5/19/98 Upside. The Qwest-LCI Marriage
Excerpt: "AT&T is struggling to stay current--and will spend billions to upgrade its network during the next few years."
upside.com
By David Futrelle
Whatever the future holds for Qwest, the LCI acquisition (assuming it
goes through) almost certainly accelerates the timetable. The deal
makes eminent sense: The companies dovetail well because they
overlap so little. LCI brought to the deal some very tangible assets:
$1.6 billion in yearly revenue, offices in 60 locations around the
country and a customer base of more than 2 million. Qwest's assets
were less tangible. While the company made a splash with its
phone-to-phone Internet-based telephony offering, Qwest was still
primarily a dabbler in retail long-distance service, with only 50,000
business customers at the start of 1998. What Qwest really brought to
the table was less a list of accomplishments than a vision of the future:
its partially realized plans for a state-of-the-art fiber-optic network.
Few think that LCI got the raw end
of the deal. Despite an impressive
growth record (26 percent last
year), industry analysts and
customers have often overlooked
LCI. In part, one suspects, that's because the company's low-key
publicity campaigns have been overshadowed by the inescapable,
fingernails-on-blackboard long-distance shilling of Paul Reiser, John
Lithgow and that wretched Dime Lady. Indeed, many of the analysts I
talked to about the merger couldn't help accidentally referring to poor
LCI as MCI from time to time--even Nacchio slipped once or twice.
Qwest, by contrast, has had little trouble getting attention--which
during the past year or so, it has adroitly translated into market power.
Although it only went public last June, by the time the LCI deal was
announced in March, Qwest's stock price had almost tripled. "They've
been working to build mind share," says Dan Taylor, a telco analyst at
Boston's Aberdeen Group. "Once they were public, they leveraged
their vision to get a market capitalization high enough so they could go
out and buy an LCI. Now they're going to be a multibillion-dollar
phone company--this from a company that 18 months ago had
nothing."
It has been, in short, quite a ride. And for Nacchio, it's been a
personal vindication as well. Nacchio's antipathy toward the traditional
telcos is understandable: Before taking the helm at Qwest, he spent 26
years working at AT&T--in "the belly of the beast," as he now puts it.
Of course, Nacchio was never your typical Ma Bell lifer; Fortune once
described him as "the guy the company would trot out whenever it
wanted to show that not everyone at AT&T was a lumbering
Bellhead." His departure from the company, in December 1996, was
scarcely cordial: AT&T President John Walter told the Wall Street
Journal that he had stripped Nacchio of his job (he was executive VP
of AT&T's consumer and small-business division), a claim Nacchio
has dismissed as a bald-faced lie.
Whether he jumped or was pushed, Nacchio seems happy to be clear
of his former employer. As Qwest elbows its way into the big leagues,
AT&T is struggling to stay current--and will spend billions to upgrade its network during the next few years. But Ma Bell is hardly advancing
into the future with the audacity of Qwest. Laden with an infrastructure
badly in need of an upgrade and increasingly out of tune with the digital
future, AT&T has launched a campaign to cut costs and speed up
meetings. It's a bit like asking the dance band on the Titanic to play
just a little faster.
The Qwest-LCI marriage | next page: Going Out West
Meanwhile, Qwest's central strategy--building out in advance of
demand with the expectation that the world will catch up--is a
venerable one. In the late 19th century, the empire builders of the
western railroads embarked upon a similar path, boldly constructing
rail lines to the middle of nowhere.
Among the pioneers was Southern Pacific railroad. Its new lines
penetrated deep into Southern California, where as historian Matthew
Josephson wrote in his classic account The Robber Barons (originally
published by Harcourt Brace & World in 1934), "Population was
almost nil ... but there was need for haste, if only to forestall future
opponents in the field." Time proved this strategy correct: Partly
because of the freshly minted rail connections, the middle of nowhere
wasn't the middle of nowhere anymore. The "mere villages" of
Southern California became the sprawling metropolises of Los Angeles
and San Diego--and the rail barons became exceedingly rich.
Qwest's connection with these early rail pioneers is more than a matter
of business style--the company was founded in 1988 as a subsidiary of
Southern Pacific. Ironically, it wasn't the first phone company to
emerge from the western railroad giant: Eighteen years earlier, Sprint
Corp. began its life as Southern Pacific Communications Co.
Qwest owes its existence not only to Southern Pacific but also to the
railroad's former owner, Philip Anschutz, a colorful if reclusive
Colorado billionaire. Anschutz is almost legendarily elusive, at least as
far as the press is concerned. He refused to sit for an interview with
the Rocky Mountain News even after the paper named him Business
Person of the Year for 1997. Qwest is only the latest in a series of
dramatic stories in Anschutz's business history.
The billionaire began what would become an extraordinary career
three decades ago as a wildcat oilman--entering that most risky of
businesses in a dramatic fashion, assuming control of an oil field that
almost immediately burst into flames. But Anschutz didn't let the
setback get the best of him. Showing a knack for what we'd now call
"out of the box" thinking, he recognized that what looked to him like
disaster might appear to American movie audiences as entertainment.
Knowing that John Wayne was at that very moment filming
"Hellfighters," a biography of famed oil-well fireman "Red" Adair,
Anschutz sold the rights to film his burning fields to Universal Studios
for $100,000. Then he used the money to pay the real Adair to put out
the flames.
In the intervening decades, Anschutz has continued to ferret out value
in things others may have easily overlooked. In many ways the key to
the Qwest venture lies in what, a few years ago, many dismissed as
almost worthless properties--railroad rights-of-way. When Anschutz
sold the Southern Pacific railroad in 1996 (for $5.4 billion), he retained
the rights-of-way along the railroad's tracks. That gave Qwest instant
access to thousands of miles of prime networking real estate. The
company has made good use of these assets, laying fiber coast to
coast alongside train tracks with Qwest's massive Rail Plows--strange
hybrid contraptions the size of a railroad car designed to dig trenches
beside the tracks as they lumber along the line.
With Qwest, Anschutz has performed an act of commercial alchemy in
many ways more amazing than his oil well adventure. He has
transformed a relatively small investment--$55 million of his money and
$400 million in debt--into billions of dollars in stock holdings. At the
time of the LCI merger announcement, Anschutz owned 83.7 percent
of Qwest's stock; he will own 55 percent of the merged company. If
the company's market valuation stays above the $11 billion it reached
when the merger was announced--and every indication is that it
will--Anschutz will have made nearly $6 billion from an investment of
less than $500 million. Railroad historian Josephson would have been
impressed.
The Qwest-LCI marriage | Going Out West
David Futrelle writes regularly on culture, media and technology for Salon,
Newsday and numerous other publications.
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