Mci: A Smaller Family And Fewer Friends

What in the world has happened to MCI Communications Corp.? Its reputation as a brilliant marketer is tarnished after losing 1.1 million customers to AT&T last year--almost 300,000 in December alone. Analysts figure that its fourth-quarter revenues dropped almost 1%, the first quarterly decline in five years. Its attempts to get into the wireless business fizzled. And since Wall Street has no clear picture of MCI's plans to diversify beyond the cutthroat long-distance business, the stock is hovering near a 52-week low of 17, almost 10 points below last March.

Investors may be unsettled, but MCI's leaders are still upbeat. Earnings in 1994, due Jan. 26, are expected to be up 15%, despite a 9% dip in the final quarter, analysts say. "We have not died," says MCI President Gerald H. Taylor. "We are not wringing our hands comforting one another about the situation." What MCI executives are doing is trying to step back from an unrelenting battle for long-distance market share where the main weapon is discounts. MCI is searching instead for niches with better margins than in the commodity-like residential long-distance business. Says Executive Vice-President Timothy F. Price: "We want to take advantage of things on an opportunistic basis--new markets, new technologies."

Such as? So far, MCI has done little beyond announcing in January, 1994, a plan, dubbed networkMCI, to spend $20 billion over six years to get into the wireless and local-calling business, while expanding overseas. But networkMCI is still mostly a blueprint, and there's more pressure for MCI to act. In a few years the seven Baby Bells are likely to gain entry into the long-distance business. As the only carrier with almost all its eggs in the long-distance basket, MCI is the most vulnerable to these well-heeled rivals.

Diversification has become more urgent since MCI changed its rate strategy: Instead of leading the long-distance wars--as it has done in the past--MCI is following. AT&T last summer unveiled a lavish advertising campaign ridiculing MCI's four-year-old Friends & Family Plan. In September, AT&T upped the ante with a 30% discount to new customers for six months. MCI ignored the challenge with the result that growth in calling minutes slowed from a high of 14.7% in mid-1993 to an industry-lagging 7.5% in late 1994 (chart, page 147).

When strident "Shame on You, AT&T" ads failed to stem the tide, MCI finally responded on Jan. 5 with a "new Friends & Family" plan. It offers a 6% discount to AT&T's True USA--just enough, say analysts, to stabilize MCI's market share without triggering another AT&T rate cut. "Chasing pricing down a rat hole doesn't make any sense," says Price.

Problem is, MCI has yet to say what does make sense. Investors want to know--they especially want to know--what it will do with a $4.3 billion cash hoard received from the sale of a 20% stake to British Telecommunications PLC on Oct. 1. "They have been very un-MCI-like in their deployment of capital," says Blake Bath, analyst at Sanford C. Bernstein. "Normally, they decide, and boom--off they go. They've known they were getting this money for more than a year....People aren't clear on what they are doing."

MCI is spending some. It has earmarked $2 billion to build local fiber-optic networks in 200 cities by 2000. It says that six cities are up and running. MCI is also building a network in Mexico, budgeting $450 million over three years. And last year, MCI paid $30 million for a 20% stake in Los Angeles' Interactive Cable Systems, which sells cable and phone systems to apartment complexes, and $20 million for a 20% stake in an in-flight phone company. And $70 million went into developing and rolling out an information-management software package for businesses.

None of these businesses, however, matches the growth prospects of wireless. And MCI's wireless plan has yet to materialize. Last February, it agreed to pay $1.3 billion for a 17% stake in Nextel Communications Inc., which wants to transform radio-dispatch systems into a cellular competitor. The deal fell apart over doubts about the quality of Nextel's service. Then, separate attempts to form wireless partnerships with GTE, Pacific Telesis, and BellSouth dissolved.

MCI's reluctance to invest big bucks hasn't helped. Talks with a personal communications service (PCS) consortium led by Bell Atlantic Corp. collapsed when the group wanted MCI to help foot the bill for building it. MCI thought lending its brand name was enough. "It all fell apart because of egos," says Albert Grimes, an ex-MCI exec.

Now, MCI is in fallback mode. It plans to lease capacity and resell it, banking on a glut of wireless capacity to drive down wholesale rates. That could make for lucrative margins, but reselling is not without risks. MCI won't be able to control the quality of the network, nor will it be out in front with new services.

Analysts wonder if MCI's management is foundering or just trying to stay nimble. One thing in their favor, says Linda B. Meltzer, of UBS Securities Inc.: "MCI excels when the chips are down. Some companies flourish in a challenged atmosphere." And this situation is nothing if not challenging.

Before it's here, it's on the Bloomberg Terminal.