NEWS ANALYSIS : COMPANY TOWN : MCI Deal Shows That It’s Decided to Join the Club

By plowing up to $2 billion into Rupert Murdoch’s News Corp. publishing empire, MCI hopes to supplement its communications business with lucrative new ventures that marry its long-distance communications savvy with the publishers’ broad range of news and entertainment properties.

But MCI’s inability to offer a cogent explanation of just what it would gain from the News Corp. deal suggests that it was acting mainly on an abstract desire to establish a major alliance with an information company. Rivals such as AT&T; Corp., Sprint Corp. and the regional Bell companies have all been busy on the billion-dollar-deal front, and MCI appeared vulnerable out on its own.

However, the search for synergy between technology and the world of information and entertainment has been humbling to more than one corporate titan: Matsushita’s acquisitions of MCA, for example, was something of a disaster, and US West has yet to produce any value from its multibillion-dollar investment in Time Warner Inc.

“The underlying idea is to create a vertical monopoly that combines content and distribution,” says John C.B. LeGates, managing director of Harvard University’s Program on Information Resources Policy. But with so much diversity in both content and distribution available, he adds, “it is not clear that anything new is created.”

MCI officials defend their deal in several ways. First of all, they say, it represents a good investment in itself. Unlike the Bell companies, which recently spent hundreds of millions of dollars to create new entertainment companies from scratch, MCI will own a share of a company that has great libraries of movies, television programming and publishing properties.

Furthermore, MCI believes it has the capability to increase the value of News Corp. by helping to promote and distribute its programming--though the examples offered on just how it might do this are less than convincing.

MCI says it will prominently display News Corp. information and entertainment on its site on the Internet’s World Wide Web, thereby both attracting shoppers and promoting News Corp. properties.

“View us as the grocery store,” says Tim Price, MCI’s executive vice president. “We don’t want to be just a distributor. We want to put our own brands at eye level.”

For example, by offering little quizzes about what will happen next on “Melrose Place” and promising cameo roles to the winners, MCI would persuade more net surfers to stop at their site.

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“We think we can make (News Corp.) more successful, and we want part of the action,” says Price.

But MCI says the key value will come out of the $400-million joint venture between the two companies designed to capitalize on News Corp.’s content and MCI’s distribution network.

For example, MCI plans to build a satellite network in North and South America similar to one News Corp. has created in Asia. The network will offer communications services to businesses during work hours. During off hours, however, the satellites could help pay for themselves by offering Fox movies on a pay-per-view basis or letting software companies distribute products to users via satellite.

But while the deal gives MCI quick access to large amounts of content, says Bill Bluestein of Cambridge-based Forrester Research, “it remains to be seen how MCI will develop products that make their investment worthwhile.”

News Corp. won’t be a big help in this new arena. The company purchased Delphi Internet Services in 1993 because Murdoch wanted his own electronic outlet for his magazines and newspapers, but the company has failed to modernize its system and Murdoch has been slow to come out with on-line versions of its products.

While the investment in News Corp. does give MCI quick access to large amounts of information and a library of movies, the company could negotiate those rights independently at a far lower cost. To provide a sufficiently broad offering for any news or entertainment service, such deals must be made in any case.

And while the benefits from the partnership are unclear, the risks are many, experts say. MCI, which faces declining margins in its communications business, needs money for its battle to break into the intensely competitive $80-billion market for local phone services. Instead, the company is spending its $4.3-billion cash hoard from British Telecom in hopes of earning money in a business that is barely established.