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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