So close, and yet so far. WorldCom Inc.'s (WCOM) $37 billion merger with MCI Communications Corp. (MCIC) is within inches of completion. But the European Commission and the U.S. Justice Dept. are withholding approval until the companies can prove that their combined Internet operations won't crush rivals.

Regulators are on the right track. Internet data networks are doubling every four months, and in a few years, they'll carry far more traffic than traditional voice networks. So, trustbusters must make sure early on that no one player can dominate the market, raise prices, and squeeze out rivals. ''There's a potential for abuse,'' says Donald Heath, president of the Internet Society. ''Someone with critical mass can dictate prices.''

The EC has determined that MCI-WorldCom would control up to 65% of the so-called Internet backbone, the global network of data carriers that local operators use to make their connections. That's a big chunk of the market, and the fear is that a giant could not only hike prices for small Internet-service providers but also charge unreasonable fees for other backbone networks that need to send traffic across WorldCom-MCI's system.

To appease regulators, MCI has offered to sell its routers and wholesale Internet-service customers to Britain's Cable & Wireless PLC (CWP). It will also give C&W revenues from retail Net customers and attractive transmission rates on its fiber phone network for five years. This is a good start.

But beyond C&W, the EC and Justice should guarantee a fair shake for other competitors--such as Level 3 Communications Inc. (LVLT), Qwest Communications International Inc. (QWST), and eventually the Baby Bells. One possibility: Negotiate a consent decree in which MCI-WorldCom would promise to offer fair-market interconnection terms to all rivals that need to hook on. And to avoid government regulation, the industry could police pricing itself through an arbitration system.

LOCAL MOVES. But trustbusters are so far signalling that they aren't out to scuttle the deal--by, for example, demanding the sale of WorldCom's market-leading UUNET Internet service. After all, from a U.S. perspective, MCI-WorldCom together could be pro-competitive: They say they'll take on Baby Bell local monopolies. Moreover, many companies are building data networks that could compete with MCI-WorldCom, including recently announced ventures from Bell Atlantic (BEL) and Sprint (FON). Here again, maintaining competitive hookup charges will be key. ''You don't want interconnection used as a strategic weapon,'' says Hal R. Varian, dean of computer studies at the University of California at Berkeley.

Still, more competition is coming soon to the Internet backbone. The job of regulators must be to maintain a level playing field until that day arrives.

By Catherine Yang


Updated June 11, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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