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C&W struggles to establish U.S. presence

Details of a lawsuit explain the British telecom firm's flat performance in the United States, despite earlier plans for a strong push following the purchase of MCI's Net assets.

Cable & Wireless's $1.75 billion purchase of MCI WorldCom's Internet business has turned into an albatross weighing down the company's planned U.S. expansion, according to details of a lawsuit filed last week.

The British company has been planning a marketing blitz aimed at cementing its brand as one of the top Internet and long distance players in the United States. But seven months after agreeing to purchase the Net unit, the company has barely made a mark in the highly competitive market.

The purchase of MCI Worldcom's Internet backbone and business last year was supposed to be the jewel in the crown of its Net efforts. But just last week, Cable & Wireless filed a federal lawsuit charging that MCI WorldCom has reneged on many of the provisions of that sale.

Details of the suit paint a picture of a company that planned to build quickly off the base of a thriving Net business, but has instead been forced to spend time and millions of dollars shoring up a crumbling foundation.

Both companies refused to discuss the specifics of the suit, filed in U. S. District Court in the District of Delaware.

Cable & Wireless has been in the U.S. market since 1975, primarily providing long distance services for small and medium-sized businesses. It has never made a push to reach the level of infrastructure or brand recognition of bigger U.S. players like Sprint or the former MCI.

But when MCI was ordered to shed its Net assets as a condition of its merger with WorldCom last year, the British firm recognized its chance. It made its bid, on the condition that the entire Internet business--network, customers, and employees--would be a part of the deal.

Shortly after the purchase went through, the company began moving toward a bundling strategy currently embraced by AT&T and MCI WorldCom for businesses and high-end consumers, using the Internet as its centerpiece.

Subscribers to the company's $14.95 per month ISP service could also get long distance rates of just 7 cents per minute in the initial offer. That marked a considerable savings over both Net and telephone fees of competitors like AT&T.

But aside from a few tentative announcements, the company hasn't aggressively pushed new products, nor provided much marketing support for its existing offerings. Meanwhile, a steady flow of high-level executives out of the company has raised warning signs of a business in turmoil.

Buyer's remorse?
According to Cable & Wireless' lawsuit, MCI WorldCom provided barely a skeleton staff to run the Net unit, resulting in sharply degraded customer service, sales and marketing, and engineering functions.

The original purchase agreement says that the Internet business was to be provided with all the "necessary" staff needed to run the operation. That definition will likely be litigated in court, or be a key part of any settlement agreement.

But Cable & Wireless notes that MCI WorldCom provided just 41 employees out of a sales staff of 324, one worker out of 49 needed to fulfill billing department functions, and little or no staff from the operation's network architecture, Internet security, capacity planning, or other engineering departments.

MCI WorldCom also failed to provide a full list of customers for the business, the British company said. This has resulted in customers complaining about billing problems before Cable & Wireless was even aware of the customer's existence, the company added.

MCI's Internet business was growing at a rate of between 50 percent and 100 percent a year before the sale. Under Cable & Wireless, the business has actually lost customers, the suit notes.

This has resulted in direct revenue losses of tens of millions of dollars, along with unexpected recruitment costs totaling at least $12 million, the company says. Cable & Wireless expected to have $400 million in annual business from the Net operation by the end of 2000, but is now unlikely to reach that mark, a spokeswoman said.

But the effort has also sharply delayed Cable & Wireless' overall expansion, the company added.

"[We] have been unable to market new services to existing customers, or even to take new orders from existing customers in a timely manner," the lawsuit says. "[We] have been unable to pursue new commercial customers, to develop and announce new products, or even to advertise for new dial-up customers."

Cable & Wireless already has a reputation for "chaotic" business plans, analysts said. But the allegations in the suit would go a long way toward explaining their relative silence in the U.S. market, and how the difficult Internet transition has undermined the rest of the company's offerings.

"Bundling [products] is now the Holy Grail of these services," said David Eiswert, a telecommunications analyst with the Strategis Group. "It hurts both products for them to wind up with an Internet product that isn't up to snuff."

While both companies are remaining quiet on the lawsuit, Cable & Wireless does say it is willing to seek a settlement outside of court.

"We are willing to continue to meet with them in order to come to some negotiated settlement," said Kelly Gannon, a Cable & Wireless spokeswoman.

No dollar figure has been placed on the lawsuit, but some reported estimates have ranged as high as $100 million in damages.