Telecom merger pits WorldCom against AT&T

With the company's merger with Sprint, the stage is set for a titanic struggle for consumer and business communications customers--with Ebbers in one corner and AT&T's C. Michael Armstrong in the other.

Ma Bell, the nation's largest long distance company, has made its money in the consumer market. Recent multibillion-dollar cable deals have given it the networks needed to offer local phone service as well as cable TV. It also offers dial-up Internet access and wireless phone service. In contrast, MCI WorldCom and Sprint have a solid foothold in the business market for long distance and data.

The Sprint acquisition will pit the new WorldCom squarely against AT&T in the wireless market. The combined firm's long distance power could also make it a formidable challenger to AT&T's market dominance. WorldCom also plans to play a serious role in the local phone market.

Both companies aim to offer customers and businesses alike combined packages of long distance, wireless, and high-speed "last mile" Internet access technology, in addition to international telecommunications services. It will be here that the firms truly duke it out for the No. 1 spot in the industry, analysts said.

"There's three massive battlefronts if you look to the future: the 'last mile,' wireless, and the overall business market," said Andy Belt, executive vice president with industry consultants Renaissance Worldwide. "None of the key battlegrounds will be long distance."

Ebbers, Armstrong, and the Bells
The merger places MCI WorldCom's Ebbers at top of the telecommunications world, standing in the wake of some 76 acquisitions over the last four years. He now is on par with AT&T's Armstrong, who has committed more than $110 billion to position his company in the high-speed phone and data market.

Although the executives' need to buy was spurred by competition, their methods and motivations were different.

"Armstrong came in trying to move a behemoth from a fairly staid part of the industry and compete that way," said Boyd Peterson, a telecommunications analyst with the Yankee Group. "Ebbers really built [the company] through acquisitions."

But both companies are racing to stay ahead of the pack of emerging long distance carriers and high-speed Net access providers that are slowly edging into their established markets.

Upstarts like Qwest Communications International and Level 3 Communications have eaten into the larger long distance players' market share in recent years. The companies have also helped drive a price war that has brought long distance prices as low as 5 cents per minute.

Local phone companies like Bell Atlantic and SBC Communications are also gearing up to enter the long distance market, pending federal approval. The Yankee Group has estimated that these companies will capture about 20 percent of long distance customers just a few years after they enter the market.

This has prompted Ebbers and Armstrong to pursue size as both a defensive and offensive move--a strategy now capped by today's merger.

Size and breadth
Analysts say gaining size becomes a matter of survival as larger companies can offer lower rates.

"In the telecom arena, you can't be big enough," said Elliott Hamilton, an analyst at Strategis Group, a telecommunications market research firm. "As long as Wall Street views bigger as better, you'll continue to see these deals."

The merger helps MCI WorldCom bulk its ranks, but it also fills a significant hole in its wireless strategy.

The addition of Sprint's PCS cellular phone business will be an integral part of WorldCom's bundle of voice and data services, according to executives. "If you miss just one piece of that, that might knock you out of the market with some customers," Hamilton said.

The combined WorldCom will have 4 million cellular phone customers and 1.7 million paging customers. By comparison, AT&T Wireless Services is the nation's largest wireless carrier, with 11.4 million of the nation's roughly 75 million cellular phone customers.

Different battlegrounds?
Some analysts suggest WorldCom may not compete directly with AT&T in many markets.

"It seems to me that [AT&T CEO] Armstrong wants to play on the consumer side, and it seems to me that Ebbers wants to play on the business side," said Lisa Pierce, a telecommunications analyst at GIGA Information Group.

Some analysts believe Sprint-MCI, which each separately have strong footholds in the business long distance market already, will compete with AT&T in niche markets.

"I don't know if AT&T is ever going to lose it's position as the No. 1 consumer long distance brand, and I don't know if they want to try to unseat AT&T," said Melanie Posey, a telecommunications analyst at International Data Corporation. "So then the game becomes, 'Where can we compete with AT&T more evenly? In Internet, data, and wireless.'"

The business telephone market may also be another area in which the new WorldCom can give AT&T a run for its money. "AT&T, on the business side, doesn't have a clear strategy," Pierce said. "So my concern is that AT&T will miss the boat with business customers."

Name games
Despite the similar services and technology used by AT&T and Sprint-MCI, questions remain about marketing and management. Some wonder whether a combined Sprint-MCI WorldCom will have the same organizational focus and brand name recognition that AT&T enjoys.

"AT&T still has the preeminent brand, particularly in the long distance space," said Carl Garland, an analyst with market watcher Current Analysis, in prepared remarks. "AT&T vs. WorldCom is simply no contest from a branding perspective."

After all, MCI WorldCom already is an amalgam of acquisitions, and adding Sprint might only make the integration process more complicated.

Executives quickly moved to diffuse the criticism. "Our culture has been to take people from different companies and fit them together to make the most effective management team," Ebbers said.

But executives also said they expect to continue marketing services under the companies' various brand names, including Sprint, MCI, SkyTel, and UUNet--a decision that some analysts questioned.

"That will confuse consumers," Giga's Pierce said.