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MCI WorldCom: How Shoddy Logic Presents Buying Opportunities
By Alec Appelbaum
ONE OF THE NICE THINGS about 21st-century telecommunications is that when one company gets bigger, rivals can often benefit. If you remember that, you could make a lot of money when investors take the sort of knee-jerk approach to a company like MCI Worldcom (WCOM) that they did yesterday.
MCI WorldCom, which owns one of the nation?s biggest long-distance networks for Internet traffic, sagged 9% yesterday to a new 52-week low as traders dumped it following news that Internet service provider America Online (AOL) would buy cable and media conglomerate Time Warner (TWX). Their reasoning was this: That AOL would be inclined to use Time Warner cable to deliver its service in the future ? and that MCI WorldCom would lose its huge data-delivery contract with AOL as a result.
But that logic is wrong. MCI WorldCom carries AOL traffic over a high-speed national network known as UUNet and delivers it to local networks. Those networks can consist of ordinary phone lines, cables like the ones feeding your TV, or fat T1 lines like those delivering data to many office buildings. It?s all money to MCI WorldCom. So the idea that AOL subscribers might move more quickly to cable than to high-speed phone lines might worry local phone companies, but it should please the big long-distance operators.
?If AOL's customer base moved overnight to high-speed cable infrastructure, traffic and REVENUES would increase to UUNet,? fumed Salomon Smith Barney?s Jack Grubman in a note this morning.
A more sophisticated worry, cited by Donaldson, Lufkin & Jenrette analyst Richard Klugman in a note this morning, involves the other big long distance operator. ?Some believe AT&T (T) could gain business away from MCI WorldCom if it packages a deal for AOL backbone services along with a Time Warner cable partnership,? Klugman wrote. Ah-ha.
As we noted on Monday , AT&T stands to cut deals with AOL Time Warner for delivering content over Ma Bell's nationwide network of cable lines. MCI WorldCom, which is buying Sprint (FON) in part to control more local connections (via wireless technology), doesn?t yet have the size or capacity to cut similar local deals. But that doesn?t leave it out of the bidding.
Remember: AOL is buying Time Warner on the assumption that everyone wants entertainment and media based on digital technology. As technological advances make movies and music more easy for AOL members to order over the Internet, AOL will want to send more content to more members. Just as it cuts deals with AT&T to expand its reach into markets beyond Time Warner Cable?s, it will want to get backbone service from many suppliers to make sure its services run quickly and reliably. For that reason, AOL might conceivably shop around. But not at MCI Worldcom's expense.
"They get the best pricing [already], and nobody?s network is bigger than MCI WorldCom?s," says Ned Brines, portfolio manager of the Phoenix-Engemann Focused Growth Fund (PASGX). "Unless somebody dramatically underprices their services, I find it unlikely that they would move. It?s an expensive undertaking to move."
Now it's true that MCI WorldCom will have to renegotiate contracts with AOL this summer, and AOL will be bigger and maybe more aggressive on pricing. But analysts seemed confident that AOL would keep most of its backbone business with MCI WorldCom. Indeed, AOL?s increased heft makes it increasingly likely to want more distribution, not less, as it generates more traffic.
And that spells opportunity for MCI WorldCom, AT&T, Qwest (Q) and any other company with space on its network to sell. MCI WorldCom already has the inside track, which is why its stock shot back today for a 3.6% gain. You may have already missed a key buying opportunity this morning, but given that MCI Worldcom is still about 30% off its 52-week high, there's probably more room to run in this stock. And in a complex sector like telecom, knee-jerk logic provides plenty of opportunities. Just keep your eyes open. |
