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MCI backbone draws buyers

Why is MCI caught in a billion-dollar bidding war between WorldCom and British Telecom? It's the Internet, stupid.

Why is MCI Communications (MCIC) suddenly caught in a $30 billion bidding war between WorldCom (WCOM) and British Telecom (BTY)? It's the Internet, stupid.

Sure, being the nation's No. 2 long distance company is important, but MCI's massive Net backbone is at least as big a lure to both bidders, many analysts say.

The rapid growth of the Internet is prompting telecommunications carriers to leap at every opportunity to expand their networks for carrying voice, video, and data. The telephone companies see big moneymaking opportunities connecting businesses to the Net, more profitable perhaps than phone services, where competition is cutthroat and some regulatory hurdles still exist.

"What MCI has in the Internet space is as important as anything else for WorldCom," said Joe Bartlett, an analyst with the Yankee Group in Boston. "British Telecom already was working with MCI in providing Internet services" before bidding for the company outright, he added. That deal, called Concert, involved the two companies' effort to build the world's largest private backbone.

As in the phone business, economies of scale are the guiding principle when building a communications backbone. Consolidation among Internet service providers is expected to accelerate. A recent study by the Gartner Group predicted that a large majority of the nation's 4,500 ISPs will be forced out of business by the year 2000, brought on by competition and the capital constraints required to build faster, more efficient networks.

Nobody seems to know that better than WorldCom, which has been on a buyout binge to build its network. (See related story) Last year, WorldCom bought UUNet, the world's largest ISP, through its acquisition of MFS Communications.

Then in September, WorldCom bought CompuServe and America Online's network services company in a $1.2 billion Internet transaction. It plans to sell CompuServe's consumer business to AOL but keep the business network. (See related story)

MCI's Net business would be another conquest for WorldCom. MCI has a $100 million Internet business today that it expects to grow to $2 billion by the year 2000. The company provides direct Net access from the United States to 70 countries. Its backbone, one of the world's fastest and largest, carries an average of 110 terabytes of information per week at speeds of 622 mbps. Traffic is growing at 15 percent every month, according to the company.

But British Telecom won't let the Net business go to WorldCom without a fight. In February, the heads of MCI and BT trumpeted that their planned merger would make them the world's largest Internet provider, carrying an estimated 50 percent of the global traffic.

Some analysts speculate that WorldCom's hostile bid for MCI could result in a three-way deal also including British Telecom. BT, for example, also covets MCI's long distance business. But who winds up with the Internet spoils remained an open question.