Mci: Attacking On All FrontsMark Lewyn
For a quarter of a century, MCI Communications Corp. has succeeded with a single, simple strategy: kicking industry giant AT&T in the shins and grabbing whatever chunks of the long-distance phone business drop out of its hands. The David vs. Goliath shtick, combined with MCI's savvy marketing, has enabled it to grow from a small microwave communications operator serving two cities into a $12 billion corporation with 20% of the $60 billion long-distance market. Its success has prompted some rivals to say that MCI really stands for "Money Coming In."
But going into the multimedia future of global, deregulated telecommunications, MCI will have to take on a lot more than AT&T to keep the money coming in. The traditional lines between long distance, local phoning, cable TV, and wireless are collapsing. Congress is poised to pass legislation to let the seven well-heeled Baby Bells into long distance. Long-distance laggard Sprint Corp. suddenly looks formidable: its proposed $20 billion merger with Electronic Data Systems Inc. could produce an Info Highway powerhouse.
VAGUE DETAILS. MCI's response? Do unto the competition first. "We really need to reposture this company into a leadership role, not a following role," says MCI Chairman Bert C. Roberts Jr. To get out in front, Roberts now wants to reengineer the entire company according to a grand plan he has dubbed networkMCI. Unveiled in January, networkMCI is a $20 billion, six-year make- over aimed at weaving together the company's existing long-distance voice and data services with a new local-phone network and the latest in digital wireless services. Roberts describes the plan as "the sum of all the plans and opportunities we have in the new, emerging markets."
What does it all mean? Many of the details remain vague, but the overall thrust is to position MCI as a leader in the world of futuristic communications. In a series of corporate image ads--a first for MCI--Oscar-winning child actress Anna Paquin suggests some far-out possibilities for MCI's brave new telecommunications world. And the usually outspoken Roberts gets a bit Zen-like when describing his new direction. He says he wants the company to emulate the osprey that dive for fish near his Chesapeake Bay home. "You try and come up with a strategy that is based on what's going to happen--not what is happening," Roberts explains. "If the bird is going to catch a fish, he can't go to where he sees the fish now. He has to anticipate where the fish is going."
The analogy is lost on some. "MCI is embarking on a strategic vision where the endpoints aren't clear," warns S.G. Warburg & Co. analyst William N. Deatherage. For now, he rates AT&T and Sprint stock as buys and MCI as
Still, some parts of the master plan are clear: MCI wants to move aggressively into services and geographic markets that offer greater growth and earnings potential or boost long-distance profits. For instance, the company plans to spend $2 billion of networkMCI's $20 billion budget to build local-phone networks in 20 cities over the next few years--with an ultimate goal of providing local service in 200 cities by the year 2000. In February, it jumped into the booming market for wireless voice and data networks by paying $1.3 billion for a 17% stake in Nextel Communications Inc., which plans to build a national wireless digital network that MCI will market. And it's about to spend $150 million for a stake in In-Flight Phone, which has contracts to operate air-to-ground phones on Continental and USAir (box).
MCI is on the move on the international front as well. It has forged a key strategic link with British Telecommunications PLC, which agreed a year ago to pay MCI $4.3 billion for a 20% stake in the company. In Mexico, MCI has formed a joint venture with Grupo Financiero Banamex-Accival, a financial syndicate that wants to challenge the established Mexican phone company. North of the border, MCI is joining forces with Stentor, a Canadian phone company group, to create a digital network that will link the U.S. and Canada.
The few pieces of networkMCI that are well defined are not without potential problems. Ultimately, the joint-venture with BT is expected to win Federal Communications Commission approval. But Washington has slowed the deal by using the approval process to exact further concessions from the British on opening their telephone markets. The Mexico deal has numerous regulatory issues outstanding as well, and MCI will have to compete for licenses there with several well-heeled competitors, notably Bell Atlantic Corp.
MCI's wireless move may be one of its biggest gambles. MCI had been slow to move into wireless, announcing its Nextel purchase a year after Sprint bought the nation's ninth-largest cellular carrier, Centel, for $4.5 billion and six months after AT&T laid plans to acquire McCaw Cellular Communications, the largest cellular phone operator, for $12.6 billion.
NO LETUP. MCI's stake in Nextel is not quite on the same scale. What's more, Nextel's specialized mobile radio (SMR) technology, which has been used mainly as a two-way-radio dispatch service, is just now being rolled out as an all-digital competitor to cellular calling. So far, the system is only up in Los Angeles. Nextel must still build a coast-to-coast network and market the service, a project that the company says will take two years.
While MCI attempts to get its new ventures off the ground, it can't afford to let up in long distance, where it gets virtually all its revenues. For now, the picture is encouraging. MCI has recovered from a nosedive in 1990, when its profits and stock price dropped by half after a restructuring and intensified competition from AT&T. MCI clawed its way back with the help of the hugely successful Friends & Family discount program, which has boosted its long-distance business by $1.2 billion annually. The company says its recent 1-800-COLLECT campaign has snagged an even larger market-share gain in the $3 billion collect-call arena (box). Warburg's Deatherage expects revenues to rise 14%, to $13.5 billion, in 1994, more than twice the industry average. And he estimates that earnings could hit $914 million this year, up 25% from the $731 million before extraordinary charges earned in 1993.
But, in the end, long distance is still a commodity--a phone minute. And revenues per minute keep dropping, which means that new ways must be found to cut costs. That's where MCI hopes its new local-calling business can pay off quickly. Part of the 76% jump, to $3 billion, in the company's capital-spending plan will go to creating local fiber-optic systems in New York, Los Angeles, and other major cities. The new cabling, using rights-of-way purchased from Western Union Corp. four years ago, will allow MCI to connect directly to big long-distance customers, bypassing the local Baby Bell's network and avoiding access charges. The potential savings are immense: MCI paid local carriers $5.6 billion last year--or 47 cents of every dollar it brought in--on access charges.
If going into local service makes financial sense, MCI's move overseas makes even more. The domestic long-distance market is growing by only 5% a year, but international calling is soaring at triple that rate. A critical part of MCI's international game plan is the NAFTA market. Many of the company's existing customers have set up shop in Mexico and Canada to take advantage of the North American Free Trade Agreement, and MCI wants to follow them there. Once networks in Mexico and Canada are in place, MCI hopes to create a three-country market for long-distance that can offer services such as Friends & Family throughout North America.
BIG RIVALS. Hence the deal with Banamex, which has a private network that links its 650 branch offices throughout Mexico. MCI plans to invest $150 million in 1994 and $300 million more over the next several years for a 45% stake in a joint venture with Banamex to build a public network to 250 cities. "Communications between the U.S. and Mexico are going to explode," says MCI's chief strategist, Richard T. Liebhaber. "I gotta be there."
This summer, the Mexican government plans to grant as many as six licenses for long-distance competition, to start in August, 1996. "We're confident that we will get one," says Manuel Medina Mora, deputy president of Banco Nacional de Mexico. The venture will face formidable competition, however. Last October, Bell Atlantic agreed to pay $1 billion to buy 42% of Grupo Iusacell, Mexico's second-biggest cellular company.
MCI is hoping its alliance with BT will give it a lot more international clout. MCI will market services in North and South America, while BT will get the rest of the globe. Roberts says the partners are talking to Japan's Nippon Telegraph & Telephone Corp. about joining the venture to market to the Far East.
While all of these deals are going down, MCI is trying to hang on to the aggressive style that got it where it is. To avoid a bureaucratic culture, executives recently rejected plans to centralize operations around Washington on a single campus. "It could have saved us millions," says MCI President Gerald H. Taylor. "But what will you give up? People begin to think they work at a factory."
There's little danger of that. Freewheeling and fast remain the watchwords. One recent example: When research showed that 60% of frequent business travelers have missed a child's birthday and 40% have missed a spouse's birthday or a wedding anniversary, MCI quickly launched "Guilt Trip," a campaign to shame travelers into calling every night from the road--via MCI, naturally.
The big question, of course, is whether MCI's $20 billion gamble will pay off. Savvy salesmanship will help, as will its enviable record in the giant-slaying department. But MCI will need to be more than feisty and fast to make Robert's grand vision come true.