A Change in Tone
When MCI Communications and British Telecommunications announced their intention to merge last November, consumer advocates had finally found a mega-deal they could love. Unlike previous phone company combinations that erased big players from the competitive landscape, BT’s backing would help Washington-based MCI compete more fiercely in both local and long-distance telephone markets.
Now those expectations are being put on hold. If Jackson, Miss.-based WorldCom succeeds in its audacious $30-billion bid for MCI, the combination of the nation’s No. 4-ranked long-distance company with No. 2-ranked MCI would probably provide fewer of the benefits that made the MCI-British Telecom deal attractive to consumers and many small businesses, analysts said.
But other business customers--especially large ones--could benefit from a WorldCom takeover of MCI. Unlike its rivals, the new company would be able to offer a broad of array of local, long-distance and Internet services to businesses in markets across the country.
“The British Telecom deal wasn’t bad for American consumers, but in the case of WorldCom it’s completely different,” said Regina Costa, telecommunications research director at TURN, a San Francisco-based utility-reform network.
“MCI has pursued a strategy of serving residential customers, and WorldCom hasn’t done that,” Costa said. “For competition to work in the way that Congress envisioned, you have to have choices for residential and small-business customers. Otherwise what you have are billions of dollars shifting hands between corporations, and customers getting higher prices.”
Congress reformed the nation’s telecommunications laws 18 months ago with the aim of spurring competition, thus bringing new services and lower prices to consumers of all stripes. But since then, phone companies have embarked on a merger frenzy to create larger companies that are more powerful and diversified.
That has riled lawmakers and consumer advocates, who expected companies to enter new markets by building new infrastructure instead of simply buying up competitors.
Casey Alexander, an analyst for Gilford Securities in New York, said a WorldCom-MCI merger is not likely to benefit either business or residential consumers in the form of lower prices.
“At some point in time, WorldCom has to turn these cost savings into better margins, [or else] Wall Street is going to stop paying for this stock,” Alexander said. “That would lean against the consumer.”
Still, WorldCom is among the most aggressive builders of local phone networks that are challenging the incumbent Baby Bells. In August 1996, WorldCom bought MFS Communications, owner of local phone networks in 60 cities, and on Wednesday, it announced a $2.4-billion deal to buy Brooks Fiber Properties of St. Louis, which operates or is building phone networks of its own in 44 cities.
“They are growing as if they want to compete with the local phone companies, and hooking their local phone capacity with MCI’s long-distance capacity could create a competitive option for consumers who want one-stop shopping,” said Gene Kimmelman, co-director of the Washington office of Consumers Union.
Even though WorldCom is currently focused on business customers, the “natural progression” would be for the firm to “start with the biggest customers with the highest margin and then reach out and build up their customer base,” Kimmelman said.
To Brian Adamik, a vice president with the Boston-based market research firm Yankee Group, the WorldCom-MCI deal is “intended to bring capabilities together so that these service providers can deliver on the promise of being a one-stop shop. This is not anti-competitive at all.”
Even though the deal would combine two of the world’s top Internet “backbone” providers--companies that carry high-volume traffic along the main network routes--a merger wouldn’t reduce competition in the online marketplace at all, said Christopher Mines, senior analyst at Forrester Research in Cambridge, Mass.
“There are 5,000 Internet service providers at the retail level who sell access and hosting and other kinds of services on the Internet, and it’s a monstrously competitive marketplace,” he said. “I don’t think this combination would fundamentally change the user experience in terms of pricing or even quality of service on the Internet.”
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WorldCom View
WorldCom’s offer of about $30 billion for MCI Communications would be the largest corporate merger in U.S. history.
The Potential Impact of the Deal
* Consumers: A combined Worldcom-MCI would bring an array of telecommunications services under a single roof, including local and long-distance phone service and Internet access. Analysts expect consumers to benefit from the convenience of one-stop shopping, but some consumer advocates fear that WorldCom would be slow to offer lower prices for mass-market services.
* Businesses: These are WorldCom’s core customers, and they already benefit from fierce competition among telecommunications firms. WorldCom is not expected to pursue small businesses as aggressively as it does larger companies, which offer higher profit margins.
An Aggressive Acquisition Campaign
WorldCom has completed more than 40 acquisitions over the last five years. Among them:
* Last month, WorldCom agreed to buy CompuServe for $1.2 billion in stock, then sold its consumer online business to America Online, keeping CompuServe’s network.
* Late last year, WorldCom bought MFS Communications for $12.5 billion. MFS brought WorldCom a local telephone network that catered to businesses and MFS’ newly acquired UUNet Technologies, which operates an Internet network.
* WorldCom bought Williams Telecommunications Group’s 11,000 miles of fiber-optic cable and other assets for $2.5 billion in 1995.
U.S. Long-Distance Market Share
WorldCom’s share of the long-distance market would more than triple if it acquired MCI, but would still be less than half of AT&T;’s.
AT&T;: 52.6%
MCI: 18.0%
Sprint: 10.1%
WorldCom: 5.1%
Others: 14.2%
Sources: Associated Press, Bloomberg News, Dataquest
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Telecom Deal Coverage
* WorldCom bids about $30 billion to take over MCI. A1
* British Telecom might be better off not buying MCI, analysts say. D3
