NEWS.COM article "Phone companies' new calling"
By Jeff Pelline
Staff Writer, CNET NEWS.COM
March 10, 1998, 1:05 p.m. PT
URL: news.com
Cutting-edge technologies such as Internet and computer telephony--perhaps more than
deregulation--are proving to be key catalysts in creating "new" telephone companies that are doing
battle with the likes of AT&T (T), MCI Communications (MCIC), and Sprint (FON).
The group includes start-ups such as Qwest (QWST), the Internet Telephony Exchange Carrier,
and Level 3 Communications, and nontraditional telcos such as WorldCom (WCOM).
Microsoft (MSFT) is getting into the act too--not as a telco, per se, but in an effort to make its
dominant Windows operating system part of the telephone infrastructure.
Many nontraditional telco providers, not just the AT&Ts and Sprints of the world, are touting
themselves as "one-stop shops" for communications--offering phone and Net access, for example.
Their claims point to what is one of the biggest promises of telco reform, but they have been slow
to materialize.
Deregulation was supposed to spur new competition in the telephony space, but more than two
years after the Telecommunications Act of 1996 was signed into law, telecom carriers and federal
regulators still are fighting over opening new markets and allowing Baby Bells to get into the long
distance telephone business.
But technology is not standing still, and the convergence of technologies for carrying voice and data
over the Net already is happening.
Once criticized for their low-quality, voice-over-IP (Internet protocol) networks are gaining steam.
Net phone calling's chief benefit: lower-cost calls. Little-known companies now are offering phone
calls via the Net for less than 10 cents per minute.
Other efforts include creating new software interfaces for telephony. Microsoft, for example, is
demonstrating a technology for Windows-based computer telephony.
The traditional telcos, notably AT&T spin-off Lucent Technologies (LU), are not standing on the
sidelines. They also are implementing many of these new technologies but have been finding that the
competition is getting tougher along the way.
Some examples of the "new" telephone companies include the following:
Qwest. It took a technology outsider such as Philip Anschutz, who became a billionaire by
running oil and railroad businesses, to see the potential of competing against the telcos with a fiber
network that carries voice and data traffic. He used railroad right-of-ways to help build the
network, as well as money raised from an IPO last year and talent recruited from AT&T (such as
CEO Joseph Naccio), to help energize the company.
Qwest has been on a rapid expansion binge, capped by yesterday's buyout of LCI International
(LCI) for about $4.4 billion. (See related story ) According to Qwest, the merger will create the
nation's fourth-largest long distance telephone company. It gives Qwest access to sales and
marketing expertise, as well as distribution channels. Combined, the companies had revenue of
$2.3 billion last year and served more than 2 million business and residential customers.
Wall Street has taken a liking to Qwest. Its stock is hovering at a 52-week high of about 37, up
from about 13 when it went public last summer. In its short life, Qwest's market capitalization has
come to stand at $7.5 billion.
Microsoft. The company's mission to meet lofty profit expectations by expanding into new,
software-dependent businesses is well-known, but little attention has been paid to its foray into
telephony. Despite his $1 billion investment in cable giant Comcast (CMCSA), Microsoft CEO Bill
Gates says he has no plans to buy a telco.
But that hasn't stopped the software giant from getting into the business. Last week, Microsoft
demonstrated features for the first time that will let companies use the Windows operating system
for both traditional and Net telephony applications. The features of its upcoming Windows NT 5.0
release will make it easier for data, voice, and video to coexist across the same network. (See
related story)
In addition, Microsoft has been teaming up with telcos to promote high-speed Net access over
copper wires, dubbed DSL. It has joined Intel and Compaq Computer, as well as a consortium of
telcos, for this so-called copper renaissance.
WorldCom, one of the fastest-growing telcos. It is no start-up, but its recent buyout binge, which
saw it take ownership of the likes of CompuServe's network and MFS Communications, has
catapulted WorldCom into the ranks of the major leaguers in long distance.
WorldCom has grown so fast, in fact, that some of its deals, such one pending with MCI, now are
drawing the close scrutiny of regulators. They worry that the company may dominate the Internet
backbone. (See related story) WorldCom denies that, however, and has said that it is confident its
deal with MCI will win regulatory approval by midyear.
Led by hard-charging CEO Bernard Ebbers, WorldCom is mapping a highly aggressive growth
strategy. WorldCom, MCI, and Spain's Telefonica yesterday announced a three-way alliance to
offer telephone service to the Americas. WorldCom's stock is trading at near a 52-week high of
about 38.
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