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Commentary: On with the shakeout

Many are panicking about WorldCom, fearing that services might stop immediately. Meta believes the company's network will keep operating, even if there's a bankruptcy filing.

Many user organizations are panicking about WorldCom's situation, fearing that services might stop immediately. We believe the WorldCom network will keep operating, even if there is a near-term bankruptcy filing.

However, service quality will decrease further, and users should act now to minimize their dependence on WorldCom services. They should also have contingency plans in place for the possibility that WorldCom will eventually go out of business.

See news story:
WorldCom finds itself in a world of hurt

Even before this week's announcement of massive financial improprieties, WorldCom was saddled with a huge debt load, irrationally low pricing, a disjointed network, poor operational quality, account management problems and investigations into fiscal irregularities. All of these problems stemmed from WorldCom's "growth at all costs," acquisition-happy strategy, which seemed so successful during the late-1990s boom.

WorldCom's new strategic plan, emphasizing growth areas like virtual private networks (VPNs) and voice-over-IP services, which had been expected this week, will need to be delayed, if not entirely scrapped, because of the current financial scandal, which together with the company's debt crisis poses an imminent threat to WorldCom's solvency.

Meta Group now expects that much of WorldCom will be sold off in pieces, with UUNet, comprising a large portion of the Internet backbone in North America, the only likely surviving entity. Although we do not expect any immediate cessation of WorldCom services, its financial straits along with the pending layoff of 28 percent of its work force will result in diminished service levels. User organizations stuck with WorldCom agreements will struggle through the sell-off and dissolution period, experiencing problems including move, add, change and circuit installation delays, as well as unresolved trouble tickets.

Given WorldCom's previously disclosed problems, Meta Group has not recommended this carrier to its clients for months. User organizations that are unfortunately now migrating to WorldCom as a new carrier will likely encounter significant delays as local exchange carriers delay circuit installs, fearful of WorldCom defaulting or delaying its repayments. Users that have been evaluating WorldCom for new deals should instead turn to other carriers.

The likely U.S. beneficiaries of the WorldCom debacle are AT&T and, to a lesser extent, Sprint. AT&T, still viewed as the quality long-distance provider even though its service levels have been declining in the current commodity pricing environment, will no longer need to reduce prices to slow the loss of business customers to WorldCom discounting offers. We recommend that organizations avoid Qwest Communications International's out-of-region services because of the company's financial condition.

Surviving former regional Bell companies like Verizon Communications and SBC Communications are already moving into long-distance services and the corporate market, and are potential buyers of WorldCom assets. Verizon in particular is positioned to emerge as a nationwide long-distance provider in 12 to 18 months and to become a viable national data service provider within 24 months.

WorldCom international services are at especially high risk. WorldCom had already announced a country-by-country review of its international services, indicating that it would likely sell off some of these assets. Users should consider migration of these services to AT&T, Infonet or Equant. They should also consider financially viable local and regional carriers for selected services (such as European carriers Cable & Wireless for IP, BT Ignite for IP or frame relay, and COLT for private-line services). In Asia, NTT and Singapore Telecommunications are feasible alternatives.

A silver lining, for some
The redeeming feature of WorldCom's meltdown is that it probably marks the low point of the financial troubles of telecom carriers in the United States. Surviving carriers will be able to raise prices to achieve profitability. However, we expect European carriers to continue to struggle, with more companies entering bankruptcy during the next several months.

With reduced competition, we expect pricing for international managed services to increase 10 percent to 15 percent during the next year. However, we recommend that user organizations focus not on the cost of telecommunications services, but instead on ensuring the stability of their networks. The cost to the business of a network outage is frequently higher than potential savings offered by discount carriers. Customers should seek services from financially viable service providers on a local and regional basis.

As the worldwide telecommunications market implosion comes to its natural conclusion, we believe pricing will broadly increase within 12 to 18 months. However, in the near term, as the implosion continues, prices will continue to drop, with stronger competitors driving weaker carriers from the market, starving them of cash by keeping prices low.

User organizations with WorldCom agreements in force should exercise any exit clauses in those contracts before Chapter 11 is declared, to avoid the increased difficulties in vacating agreements that a bankruptcy filing could cause. WorldCom users that cannot exploit exit clauses should examine their contracts to determine in what circumstances they can switch to or add other carriers. Business-critical traffic should be migrated as soon as possible to other carriers to avoid the risk of service failures and to ensure network stability.

As the worldwide telecommunications shakeout continues, all user organizations should review the viability of their carriers on a quarterly basis for the next two years. And as a contingency, wide-area network infrastructure should be re-architected for "switchability" (that is, the ability to quickly move data services to alternative carriers). If possible, telecommunications services should be dual-sourced, which will increase cost but diminish risk, providing a clear migration path should one telecom provider falter.

Meta Group analysts David Willis, Donald Carros, Jean-Luc Previdi, Peter Firstbrook, Dale Kutnick, Val Sribar, David Cearley and Jack Gold contributed to this article.

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