MCI to fund local phone, tech start-ups

The nation's second-largest long distance carrier recently has spent considerable resources improving its cutting-edge Internet technologies. But the new investments also could help it fund an end run around the baby Bells' local phone networks--much as AT&T is attempting to do with its move into cable telephony by merging with Tele-Communications Incorporated.

According to company executives, the fund will invest in companies that can increase the performance of MCI WorldCom's networks and in start-ups that can bring new technology to the company's suite of services.

The company will fold about $350 million in existing investments into the fund, selling off, merging, or adding to some of the properties, according to a Financial Times interview with company chairman Bert Roberts, who will chair the fund. The company will likely add about $150 million in new capital to the fund, Roberts also reportedly said.

Analysts said that some of the fund's resources would likely be used for new investments--or outright purchases--of start-ups that are building local telephone networks to compete with the baby Bells.

MCI WorldCom has a driving financial incentive to find its own way to business and consumer phone lines, avoiding the "last mile" networks of the Baby Bells, analysts say. The Bells currently charge long distance companies such as MCI and AT&T access fees of about 4.5 cents per minute. These charges traditionally make up about 45 percent of the cost of a long distance telephone call.

"As long distance competition intensifies, the margins are getting shrunk," said Craig Clausen, senior vice president of the New Paradigm Resources Group, a Chicago-based telecommunications consulting firm. "They need to get a handle on their costs."

WorldCom also needs to cover its bases for the time when the local Bell companies are allowed into the long distance market, becoming more direct competitors. "They recognize that at some time that wall comes tumbling down," Clausen said. "Then they're going to have to get access from their competitors, and that will be much harder."

WorldCom is no newcomer to local markets. In 1996, the company merged with MFS Communications, then one of the largest alternative local access companies. By the time WorldCom joined with MCI earlier this year, that company had already added substantial local capacity in major cities to its own core long distance business. That has given a solid foundation for competing with the Baby Bells in local markets.

But so far, analysts say, that foundation has been concentrated in the major metropolitan and financial centers.

"If they're serious about being an end-to-end company, they've got to get into the second-tier cities," said Hillary Mine, a telecommunications analyst for Probe Research.

Mine said that there is a long list of alternative local phone companies that have been developing a strong regional presence. She cited McCloud, a successful Midwestern company, as a possible target for investment.

"Right now is a time for investing in those kinds of companies," Clausen added. "The financial markets have just dried up for these guys. MCI could be stepping in to fill those shoes."

If MCI's investments did help accelerate competition at the local level, which in turn would likely bring down local telephony prices for business and consumers, regulators would likely to do little in reviewing their actions, Mine added. "I don't think any regulatory body would do anything except jump up and down," Mine said.

Outside the realm of traditional phone service, MCI also has shown it is serious about pushing the envelope for telecommunications technology.

Earlier this week, the company announced plans to roll out high-speed digital subscriber line (DSL) Internet service across the country by the end of the year. The scale of that service, which is expected to serve 600 points of presence by the end of March 1999, is larger than that of any of the previous DSL announcements from the regional Bell companies or competing local providers.

Seed money for start-ups that can add new features to the existing MCI WorldCom services will be critical in helping the company keep its competitive edge as data and other high-tech services come to dominate the telecommunications business, analysts said.

The MCI WorldCom fund will be led by company senior vice president Susan Mayer.