| BUSINESSWEEK ONLINE : OCTOBER 11, 1999 ISSUE | ||||||||
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| SPECIAL REPORT
A Failure to Communicate Will mistrust doom the MCI-Telefonica global alliance? Back in March of 1998, they were all smiles and handshakes. Executives at Spanish phone operator Telefonica de Espana (TEF) and U.S. long-distance powerhouse MCI WorldCom Inc. (WCOM) unveiled a partnership with sweeping plans to provide telecommunications services to customers around the world. Together, the partners would ''enhance the short- and long-term growth and value of the companies,'' beamed WorldCom's CEO Bernard J. Ebbers, who, at the time, was busy taking over MCI. As part of the deal, MCI and Telefonica would create separate ventures to serve European and Latin American markets, cooperate on a bold fiber-optic ring around South America, and create a marketing company targeting the growing U.S. Hispanic community. So much for sweeping plans and beaming CEOs. More than a year and a half later, the partnership between MCI WorldCom and Telefonica is stalled at the starting gate. Of the dozen or so initiatives the companies have announced, virtually none has come to pass. Worse, in many markets MCI and Telefonica look more like archrivals than allies. In Brazil, for example, MCI WorldCom bought a controlling stake in long-distance carrier Embratel (EMT)--a move that pits it directly against Telesp (TSP), the network operator in Sao Paolo state that Telefonica owns. The two sides have even tangled in Brazilian courts over what services each can provide. Now, experts say the partnership may soon break up. It would be a setback for both sides. Alone, each company will have a harder time breaking into key countries dominated by the other. Telefonica is the strongest player in the $50 billion Latin American telecommunications market and could help MCI gain a foothold beyond its current operations in Brazil and Mexico. And MCI is among the biggest telecom guns in France, Germany, and Britain, giving Telefonica a much-needed base in Western Europe. Telefonica also has little presence in North America--MCI's stronghold--and will need operations there if it hopes to woo many large corporate customers. A case of squandered opportunities? Maybe. But just add MCI-Telefonica to the long list of troubled international telecom alliances. Even though telecom executives hail partnerships as the best way to provide suites of global services to their large corporate customers, the dismal truth is that few fly. Consider the partnership of Sprint (FON), Deutsche Telekom (DT), and France Telecom (FTE) called Global One. Ever since DT launched its ultimately futile bid for Telecom Italia (TI) this spring without telling its French partner, the Germans and French have been at each other's throats. And then there's Unisource, an alliance that was so loosely cobbled together that it was never able to offer quality service consistently. AT&T (T) and Telefonica have exited, leaving Swisscom (SCM), Dutch carrier KPN (KPN), and Swedish operator Telia. And now the troika has decided to sell off the partnership's assets. CULTURE CLASH. Why don't these alliances work? At the heart of the problem is a wariness that prevents the partners from integrating operations or sharing competitive information. Companies enter into the deals to provide end-to-end communications services for their large corporate customers. The best way to do that and still provide a quality network--while keeping a lid on costs--is to knit together the sales, marketing, and technical departments of the partners. The only problem is, no one wants to do that. So far, companies haven't been willing to relinquish control of resources. And often, neither side will hand over its best customers. ''The alliances are by nature very unstable,'' says Roger Wery, who heads the communications practice at telecom consultancy Renaissance Worldwide Inc. ''We're talking about massive corporations that have distinct cultures, and that creates a lot of sparks.'' MCI's partnership with Telefonica started out troubled and soon deteriorated. Neither side was ever as deeply committed as each publicly professed, insiders say. The partnership was brought into MCI WorldCom through MCI's relationship with British Telecommunications PLC (BTY), which had an alliance with MCI that broke down after WorldCom trumped BT's bid for the long-distance carrier. While WorldCom agreed to continue the Telefonica partnership, the truth is it goes against the grain of the maverick company that Ebbers has sought to build. ''WorldCom has historically taken a go-it-alone approach,'' says Donaldson, Lufkin & Jenrette Inc. analyst Richard G. Klugman. Consider the ballyhooed plans for a fiber-optic ring around South America. The partners had agreed to build out a circle of fiber-optic cables that would link the continent with North America and Europe. Telefonica is pushing ahead with the plans, but with New Jersey-based IDT Corp. as a 10% equity partner. MCI declined to participate and is being courted by Bermuda-based Global Crossing Ltd. (GBLX) as an anchor tenant on a rival Latin American cable, industry insiders say. Asked to explain the reversal, a spokesman from MCI would say only that ''we looked at it, and we weren't interested.'' Indeed, a list of the alliance's initial goals reads today like a litany of broken promises. The pact called for Telefonica to distribute MCI's services in Spain. It didn't happen. Telefonica had the option of buying a 10% stake in MCI's European operations and a 46% share of the company's activities in Italy. Neither happened, and Telefonica has since created its own unit focusing on Italy. The two were to form a subsidiary to explore opportunities in Eastern and Southern Europe. It wasn't formed. Relations are the most tense in Brazil, Latin America's largest market. The two were supposed to cooperate on investments there but instead have become bitter rivals. In July, when Brazilians were given the chance to choose a long-distance carrier for the first time, the network broke down and only 20% of calls could be completed. Each company blamed the other and, in the end, both were fined by Brazilian regulators. Among the MCI executives stirring up trouble in Brazil is Jorge Rodriguez, who previously had been responsible for building strong relations with Telefonica as his company's chief representative to the alliance. ''That their differences emerged so publicly is yet another indication of virtually no cooperation between the two companies in Brazil, which is the most important Latin market for both of them,'' says Yankee Group Research Inc. analyst Carlos Guzman-Perry. ALIVE, IF NOT WELL. To date, the only concrete accomplishment either side can point to is an exchange of board members: Telefonica Chairman Juan Villalonga Navarro sits on MCI WorldCom's board and MCI Chairman Bert C. Roberts Jr. is a member of Telefonica's. And if MCI WorldCom consummates its rumored takeover of Sprint, that could prove to be one more demanding distraction that could keep MCI Worldcom from moving the Telefonica relationship forward. Spokesmen from both companies say that the partnership is alive, although executives on either side declined to comment for this story. The question facing Telefonica is: What next? It has been a member of three alliances, and if this one were to fail, the Spanish company may have trouble lining up another dance partner. ''For Telefonica to choose a fourth ally now could be seen as just one ally too many,'' says Graham Johnson, who follows the telecommunications industry for consultancy Analysys Ltd. Officially, neither company is prepared to write the partnership off yet. And some analysts believe the relationship continues to make sense: MCI wants a stronger foothold in Latin America, while Telefonica needs help penetrating North America and the rest of Europe. ''Each can bring to the table something that the other needs,'' says Glenn R. James, regional director for Latin American telecom at Deloitte Consulting. Perhaps, but neither side has yet shown that it's willing to do what it must to take advantage of what the other offers. By David Rocks in Atlanta _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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