MCI WorldCom's not-so-subtle wireless strategy

With a hugely successful series of acquisitions behind him, Ebbers now is looking for a way to get into the wireless business. In light of media reports that MCI WorldCom is talking to long distance competitor and wireless player Sprint about a possible merger, Ebbers seems to have decided on a plan that could seriously shake up the telecommunications map.

MCI WorldCom desperately needs a wireless business. Over the last year, AT&T and Sprint have been making huge strides in the mobile market, and are now able to offer corporate customers service packages--long distance, Net access, and wireless--that MCI can't match. In another significant move, Bell Atlantic and Vodafone AirTouch agreed earlier this week to merge their mobile operations, creating the biggest wireless company in the United States.

Ebbers has said his company currently doesn't need a wireless business, but analysts say time is running out for MCI WorldCom to get into the wireless game.

"It is absolutely essential that MCI have a wireless play," said Andrew Cole, director of Renaissance Worldwide's wireless consulting division. "Their core services are becoming a commodity. And even other products, like calling cards, are losing revenue quickly."

Several of MCI WorldCom's biggest clients have been pushing the company to add a wireless division, unhappy that they can't get service through their main communications provider, Cole added.

The grandest gesture or the cheapest?
A Sprint acquisition would be akin to throwing a stick of dynamite into the telecommunications market, forcing the biggest players to shift strategies and alliances--not unlike what happened when WorldCom bought MCI two years ago.

But although some industry insiders characterize MCI WorldCom's talks with Sprint as "advanced," MCI WorldCom does have other, cheaper options.

The company has had a long on-again, off-again history of merger negotiations with Nextel, the only remaining independent national wireless company. The firms' last round of negotiations broke off in May, after the two companies could not come to an agreement on price.

Since then, Nextel's shares have more than doubled. But some analysts say buying Nextel still would be cheaper for MCI WorldCom than acquiring Sprint's wireless business.

Sprint as a whole is valued at close to $47 billion. But the tracking stock for Sprint's wireless business gives that division a $35-billion valuation--far above Nextel's market capitalization of $20 billion.

"I still think that Nextel is the best of the wireless options," said F. Drake Johnstone, a Davenport financial analyst. Nextel also has a focus on business customers, while Sprint's PCS division has proved popular with consumers, Johnstone noted.

Some analysts also have pointed to another option: Buy a series of smaller players that use a different technology than Sprint or Nextel, and combine them to create a national network. This strategy would include companies like VoiceStream Wireless--which recently purchased Omnipoint and Aerial Communications--and Powertel, all of which use the GSM standard for their mobile phones. GSM is a wireless system widely used in Europe to allow cell phones to communicate to each other.

But that strategy lacks the flash and headline draw of a multibillion-dollar acquisition, analysts say.

"Ebbers has thrived on sexy acquisitions, and these wouldn't be sexy," said Iain Gillot, a wireless analyst with the International Data Corporation. "But what [MCI needs] is a cheap existing network with financial problems, and that's exactly what the GSM guys bring."

Other analysts say that these small players are overvalued in the market, however, and would not bring MCI WorldCom as sophisticated a network as Sprint or Nextel.

Federal hurdles
Federal regulators also are likely to be highly skeptical of an MCI WorldCom-Sprint merger, and may put the brakes on any such deal.

"Until you get the [big local phone companies] in the long distance market, I would think they'd have a tough time from a regulatory perspective," Johnstone said.

Bell Atlantic is expected to win regulatory approval to enter the long distance market in New York in the first half of 2000, but it will much longer before the other local companies win approval in all 50 states.

Consumer groups also said they would set themselves against such a merger, arguing that it would slow competition.

"If MCI and Sprint attempt to merge, the Consumer Project on Technology will ask the Department of Justice to stop the merger on the grounds that it will reduce competition in the long distance telephony market and harm consumers," said Ralph Nader, a leading consumer advocate, in a prepared statement.

"MCI has already used its merger with WorldCom to delay the benefits of competition, and this merger would harm consumers even more."

MCI WorldCom could agree to sell off Sprint's long distance, local phone, and Internet businesses, however--a move that would essentially dismantle Sprint from the ground up. Similarly, WorldCom was forced to sell MCI's Internet business as a condition of the acquisition.

Sprint's wireless business has about 4 million subscribers, and is operating deeply in debt as it continues to build its nationwide network. By comparison, AT&T has about 11.5 million subscribers, and Vodafone AirTouch has about 9 million.

Sprint and MCI WorldCom declined to comment on the news of their talks, which were first reported by the Wall Street Journal.