CNET news - Is MCI's divestiture enough?
By Dan Goodin
Staff Writer, CNET NEWS.COM
May 28, 1998, 1:45 p.m. PT
Today's announcement that Cable & Wireless will purchase MCI Communications'
Internet backbone service appears to be doing little to placate the raft of competitors,
consumers groups, and governmental overseers who have voiced concern over MCI's
proposed megamerger with WorldCom.
C&W's purchase includes all of the equipment associated with MCI's wholesale
Internet business, which sells services to Internet service providers and other resellers
of Net access. According to a press release issued by both companies, the divestiture
"addresses antitrust issues" raised in recent months by both the U.S. Justice
Department and the European Commission, and "should clear the way for the swift
approval of the MCI-WorldCom merger."
Governmental officials were not immediately available to comment on the
announcement, but analysts, consumer advocates, and competitors contacted for this
story were skeptical that the deal would be far-reaching enough to blunt widespread
criticism of MCI's proposed $37 billion merger with WorldCom. Since the deal was
announced last November, these groups have warned that the merger would increase
prices and disrupt a delicate balance among backbone providers that, thus far, has
allowed the Internet to thrive.
"The jury still will be out over whether this will be enough or if it's the first bargaining
chip to placate" those opposed to the deal, said Craig Johnson, principal of the PITA
Group in Portland, Oregon. He noted that the $625 million price tag for MCI's
backbone business represents only a fraction of MCI's total Internet business.
"This divestiture probably was the easiest piece for them to carve out, and probably
was something they were going to have to do anyway," Johnson added, explaining that,
in order for the companies to merge successfully, they would have to integrate a
number of networks that employ different technical protocols. Under those
circumstances, it would not be surprising for MCI to jettison certain incompatible or
unprofitable parts of its infrastructure, he said.
Representatives from MCI were not immediately available for comment.
Other players in the Internet industry also were wary of the deal.
"As a practical matter, Cable & Wireless looks like it will be a wholesaler of backbone
services to MCI," said Mark Schechter, an attorney representing GTE in its lawsuit
aimed at blocking the WorldCom/MCI merger. "It's a partial divestiture that creates
the appearance of creating new competition, but it really doesn't create a viable,
stand-alone business that's capable of competing effectively with MCI."
Sprint, another Internet backbone provider that has voiced concerns over the
proposed MCI-WorldCom merger, also has said that the sale to C&W does not
appear to go far enough. "While the sale of MCI's ISP segment might reduce
MCI/WorldCom's Internet infrastructure, it would do little to alter the anticompetitive
Internet landscape that would result from the combination," Sprint said in a statement.
"That can only be addressed by a complete divestiture of WorldCom's or MCI's
Internet operations."
Sprint is not the only group calling for a complete divestiture. James Love, director of
the Consumer Project on Technology, which is affiliated with consumer advocate
Ralph Nader, said: "If [MCI is] going to divest of their Internet facilities, it would be
best if they sold all their Internet operations."
Love and others said it would be difficult for MCI to completely divest itself of its
Internet network, because the company has facilities that serve both its voice and
Internet divisions.
As previously reported, the Justice Department, the European Commission, and 15
state attorneys general are investigating the proposed merger. In addition to concerns
that the merger might have an anticompetitive effect on the market for long distance
phone services, the agencies' investigations also are scrutinizing the potential for the
resulting combination to control too high a concentration of the Internet traffic flowing
over the high-capacity lines that form the Internet's backbone.
Under current conditions, backbone providers are forced to cooperate with their
competitors by interlinking their networks. Opponents of the merger say an
MCI-WorldCom combination will control so much of Internet traffic--between 45
percent and 70 percent by some estimates--that it no longer will have an incentive to
enter into such "peering agreements."
But not everyone believes MCI's sale will fail to satisfy government overseers'
concerns.
"I think this sale will satisfy the overlap regulators were concerned about," said Abhi
Chaki, an analyst with Jupiter Communications. "With this thing divested, I think the
coast is clear for the two companies to merge."
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