The Main Event: Bernie Vs. Mike
Until recently, C. Michael Armstrong notes wryly, the telecommunications business was "relatively boring." Not anymore. The AT&T CEO, a newcomer to telecom when he assumed the top post at the phone giant in 1997, has done his part to shake up the industry. He has revamped his sprawling company and spent more than $110 billion to buy cable-TV companies, which he's betting will give AT&T the digital multimedia network of the future for both home and business.
Bernard J. Ebbers, a onetime basketball coach and motel operator, has done his part to enliven telecom, too. Since getting into the phone business by investing in a tiny long-distance reseller in 1983, the MCI WorldCom Inc. CEO has built a long-distance empire through a series of astute buys. His latest move, the audacious $129 billion deal to snap up No. 3 long-distance player Sprint Corp., will be the largest corporate acquisition ever. To keep Sprint from falling into the hands of BellSouth Corp., a last-minute rival bidder, Ebbers sweetened his offer by close to $20 billion without blinking.
If the deal goes through, it will leave two nearly equal titans at the top of the phone industry--both headed by strong-willed outsiders. These men, not burdened by the memory of that old phone industry--where regulations were strict, growth was slow, and technological change took years--are shaping how communications markets will evolve. Each intends to make his company dominate telecom in the 21st century and is spending hundreds of billions to make that happen.
But the execs are using vastly different strategies. Armstrong, who spent two decades selling computers for IBM and five years as CEO of Hughes Electronics Corp., is leaning heavily on technology to make AT&T the winner in the new era of digital communications. He has spent megabucks on cable systems and is plowing billions more to upgrade them to carry digital TV, Internet traffic, and local phone calls. The payoff is far from assured: In early trials, the technology is not proving as reliable as expected. And on Oct. 6, Leo J. Hindery Jr., the former Tele-Communications Inc. exec in charge of AT&T's cable strategy, resigned, further clouding the picture. Investors, concerned about the huge investments and scant signs of payoff, have dumped AT&T shares, which have dropped 25% since May, to around $46.
Dealmaker Ebbers is taking on more financial than technical risk. But he, too, is betting heavily on new and unproven technology--in his case, wireless--to link his long-distance networks directly to the offices and homes of customers. Mainly, however, he's putting $129 billion behind the notion that, with Sprint, he can put together enough pieces and achieve enough efficiencies to meet virtually every telecom need that his core business customers will want.
In this business, where regulatory and technical barriers are evaporating, size matters--a lot. In the past two years, there has been a frenzy of dealmaking around the globe to prepare for the day when there is virtually no differentiation between local and long-distance calling or between carrying voice, data, or video. In the U.S., the number of local-phone companies has shrunk from seven to four as SBC Communications bought Pacific Telesis and Ameritech and Bell Atlantic absorbed Nynex. These new megaregionals are itching to go national once they get into long distance. "It verifies that you need scope and scale," says SBC Communications CEO Edward E. Whitacre.
The trend is everywhere. Long-distance upstart Qwest Communications swallowed US West. In Europe, Telecom Italia was gobbled by electronics giant Olivetti after a bidding war with Deutsche Telekom. Phone companies the world over--long regulated and, in many countries, state-owned--are being set loose on a competitive world stage. "We'll see another whole wave of mergers to come," says Robert C. Fox Jr., a vice-president at Mercer Management Consulting, including more global linkups involving companies like Deutsche Telekom or Japan's Nippon Telephone & Telegraph.
As this worldwide free-for-all gathers steam, both Armstrong and Ebbers are desperate to move beyond plain old long-distance service. At the end of 1998, MCI WorldCom and Sprint held 34% of the U.S. market between them. AT&T had 45%. But cutthroat competition and endless price wars have made long-distance service alone unattractive. Instead, companies like AT&T and WorldCom hope to thrive by offering bundles of services to businesses and consumers. With WorldCom's lead in carrying Internet traffic and its relatively strong non-U.S. presence, it will be able to sell local, wireless, and even global e-commerce services. "It's a match made in heaven," says Anna-Maria Kovacs, a telecom analyst at Janney Montgomery Scott Securities.
Whether all this will be heavenly for customers remains to be seen. The promise is massive communications capacity available virtually everywhere at ever-lower prices. The reality may be far different. Regulators and consumer advocates were quick to raise concerns about the WorldCom deal. Even Federal Communications Commission Chairman William E. Kennard, who has supported previous telecom megamergers, blasted the deal as a "surrender" in the long-distance price wars. "How can this be good for consumers?" he asks. That's something Ebbers and Armstrong will have to think about to make their massive bets pay off.
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