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The Perception of Qwest
[March 23, 2005]

The Perception of Qwest

The eroding business climate of wireline carriers has prompted many to write off Qwest as viable going concern. While Qwest struggles to compete in an eroding business and pull themselves out of a largely negative public perception, their visible pursuit of acquiring MCI has raised questions regarding their industry position and strategies in doing a mega deal. If the industry dynamics are so poor, why is Qwest looking to acquire MCI? Pete Wilson, Vice Chairman of Vercuity provides his perspective.

Ever since the financial and stock trading scandals broke and Dick Notebart arrived, Qwest has been very concerned about their public perception. As the old adage goes, “perception is reality” and Qwest is fighting what they believe to be an unfair notion that they are not a top tier supplier to the enterprise market. The scandals and poor financial management during the prior regime certainly hurt them in the enterprise segment. However the legacy Qwest long distance carrier was on a roll when US West was purchased.

Buying US West burdened the resulting company and instantly made them a non factor in the enterprise segment due to all the regulatory constraints. It was late 2003 before the crippling sanctions were lifted and Qwest could compete; but by then the market dynamics had turned ugly. Qwest with US West in toe could not win at the enterprise level because they couldn’t compete with the weight of the regulatory sanctions. This hurt them much more then the scandals that have emerged under the prior management regime. It is hard for Qwest to now change perceptions that they were a niche player after several years of operating with their hands tied by regulators.

Qwest realizes they have to do something if they want to continue to grow. Their legacy markets are under attack on many fronts and they strategically are not positioned in the fast growing wireless sector. “Doing nothing” relegates them to managing a shrinking business and that is not why a man of Notebart’s stature took the CEO role. Qwest knows getting MCI is a long shot and that their actions will likely force Verizon to pay more but still leave Qwest without MCI. You can’t fault Qwest however because if one doesn’t play, there is no chance of winning. Qwest has to take the chance and risk failure in pursuing MCI. At some level Qwest has some hope that they could indeed pull off the MCI deal and take defeat a slow moving RBOC like Verizon. While very unlikely, Verizon’s cocky industry position could bolster an attitude that they don’t need to respond to Qwest and ultimately lose the deal to MCI shareholder insistence on taking the higher bid.

Acquiring MCI would clearly strengthen Qwest but do nothing to fix any of their strategic weaknesses like wireless. Qwest prospective purchase of MCI is a means to enhance their value for an eventual second merger or acquisition. The MCI assets would simply make them much more attractive to an eventual suitor (VZ, BLS).

As of late, Qwest has been getting high marks for its IP Telephony/MPLS services to enterprises. They are chipping away and being successful but that success is still muted. Long distance and the traditional IXC market remains a lousy business, so Qwest is doing no worse than others at managing the issues of price compression, oversupply, VoIP and wireless cannibalization. The MCI initiative gets them more mindshare in the enterprise segment and part of the challenge is just being given an opportunity to bid or engage in a client opportunity. From that perspective these actions should help them but doesn’t radically change the market’s perception of Qwest. Winning clients one deal at time over a sustained period is the only way to prove your worth to the enterprise customer.

Pete Wilson is Vice Chairman of the Board of Directors of Vercuity.

Stephanie Miller
Telwares, a Vercuity Company

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