InfoWorld: MCI WorldCom-Sprint deal signals industry changes
By Nancy Weil
InfoWorld Electric
Posted at 5:01 PM PT, Oct 5, 1999
While analysts Tuesday predicted regulators eventually will permit MCI WorldCom to buy Sprint, the result will not necessarily be good for consumers or for competition, according to industry insiders. The deal indicates the industry is headed for a model focused on bundled-service packages offered by increasingly fewer, big players.
Although analysts agreed that WorldCom, as the new company would be called, should be in better position to duke it out with AT&T, the deal essentially would lead to two dominant U.S. carriers with a closely matched share of the long-distance market, as well as wireless holdings, Internet service and a global presence.
This will be an issue for users and regulators, especially regarding the long-distance market.
"MCI WorldCom will argue that the long-distance market is wide open and that there has been competition for 15 years," said Melanie Posey, an analyst at International Data Corp. (IDC), in Framingham, Mass. "At the same time, sure, it's an open market, but you've got AT&T with 40 percent of the market and then MCI WorldCom-Sprint with 40 percent. On the face of it, that looks more like a duopoly than anything."
When WorldCom bought MCI, it became the second largest U.S. carrier behind AT&T. Meanwhile, Sprint has been in the No. 3 spot. So, the acquisition, valued at $129 billion, is sure to raise issues about the intent of the U.S. Telecommunications Act of 1996 and call into question why U.S. regulators, including the Federal Communications Commission, allow such monster deals to pass scrutiny if the objective was to create more, not less, competition.
But the task of interpreting the Telecommunications Act "is not like a courtroom where there's precedent and case law," Posey noted.
What has been established, though, is that carriers have drastically lowered long-distance prices in the years since the act was passed. As a consequence, if the monolithic WorldCom is indeed created, "I wouldn't see any benefits coming to users right away," said Jeff Phillips, an analyst at Telechoice, in Owasso, Okla. "Rates are pretty darn low right now in long distance. I don't believe we'll see lower prices."
Like Posey, Phillips believes one possible outcome of the emergence of a handful of dominant players in the telecommunications market could be the bundled-service model with long distance, Internet, wireless, and other services rolled into one package with a set price.
While that end of the market develops, Phillips envisions the possibility that the other end of the spectrum will be niche players like applications service providers focused on providing specific offerings, somewhat like Internet service providers did a few years ago before consolidation in that area. The old middle ground with lots of regional telecommunications carriers could be gone, he said.
Although users are not likely to see much change for a while, Phillips said he does think that a bigger WorldCom would be good, in that "there's going to be another big player against AT&T." Both WorldCom and AT&T would "deliver all the puzzle pieces" that users want from wireless to data networks to everything in between.
Sprint's wireless holdings are widely viewed as its primary attraction to WorldCom, which currently lacks that piece of the puzzle. MCI WorldCom wants a strong wireless component as a way to be able to offer complete bundled services, Posey said.
Getting to that point will, however, require concessions on the part of MCI WorldCom and Sprint to appease regulators, said both Phillips and IDC's Posey. WorldCom would most likely readily agree to certain concessions, said other analysts.
"If they have to divest of the U.S. long-distance part of Sprint, they wouldn't mind," said David Brown, a telecommunications consultant at Schema Ltd., in London, adding that MCI WorldCom is not interested in Sprint for long-distance service anyway, but is primarily attracted by wireless and overseas holdings.
Though the deal would create a huge company, Brown said it would not necessarily crush new upstarts. "It would decrease competition quite significantly in the U.S., but equally there are a lot of players and new ones coming in all the time," he said.
But even if WorldCom sells off some Sprint services to appease regulators, users might not be entirely thrilled with the prospect of an MCI WorldCom-Sprint deal.
Mike Lieberman, president at Net Wright LLC, has contracts for services with both MCI WorldCom and Sprint. His company, with offices throughout Wyoming, develops wide area networks for customers and also offers consulting and Internet services. It is critical that his company has connectivity, which is why Net Wright has contracts with both.
"If Sprint gets purchased by MCI WorldCom, guess who's going to manage those [Sprint]lines?" Lieberman wrote in an e-mail Monday in response to an article about the proposed acquisition.
"Yes, Sprint's Internet service might get spun off, but I would now (along with many other users) be in the boat of having the same company support my two service connections, which I took so as to make sure that our company always had connectivity, no matter what one provider did," Lieberman said.
The problem, Lieberman said, is that even if part of Sprint's business must be divested, the combined Sprint-WorldCom entity will still own the basic infrastructure.
Lieberman has strong views about having to rely on one provider: "Should Sprint join with MCI WorldCom, I (and others) really get hosed. The merger may be wonderful for the wireless business, but it's the pits for [the] Internet."
MCI WorldCom, in Jackson, Miss., can be reached at www.wcom.com. Sprint Corp., in Westwood, Kan., can be reached at www.sprint.com.
Nancy Weil is a Boston correspondent for the IDG News Service, an InfoWorld affiliate. Jana Sanchez , London bureau chief for the IDG News Service, contributed to this report.
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