telegraph operator Western Union. Eventually, though, MCI and the other access providers aim to provide full-blown local services as well. And MCI will likely link up with other communications companies to offer many of these new services.
“This is raising the ante in the local exchange market. For the first time now the regional (Bell) companies will face serious competition,” said Fritz Ringling, partner at Network Dynamics Assn., a New York consulting company.
But regulatory issues, such as whether you will be able to keep your phone number if you switch local carriers, remain.
On Wall Street, shares in the RBOCs fell Tuesday as the prospect of increased competition loomed. Of Pacific Telesis’ $9.9 billion in revenues, $2.25 billion comes from charges to long-distance carriers for use of local lines.
As long-distance carriers install their own lines, Pactel’s earnings from this business could fall substantially.
MCI shares also fell Tuesday--closing down $1.875, to $26.625 a share on the NASDAQ--as investors worried about the cost of the new investments.
Blake Bath, an analyst at the Sanford C. Bernstein investment bank, noted that about half of the $20-billion announced investment by MCI eventually would have been spent anyway. In addition to the $2 billion in local networks, he expects MCI to spend up to an additional $4 billion on a new type of wireless phone system. MCI will also spend billions upgrading its long-distance network to offer more high-capacity data and video services.
Weber reported from New York and Helm from Seattle.
