Worldphone Plc?

After BT-MCI, rivals review their global telecom alliances

British Telecommunications' planned $20 billion-plus takeover of MCI Communications is a bold line in the sand: If the deal clears regulatory roadblocks, as expected, BT will become the first foreign phone company to carry local, long-distance, and international calls for millions of Americans.

BT-MCI, to be renamed Concert PLC, represents the emergence of the truly international phone company, the borderless carrier. The world's other phone carriers have little choice but to respond with cross-border alliances of their own. The ultimate result: a global market dominated by a handful of companies that deliver calling services, TV programs, Internet hookups, and wireless communications from Montana to Mali.

BT and MCI's megamerger has set a new standard to be met, or rejected, by rivals--aiming for the seamless global organization that industry experts believe is needed to win the battle for lucrative multinational corporate accounts and break into new markets. "A lot of telecom executives around the world are staying up nights worrying about this," says Jeffrey Kagan, president of U.S. telecom consultant Kagan Associates. With expected cost savings of $2.5 billion over five years, the merged company will drive down global phone rates--forcing its rivals to respond. "We were ahead of the wave," boasts BT Chairman Sir Iain D.T. Vallance. "Now, we're making the wave."

It may not be a wave that everyone wants to surf in quite the same way. AT&T insists it has no plans to alter its international strategy of sticking with partnerships over acquisitions. The company figures it already gets tremendous breadth of service from alliances with the 16 international phone companies in WorldPartners. "There is just no way that any one company could own all that," says AT&T international head John C. Petrillo. That's why Petrillo says he is puzzled by BT's megamerger. "They have decided to park an awful lot of their investment in MCI," he says.

In private, however, the BT-MCI deal is sure to force AT&T--and nearly every other international carrier--to rethink strategy. In fact, AT&T's London staffers canceled their weekend plans as soon as the BT-MCI news leaked on Friday night, Nov. 1, in order to plan a counterattack. The world's second-largest phone company, after Japan's Nippon Telegraph & Telephone (NTT), for the first time will be facing a rival in its home market whose annual revenues and breadth of telecom services will nearly equal its own.

The upshot: Customers are willing to switch. "The deal makes BT-MCI a real alternative," especially in the U.S., says Philip Barton, chairman of the European Virtual Private Network Users Assn., a key European customer consortium. That's exactly the payoff BT and MCI are hoping for. With the U.S. barreling toward full competition at the start of 1997, moreover, MCI needs billions of dollars in capital and BT's expertise running local networks in Britain as it tries to break into the $100 billion U.S. local-calling market. In return, BT gets a huge foothold in the U.S. market. Already, BT plans to parachute several dozen key MCI managers into its European operations.

No question, the combination presents formidable challenges. The two companies must meld two vastly different corporate cultures that already were clashing in their joint venture, formed in 1994, a year after BT bought a 20% stake in MCI. And while they deal with internal problems, MCI is struggling with sluggish growth in its core long-distance business and legal hurdles that could slow its move into local-calling service.

The idea is to resolve the conflict that has dogged the companies' three-year-old partnership. "They'll need to find a compromise between the well-run structure of BT and the cowboy structure of MCI," says Lev Volftsun, a former executive at MCI, BT, and the joint venture who is now CEO of Light Speed International Inc., a telecom-software developer. The first order of business is to create a single sales force. Like a squabbling couple who try to solve their problems by getting married, BT and MCI had separate sales forces pushing Concert's offerings to multinational customers, leading to competition and overlapping responsibilities. The same corporate customer often was offered different deals in the U.S. and in Britain for similar packages of services. "It was a very confusing model," says Nick White, head of worldwide telecom for Unilever PLC, a customer.

SCRAMBLING. The industry's other consortiums have confronted similar startup pains. For three years, most of telecom's giants have struggled to come up with the right combination of partnerships, acquisitions, and investments that will enable them to offer globe-spanning services--with mixed results. AT&T's three-year-old WorldPartners consortium of 16 phone companies has been plagued by poor coordination and management changes, while the Global One Alliance of France Telecom, Deutsche Telekom, and Sprint, started in 1994, has yet to make any significant inroads in key European markets outside its home countries.

But CEO Peter Bonfield started picking up customer concerns shortly after arriving as BT's new CEO at the start of the year. Formerly CEO of British computer maker ICL, he had few preconceived notions about how the telecom world was supposed to work. So he reexamined the MCI deal and in late spring flew to MCI's Washington headquarters to discuss the lack of coordination with MCI President Gerald H. Taylor.

The result: what the companies call "the Cherry-Blossom Principles," named after Washington's then-blooming cherry trees. Rather than divide the world between them by geographic markets, as they had been doing, the two companies decided on a unified approach. In June, BT suggested that they combine their international operations. Shortly after, MCI Chairman Bert J. Roberts Jr. went one better, proposing the full-blown merger.

One surprise aspect of the merged company, Concert Global Communications, is how many key jobs are going to MCI executives. MCI Chief Financial Officer Douglas L. Maine, Chief Technical Officer Fred Briggs, and Strategy Development head Michael J. Rowny will all keep their titles in the new entity. "Bonfield wants to inject a little MCI chutzpah into BT," says an investment banker. In fact, with Bonfield and BT's Group Finance Director Robert Brace both being relative newcomers, very few old-school BT managers are left near the top.

Competitive reaction has been swift, and negative. AT&T Chairman Robert E. Allen called on the U.S. government to give the deal "the scrutiny it deserves," arguing that the British market is not truly open to competition. Executives at France Telecom sputter that the BT-MCI deal is proof that Concert was a failure.

ZIPPED LIPS. The one phone company that has had little to say is the world's largest, Japan's NTT. Japan remains one of the most restricted telecom markets in the world, but the government is nearing a decision to restructure NTT in a way that could pave the way for an alliance with a foreign carrier. NTT is unlikely to want to enter an exclusive partnership, say Japanese analysts, preferring to play the rival alliances off against one another.

NTT is the telecom's Holy Grail, the partner that can lead them to booming Asian markets. "By any measure, Asia-Pacific has the greatest opportunity for growth," says Thomas L. Elliott, managing partner at Arthur Andersen & Co.'s Global Communications Group. Here, AT&T may have the edge: NTT already has agreed to a trial of voice services that includes providing domestic connectivity in Japan, and the two companies have several technical joint ventures. Meanwhile, Asia represents a gaping hole in BT's global reach.

Many industry-watchers believe the MCI deal in fact was a consolation prize, after BT failed to buy Cable & Wireless PLC earlier this year. Its main attraction: a 57% stake in highly profitable Hong Kong Telecom, a key link to the huge mainland Chinese market. BT almost bought C&W, balked at the asking price, and now insists it preferred MCI all along.

Nevertheless, industry sources say BT and MCI executives now are rushing over to Asia to find a partner there. They're also still talking to GTE about a potential combination in U.S. wireless or local service. There will be plenty more deals before the dust settles on this industry of newly borderless carriers.

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