Information Processing: TELECOMMUNICATIONS
MCI: DON'T COUNT THE CHICKENS JUST YET
It faces a massive merger, smaller rivals, and costly expansion
There's been a certain amount of gloating around MCI Communications Corp. over archrival AT&T's endless string of bad news. After all, while AT&T has seen its share of the long-distance market drop a full percentage point in the past year, to just under 54%, MCI has held its share steady at around 18%. "This is a great time," says MCI President Timothy F. Price.
Is it? For years, MCI was the one snagging market share from AT&T, but now a host of smaller competitors are making life tough for MCI. In fact, the No.2 long-distance carrier is facing many of the same challenges as AT&T--namely defending its core long-distance business in a far more competitive market while making a costly push into local calling. At the same time, MCI must manage the most wrenching transition of its 25-year history--its planned $22 billion merger into British Telecommunications PLC, expected to close by yearend.
Granted, MCI can learn from its British counterparts. In late February, 15 BT executives flew over to explain to MCI how their own local-calling and billing systems work. But too much input from BT could make MCI bureaucratic--and trigger an exodus of the most aggressive employees. Some MCIers are already circulating resumes, according to an executive at a rival company. "My No.1 job is to make sure MCI remains MCI," vows Price.
DEEP POCKETS? This is hardly a good time for such distractions. MCI has invested $1 billion building local-calling networks in 20 cities, and says it will spend an additional $700 million this year. UBS Securities Inc. analyst Linda B. Meltzer figures MCI won't turn a profit on the local business until at least 2000, and the increased spending will keep 1997 earnings flat or down slightly from last year's net of $1.2 billion.
With the BT deal, MCI should theoretically have deep pockets to draw from. But don't look for big dollars to flow from BT's coffers any time soon. The British phone company must also devote resources to competing in Europe and to its home market, where it is under political pressure to upgrade aging phone networks.
The takeover should, however, boost MCI's core long-distance business. Once the merger goes through, MCI will be able to offer a global menu of voice and data products, giving it more clout with corporate customers. MCI has been chasing such business for years in an effort to reduce its exposure in the volatile, low-margin residential market. Two-thirds of MCI's revenue now comes from business subscribers, up from about 50% five years ago. "They are unquestionably No.1 in terms of serving multinational customers," says Forrester Research Inc. analyst David Goodtree of the BT-MCI team.
But the business market is getting tougher as well. Upstarts such as WorldCom Inc., the fourth-largest long-distance carrier, are focused almost exclusively on corporate customers. Add to that the entry of the Baby Bells into long-distance in the next year or two, and you have a recipe for sharp price declines. It looks as though MCI may have to cut back on the gloating.By Amy Barrett in Washington, with Julia Flynn in London