WorldCom has competitors on the run
Although WorldCom's acquisition of CompuServe closed over the weekend, competitors started to bolster their defense shortly after the deal was announced last September.
ICG Communications (IGCX), for example, announced its acquisition of Netcom (NETC) a month after WorldCom publicized its plans to acquire CompuServe. The IGC deal closed last month.
Abhishek Gami, vice president at Nesbitt Burns Securities, said that, in light of WorldCom's acquisition of CompuServe's network services divisions, Sprint and PSINet have joined the growing roster of WorldCom competitors. He said those companies will need to spend a lot of money on building out their backbones in order to remain players in the increasingly competitive environment WorldCom's merger has created.
"WorldCom will have the ability to upgrade to higher-speed bandwidth, and the others will have to build up the modem side by adding more modems and pops, through direct build-up and acquisition," Gami said.
Sprint and PSINet already have nationwide networks, Gami added, but smaller competitors like EarthLink or Mindspring will have to step up expansion through acquisition.
Following in ICG's footsteps, some telephone companies--especially smaller, more nimble ones--appear to be gobbling up ISPs in order to have a strong Internet presence without having to start from scratch.
As part of a three-way $1.2 billion stock deal, WorldCom acquired CompuServe's network services division, one of the largest data communications networks. It includes about 100,000 dial-up ports in 105 countries worldwide, and provides networking services to some 1,200 corporate customers.
WorldCom also is paying America Online (AOL) $175 million for its ANS Communications division. Under a five-year contract, WorldCom will become AOL's largest network service provider.
AOL, meanwhile, will take over CompuServe's interactive services division to bolster its operations.
The merger has helped WorldCom evolve into an international communications company that offers local, long-distance, international, data, and Internet access. That move puts the pressure on the competition to beef up their backbones any way they can, analysts said.
Linda Meltzer, an analyst with UBS Securities, said in a recent research report that WorldCom now is poised for "significant synergies through 2002," considering its pending acquisitions of Brooks Fiber and MCI.
"These transactions will likely bolster WorldCom's local presence in key second-tier cities and greatly enhance its already strong Internet/data positioning," she said.
Meltzer also pointed to the expansion potential for WorldCom that will result from the deregulation of European markets, given the company's strong local presence with established networks.
"WorldCom has the only Pan-European network connecting its local networks, which will greatly enhance its ability to compete with incumbent local providers as markets open to competition beginning January 1, 1998," she said.
John Sidgmore, WorldCom's chief operating officer, said at an analyst conference last week that his company's backbone capacity has grown by two times every three months, bringing growth to 1,000 percent per year. He predicted that, by the year 2000, 50 percent of all bandwidth will be dedicated to the Internet.
Sidgmore said also that, in ten years, he expects 99 percent of telecommunications networks to be dedicated to Internet access, with the remaining 1 percent dedicated to voice transmissions. He noted that, with the multitude of new multimedia applications being introduced in the marketplace, more bandwidth will be needed to support voice and video online in the future.
WorldCom also bought backbone provider UUNet (UUNT) last year.