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FROM NICHE PLAYER TO PHONE JACK-OF-ALL-TRADES
The telephone bypass business has been a tidy little moneymaker for almost a decade. The so-called competitive access providers (CAPs) connect companies in major cities directly to long-distance carriers at rates as much as 15% lower than the local phone company. They'll rack up sales of some $500 million this year, but that accounts for only 0.2% of all local calls. Which may explain why the 50 or so bypass companies don't garner much notice in the hype-happy telecom world.
Take MFS Communications Co., one of the largest CAPs, with operations in 24 cities. The Omaha-based company, once known as Metropolitan Fiber Systems, is about as far as you can get from a household word. Yet analysts expect its revenues to jump this year to $200 million from 1993's $141 million (table). And MFS is about to get a lot bigger. It wants to go way beyond bypass and plans to spend at least $1 billion over the next five years to become a full-fledged local and long-distance phone company, competing with the likes of Ameritech Corp. and AT&T.
Here's the plan: Within three years, MFS will have state-of-the-art phone systems in 75 U.S. and 10 foreign cities. It will link these local networks with leased long-distance lines. Its mission? Offer voice, video, and data transmission services to small and midsize businesses. If it succeeds, C.J. Lawrence Inc. analyst Stuart P. Conrad predicts MFS could have sales in excess mf $2 billion by 2000. Says MFS Chief Executive Officer James Q. Crowe: "This is one of the great opportunities in American business."
The key to it all is gaining "co-carrier" status. Co-carriers have equal standing with local phone companies and can connect directly to the Bell system without paying crippling access charges. MFS already has co-carrier status in New York, Maryland, Illinois, Massachusetts, and Washington. But it could take three to four years to extend co-carrier arrangements across the country. MFS says it is sure it will prevail in the end. For now, delays give the Bells time to upgrade their networks to match MFS.
MFS might also run into problems with its business-only focus. Its nearest rival, Teleport Communications Group Inc., joined forces in October with Cox, Tele-Communications Inc., Comcast, and Sprint to go after the consumer market. Robert Atkinson, Teleport senior vice-president for regulatory affairs, insists: "You can't be a successful business-only carrier."
No surprise, MFS doesn't agree. "We plan to do one thing and do it well," says Crowe, "and that's serve business. " He estimates that corporations in the U.S. and Europe spend more than $130 billion on telecom services annually: MFS needs only a tiny slice of that market to become a billion-dollar company.
Getting the cash to capture that sliver isn't a problem. With 69% of its stock held by privately owned construction giant Peter Kiewit Sons Inc., MFS has access to deep pockets. Since creating MFS in 1987, Kiewit has poured $500 million into it. In the past two years, MFS has raised another $1 billion through stock and debt offerings.
BIG SPENDER. MFS believes it has to spend a lot to maintain its network's high quality. Its selling point, beyond lower rates, is reliability. By one measure--mean time to repair a high-speed circuit--MFS is twice as good as the Bells on average, according to Federal Communications Commission figures. MFS's edge is its all-fiber network and heavy investment in digital switches.
The building boom isn't about to stop. Crowe, a former Morrison Knudsen Corp. executive who has led MFS since its creation, is hell-bent on expansion. He doesn't expect any profits until 1997, when capital spending begins to taper off. Analysts expect MFS to lose $125 million this year, after a $31.5 million loss in 1993.
A chunk of spending will go overseas, as MFS works to keep up with globe-girdling customers. It has small operations in Paris and Frankfurt, but its most aggressive move is in London, where it has spent $50 million building a network. The British venture started in mid-1994, and MFS says it has signed up 90 customers. It plans to wire at least seven more cities outside the U.S. by 1997.
MFS is also targeting one-stop shopping for small companies that lack the expertise to manage their own telecom needs. It wants to put these companies on its network, offer them advanced services such as voice mail, and resell long-distance service bought at a discount from the big carriers.
MFS gave itself a boost by acquiring Centex Telemanagement Inc., a local and long-distance reseller, for $200 million in early May. MFS not only acquired 11,000 new customers with Centex--it bought one of AT&T's largest customers. "This gives them leverage to negotiate long-distance prices," says Yankee Group Inc. analyst Ryan James. "MFS is maturing quite nicely." Who knows, it could grow into a household word yet.Kevin Kelly in Oak Brook, Ill., with Julia Flynn in London