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Reality Check

March 2000

Robert Vahid Hashemian Telecom's Mega Merger Mania

BY ROBERT VAHID HASHEMIAN


In my January column, I complained that there is too much competition among small telcos, leaving customers confused amid the chaos. Consider this column a follow-up in which I look at the giants of the telecom industry going to the other extreme (too much consolidation) and why this is also bad for the consumer.

As a Web programmer, I am often faced with the task of manipulating character strings. One of these manipulations involves string concatenations. Put "MCI" and "WorldCom" together and you get "MCI WorldCom." Now put "MCI WorldCom" and "Sprint" together and what do you get? "WorldCom?" At least that is the proposed name for the new telecom giant that will be created when MCI WorldCom and Sprint tie the knot sometime in the future. With a price tag of almost $130 billion, you can bet that this event's proceedings are being closely monitored by the telecommunications industry, regulatory bodies inside and outside of the U.S., and consumer advocates. Still there remains little doubt that WorldCom, with Bernard Ebbers at the helm, has become a force to be reckoned with. While AT&T's Ma Bell days may be behind it, WorldCom's star seems to be rising ever faster to perhaps become the next Ma Bell in town. The story of WorldCom is just as amazing as its recent bid for Sprint.

BACKGROUND
WorldCom began its life in 1983 as LDDS, a small long-distance telephony company in Mississippi. While LDDS grew nominally in its local area, its explosive growth began in 1989 when the company went public and began a legacy of never-satiated growth through acquisition. In 1995 LDDS changed its name to WorldCom; it was then changed to MCI WorldCom in 1998 following the acquisition of MCI and we may still see another name change in the wake of the Sprint acquisition. Throughout its short life, WorldCom has acquired almost 70 companies with various assets, capabilities, and market penetrations. Some of the more notable acquisitions include MFS, UUNET, Brooks Fiber, WilTel, ANS, and of course MCI. The strategy has served WorldCom quite well. It has grown in leaps and bounds, easily sidestepping (or absorbing) other telecom companies who were once considered more prime for growth. WorldCom's market capitalization has ballooned to over $150 billion, and with Sprint's acquisition (including PCS, Sprint's tracking company), it could grow as high as $250 billion. If the Sprint acquisition is successful, WorldCom will become the second largest telecom company in the U.S., trailing only what has to be a very nervous AT&T. (Not bad for a company that is still a relative adolescent!) While the shareholders of both companies are salivating over the growth prospects of the new company, the consumer's fate should be the real focus here. We don't have to look too far back to see how the consumers fared after the MCI and WorldCom merger was completed. Unfortunately, many times when consumer rights should be the story, money seems to be the only topic that is covered. I would say, what about service?

NO SUBSTITUTE FOR EXPERIENCE
Just like many other businesses in our home state of Connecticut, we welcomed WorldCom with open arms after years of oppression at the hands of SNET (Southern New England Telephone, now owned by SBC Communications). The Telecom Act finally ended the local monopoly of SNET, and WorldCom was the first outsider to start offering local and long-distance service in one package. We started our telephone service with them and later on added a frame relay service as well. At the onset of the MCI acquisition by WorldCom, we rejoiced at the prospect of dealing with a larger company. You've heard the pitch from the large company's salespeople before: "We have more resources to serve you," "We have more customers than the other company," "We have everything you can ask for and more." We have been conditioned to believe that bigger is better.

The MCI and WorldCom merger is perhaps just what the contrarian was looking for. Bigger wasn't necessarily better. Among the biggest hassles we inherited from this merger was a problem with billing. As the two companies were apparently trying to merge their billing departments, we ended up as the victims. We had to live with many over-charges, incorrect fees, and fragmented bills. While the bills now sported the new MCI WorldCom watermark, that seems to have been the only thing the disparate billing departments could agree on. Bad service was yet another issue. Many people still shudder at the thought of the MCI WorldCom frame relay outage that gripped most of their service areas this past August. While that extended and expanded blackout made national news, we suffered through several of them during the past year. Were these outages the result of WorldCom trying to merge its technical departments with MCI? Who knows? But it is ironic that most of our interruptions happened after the merger.

And what about prices? Yes, it's true, we do pay less today for our telephone service than we did two years ago. But I believe that would have happened anyway. You can't tell me that we ended up with better rates strictly because of the MCI and WorldCom merger. If they hadn't merged and were instead still competing against one another, we might have had even better rates than we pay today. The fact is that MCI WorldCom still has competition out there and it must lower its prices in order to survive. Believe me they haven't lowered prices out of the goodness of their hearts.

When the MCI and WorldCom intentions to merge came to light, plenty of debate ensued. The FCC, the FTC, and the Department of Justice (DoJ) were among the many bodies that examined the deal to be sure that it was in line with consumers' interests. And so, the deal came to pass. MCI first had to rid itself of Concert, a joint networking venture that it had with British Telecom (Concert is still alive and kicking today as a wholesaler of international Internet telephony with AT&T replacing MCI in the venture). Then per regulatory requirements it sold its Internet assets to Cable and Wireless plc before concluding its merger with WorldCom. That was mid-1998.

The Sprint acquisition is not unlike the MCI case. Sprint is ridding itself of Global One, a partnership it has with France Telecom and Deutsche Telekom and both MCI WorldCom and Sprint have hinted that Sprint would be willing to part with some of its Internet assets should the merger be approved.

From a business perspective this merger makes perfect sense. The combined company would be better positioned against AT&T and would potentially cut into AT&T's market share with more ease. The new company's share of the long-distance market in the U.S. would reach 40 percent versus AT&T's 45 percent. On the Internet infrastructure side, the combined company would be an enormous force. Just considering the backbone status alone, the company would own the lion's share. On the consumer and business broadband services front, Sprint's ION service could make a great addition to MCI WorldCom's On-Net service. And last, but certainly not least, Sprint PCS can finally fill the great void that MCI WorldCom has been plagued with for so long - wireless. After unsuccessful attempts at wooing NexTel and AirTouch, Sprint PCS has to look mighty appetizing to MCI WorldCom.

3 MINUS 1 =1 WARY COLUMNIST
On the surface the planned merger seems to have alarmed not only the regulators, but also the DoJ (Department of Justice) and Congress, who are supposed to be looking out for the public's interest. They have good reason to be alarmed if the rash of recent mega-mergers in the telecom industry has anything to do with it. SBC and SNET, SBC and Ameritech, US West and Qwest, and Bell Atlantic and GTE are but a few examples of the new merging binge. In a recent inquiry by the senate judiciary committee, senators openly expressed their concerns regarding the merger in front of both companies' CEOs. At issue is the simple fact that after the merger, over 80 percent of the long-distance market as well as perhaps over 50 percent of the Internet backbone would be controlled by two companies, AT&T and WorldCom -- clearly a duopoly.

The FTC and FCC have also raised warnings about such a merger. An internal FCC memo had gone so far as to state that the merger would have intolerable impact on consumers. Both companies have maintained that the planned merger is vital to their survival as well as good for the consumer as the long-distance concept no longer applies in today's world. The Internet backbone monopoly issue is the wildcard however. Most believe that in order for the merger to gain approval, Sprint would have to divest its Internet assets. Otherwise, the future of the Internet as well as the fledgling Internet telephony industry could be in serious jeopardy.

In my opinion, this merger has monopoly and anti-competitiveness written all over it. It is bad for the consumer, as it is bad for the telecom industry. If three companies control 80 percent of the long-distance market and half of the Internet backbone, how can it be better if we allow it to be just two companies? In my January article I had complained about the chaos caused by myriad companies jumping into the telecom business. Sure I want to see an end to the chaos, but these mega-mergers at the top of the food chain aren't the answer. They start out by sticking the consumers with bad service while the companies mesh their departments, and they could turn out worse by over-charging the consumers once they realize the consumer has nowhere else to go.

I am getting ready for a new round of billing headaches once the merger gets underway. Meanwhile you can let me know what you think of this mega telecom merger. c

Robert Vahid Hashemian provides us with a healthy dose of reality each month in his Reality Check column. Robert currently holds the position of Director for TMCnet.com -- your online resource for CTI, Internet telephony, and call center solutions. He can be reached at rhashemian@tmcnet.com.







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