The proposed merger of WorldCom and MCI would create the second-biggest long-distance phone company, after AT&T. But should shareholders and regulators bless the marriage, the new company would become the market leader in data services, and would control an estimated 60 percent of US Internet traffic.
WorldCom's most recent spending spree has netted Brooks Fiber Properties, America Online's ANS, and CompuServe Network Services in just the past 23 days. Last year it bought out MFS Communications with its UUNET subsidiary. The implications for business consumers of bandwidth are potentially huge.
"We're not talking about bringing together a group of second-string players," said Dan Taylor, an analyst at Aberdeen Group. "This is an all-star team of data services, and there's nobody playing on the other side."
The combined entity would offer systems integration capabilities through MCI's Systemhouse, network integration capabilities with CompuServe Network Services, Internet capabilities with UUNET and MCI Internet, and sophisticated broadband data capabilities, including frame relay and ATM.
"There may be some overlap in what the two companies bring to the table, but not much," said David Cooperstein of Forrester Research. "Both were focused on businesses, and there's no lack of need for that in the market."
But will WorldCom/MCI be a good giant, or a bad giant?
"There could be a little more power on the supplier side than there used to be," said Cooperstein. "It needs to be watched very carefully, since there will be fewer choices." He and others expect that the data services side of the proposed merger could attract more scrutiny from anti-trust investigators at the Department of Justice than the long-distance telephony side, where AT&T and Sprint are still strong competitors.
But Geoff Mott, the director of OC&C Lochridge, a Boston consulting firm, said he doesn't think WorldCom/MCI's position in data services would be monopolistic.
"They won't be in a position of holding people to ransom," he said. "The growth in infrastructure is so phenomenal right now - you've got new fiber everywhere, and satellites - that there's not a finite amount of Internet backbone."
"In the short term," Mott said, "there may be some price downside to these guys having such a big market share, but the competitors will respond."
Some say the big competitors in data services - Sprint and AT&T - lack the marketing savvy and momentum that the new company will wield.
"The services [Sprint] has are impressive, but they just don't want to tell anybody about it," said Aberdeen's Taylor. "And AT&T can't get out of its own way. They've been losing staff and losing leverage."
WorldCom, by comparison, has rocketed from total unknown to talk-of-the-town status in the past few months. "They intend to be the mega-carrier of the Internet world," said Forrester's Cooperstein. And said William Tai, a partner at Institutional Venture Partners in Menlo Park, California, momentum builds on momentum. "The dominant provider will capture most of the value of the market," he said. "The bigger you get, the exponentially richer the returns are."
Another source of rich returns - albeit one that's still over the horizon - is the emergence of Internet telephony as a business communication tool.
Some, like Tai, predict that Internet telephony will save companies huge sums on phone bills. "WorldCom's investing in owning the infrastructure that may be the next infrastructure for voice," he said. "When voice becomes a data type on that network, WorldCom will own it." Mott at OC&C Lochridge agrees, noting, "Internet telephony isn't an `'f', it's a 'when', and WorldCom doesn't have the baggage that others like AT&T have about getting into that market."
But will Internet telephony live up to the hype, enabling WorldCom to corner the market? Gartner Group analyst Eric Paulak doesn't think so. "It won't have an impact," he said. He also contradicts Mott's assertion about WorldCom lacking "baggage." "WorldCom makes 70 percent of its revenue from voice communications, and they have a vested interest in that," Paulak said.
The biggest challenge facing WorldCom, Paulak said, isn't making Internet telephony a reality, but rather figuring out how to successfully weave together its recent acquisitions.
"It's going to be in absolute nightmare," he predicted. "We're talking about integrating WorldCom with ANS with UUNET with MCI with CompuServe. And WorldCom doesn't have a good track record with integration in the past." He said that typically, WorldCom will eliminate the support organizations of the companies it acquires, stretching its own support staffers past the breaking point. "That ticks off customers," he said.
While there are still questions about whether the WorldCom/MCI deal will win approval - and whether MCI intends to stand up its previous suitor, British Telecom - observers are clear on two things: First, the merger is a reasonably good fit, since both companies are primarily business-focused and their services don't overlap much. Second, the resulting company will be a powerhouse when it comes to data services.
"WorldCom's focus over time has shifted from growing the voice business to completely dominating the backbone of the Internet," said venture capitalist Tai. "They're positioning themselves for the future."
