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Commentary: As WorldCom goes, so goes telecom

Gartner believes the WorldCom restructuring makes sense: it deftly segments the business into units that are homogeneous with respect to customers, products and services.

By Jay Pultz, Gartner Analyst

Essentially, WorldCom plans to split its consumer and wholesale long-distance voice business from its voice, data and Internet services for enterprises.

See news story:
WorldCom confirms long-distance tracker, lowers expectations
Gartner believes the restructuring makes sense. WorldCom will deftly segment its business into units that are homogeneous with respect to customers as well as products and services--and that have clearly defined and differentiable financial characteristics.

Other carriers will likely follow the lead of WorldCom and AT&T, which announced a restructuring last week. The same market pressures that led AT&T to split itself into four parts led to the WorldCom restructuring. The price of long-distance voice services has dropped faster than anyone anticipated, and overall revenue from that segment is nearly flat, with substantial declines in the consumer sector.

To underscore the point, WorldCom issued an earnings warning--for fourth quarter, 2000 and 2001--simultaneously with the restructuring announcement. WorldCom cited "intense pricing pressures" as a major factor for its expected slowdown in revenue growth.

Carriers counted on voice revenue continuing long enough to fund the development of value-added network and e-business services, which are growing faster and have higher profit margins. (WorldCom derives 65 percent of its revenue from voice, somewhat less than the industry average.) The new restructuring plan prepares the way for a quicker transition.

Clearly, WorldCom will focus on the enterprise segment. Gartner expects that WorldCom will migrate all the voice services that make sense to its data networks. WorldCom maintains that it has no plans to spin off or sell the MCI unit, but Gartner believes that WorldCom's enterprise focus and voice services migration move paves the way for MCI's eventual sale, when market conditions warrant and a buyer can be found.

The deal will make little difference to enterprises in the short term, but it further indicates that the industry structure is changing. WorldCom will essentially become two companies, with different customers and different product and service portfolios. Likewise, the industry will no longer move toward consolidating around a handful of carriers that provide all network services to all types of customers. Instead, carriers will become more focused--e.g., by concentrating on enterprises and exiting the consumer space or by focusing only on Fortune 1000 enterprises. In addition, carriers will offer bundles of services--with fewer options available for traditional voice-only services.

Gartner's assessment is that enterprises that have not already done so should start planning their move to converged voice and data networks. Enterprises should plan to think harder about their networking needs and how to buy services, because they will face choices between carriers that offer different types of services. For example, AT&T's and WorldCom's plans suggest a strong focus on business-to-business over business-to-consumer e-commerce.

(For related commentary on selecting a long-distance carrier, see TechRepublic.com--free registration required.)

Entire contents, Copyright © 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.