Q&A WITH WORLDCOM'S JOHN SIDGMORE

When WorldCom Inc. completes its pending $37 billion merger with MCI Communications Corp., John W. Sidgmore will be there to guide the new telecom giant to its future in data communications. As President of WorldCom's Internet unit, UUNET, based in Fairfax, Va., Sidgmore already presides over one of the world's largest Internet backbone providers. And that's before MCI's own sizable Net backbone is added to it. While both WorldCom and MCI run traditional long-distance businesses with forays into local calling, WorldCom is basing their future together on the growth of data communications.

In 1998, WorldCom expects 20% to 25%, or $2 billion, of its pre-MCI revenue to come from Internet business. That's more than 40% of WorldCom's growth. In 1997, Internet revenue was slightly under $600 million, or 7.5% of total revenue. Because of the Internet's huge growth rate, WorldCom is trying to increase the share of its revenue that comes from the Net. But Sidgmore, who is WorldCom's Vice-Chairman and Chief Operating Officer as well as President and CEO of UUNET, believes that growth in Net business won't necessarily come from snatching traditional phone company services, such as voice, but rather from the explosion of more sophisticated data applications. For that reason, he downplays Internet voice services.

Sidgmore discusses these issues in a Feb. 26 interview with Catherine Yang, telecom correspondent in Business Week's Washington Bureau.

BW: Will data network companies eat the phone companies' lunch?

Sidgmore: We wear two hats at WorldCom. WorldCom has a large segment of its business in the traditional telecom world. UUNet is [part of] the new data networking. We often try to see both sides of the issue. At the end of the day, we have based our entire strategy on the growth of the Internet and related data communications markets over the next couple of years.

If you look at the way demand for the Internet is growing, it's absolutely mind-boggling. We've never seen an industry in history with this growth rate. The capacity in UUNET's backbone increases 10 times a year and doubles every 3.6 months. That's 1,000% growth a year. That has been very consistent for the last three years. Think of other models like the PC industry, where Moore's Law rules. We're not doubling every 18 months here, but every 3.6 months.

The traditional voice market grows 8% to 10% a year, compared to the 1,000%-a-year growth on the Internet. It doesn't take long for the Internet to be the driver, the dominant piece in the industry. We have bet a lot of chips on that continuing. That's why we acquired CompuServe and ANS and why WorldCom moved to buy MFS before that, why we put so much capital to work on the Internet. We believe that will be the vehicle for growth in the industry. At the end of the day, the winner for the Internet will be the winner in the telecom industry more generally.

With 1,000% growth on the Net and 8% growth in voice, by the year 2000, 50% of all bandwidth in all the networks around the world will be dedicated to the Internet, compared to about 10% today. Keeping the growth rates the same, by the year 2003, more than 90% of the bandwidth in the world will be for the Internet and 10% for everything else. All these arguments on voice over the Internet are the wrong question because voice will be a niche market. If you just do the math, it's hard to see how the Internet doesn't become the driver for the world's telecom traffic.

I argue this is the reason why most telephone companies around the world awakened to this last year. Fax accounts for half of all international minutes [that are] now counted as voice. If half of all international traffic is really fax, to a phone company, their core business could be seriously hurt by the Internet. It's the low-hanging fruit of the Internet companies. Half of their core business in the international world is at risk. Suddenly these 100-year-old telephone companies have gotten hip to this new technology called the Internet, because they see their core businesses being attacked.

Two things are happening at the same time that completely and fatally change the industry curve forever. First is historic deregulation. For the first time in 100 years, there can be competition. Since January, 1998 [because of the World Trade Organization agreement to open up telecom markets], major centers in Europe are open to competition for the first time ever.

Second, this new technology called the Internet completely changed the cost structure and way people think about building networks. The entire landscape can be upset in the next few years.

The Internet will be at the fulcrum of what changes the industry. Ten years from now, the winners will be much different from the winners you see today in telephones. Our vision is to build a phone company that looks more like a Silicon Valley PC startup. If this is the wrong vision, you'll be talking to a different guy [in my job] next year.

BW: What's the future of voice over the Internet?

Sidgmore: You're going to see more and more voice go over the Internet. But in the next year or two, most voice traffic will stay on the public-switched network. What is going to move are segments of the voice world that aren't really voice. The growth segments will be fax, messaging, and voice mail, which can all be done easily on the Internet with high quality and low cost.

Then, there probably will be a market for lower-quality, lower-cost voice. An example of an application is if a college student leaves home, I bet 9% of their parents would accept some static for a 90% reduction in cost.

Other applications include customer service. If you're on a Web site looking at product information and you want to buy the product by hitting a button to talk to them instantly, it's so convenient that even if the quality isn't perfect, you'd do it. Cellular proves that there is a market where people are willing to trade off quality for ease of use.

BW: What is the biggest obstacle to improving the quality of voice over the Internet?

Sidgmore: Traditional voice networks are expensive transmission networks that keep all bits in the electronic stream synchronous with each other. In the public Internet, because of the way packets move, you can't guarantee that the bits arrive at the same time.

You can solve the problem with more guaranteed bandwidth--such as a dedicated bandwidth within a company. The real question is how much you want to pay. As you put in more bandwidth, you reduce the cost advantage. Though there will be lots of voice over the Internet, I don't think it's going to pull mainstream voice off the public-switched networks.

BW: What are the future growth areas in applications for the Internet then?

Sidgmore: Anything that looks like store and forward, instead of being truly live. That's easier on the Internet.

The biggest driver of growth to me will be more traditional data. One area is computer-to-computer communications, which are really starting to drive bandwidth up. It's a gigantic driver of growth. Intercorporate communications, orders going back and forth, is happening more and more on the Internet. When you think of how fast computers can communicate, you can see how that drives capacity and bandwidth.

Second, today when you're on the Web looking for information, you sign onto a Web site. Suppose there were a computerized way to do that. You could program your computer to search all Web sites about auto engines. Think of how much network capacity that will take. We can easily dream up scenarios where Internet demand grows upward.

BW: If the Bells are just waking up to the Internet, what about long-distance carriers that have been in this business?

Sidgmore: Long-distance companies in the U.S. have done better than anyone else as phone companies looking into this. The model of the future is a phone company that marries an ISP. That's what happened when WorldCom bought UUNET. BBN/GTE will be successful. Sprint and MCI have been reasonably successful.

But it surprises a lot of people that the phone companies haven't grown their Internet business faster. Part of the problem is that when a large, going concern enters a new business from scratch, the new business is so small compared to core revenues that they don't put the right resources in.

That's why ISPs grow up faster. We had nothing else to focus on. We had to make this work. But there's a lot of room for a lot of players in this industry. I think the long-distance companies will succeed.