Bells Take Aim at Rival
WorldCom Inc.’s archrivals have set their sights on the fallen telecommunications giant, potentially undermining its financial health as it struggles to emerge from the largest bankruptcy filing of all time.
This group of competitors -- which includes Pacific Bell parent SBC Communications Inc. and the other Baby Bell local phone companies -- is lobbying federal regulators for new rules that would require the nation’s No. 2 long-distance company to make hundreds of millions of dollars in upfront payments before it can use the Bells’ networks to route phone traffic. Currently, WorldCom pays the Bells after it collects from its long-distance customers.
The Bells aren’t WorldCom’s only foes. The Clinton, Miss.-based carrier also is fighting the largest labor union in the telecommunications industry and even an influential church group that has taken aim at the company.
They all are seeking to slow the financial reorganization of the former telecom titan in a bitter campaign that analysts say is being orchestrated by the Bells, long-distance carriers AT&T; Corp. and Sprint Corp., and others hoping to wrest business from WorldCom and head off a bloody price war.
“There are a number of battles on a variety of issues that ... suggest there is an organized effort by rivals to keep WorldCom in bankruptcy as long as possible and make it as painful as possible to ensure they don’t get out,” said Blair Levin, a former chief of staff at the Federal Communications Commission who is now a telecom analyst for investment firm Legg Mason Wood Walker Inc.
“AT&T;, Sprint and the Baby Bells,” Levin added, “are clearly better off the longer WorldCom stays” mired in Bankruptcy Court or remains tied up with federal regulators, who are under political pressure to protect consumers from possible service interruptions by financially troubled carriers.
The Bells deny that they are behind any organized effort to undercut WorldCom. They say their only aim is to protect themselves from the same financial ruin that has engulfed WorldCom and so much of the rest of the industry.
WorldCom sought Chapter 11 protection in July, listing assets of $104.billion and debts of $32 billion. The company has been charged by the Securities and Exchange Commission with fraud for misstating earnings by as much as $9 billion dating to 1999.
About 35 major telecom providers have sought federal bankruptcy protection in the last two years, including Winstar Communications Inc. and Global Crossing Ltd., a venture headed by Los Angeles financier Gary Winnick.
Yet critics have singled out WorldCom as a special case because its accounting irregularities were so massive and because the company’s aggressive pricing of services -- grounded in what turned out to be fictitious profit -- forced other carriers to follow suit, causing massive industry losses.
One of the key factors fueling the intense lobbying, analysts say, is the desire of SBC, Verizon Communications Inc. and BellSouth Corp. to poach WorldCom’s turf. They are angling to enter the $100-billion-a-year market for supplying data and long-distance services to large businesses.
WorldCom and AT&T; are the leading providers of such services. But WorldCom is losing its grip on the business as it struggles to emerge from bankruptcy protection. Sprint says it has gained about $250 million worth of business from big company customers at WorldCom’s expense. AT&T; says it has won some former WorldCom customers too.
The three largest regional Bell phone companies have been largely cut off from the market because of federal rules that restrict their ability to offer long-distance service in their home markets, and they are pushing to get those restrictions lifted.
SBC, for instance, is making an aggressive bid for approval to offer long-distance service in California. A fourth Baby Bell, Qwest Communications International Inc., has been able to develop a significant long-distance presence by building its own nationwide fiber-optic network.
However, WorldCom is beginning to turn the tables on the Bells in their primary market: local phone service.
WorldCom’s MCI unit has more than 2 million subscribers for “The Neighborhood,” a plan that offers combined local and long-distance telephone services, voicemail, caller ID and other services in 36 states for a monthly fee between $50 and $60.
The jockeying for market share has some analysts speculating that a local Baby Bell will try to gain a national footprint to lure big corporate customers by either acquiring MCI or eliminating the company as a competitor. That’s why they believe the Bells are undertaking their own lobbying and encouraging outside groups to pressure WorldCom.
The anti-WorldCom efforts began in August, when the Bells filed a petition with the FCC seeking authority to demand hundreds of millions of dollars in upfront payments from WorldCom and other financially troubled carriers that use the Bells’ networks. The Bells said the payments would help protect them from deadbeats such as WorldCom, which owes SBC alone more than $325 million.
WorldCom has called the prepayment proposal “unnecessary, subjective and potentially discriminatory.” If it were to be implemented, experts estimate that WorldCom might initially have to come up with close to $1 billion to pay the upfront fees or deposits -- an amount that WorldCom officials say would strangle the company.
Telecom experts say the FCC isn’t likely to do that, however. Instead, they expect the agency to strike a middle ground that will allow the Bells to collect some additional money but probably much less than they are seeking. A decision by the FCC is at least a month away.
The lobbying campaign spread last month when the United Church of Christ, a Cleveland-based ministry with 6,000 churches, filed a petition with the FCC seeking to bar WorldCom from transferring its valuable communications licenses to other entities. The company needs that flexibility in order to reorganize its communications assets, such as microwave transmission towers, and to get out of bankruptcy.
“There was a corporate culture of greed, fraud and criminal behavior at WorldCom that makes the company no longer eligible to hold the public trust,” said the Rev. Robert Chase, executive director for the Office of Communication of the United Church of Christ Inc.
“We are not out to punish the rank-and-file or investors. But to allow those at WorldCom who created the crisis to emerge from bankruptcy endangers the telecommunications industry and its infrastructure,” Chase said.
WorldCom already has beaten back one challenge from the formidable Communications Workers of America, the labor union that represents 700,000 industry employees.
The CWA asked federal procurement offices in late October to cut off WorldCom’s $1.7 billion in government contracts for telecom services. But this month the General Services Administration extended WorldCom’s federal contracts through January 2004. The procurement agency said WorldCom’s performance “has been consistent with the terms” of its accords with the government.
Plenty of others -- including a number of high-ranking phone executives -- take a dimmer view of the company, and they have stepped up their criticism of WorldCom’s efforts to emerge from bankruptcy.
“The impact of the malfeasance at WorldCom, Global Crossing and Qwest and the damage it has caused cannot be overestimated,” Sprint Chairman William T. Esrey said in a speech this month at a UBS Warburg investors conference. “From a public policy perspective, it is troubling that a company possibly could commit fraud, go into bankruptcy and then emerge with a competitive advantage against companies that behaved ethically.”
Verizon Vice Chairman Lawrence T. Babbio Jr. expressed a similar sentiment last week when he called WorldCom “outright dishonest.”
“They committed fraud and they should not be in business; we’d all be better off,” Babbio said at a forum sponsored by Chief Executive magazine.
The Bells deny, however, that they are driving any broad campaign to sink WorldCom.
“I’m not aware of anything we have done to support” the efforts of church groups or labor unions against WorldCom, said BellSouth spokesman Bill McCloskey. Spokesmen for Verizon, SBC, Sprint and AT&T; also denied any involvement.
Of course, WorldCom critics have plenty of their own motivations to oppose the carrier even without the Bells’ backing.
The CWA has long been upset with WorldCom because it has had no success organizing workers at the carrier. The United Church of Christ has had a long history of battling powerful communications companies in the name of the public interest.
Yet many analysts say the timing and intensity of the anti-WorldCom movement suggests it is being coordinated by the Bells.
“The spin behind this is largely driven by the Baby Bells and slightly by AT&T;,” said Brian Moir, a Washington lawyer and lobbyist who represents large business telephone customers.
“The Baby Bells are trying to force a situation where one of them can buy WorldCom.”
WorldCom draws an even more direct connection. The company claims that Chase of the United Church of Christ has been influenced by his association with Samuel A. Simon, founder of a Washington-based consulting group called Issue Dynamics Inc., which has done work for some of the regional Bell telephone companies as well as their national trade association.
“The Bell companies would like nothing better than for us to not emerge from bankruptcy,” said WorldCom spokesman Peter Lucht.
Chase acknowledged that he knew Simon but said that their relationship has had no bearing on the church’s lobbying campaign against WorldCom.
In the end, some experts think the lobbying efforts will ultimately prove fruitless.
“Most companies are not going to be successful going through Chapter 11,” said Royce Holland, chief executive of the struggling regional carrier Allegiance Telecom Inc., which has seen many comparable firms file for bankruptcy protection.
“Chapter 11 can fix your balance sheet, but not a business plan that wasn’t well thought out or a management team that couldn’t execute,” Holland said.
However, he added, “WorldCom may be an exception to that rule. With a world-class network, and good management, it has the resources” to get back on its feet.
