'THIS IS THE OFFICIAL DAY THE TELECOM WARS BEGIN'
It wasn't supposed to play out this way. Back in February, 1996, when the landmark Telecommunications Act deregulating the nation's local and long-distance calling industries was signed into law, telecom companies large and small predicted that the industry would eventually consolidate into five or so megacarriers. Each would offer the whole gamut of phone, data, and entertainment services to consumers and businesses--the one-stop communications shops that customers keep saying they want. And, predicted industry seers, only the biggest outfits would have the resources to stock that shop: that is, AT&T, MCI, Sprint, the seven Baby Bells, and GTE--in one or another combination.
WorldCom Inc. CEO Bernie Ebbers is making every other executive in the telecom business look like a foot-dragger. His bid for MCI Communications Corp. puts enormous pressure on other big companies to speed up their move into new markets and services. ''Today is the official day that the telecom wars begin,'' trumpets Dennis Exton, telecom analyst at Nikko Europe PLC in London.
True, there have been other telecom deals, but none as groundbreaking. By comparison, the SBC Communications-Pacific Telesis and Bell Atlantic-Nynex mergers only created much larger local calling giants, each determined to protect its home turf rather than reach into new markets. MCI's efforts to build a local-calling network drained hundreds of millions from its coffers and forced it to turn to British Telecommunications PLC for rescue. AT&T has stumbled from one local-calling strategy to another: The latest is to franchise its brand to small competitors of local phone companies. Sprint, meanwhile, is focusing its expansion efforts on a new type of wireless calling that is just now rolling out.
''BIG GAME.'' A WorldCom and MCI combination would be on another level entirely. MCI has lots of corporate customers who want alternative local networks. WorldCom has the alternative local facilities and just needs customers to load onto them. If WorldCom wrests MCI away from its intended partner, British Telecom, it will have foiled BT's efforts to buy a presence in the U.S., will have created AT&T's largest challenger yet in the long-distance market, will have made WorldCom the largest local-phone competitor to the Bells and GTE Corp., and will have given itself the pole position among Internet-access providers.
WorldCom's rivals will have to struggle to respond quickly. Many of them are hampered by regulatory restraints, cautious investors, and lingering monopoly mind sets. ''WorldCom is attempting to get into the big game, and it has everything to gain,'' says Brian Adamik, a consultant at Boston's Yankee Group. The large carriers, on the other hand, ''are prisoners of their own legacies,'' says Adamik. ''They know they have to get their houses in order, but they have always moved cautiously.''
Indeed, the older companies have saved some of their most aggressive actions for courtrooms and regulators' offices rather than the marketplace. Local and long-distance carriers have filed a flurry of claims and counterclaims since the telecom bill passed--in an effort to keep each other out of their respective markets. Several of the Baby Bells, for example, sought and won a federal injunction recently blocking federal rules that would have required them to lease networks to competitors. ''Winning for the Bells means delaying competition in core markets, and that leads you to be fairly conservative,'' says James F. Moore, president of Boston's Geopartners Research Inc. ''The regional phone companies are very consistent. They are not innovating--not taking risks.''
Until now, the Bells figured they could afford to go slow because none of the big three long-distance carriers could afford to build multibillion-dollar local networks connecting homes and cities while fighting it out in the low-margin consumer long-distance business.
But if the WorldCom-MCI deal goes through, the equation changes. With local networks in nearly 100 cities, WorldCom would be less dependent on access to the Bells' networks--it can siphon off high-revenue business customers in local calling by offering them state-of-the-art technology, long distance, and Internet access. The Bells are left with lower-volume residential customers--and with little choice but to go after new sources of income.
AT&T can't easily retaliate by buying into local phone systems itself. When AT&T hinted that it was in talks to merge with No.2 local carrier SBC Communications earlier this year, federal regulators made it clear that they would oppose any combination that hints of putting the Bell system back together. ''Acquisition is definitely the way to go because the cost of trying to build something from scratch is simply too capital-intensive,'' says Robyn G. Nietert, a partner at the Washington law firm Brown Nietert & Kaufman. ''But it's taking too long for the regulators in Washington to realize that.''
A SIGNAL. The WorldCom deal might ignite a series of attempted deals that could make Washington reconsider its opposition. AT&T may not have had any luck with SBC, but analysts speculate that GTE, which was never part of the old Bell empire, might be a target more acceptable to regulators. ''I think you will see a very dramatic move from AT&T once it brings a new CEO on board,'' says an industry consultant close to the company.
BT, too, must figure out a new way to get into the U.S. market if it loses out on MCI. Although the company could refocus its energies on Europe, where national telecom markets are scheduled to open to competition in January, it can hardly afford to ignore the U.S., the world's largest telecom market. That's particularly true since its two largest European competitors, France Telecom and Deutsche Telekom, already own 20% of Sprint. James Dodd, an analyst at Dresdner Kleinwort Benson in London, suggests that BT might develop an operating partnership with AT&T, form a partnership with one or more of the Bells, or buy a smaller local exchange company such as New York's Teleport Communications Group Inc.
Certainly, WorldCom's bid has shown the industry's giants that if they don't take action, someone else will. ''Bernie Ebbers has sent a signal to the rest of telecommunications industry that this is the way you make an industry-leading firm. You put all the pieces together and organize it quickly,'' says William K. Newbury, an analyst at Teachers Insurance & Annuity Association-College Retirement Equities Fund. If the rest the industry got the message, those one-stop shops may open for business a lot sooner.
By Catherine Arnst in New York with bureau reports
Updated Oct. 2, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.