BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESS WEEK E.BIZ -- COVER STORY

WorldCom Laying It on the Line
Bernie Ebbers is trying to remake the company into an Internet power, just as he's feuding with top Net strategist John Sidgmore

Photo by Bowles/Corbis Sygma
CEO Ebbers with Vice-Chairman John Sidgmore
It was a humbling moment. In a presentation to analysts at a Manhattan hotel on Nov. 1, WorldCom Inc. ( WCOM) CEO Bernard J. Ebbers, the swaggering cowboy of the telecom industry, was back on the heels of his trademark boots. With his core long-distance phone business unraveling faster than expected, he announced plans to split the company into two businesses, one focused on consumers and the other on corporate customers. He also conceded that WorldCom was going to fall far short of Wall Street's forecasts for the fourth quarter and next year. Instead of rising at double-digit rates, WorldCom's revenues would inch up no more than 7% to 9%. Worse, profits for the fourth quarter would likely be half the $1.4 billion that analysts had been expecting. Investors dished out swift punishment: They pounded the company's stock down 20% to less than $19, wiping $17 billion off WorldCom's market cap in a single day. ''I've let you as investors down,'' Ebbers told the crowd. ''I've let myself down.''

Ebbers cutting himself a fat slice of humble pie? It's just the latest sign that the once unstoppable juggernaut of the telecom industry isn't the company it used to be. Ebbers' longtime strategy has been to buy growth by gobbling up ever-larger competitors. That approach ended when federal regulators torpedoed his bid for Sprint Corp. ( FON) last spring. Regulators warned Ebbers that the only deals they'll approve now are niche acquisitions. But even those may be harder to come by with WorldCom's stock in the doldrums.

So where will Ebbers find growth? In a word, the Internet. The planned restructuring is a forceful affirmation that WorldCom needs to move beyond its traditional phone business to find salvation. Ebbers' plan is to sell businesses new, lucrative e-commerce services. As WorldCom executives see it, they have a built-in advantage: a vast, global network of 300,000 miles of fiber optics that can deliver speedy Internet access--and open the door to other nifty Net services. Why, they argue, shouldn't WorldCom, the company that already carries 50% of the world's Internet traffic, also manage the industrial-strength Web sites of other companies? And why shouldn't WorldCom, with its 40 million phone customers, charge for whiz-bang technology that lets them browse the Web by simply speaking into their phone? ''We have the right assets to move fast into digital businesses,'' crows Ebbers.

Hold on little dogie. Unfortunately for Ebbers & Co., that may be easier said than done. While WorldCom has been a leader in carrying basic Web traffic, it's late to the party for providing extra Internet services. Consider the fast-growth market for hosting other company's Web operations. Today Silicon Valley upstart Exodus Communications Inc. ( EXDS) is No. 1 with a 40% share. And Exodus' hold will likely get stronger. If Exodus closes its deal to buy the Web-hosting operations of Global Crossing Ltd. ( GBLX), it will boast 46 data centers and 5,000 customers (Page EB48). ''WorldCom is up against enemies now who really understand the technology of the Net and how to exploit it,'' says analyst Adam Quinton of Merrill Lynch & Co.

Nasty Surprise. Worse yet, WorldCom is entering this new arena more by default than by careful planning. While Ebbers declined repeated requests to be interviewed, friends, former executives, business partners, and customers describe a company that's still reeling from the loss of Sprint. ''Quite frankly, we were caught flat-footed,'' concedes a senior executive who recently left WorldCom. ''Ebbers was sure he could pull off the Sprint deal in the 11th hour.'' Brian Brewer, Worldcom's senior vice-president for business marketing, concedes WorldCom was overconfident about the acquisition and lost valuable time negotiating with federal regulators, but he says WorldCom is poised to make up for lost time.

Playing catch-up, coupled with the plummeting stock, has wreaked havoc on morale at WorldCom's offices in Clinton, Miss., and Washington, D.C. Top executives joke that it doesn't pay to come into work--given that the losses on their stock holdings in the company far exceed their base salaries. Ebbers, a renowned penny-pincher who got rid of company cars at MCI and made well-heeled MCI execs share rooms at budget hotels on business trips, has taken extraordinary steps to stem defections. He has offered fat cash bonuses equal to several year's worth of salaries to execs who stay through 2002. But the offer has had limited success. In recent months, the list of key departures has included Timothy F. Price, president and CEO of the company's MCI WorldCom Communications unit, and John Donoghue, former senior vice-president of consumer marketing. Brewer says executive departures are normal in telecom since it's such a fast-paced industry.

A more crippling defection may yet come. Many WorldCom insiders are speculating that John W. Sidgmore, the company's vice-chairman, is on the way out. The exit of Sidgmore would be a brutal blow since Sidgmore has been the guiding spirit behind WorldCom's Net strategy. In 1996, when Ebbers wanted to sell off a little-known division he had acquired called UUNET Technologies Inc., which carried Internet traffic, Sidgmore convinced him it would be crucial to keep. Today that division boasts the largest Internet backbone in the world. Sidgmore also cut a landmark deal to buy America Online Inc.'s ( AOL) Internet plumbing so AOL could focus on marketing and WorldCom could consolidate its leadership in carrying Net traffic. ''Sidgmore is vital,'' says Sajai Krishnan, a partner in the San Francisco office of consultant Booz, Allen & Hamilton. ''He's the brains behind the whole Internet effort.''

While Sidgmore declined to be interviewed for this story, his actions speak loudly. Insiders say that Ebbers and Sidgmore have never gotten along particularly well. Tensions between them have escalated since last year when Sidgmore pushed to buy wireless player Nextel Communications Inc. ( NXTL) and Ebbers balked at the high price tag. ''Sidgmore was so pissed off about Nextel that he took his ball and went home,'' recalls a former WorldCom exec. Not long after the dispute, Sidgmore gave up the day-to-day management of UUNET, retaining the ceremonial title of vice-chairman. Since then, he signed on as chairman of Strategy.com, a startup that provides personalized news, stock quotes, and other Net services.

Perhaps most telling, Sidgmore, who has played a key role in acquisitions since joining WorldCom, wasn't involved in the company's September purchase of telecom upstart Intermedia Communications Inc. ( ICIX), a $3 billion deal that gives WorldCom control of the Web-hosting firm Digex Inc. Brewer, the most senior Net exec after Sidgmore, says that Sidgmore remains ''our big picture guy,'' even though he's not involved in daily operations. Brewer denies there are serious tensions between the two execs.

Losing Sidgmore's full focus couldn't come at a worse time. Without Sidgmore, WorldCom's Internet gambit rests heavily on the vision of Ebbers, who has long admitted his aversion to technology. It took him years to get a cellular phone and a pager. As recently as a year ago, employees say, the best way to get in touch with Ebbers was via fax. Any e-mail had to go through his secretary. Company officials say Ebbers has e-mail now.

Ebbers has long been an outsider in the industry dominated by Ma Bell lifers. Born in 1941 in Edmonton, Alberta, he came to the States after flunking out of the University of Alberta. After relocating to Mississippi, he tended bar for a while and then coached high school basketball. Later he went to school at Mississippi College, where he played basketball on a scholarship. He quickly fell in love with the state and likes to say that the only way he'll leave is ''in a box.'' After college, he became one of the owners of a small chain of motels.

His start as a telecom exec was something of a fluke. He chipped in money to start up a company called Long Distance Discount Service in 1983 with several other Jackson entrepreneurs. It was only after the company ran into problems that Ebbers took over as chief executive. He quickly found he had a knack for dealmaking and built the company through more than 70 acquisitions. All the while, he's kept his down-home appeal. He lives on a giant soybean farm with horses, and he relaxes by puttering around on his tractor. At his wedding last year, he wore jeans and cowboy boots with his tuxedo jacket.

With or without his top Net strategist, Ebbers is pushing hard to rebuild momentum at WorldCom. Creating a tracking stock for the lagging consumer and wholesale long-distance businesses, in a move similar to the four-way breakup of AT&T Corp. ( T), is just the start. He's aiming to close the deal for control of Digex soon, which should help WorldCom accelerate growth in its data and Internet businesses. Already, revenues at those businesses are climbing more than 25% annually, while revenues for the consumer and wholesale businesses are beginning to shrink.

The restructuring will create a new WorldCom, one that's smaller but faster growing. The existing company is projected to boost revenues 11.5% to $45.8 billion in 2001 from $41 billion this year, according to Credit Suisse First Boston analyst Daniel P. Reingold. But if Ebbers separates the consumer and wholesale businesses, Reingold expects that WorldCom will increase revenues 17.6% to $34.6 billion next year. That, Ebbers hopes, will once again convince investors to flock to WorldCom's stock. And with a high-flying currency, Ebbers could go back on the hunt for acquisitions and round out his offerings in the Internet sector. ''Dot-coms are cheap now, and Ebbers will gobble up a mess of them if he can,'' says analyst Jay Pultz of market researcher Gartner Group Inc.

Can Ebbers make WorldCom an Internet powerhouse? Although the odds are against him, he may yet prove the naysayers wrong. He is, after all, the only person in the telecom industry who has been able to create a legitimate rival to the remnants of the Ma Bell monopoly--and he's done it all in less than 20 years. Jettisoning the wholesale and consumer businesses will probably help his stock recover. And if he can use WorldCom's close ties with corporate customers to sell more valued-added services like Digex' Web-hosting, revenue growth should accelerate in the years ahead. ''I'm banking on more big companies continuing to switch over to digital networks and that will only help WorldCom,'' says Brian B. Hayward, portfolio manager for the Invesco Telecommunications Fund ( INTCX), which is holding onto its WorldCom stake despite the company's recent troubles.

Photo by James Keyser
Qwest CEO Nacchio has taken a Net lead.
Ebbers has no time to lose. WorldCom's problems have gotten so severe that the usually gruff, ever swaggering Ebbers concedes he may have to give up his job. ''I'm sure with the recent performance of the stock people have a legitimate right to ask if I'm the right person to lead this company,'' he told analysts at the Nov. 1 meeting. WorldCom declined comment, but insiders say Ebbers is in no danger of losing his job. WorldCom's problems are a stark contrast to the stellar performance of several telecom upstarts. Qwest Communications International Inc. ( Q), for example, has been expanding headlong into Net-related services since acquiring the Baby Bell U S West Inc. ( USW) earlier this year. ''We're able to walk and chew gum at the same time, a unique attribute in this industry today,'' quips Joseph P. Nacchio, Qwest's chairman and CEO.

Even if Ebbers hangs on to his job, he runs the risk of going from hunter to hunted if WorldCom's stock price drops much further. With a market cap of $52 billion, a weakened WorldCom would look particularly attractive to giant European telecommunications companies, such as Spain's Telefonica ( TEF) and Germany's Deutsche Telekom ( DT), which are eager to gain a foothold in the vast U.S. telecom market. Deutsche Telekom has cut a deal to buy wireless telephone operator VoiceStream Wireless Corp. ( VSTR), but ''that won't be enough to satisfy its appetite'' for U.S. properties, says Deutsche Bank telecommunications analyst Gary P. Jacobi.

WorldCom's independence may well depend on Ebbers' Net strategy. He is starting with the important strategic advantages of being the largest provider of access to the Internet and the largest carrier of Net traffic. Now Ebbers needs to move beyond just carrying data to storing, enhancing, and manipulating it in ways companies will be willing to pay for. Analysts estimate that the market for these sorts of value-added services could hit $100 billion in 2004, up from $37 billion this year. WorldCom plans to spend up to $100 billion--$9 billion this year alone--to enable its network to function like a high-speed computer, offering everything from Web hosting to wireless Internet connections.

New Frontier. One promising e-business initiative is Ebbers' move into Web hosting. The market is doubling in size this year to $3.7 billion and is expected to hit $17 billion in 2004. Better yet, margins in the business can be 50% or higher. WorldCom has been something of an also-ran as more nimble upstarts like Digex ( DIGX) and Exodus have rushed to help companies take advantage of the Net. ''We haven't seen them be very effective,'' says Ellen M. Hancock, Exodus' chief executive.

Ebbers should be able to change that with his deal for control of Digex. When he announced WorldCom's acquisition of Intermedia on Sept. 5, he made it clear that the purchase was about grabbing Intermedia's majority voting stake in the Web-hosting upstart. While Digex will remain an independent company, it will have close ties to WorldCom. The telecom giant will use its sales force and long list of corporate clients to market Digex' Web services in the U.S. and overseas. WorldCom also intends to provide Digex with additional resources, such as 120 Web-hosting centers worldwide over the next year. ''I expect WorldCom will be among the leaders a couple years from now,'' says Ford Cavallari, executive vice-president of market researcher Adventis. Together the two companies ''will be the toughest competitor,'' concedes Hancock.

WorldCom may be a tough rival in another budding market. Increasingly, corporations are deploying internal networks for sharing their most sensitive data. The market for these so-called virtual private networks, or VPNs, is about $3 billion today and it's projected to increase 20% annually to about $8 billion in 2004. Although it faces stiff competition from rivals like AT&T and upstart Level 3 Communications Inc. ( LVLT), WorldCom is one of the leaders in the market. Analysts figure it could remain a top competitor because of its expertise in constructing data networks for its own use around the world.

Granted, many of the Net-related opportunities are chump change to a company the size of WorldCom. But Ebbers is attacking a wide range of opportunities, hoping that success in several markets could improve the company's overall financials. One example is voice browsing, a nascent technology that allows people to surf the Web by simply speaking commands into the phone. WorldCom is beginning to sell software that lets companies incorporate voice browsing into their Web sites. WorldCom also is planning to use a wireless technology to offer high-speed access to the Net in 100 cities by the end of 2001. And the company is testing digital subscriber lines, or DSLs, which are high-speed Internet connections over phone lines that let customers get everything from movies to television channels to Internet access over a traditional telephone line.

Photo by David Fields
Ebbers wants WorldCom's lead in data traffic to translate into high-value Internet services.
Is WorldCom really ready to give what it takes to be an Internet full-service provider? As companies increasingly move their operations to the Net, they need much more expertise and service than they're used to getting from their telephone company. Corporations care about fast service, reliability, and being able to reach a salesperson pronto when things go wrong with a Web site. That's going to be a stretch for WorldCom where Ebbers has always run a no-frills shop.

Consider the case of Tony Canella. He's the director of network administration at HITT Contracting, a commercial builder in northern Virginia. The company had been a longtime MCI customer, but Canella noticed that service began to slip in the wake of the WorldCom acquisition. ''After the merger, WorldCom forgot who we were,'' he says. ''We didn't have a sales rep to contact. We lost our dial tone twice for a whole day.'' Canella eventually switched his business to upstart Nextlink Communications Inc. ( NXLK) And he isn't the only one. Several other WorldCom customers complain about the low quality of service. ''WorldCom promised to have us connected to their network in 30 days,'' says the chief technology officer at one multinational company. ''It took 120 days and might have taken longer if we hadn't bugged them for weeks.''

Delivering service on Internet time will be even more difficult for WorldCom should Sidgmore leave. The bearded 49-year-old has proven himself a digital visionary who zigged when others were zagging. For example, as other companies were following America Online into the consumer market in the 1990s, Sidgmore trained his sights on corporate customers. He also inspires intense loyalty among his troops. When UUNET went public in 1995, Sidgmore called a meeting and distributed stock to the lowliest employees. Some of his staff returned the generosity with shouts of ''John, have my children!''

But he's always had an uneasy relationship with Ebbers. Insiders describe the executives as two ''alpha males,'' who have long clashed over style and strategy. ''Bernie has never liked Sidgmore,'' says a former senior WorldCom executive. ''He's a monarch and wants courtiers and vassals. Sidgmore is neither.''

The alliance between Sidgmore and Ebbers has grown increasingly fractious. For starters, Sidgmore lobbied for a big--and expensive--campaign to persuade MCI employees to stay after WorldCom bought the company. Ebbers vetoed the notion, and an estimated 80% of MCI's former executive team wound up leaving the company over the next two years. Sidgmore also urged Ebbers to spin off UUNET as a separate company. That way the Internet operation could set its own strategy--unburdened by the declining long-distance business--while creating new stock options to reward his workforce. Some analysts thought it was a smart move, but Ebbers nixed the idea.

More than anything, say insiders, Sidgmore is becoming increasingly frustrated with Ebbers' unwillingness to take risks. ''Ebbers looks at the market, sees what's hot, and then copies it,'' says a former senior executive. ''He never wants to be out on a limb, to be called crazy by Wall Street.'' The tensions came to a head last year over Nextel, a Virginia-based wireless carrier that uses a different technology than other wireless carriers and has a smaller coverage area. After Ebbers walked away from the deal, Sidgmore became less involved in the company's day-to-day operations. He continues, however, to spar with Ebbers regularly. ''More than ever, the two of them are screaming at each other and pounding the table during staff meetings,'' says the former executive.

Such high drama is the last thing Ebbers needs these days. He already has his work cut out for him in trying to transform WorldCom from a telephone company into an Internet powerhouse. And, unless Ebbers can rise to his high-noon challenge there will be no peaceful puttering around on a tractor for this telecom cowboy.

By CHARLES HADDAD

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EBIZ Contents for issue dated Nov. 20, 2000


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