Telecom Deal Fans Concerns for Consumers
The proposed $115-billion merger of long-distance giants MCI WorldCom and Sprint has won plaudits from investors, but this deal--and other big-ticket phone mergers--may do little for consumers who want nothing more than basic phone service.
Increasingly, phone company mergers are being driven by the desire to offer comprehensive packages that include everything from high-speed Internet access to video, wireless, international, long-distance and local phone service. But critics say each new telecommunications merger brings more benefits for affluent high-end users and less for average users or callers on tight budgets.
* The proposed merger, which would be the largest corporate acquisition in history, would give No. 2 MCI WorldCom and No. 3 Sprint about 37% of the $90-billion U.S. long-distance market. Industry leader AT&T; holds a commanding 43% of the market, leaving the remaining 20% in the hands of hundreds of smaller players, the largest of which is Qwest Communications International.
I That concentration has consumer advocates worried that the marriage of the two companies would leave much of the residential long-distance business in the hands of a duopoly with little incentive to cut prices.
“Bundling will be good for people who can afford the bundle,” said Mark Cooper of the Consumer Federation of America. “But average consumers have been getting higher long-distance bills, higher cable bills, higher pay phone bills, and no competition in any of those markets.”
Within hours of the MCI WorldCom-Sprint announcement Tuesday, even Federal Communications Commission Chairman William Kennard wondered aloud, “How can this be good for consumers?”
But an FCC official close to Kennard said that while the deal is not a slam-dunk for MCI WorldCom, it is unlikely that regulators will block the transaction outright.
The combined company would have significant operations in 65 countries. Annual revenue would total more than $50 billion, with nearly 150,000 employees.
Under the agreement, MCI WorldCom would pay Sprint $76 per share in MCI WorldCom stock. Shareholders in the Sprint PCS wireless business unit would receive one share of a new WorldCom PCS tracking stock, plus 0.1547 share of MCI WorldCom stock.
The transaction is worth a total of $129 billion, including the $115-billion stock swap and $14 billion in assumed debt. The new company would be named WorldCom, but both firms said the merged entity would continue to use the MCI and Sprint brand names.
MCI WorldCom’s final bid beat out offers from regional phone company BellSouth, which had hoped to buy Sprint to add long-distance and a national footprint to its arsenal.
In trading Tuesday, MCI WorldCom shares fell $3.69 to close at $67.94. Sprint finished the day at $58.88, down $2, and its Sprint PCS unit fell $4.69 to $74. BellSouth fell 63 cents to close at $41.81.
During briefings early in the day, MCI WorldCom and Sprint quickly pledged to prove to consumer groups, the FCC and Kennard that the marriage would be a boon to phone users nationwide by creating a strong rival to AT&T; and offering additional choices for local phone service. Through Sprint, the two companies would serve 8 million local phone customers in 18 states.
“We’re going to be very significant competitors to the Bell operating companies,” MCI WorldCom Chief Executive Bernard J. Ebbers said. “This is what regulators and legislators wanted when they passed the Telecom Act--competition across the board.”
In addition to a commanding presence in long-distance, the merged company would hold a sizable chunk of the nation’s fiber networks that carry Internet traffic. It would also have more than 4 million wireless phone customers nationwide.
MCI WorldCom and Sprint, through their separate purchases of wireless cable operations, also have the beginnings of a system that could carry high-speed Internet service to millions of homes beyond the reach of the copper-based technology known as digital subscriber line, or DSL.
“The licenses cover a fairly large proportion of major metropolitan areas, and that’s going to provide a delivery system for broadband access and high-speed Internet service, so I think that’s going to be beneficial to customers,” said Robert Fox, head of the global telecommunications practice at Mercer Management Consulting.
Phone companies believe they must have the entire range of communications products so they can offer customers bundles of services to offset slim margins in long-distance with higher-priced offerings such as Internet access. Some companies have already begun to experiment with service packages carrying price tags of $40 or more per month.
Cooper and other consumer advocates acknowledge that advertised per-minute long-distance prices have dropped steadily, but they argue that monthly fees more than offset the lower prices for most residential callers. In addition, much of the recent price reductions have stemmed from mandated reductions in access fees industrywide rather than competitive pressures.
Those concerns were echoed Tuesday by the 630,000-member Communications Workers of America, which voiced opposition to the deal. The trade union noted that when the FCC approved MCI and WorldCom’s merger last year, Kennard said the industry was “just a merger away from undue concentration.”
“This would be that merger,” the union declared.
Still, the FCC and the Justice Department, which is looking at any possible antitrust issues raised by the deal, will probably approve it after requiring WorldCom to sell off Sprint’s Internet backbone, sources said.
That would be consistent with the stance regulators took last year when--at the urging of Sprint and others--the Justice Department and European Union required MCI to sell its Internet business to Cable & Wireless as a condition for MCI to merge with WorldCom. That sale later became mired in a nasty lawsuit between the firms.
Regulators may also push WorldCom to spin off Sprint’s local phone business and jettison some of Sprint’s long-distance facilities to bolster competition.
“I see no particular antitrust issues that could block the deal” outright, said Scott Blake Harris, a Washington communications lawyer who headed the FCC international bureau.
“MCI WorldCom could make a pretty good case that they can make wireless a more vigorous competitor.”
As for long-distance, added Harris, “one has to assume that the regulators will take into account the imminent arrival of Bell Atlantic, US West and BellSouth, which will radically transform the market.”
