Listen to Bernie Ebbers, chairman and CEO of MCI WorldCom Inc., the architect of one of the most aggressive and successful strings of consolidations and acquisitions in corporate history, as he reflects on his company's eight-day frame relay outage this summer:
"Part of the reason that there is some concern here is that there has been a lot of consolidation in our industry and this software was originally developed by Cascade Communications [Westford, Mass.], who was then acquired by Ascend Communications, Alameda, Calif.], who has since been acquired by Lucent [Technologies Inc., Murray Hill, N.J.]," Ebbers said this summer. "And so one of the concerns obviously in this cycle of events is what happened to the people and the process that did the development and wrote the software. And was the capability to maintain this software retained through these transactions?"
Ebbers, of course, is wondering aloud about his vendors, not his own company. Still, it is as if Howard Johnson doubted the utility of motel chains, or Baskin asked Robbins if 31 ice cream flavors weren't a bit much. And, with MCI WorldCom marking one year as its present self, it is worth asking whether it has grown too fast for its own good. Also, since MCI WorldCom, with a local presence in 89 markets, is the biggest competitive local exchange carrier (CLEC) in the country, is it a competitive threat to independent CLECs?
Craig Clausen, senior vice president at New Paradigm Resources, Chicago, believes the answer to the first question is yes, and the answer to the second is maybe.
"They could be very good competitors, but they've been so obsessed with growing," Clausen says. "They've had outages, and extremely poor customer service. We speak to the end-users, too, and that's the feedback we've received. People are looking for a higher quality of service (QoS), and that's where the smaller CLECs really need to beat their chests."
Pounding on his pectorals is Peter Meyer, senior vice president of marketing at GST Telecommunications Inc., Vancouver, Wash. He thinks the ability of smaller companies to execute is an advantage over MCI WorldCom, AT&T Corp., and Sprint Corp.
"TCG [the former Teleport Communications Group Inc., acquired by AT&T] is a competitive element for us," Meyer says. "[Big CLECs] are a competitive issue for us; we do encounter them and have to manage them. But they're not as big a force on execution as the littler companies."
As to MCI WorldCom in particular, he says, "If they were truly integrated, this disruption wouldn't have been as bad. Jeez, the trouble that caused."
Traumatic as the eight-day frame relay outage undoubtedly was, it was not the end of the world and does not detract from MCI WorldCom's progress, company officials say.
"There will be ups and downs in everybody's network," says Steve Young, MCI WorldCom's vice president of global accounts marketing. "It wasn't facilities." As for getting too big too fast, Young begs to differ.
"Sure, that's a criticism that some folks have tried to aim at us," he says. "We put together programs to retain the talent ... and it has worked."
Market analysts seem to agree with Young.
"What happened to AT&T [after a similar outage earlier this year]?" asks Andrew Hammerling, senior research analyst at Banc of America Securities, New York. "The overall impact has been relatively inconsequential to their earnings, and that's the important thing. It was a Lucent equipment issue rather than an MCI WorldCom-specific issue."
When the outage began on Aug. 4, MCI WorldCom's stock closed at $80.81 1/4. It had been sliding since July 19, when it closed at $90.43 3/4. Through the eight days of outage and the days that have followed, the stock has continued falling, but more like a leaky balloon than a rock. At press time at the end of August, it rested at $76.06 1/4.
MCI WorldCom's local focus is on large corporate customers, to which MCI WorldCom can offer local service as part of an integrated package. MCI WorldCom insists those customers want to have their communications go from Walla Walla to Warsaw on one network.
"We're talking about 1,500 of the world's largest corporations," Young says. "They don't need to run networks .... They want a single vendor from end to end."
At press time, MCI WorldCom and Xerox Corp., Stamford, Conn., announced MCI WorldCom will provide local service to Xerox locations in 20 states. MCI WorldCom also provides Xerox with conferencing, private data and Internet services.
This focus on high-end customers is just fine with Anthony J. Pompliano, chairman and CEO of e.spire Communications Inc., Annapolis Junction, Md.
"The whole focus at e.spire is on small and medium-sized businesses," Pompliano says. "Being small, we have the distinct advantage of being able to change and focus on any segment of the business."
Jeffrey Kagan, an independent telecom consultant based in Atlanta, takes a contrary view.
"If you are a standalone CLEC, the waters are going to get choppy," he says.
Kagan believes the relationship between MCI WorldCom and CLECs like GST and e.spire, is analogous to that between the local hardware store and an invading Wal-Mart. It may not be fatal, but it will be rocky. For MCI WorldCom, he says, local service is a way of strengthening the core business and securing its customer base. The Xerox deal is an example.
"A standalone CLEC doesn't have the brand name, the wide variety of services that MCI WorldCom can offer," he says. Of course, MCI WorldCom offers a wide variety of dedicated and switched voice, data and Internet services.
Some analysts see a hole in that wide variety of services: wireless service.
In the spring, the industry was abuzz with rumors about MCI WorldCom buying Nextel Communications Inc., Reston, Va. However, the acquisition never took place.
"I wish Nextel and MCI WorldCom had gotten together," laments Drake Johnstone, vice president of research at financial firm Davenport & Co., Richmond, Va. "AT&T having a wireless service they can bundle with other services is a real positive, because you're seeing a migration of voice service to wireless. In the United States, 25 percent of the population has wireless service, and about 17 percent of the traffic is wireless. In some countries, it's more than half the traffic. That's where we're going in the United States in the next few years."
On May 28, MCI WorldCom announced its intent to merge with SkyTel Communications Inc., Jackson, Miss. SkyTel is a wireless messaging company with 1.7 million customers in the United States.
Aside from the SkyTel announcement and a couple of international acquisitions, MCI WorldCom seems to have taken a breather from big acquisitions.
"They're still digesting their last meal," Kagan says. "MCI was a hell of a meal."
But Kagan and other analysts see this rest as just that, a rest. Consolidation is inevitable, they say, and CLECs who might look upon MCI WorldCom as a rival should also look at the company as a potential buyer.
"Look what happened in long distance," Kagan says. "When customers demanded more, you saw consolidation sweep across the industry. Customers demanded more, and companies kept consolidating. That'll happen to CLECs. At first, customers will be tickled to death to have a choice [of carriers] and a [lower] price. Then, as they get comfortable, they'll demand things like 24-hour, seven-day customer care--the kinds of things they're used to getting from the big boys."
Since Kagan believes standalone CLECs will have trouble providing those things in competition with the big boys, he believes this is the time for CLECs to "slap on some fresh paint, get some good carpeting down and get a good price."
Analysts believe several standalone CLECs would make good acquisition targets for MCI WorldCom.
"I wouldn't be surprised at all [to see MCI WorldCom acquire a CLEC]," Kagan says. "But there's got to be a strategic reason. [Ebbers] is a very smart buyer. His bottom line is pleasing Wall Street, making the com-pany stronger and the stock higher."
Johnstone thinks CLECs with dense local fiber networks stand the best chances of competing with or being acquired by MCI WorldCom. He offers Time Warner Telecom Inc., Greenwood Village, Colo., as an example. Time Warner Telecom, a joint venture of Time Warner Inc., New York, and MediaOne Group Inc., Denver, and Advance/Newhouse, aims at medium and large corporate customers, and so is a potential competitor, as well as a potential acquisition, for MCI WorldCom. Time Warner Telecom filed a initial public offering (IPO) registration statement with the SEC in the spring, but has not yet gone public.
"They have 300 route miles of fiber per city, on average. Most CLECs, if you look at them, don't have a lot of fiber," Johnstone says.
He adds that MCI WorldCom and companies like it have a huge demand for capacity, and that Time Warner Telecom has benefited in the past from this demand, having, on occasion, sold or leased capacity to the likes of MCI WorldCom. A spokesman at GST confirms his company, which owns a fiber backbone up and down the West Coast, has done the same.
Of course, CLEC officials claim not to take much notice of MCI WorldCom's potential as a buyer.
"We concentrate on the business, bringing in new revenue and signing up new customers," e.spire's Pompliano insists. Pompliano then makes it clear he is at least considering a new coat of paint and new carpet.
"Consolidation can't be a surprise to anybody," he says. "As time moves on, and the new telecom picture becomes clearer, companies like MCI WorldCom will be attracted to a whole host of companies. In fact, the audience we'd be attractive to is probably expanded this year. Cable companies, for example, have stepped up their interest in DSL (digital subscriber line) service, and they're only half a step away from offering a full suite of communications services."
Banc of America's Hammerling thinks MCI WorldCom, notwithstanding growing pains, the lack of a wireless strategy, or other hurdles, has done well since its merger last year and will continue to do so.
"They've done a lot right, to be honest," Hammerling says. "Overall, we're very pleased with their performance. They'll transition more business toward data and the Internet. And voice, at least at some point in the future, will become relatively less important to the earnings mix in the company. We think the management talent and the quality of MCI WorldCom's assets are very good, and we're still very bullish."
According to a study published recently by Infonetics Research Inc., 400 new CLECs have become certified in the United States in the past year. "The CLEC/NSP (network service provider) Opportunity, 1999," is the fourth annual Infonetics study of CLECs, and according to its author, the last.
"We decided that the term CLEC (competitive local exchange carrier) no longer describes a distinct group of service providers," says Michael Howard, managing director and co-founder of San Jose, Calif.-based Infonetics. "It really is an aspect of service providers' business."
If that's so, why did we have 400 new CLECs pop up in the last 12 months? With consolidation happening all over the industry, why aren't there 400 fewer CLECs than last year?
Part of the explanation may lie in the fact that, with all the consolidation going on, there are still markets not served adequately by incumbent LECs (ILECs).
"Most everybody's target is small and medium-sized business in the United States," Howard says.
Howard believes there still is room for market share to be stolen from incumbents by CLECs supplying voice over Class 5 switches. However, he says, the major trend is toward integrated services, regardless of the target market.
"There is a top tier of service providers that could be called integrated service providers--though we're not really ready to embrace that term yet," he says. "[Just as] all the big service providers are developing their portfolio to provide all communications, the growing carriers are taking the same strategy." Craig Clausen, senior vice president at New Paradigm Resources Inc., Chicago, says the new crop of CLECs is likely to rely less on resale as an entry strategy than the earlier class of CLECs.
"It's not about customer base any more; it's about customers on-net," Clausen says. "We went through the resale debacle and realized that having customers is not the same as having efficient access to those customers."
Clausen adds that large carriers, such as MCI WorldCom Inc. and AT&T Corp., will look for acquisition targets whose management has already secured such access.
Still, Clausen says, there are new CLECs that think they have a better mousetrap, or think they have a market that they know more about than anyone else. 2nd Century Communications Inc., Tampa, Fla., began service this year on an asynchronous transfer mode (ATM) network, pushing intelligence to the edge of that network, a strategy their managers believe gives the company an edge with the small and medium-sized businesses many CLECs are targeting. Pointe Communications Inc., Houston, claims to be the first facilities-based CLEC dedicated to an ethnic niche--Spanish-speaking customers in the United States.
Howard acknowledges counter-trends like these. In the future, however, he believes integration will win out, and larger carriers will have an edge, particularly in retail markets where reliability, diversity and flexibility are key.
