MCI: The end of a telecom icon

Verizon's $6.7 billion acquisition of MCI closes an era in the telecommunications industry.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
4 min read
Verizon Communications' winning $6.7 billion bid for MCI this week closes the latest and likely final chapter in one of the great rebel stories of American business.

Two decades ago, MCI helped unravel the AT&T monopoly, transforming the telecommunications industry. Now it has been gobbled up by its archrival's offspring just as the competition it unleashed begins to creep into the local phone market.

"It's so ironic that the monopoly-killer is being digested by AT&T's progeny," said Scott Cleland, chairman and CEO of the Precursor Group, an independent research company based in Washington.

From its inception in 1963, Microwave Communications Inc. (MCI) grew to take on the biggest monopoly in U.S. history, helped fuel the long-distance wars of the late 1980s and 1990s and ultimately fetched a sale price of $37 billion. Then came its descent, through acquirer WorldCom, becoming part of one of the biggest business scandals of all time. News of Verizon's buyout offer came as Bernie Ebbers, its former CEO, sits in a federal court in New York City, facing charges of conspiracy and fraud.

MCI isn't the only long-distance company to go the way of the dinosaur. Its once-mighty rival AT&T is also disappearing. In response to a rapidly declining long-distance phone business, the company is being acquired by another Baby Bell, SBC Communications, for $16 billion. The passing of these two industry icons marks a new era in telecommunications as competition arises not just from other phone companies, but also from new technologies such as the Internet, wireless, cable and satellite.

Lessons in history
MCI began its battle into the telecommunications market in 1968, when William G. McGowan organized the MCI Communications Corp. in an effort to take on the monopolistic phone company. For more than a decade, MCI fought AT&T in court until finally, in 1980, it won an antitrust lawsuit that led to the breakup of Ma Bell.

That 1984 divestiture of AT&T created a new competitive landscape in the telephony market. Seven regional Baby Bells were created for local phone service, while AT&T kept its long- distance business, which competed with MCI and Sprint.

MCI grew by leaps and bounds through the late 1980s and early 1990s. By 1990, it had become the nation's second-largest telecommunications company, establishing a fiber-optic network spanning more than 46,000 miles and offering in excess of 50 services--including voice, data and telex transmissions--in over 150 countries.

"It was the proverbial David in the David and Goliath story," Cleland said. "What MCI did in the '80s and '90s was revolutionary. It was a telemarketing machine."

Having shaken up the telecommunications market, however, MCI eventually got swept up in the turmoil it created. The company's expansion made it a buyout candidate in 1996, drawing a $20 billion bid from partner British Telecom. That offer was derailed when U.S. carrier WorldCom stepped in with an offer that MCI's board of directors could not refuse.

Clear on reflection
While the $37 billion price was a coup for investors, the deal in retrospect marked the beginning of the end for the rebel that assaulted AT&T and won.

Like MCI, Worldcom was a telecommunicatons upstart, headed by a brash CEO, that was growing by leaps and bounds. Unlike McGowan, who got his start struggling to dismantle AT&T's entrenched monopoly, WorldCom CEO Ebbers began his rise capitalizing on sweetheart rules meant to foster new competition. The company made a spate of acquisitions in the 1990s, but proved unable to fully digest MCI.

"At the time, the merger between WorldCom and MCI looked like a good idea," said Frank Dzubeck, CEO of Communications Network Architects, a telecommunications consultancy in Washington, D.C. "WorldCom focused on small and medium business, while MCI had a strong presence in the consumer and enterprise markets. But in the end, the network integration was a mess and WorldCom ended up spending way too much to get it to work."

Things reached a climax in 1999, when regulators rebuffed stock-rich WorldCom in a bid to buy MCI competitor Sprint, the third-largest long-distance carrier in the United States.

The death knell

By 2002, as profits and revenues plummeted, accounting irregularities were discovered on WorldCom's books. Amid scandal, Ebbers and several other executives were forced to leave the company. Ebbers is currently on trial in New York City on fraud charges.

In the summer of 2002, WorldCom filed for the largest bankruptcy protection in U.S. history. Admitted accounting misstatements eventually totaled $11 billion.

Last year, under new management, the company emerged from bankruptcy and changed its name back to MCI. Since its emergence, it has had to reconcile its scandalous past with its hopes for the future.

But the long-distance phone market MCI helped create has been like an albatross around the company's neck. Increased competition from new technologies such as cell phones, the emergence of local phone companies on the long-distance scene and a glut of bandwidth capacity on long-haul data networks has driven prices so low that MCI has found it difficult to make a profit.

On Monday, the same day the Verizon acquisition was announced, MCI said revenue for the fourth quarter of 2004 fell to $5 billion, down 10 percent from a year ago and 2 percent from the previous quarter.

"I'm sure what's happening to MCI now makes the old timers' skin crawl," Cleland said. "But MCI was really created in an artificially competitive environment. Things have changed drastically since 1984, and thanks to new technologies, the distinction between local and long distance is no longer relevant."