Is MCI's divestiture enough?

Today's announcement that Cable & Wireless will purchase MCI Communications' Internet backbone service appears to be doing little to placate the raft of competitors and consumers groups who have voiced concern over MCI's proposed megamerger with WorldCom.

C&W's purchase includes all of the equipment associated with MCI's wholesale Internet business, which sells services to Internet service providers and other resellers of Net access. According to company representatives, the divestiture is the last big step in gaining approval from the U.S. Justice Department and the European Commission, which have been scrutinizing the proposed $37 billion merger for potentially anticompetitive effects.

"We feel very confident that this is going to meet all of the regulatory concerns and that it will absolutely be the last hurdle to get to the MCI/WorldCom merger," said John Scarborough, director of MCI's Internet product marketing. Stephen Von Rump, MCI's vice president of enterprise services, said the sale represented well over 70 percent of the company's Internet business. "We have high confidence this will meet [regulators'] requirements for approval," he said.

"The jury still will be out over whether this will be enough or if it's the first bargaining chip to placate" those opposed to the deal, said Craig Johnson, principal of the PITA Group in Portland, Oregon. He noted that the $625 million price tag for MCI's backbone business represents only a fraction of MCI's total Internet business.

"This divestiture probably was the easiest piece for them to carve out, and probably was something they were going to have to do anyway," Johnson added, explaining that, in order for the companies to merge successfully, they would have to integrate a number of networks that employ different technical protocols. Under those circumstances, it would not be surprising for MCI to jettison certain incompatible or unprofitable parts of its infrastructure, he said.

Representatives from MCI were not immediately available for comment.

Other players in the Internet industry also were wary of the deal.

"As a practical matter, Cable & Wireless looks like it will be a wholesaler of backbone services to MCI," said Mark Schechter, an attorney representing GTE in its lawsuit aimed at blocking the WorldCom/MCI merger. "It's a partial divestiture that creates the appearance of creating new competition, but it really doesn't create a viable, stand-alone business that's capable of competing effectively with MCI."

Sprint, another Internet backbone provider that has voiced concerns over the proposed MCI-WorldCom merger, also has said that the sale to C&W does not appear to go far enough. "While the sale of MCI's ISP segment might reduce MCI/WorldCom's Internet infrastructure, it would do little to alter the anticompetitive Internet landscape that would result from the combination," Sprint said in a statement. "That can only be addressed by a complete divestiture of WorldCom's or MCI's Internet operations."

Sprint is not the only group calling for a complete divestiture. James Love, director of the Consumer Project on Technology, which is affiliated with consumer advocate Ralph Nader, said: "If [MCI is] going to divest of their Internet facilities, it would be best if they sold all their Internet operations."

Love and others said it would be difficult for MCI to completely divest itself of its Internet network, because the company has facilities that serve both its voice and Internet divisions.

As previously reported, the Justice Department, the European Commission, and 15 state attorneys general are investigating the proposed merger. In addition to concerns that the merger might have an anticompetitive effect on the market for long distance phone services, the agencies' investigations also are scrutinizing the potential for the resulting combination to control too high a concentration of the Internet traffic flowing over the high-capacity lines that form the Internet's backbone.

Under current conditions, backbone providers are forced to cooperate with their competitors by interlinking their networks. Opponents of the merger say an MCI-WorldCom combination will control so much of Internet traffic--between 45 percent and 70 percent by some estimates--that it no longer will have an incentive to enter into such "peering agreements."

But not everyone believes MCI's sale will fail to satisfy government overseers' concerns.

"I think this sale will satisfy the overlap regulators were concerned about," said Abhi Chaki, an analyst with Jupiter Communications. "With this thing divested, I think the coast is clear for the two companies to merge."