Three years ago, MCI Communications Corp. was on the run. Long-distance giant American Telephone & Telegraph Co. unleashed an ad blitz showing how MCI's rates weren't much of a bargain, and follow-up calls by AT&T's phone reps won back thousands of MCI customers. MCI's market share slumped to 13% in the second half of 1990, from 14% earlier that year. With revenue growth slowing, the No. 2 long-distance company laid off 1,000 workers and consolidated operations. Wall Street, worried that one of its favorite growth stocks had topped out, dumped MCI shares, which slipped from an all-time high of 48 1/2 in October, 1989, to less than 18 in January, 1991. "We were getting clobbered," recalls Gerald H. Taylor, MCI's president of consumer markets.
But that was before Friends & Family. Launched in March, 1991, what began as a clever discount plan has turned into a marketing coup. The scheme, which offers 20% discounts to groups of MCI customers who phone one another, quickly took off--despite an AT&T advertising counteroffensive questioning MCI's practice of using customers to offer up their friends and relatives as marketing prospects.
This month, MCI signed its 10 millionth Friends & Family customer. Its share of the U. S. market has expanded to 17%--a jump worth $1.5 billion annually--while AT&T's share has contracted from 68% to 66%. In 1992, MCI revenues grew an estimated 11%, twice the industry average, to $10.5 billion. And analysts expect profits to come in at $587 million, up about 12%. Now, MCI's stock trades at around 40 (chart).
The rebound marks the beginning of a third major phase in the life of the company. Founded in 1963 as Microwave Communications Inc., MCI at first was what the late Chairman William G. McGowan liked to call "a law firm with an antenna on top." Its primary thrust was to pursue every legal angle to pry open the Bell System's long-distance monopoly. Once it succeeded, it moved to phase two, becoming a construction powerhouse as it laid a nationwide fiber-optic network.
In the 1990s, MCI's strategy is to be the master marketer of long distance--the Pepsi of telecommunications. The marketing battle will be fought in such areas as "800" service, data communications, and international calling, all expected to show double-digit growth for the foreseeable future.
"There is a recognition that technology, while the underpinning of everything we do, can eventually be matched," says Timothy F. Price, president of MCI's business markets division. "So our success or failure will largely be judged on our marketing skills." And they'd better be good: AT&T recently passed McDonald's Corp. as the nation's largest advertiser. AT&T scoffs at Friends & Family. A spokesman calls it "a pricing gimmick disguised as innovation," adding that the phone giant doesn't want to compete solely on price, but on service and features as well.
'GUERRILLA WARFARE.' The strategy in all these markets is straightforward: Fight a one-front war. MCI's ads target AT&T and never mention Sprint Corp., the nation's No. 3 long-distance carrier. MCI presents customers with an either-or situation and, internally, pushes employees to focus on a single enemy. MCI also aims its marketing at AT&T's weak points. It knew, for example, that the industry giant couldn't respond easily to Friends & Family, in part because AT&T lacked the sophisticated billing system needed to link accounts of customers from all over the country. "They are very effective at guerrilla warfare," says Joel Gross, an analyst at Donaldson, Lufkin & Jenrette Securities Corp.
Friends & Family has helped lay the foundation for other marketing forays. Focus-group interviews conducted before the campaign found that long-distance customers cared little what brand they had. The interviews also showed that MCI had a fuzzy image because it no longer was seen as a bargain-basement alternative to AT&T. Friends & Family solved these problems by establishing customer loyalty and creating an image of a "good guy" company, according to studies for MCI by J. S. Childs Inc., a New York-based market researcher.
MCI is exploiting its new image to the hilt. When a couple from Bel Air, Md., invited MCI Chairman Bert C. Roberts Jr. to their wedding last June as a gesture of thanks--Friends & Family let them court inexpensively--Roberts showed up with a camera crew in tow. MCI later used the footage in a commercial.
Now, MCI is trying to transfer the warm glow of Friends & Family to the business market. In April, 1992, it launched Friends of the Firm, a program aimed at small businesses. And to further sharpen its marketing attack, MCI created three national divisions last August--consumer, business, and national accounts--which replaced four regional units. The goal is to give MCI's national marketing more focus.
IRREVERENT. To come up with more imaginative marketing plans, MCI executives say it is essential to retain the company's irreverent underdog mentality--despite its $10 billion in revenues and 28,000 employees. That's one of Chairman Roberts' top challenges. A soft-spoken 21-year MCI veteran, Roberts took over when McGowan died last summer. "We need to think small and stay flexible," says Roberts. One tactic: To keep the good ideas flowing, most offices in new company buildings have no doors.
A feisty attitude and marketing savvy won't do it all. This year, for example, the Federal Communications Commission is planning rule changes that could give AT&T a significant cost advantage over MCI. In a move toward cost-based pricing, the agency wants to phase out regulations that require local phone companies to charge all long-distance carriers the same rates for access to local lines. Because AT&T has the lion's share of the $55 billion market, it should gain a windfall as local phone companies are permitted to give it volume discounts for completing long-distance calls. MCI and other smaller carriers are likely to be left paying higher fees.
One way MCI will try to offset this threat is to branch out from long distance, which now accounts for all its revenue. The biggest opportunity is in wireless communications, which could top $100 billion in annual sales by the year 2000. In the early 1980s, MCI held cellular licenses in seven major markets but sold them in 1986 to McCaw Cellular Communications Inc. to help fund expansion. That left MCI without a stake in the rapidly growing wireless arena, a hole made more glaring by AT&T's recent agreement to buy one-third of McCaw, the largest U. S. cellular operator.
MCI is plotting a move into the next generation of cellular, called Personal Communications Services (PCS), which promises cheap, lightweight pocket phones that eventually could start replacing wired phones in homes and offices. MCI has asked the FCC to award three national PCS licenses to a consortium of companies, which would include MCI, but the FCC could well reject the proposal. If that happens, Jonathan C. Crane, president of MCI's national accounts division, says the company might team up with a cable-TV company or a Baby Bell to get into the business.
Short term, MCI is targeting 800 service, a $7 billion market now 80% controlled by AT&T. On May 1, the FCC plans to open the field to full competition. For the first time, customers will be able to switch carriers without changing numbers. In anticipation, MCI has set up an internal contest called Project 800 Track & Attack, which awards prizes to employees who collect the most AT&T 800 numbers for MCI's sales reps to contact.
Roberts also says he has big plans for data transmission, an area in which MCI has been a laggard. Data services now account for only 5% of MCI's revenue, but MCI hopes that figure will grow to 20% by 2000, or about $4.5 billion. The company has rolled out a number of new data-communications products, including frame-relay, a low-cost alternative to a dedicated leased line.
The final frontier for MCI is the international market, where it is busy forging alliances. In late 1990, MCI joined three other companies to form Clear Communications Ltd., an alternative long-distance carrier in New Zealand. Since then, Clear has grabbed 16% of the $1.2 billion market, up from just 8% a year ago. And on Dec. 18, MCI inked a deal to provide software to Stentor, a Canadian phone consortium.
AT&T is not sitting idly by. It sued MCI for patent infringement on Jan. 11, partly because of MCI's plans to share software with Stentor. MCI calls the patents invalid. AT&T is moving north, too, buying 20% of Canada's Unitel Communications.
A setback in the international plan uould hurt. "They need to expand internationally more quickly," says Daniel Briere, president of Telechoice Inc., a Montclair (N. J.) consulting firm. Some analysts expect MCI to align itself with British Telecommunications PLC, Britain's largest phone company, which has been looking for a U. S. partner.
"My job and goal is to turn this into a much larger company that can compete on the global stage," says Roberts. By expanding into data, 800 service, international calls, and wireless, Roberts may may reach his goal. Succeeding in all those hotly contested businesses, however, will take all MCI's marketing skills.