MCI Is Looking for Safety

Soured on the long-distance phone market, the cash-rich giant bets on computer security with its buy of Network Security Technologies

By Brian Grow and Catherine Yang

Once upon a time, MCI cooed that callers using its phone lines could link up with friends and family anywhere in the world. Now, with a plague of viruses and worms barraging computer networks from all corners, the long-distance giant plans to help big corporate customers linked to its network fend off enemies headed for their in-boxes.

MCI (MCIP ), putting just a small chunk of its almost $6 billion in cash to work, expects to announce the acquisition of computer security company Network Security Technologies (NetSec) for an estimated $105 million on Jan. 20, BusinessWeek Online has learned. Based in Herndon, Va., NetSec specializes in monitoring and protecting the computer networks of major corporations such as British Petroleum (BP ) and Toyota (TM ), as well as sprawling government agencies like the U.S. Treasury Dept. MCI declined to comment, and NetSec executives were unavailable for comment.

"A NetSec acquisition is a good one," says Allan H. Carey, program manager for security and business continuity services at info-tech research firm IDC. "MCI is getting access to enterprise and government customers, and they're picking up NetSec's expertise."


  The purchase is a critical component of MCI CEO Michael D. Capellas' plan to transform the outfit from an ailing carrier of low-margin voice traffic into an Internet Age network. Much of the world's Internet traffic already runs over MCI's network. In the hope of capturing more, Capellas, the former CEO of Compaq Computer, plans to convert all 100,000 miles of MCI's cables to Internet-capable technology.

Doing so will enable MCI to add high-tech services, such as NetSec's security systems and software hosting, on the network. It's a strategy that company executives believe will fundamentally alter MCI -- and help return it to profitability soon. "We're not a phone company anymore," Capellas told BusinessWeek Online. "We're a technology company."

By offering additional services such as in-house computer security, MCI will be able to charge its deep-pocketed corporate customers additional monthly fees, according to sources familiar with the plan. Those fees could add up nicely: NetSec's revenues were expected to double in 2004 to about $30 million, according a company press release. Having such a steady revenue stream is critical for MCI as it, like other long-distance carriers, is being squeezed for cheaper voice and data-transmission rates.


  The NetSec deal is also likely to shore up MCI's appeal to customers eager to boost their computer defenses who would have been forced to look elsewhere. NetSec's security solution, dubbed Finium, creates a window into corporate computer networks so businesses can see which viruses and worms "in the wild" are approaching their networks, determine which ones are potentially damaging, then prioritize how to defend against them.

NetSec's security systems differ from those of many competitors because they have the scale to service global companies and government agencies with far-flung operations. Through its professional services unit, NetSec security experts also help corporate IT staff patch their holes and fix faulty networks.

It's a hot market to tap: The managed security services industry is growing 19% per year, according to IDC, as nervous companies outsource more of their security. Overall, industry revenues are expected to jump from $772 in 2003 to an estimated $1.6 billion by the end of 2007.


  While a plunge into computer security looks like a sound survival strategy for MCI, a host of competitors, from archrival AT&T (T ) to IBM's (IBM ) Global Services unit, also have designs on the market. Plus, MCI will now bump heads with established security prodigies like Symantec (SYMC ). And network-gear makers such as Juniper Networks (JNPR ) and Cisco Systems (CSCO ) are adding security technology to their routers in order to make the entire Internet safer.

The transformation at MCI and AT&T is being driven by a still-brutal long-distance market in which prices have been falling and a growing number of customers are leaping into cheaper Internet-based services such as voice-over-Internet-protocol. By MCI's own measure, 74% of its 150 largest customers plan to switch their old phone networks to Internet technology in the next few years.

What's more, regulatory changes are enabling the Baby Bells to pluck more customers in MCI's long-distance segment. Local phone concerns such as Verizon Communications (VZ ) and BellSouth (BLS ) now offer long-distance service in all 50 states. As a result, MCI is steadily pulling back from the consumer long-distance business and, like AT&T, expects to eventually exit the segment. "We're sizing the business to the profit opportunity," says Wayne E. Huyard, president of MCI's U.S. sales and service unit.


  Fact is, MCI hasn't seen profits in years. It's expected to lose $3.8 billion in 2004 due to a large restructuring charge and a 17.4% drop in revenues, to $16.9 billion, according to UBS Securities.

But the tide could be turning. With revenue declines in the consumer segment starting to bottom out and the cost savings from eliminating 18,000 job in the last three years kicking in, some analysts think Capellas and crew could soon see a return to profitability. UBS Securities analyst John Hodulik expects MCI to turn a small profit -- $58 million -- this year. The company declined to comment on its 2005 profit outlook. Since returning to the Nasdaq stock market last July, MCI's share price is up 11%, closing at $18.81 on Jan. 19.

Eager to move up the telecom food chain, the cash-rich, Capellas-led team at MCI can be expected to buy more businesses like NetSec to appeal to jittery corporate clients. And with its world-spanning network about to become safer, some investors may soon feel more secure putting money into MCI.

Grow is an Atlanta-based correspondent, and Yang is a Washington (D.C.)-based correspondent for BusinessWeek

Edited by Patricia O'Connell

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