Information Processing: TELECOMMUNICATIONS
MCI IS SWARMING OVER THE HORIZON
Its deregulation plan: Offer all the consumer services it can
Well, it's finally here. After years of dickering, Congress passed a landmark bill on Feb. 1 that deregulates every aspect of the communications business, allowing cable-TV providers, local phone companies, and long-distance carriers into one another's markets for the first time. It brings to a logical conclusion the process started by MCI Communications Corp., the company that in 1968 became the first to challenge the Bell System in long distance. Since then, MCI has built a reputation as a marketer par excellence, clawing 20% of the nation's long-distance calls away from AT&T.
Based on its history, MCI would seem to be an odds-on favorite in the competitive free-for-all that is about to engulf the telecom industry. But in the much more broadly defined communications market that's coming, MCI has to learn how to sell a lot more than long distance to survive. "It's no longer a question of how large a share of the $75 billion long-distance market you can get," says UBS Securities Inc. analyst Linda B. Meltzer. "It's a question of how big a share of the $500 billion converged or integrated market they will get."
ON AND OFF. Until recently, MCI has been vexingly vague about how it plans to do that. Starting and then stopping two different wireless strategies and an online service effort didn't help. But thanks to a recent flurry of deals, culminating with a Microsoft Corp. online partnership and a direct broadcast satellite (DBS) venture with News Corp. in late January, MCI has finally pulled together a cohesive convergence strategy. Now comes the task of getting all those pieces to work together. MCI, the only purely long-distance carrier, still has something to prove on that score.
Its plan: Concentrate on selling services, as many as possible. Through joint ventures, partnerships, resale agreements, and new MCI initiatives, the company will offer just about any service that comes over a wired or wireless communications system, including satellite TV, Internet connections, electronic commerce transactions, and of course, local, long-distance, and international phone calls (table). "We want to get as many hooks into each of our customers as possible," says MCI Chairman and CEO Bert C. Roberts Jr. MCI studies show that customers who buy more than one service switch carriers at a 40% lower rate.
This, of course, is the same mantra that all the phone companies are reciting: Offer a single source for long-distance and local calling, video, data, and wireless services, bundle them onto one bill, and customers will come (page 32). That's the driving force behind the flood of alliances, acquisitions, and restructurings in the telecom industry. No one can afford to stay in one telecom sector anymore. The new telecom law breaks open the cozy oligopoly of the big three long-distance carriers, which control 90% of the long-distance business. In 18 months or so, the seven Baby Bells and GTE Corp. will enter the market, putting downward pressure on prices and upward pressure on marketing costs. And any local calling business that MCI, AT&T, or Sprint gain will carry a much lower profit margin than long distance. "The current environment for long distance is relatively benign," says J.P. Morgan Co. analyst Simon P. Flannery. "There are no marketing wars right now, no real pricing pressures, and access charges continue to come down. It's a dream world, and it's about to end."
MCI insists that its long history as a scrappy upstart and savvy marketing machine will give it the edge in this harsher world. Indeed, the cocky confidence of its top executives is legendary. But various studies indicate that the local phone companies could grab as much as 10% to 15% of the long-distance market in their home regions. An executive at a local carrier warns: "If MCI thinks they are the only ones who know how to market, they are due for a fall. They should recognize that."
Roberts does recognize the need to diversify and says he wants MCI to pull in 50% of its revenues from new ventures by 2000. The company has spent more than $6 billion over the past year buying everything from a cellular-phone reseller to SHL Systemhouse, a Canadian-based computer systems integrator. And it has built fiber links in 25 cities to provide local service to business customers.
These new ventures, though, won't start producing profits for some five years. MCI just reported a 20% gain in 1995 earnings, to $1.07 billion--before restructuring charges--on a 14% gain in revenues, to $15.3 billion. But 1996 will be tougher, say analysts. J.P. Morgan's Flannery estimates that MCI's new ventures could dilute earnings by more than 25 cents a share in 1996. "They will be survivors, but I'm not sure they can continue to report double-digit earnings growth in the next few years," he says.
Still, MCI keeps plowing ahead--though in what one executive concedes could be seen as a scattershot approach. Last May, for example, MCI spent $2 billion for a 13.5% stake in News Corp., an investment that left industry observers scratching their heads over the seeming lack of synergy. The arrangement became clearer on Jan. 25, when MCI and News Corp. announced a joint venture to spend $1.3 billion building a DBS network. But three days later, Roberts announced a broad alliance with Microsoft that makes MCI the primary distributor of Microsoft's online network. Only problem is that for the past five months, MCI had been an equal partner in an online network with News Corp. "We are pushing our boat in Microsoft's waters," Roberts said.
Its wireless strategy has also been erratic. In February, 1994, it bought a stake in wireless startup Nextel Communications Inc., then bailed out eight months later. It talked to a few of the Baby Bells about bidding jointly for licenses for the new wireless Personal Communications Service (PCS), but could not reach an agreement. Instead, MCI plans to resell wireless service purchased from others, figuring that once PCS networks are built, there will be a glut of capacity. To beef up its wireless marketing, MCI paid $190 million last September for Nationwide Cellular Services Inc., a large reseller.
MCI is honing its reselling skills with paging. It started offering paging services purchased from two suppliers in May, slapping on its brand and providing billing, service, and sales. MCI already has more than 500,000 customers.
Analysts say MCI could be just as successful in the cellular calling business--if there is a capacity glut, though that isn't a given. "Building your own network is incredibly capital-intensive, so they'll save a lot of money," says Mark Lowenstein, consultant with market researcher Yankee Group Inc. "But the profit picture is quite a bit muddier. They'll be trying to negotiate rates with the same companies they compete against."
MCI's changes in direction may strike some as erratic, but to Roberts, they are evidence of MCI's flexibility--and its strength. "We're quick to move forward and quick to pull back when we have to," he says. And many analysts say it doesn't really matter how many times MCI switches direction, just where it ends up. "This industry is moving at gigabit speed," says Bear, Stearns & Co. analyst William N. Deatherage. "I think midcourse corrections in your strategy are unavoidable." MCI's recent moves have finally put some life into a stock that substantially underperformed the market last year. Shares rose from 26 in early January to 29 1/4 on Jan. 29, after the Microsoft and DBS deals were announced.
SHARING RISK. MCI also says its strategy is based on a consistent set of principles. "We buy when there are finite resources and lease when there is a glut," says Timothy F. Price, president of MCI's long-distance business. That's why MCI was willing to pay $682.5 million for a slot for its DBS satellite, twice what analysts estimated it should cost: It was the last one available. But it's a high-risk strategy, given that DirecTV has a two-year headstart and has just taken on a powerful partner--AT&T. "I felt good about the [DirecTV] deal when I made it," says Joseph P. Naccio, head of AT&T's consumer business. "I felt a lot better after I saw the price MCI paid for those licenses."
MCI will at least share the cost of its DBS venture--another strategic tenet. Roberts wants to take on partners as often as possible in order to spread around the risk, be it with Murdoch, Gates, or British Telecommunications PLC, which bought a 20% stake in MCI in 1994. "I'm not so visionary that I know where all the bucks are going to flow five years from now," he says.
Besides, argues MCI, vision is not as important as killer marketing instincts. "We don't want to dive in ahead of where the customer is," says Price. He just wants to move as fast as possible to where they are. MCI's speed has impressed Peter Bonfield, British Telecom's new president. "They're bloody fast. They can turn an idea into a product in a month." Now, Roberts just needs to hope that it takes the local phone companies longer to figure out the long-distance market than it takes MCI to figure out its new businesses.BY CATHERINE ARNST IN WASHINGTONReturn to top