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WorldCom heads for dominance

By gobbling up MCI for $37 billion, WorldCom may have secured its position on consumer groups' antitrust radar screen.

By gobbling up MCI Communications for $37 billion this week, WorldCom managed to beef up its colossal Internet backbone--and, in the process, may also have secured its position on consumer groups' antitrust radar screen.

Through a recent string of buyouts, WorldCom has created one of the largest international networking backbones to support Internet traffic. In September, WorldCom acquired CompuServe and America Online's network services company. In August 1996, the telecommunications swept up global ISP UUNet through its $14.4 billion purchase of MFS Communications.

The Justice Department cleared the way for the complex three-way deal between AOL, CompuServe, and WorldCom. In that case, the spotlight focused on what the acquisition meant for the major online services' customers. Now that the nation's No. 4 telecommunications company has purchased No. 2, at least one consumer group is gathering support to block the merger.

"We're opposed to it on two fronts," Jamie Love, director of the Consumer Project on Technology, said today. "On the regular telephone system front, the country is moving from having the facilities of four long distance carriers to three--and that is bad. The merger also gives too much competition in the Internet backbone business to WorldCom.

"I think the merger should be rejected by the government. We'll be writing a letter to Justice."

In responding this month to the Justice Department's request for more information on the proposed merger, WorldCom assured the government that the deal would increase competition. "A WorldCom-MCI combination will accelerate competition--especially in local markets--by creating a company with the capital, marketing abilities, and state-of-the-art network to compete more effectively against the incumbent network carriers, domestically and abroad," the company said in a statement.

No one at Justice was immediately available for comment today, but the approval of the deal could take months. (See related story)

However, William Kennard, the newly appointed chairman of the Federal Communications Commission, did issue a statement yesterday: "We will carefully review this transaction to ensure that it will benefit American consumers," he said.

Some argue that WorldCom's massive investment in its Internet backbone helps, not hinders, other online services and Net access companies' ability to compete.

"We think it is a great thing," said Kirsten Kappos, vice president of corporate communications for EarthLink Network, which leases backbone access from WorldCom's UUNet. "Every time WorldCom has expanded, the price continues to go down for us. This allows us to expand our services."

Other large ISPs agree that the deal is good for them. PSINet, for example, used to compete with MCI and UUNet for business Net access customers--now it has moved up the competition ladder.

"It is clearly a good thing for PSINet. Our core business is corporate Net access, the [WorldCom-MCI deal] makes us the second-largest player there," said Chuck Davin, PSINet's vice president.

But Davin admits that the buyout won't benefit everyone in the industry, such as small ISPs. WorldCom announced earlier this year that it would only let ISPs that were of comparable size in network capacity hook into its backbone--this left many mom-and-pop providers out of the loop. On the other hand, PSINet said it would peer with the little guys for free.

"More important is what the marketplace thinks of this in competitive terms," he said. "WorldCom charging for peering and its acquisitions are a zero-sum game."

Although the Consumer Project on Technology says WorldCom's buying streak will stifle competition in the backbone market, a Forrester Research analyst says there are too many emerging players for WorldCom to get a stranglehold on the industry.

"It does consolidate the Internet backbone around one powerful player for now. What looks like a strong amount of supply power will look like less over time," said Forrester's David Copperstein, who is preparing a report on bandwidth brokers.

"There is a rising tide of fiber being put in the ground. This is what is going to characterize the market," he said. "For example, Qwest's fiber is brand new and ready to accept new technologies that MCI's old networks can't handle."

Parts of the MCI WorldCom network may be outdated, but the combined backbone will give access to more 2,000 points of presence and shrink the pool of fewer than 50 players that collectively serve as the backbone of the Internet. (See related story)

This alone could bring on the antitrust regulators even if the industry accepts the ISP and backbone consolidation trend.

"We want to see more competition, not less," Love said. "Less competition means poorer services and higher prices."