Cable & Wireless nabs MCI's 'Net backbone for $625 million

By Denise Pappalardo and David Rohde
Network World Fusion, 6/1/98

Bowing to regulatory pressure, MCI Communications Corp. announced late last week it is selling part of its Internet business to Cable & Wireless plc. for $625 million in cash.

With the hope of appeasing the powers that be, primarily the European Commission (EC), the Department of Justice and the Federal Communications Commission, MCI is sacrificing its Internet backbone and wholesale Internet services business to the London-based Cable & Wireless. The company hopes the move will smooth its pending $37 billion merger with WorldCom, Inc.

Giving in

The question is: Is the sale enough?

"The only reason this was done was to address regulatory concerns," said Fred Briggs, chief engineering officer at MCI. "We believe we have addressed all of the concerns of both the [EC] and DOJ," he added.

While MCI maintains that it's selling 100% of its backbone network, the deal does not include its fiber assets. MCI is selling its infrastructure, which includes connectivity equipment such as routers and switches that make up Layer 2 and Layer 3 of MCI's Internet backbone. But the transport lines, at Layer 1, which connect these routers and switches, will still be owned by MCI.

It's hard to tell if this will cause a problem with regulators because the issue comes down to how you define an Internet backbone, said Johna Till Johnson, program director at the Meta Group, Inc., a Stamford, Conn.-based consulting firm. Non-telco ISPs, such as the original BBN Planet and UUNET Technologies, Inc., did not own their own facilities. It doesn't make sense that because MCI is a facilities-based company, it would give up Layer 1 network assets, she said.

Internet access users aren't too concerned with which company will own the network but are more concerned about quality. "As long as there is a good service and sufficient bandwidth to do what I want to do, I don't care who owns the network, unless the management of the company is really screwed up," said Stan Kluz, manager of network services at Lawrence Berkeley National Laboratories in Berkeley, Calif., and former president of the California ISDN Users Group.

While Cable & Wireless will get all of MCI's ISP wholesale customer business, the company will not get MCI's business or residential customers.

GTE Corp., one of the biggest opponents of the MCI/WorldCom merger, says this sale is not satisfactory.

"A partial sale of Internet assets will not be enough to address our concerns and it will not solve the problem of Internet dominance," said Peter Thonis, vice president of external communications at GTE Corp.

MCI is holding on to part of its customer base, which is not a total divestiture, he said. When BBN and UUNET Technologies were sold, all of their customers and employees were part of the deal. That is not the case with MCI's deal with Cable & Wireless, he said.

But analysts do not agree with this line of thinking. The EC has publicly revealed that its bone of contention with the proposed MCI/WorldCom merger is the potential for MCI/WorldCom to have dominate control over Internet backbone traffic merger approved, said David Goodtree, a director at Forrester Research, a Cambridge, Mass.-based consulting firm. Then selling off MCI's Internet backbone should do the trick, he said.

But if there are other issues that have not been publicly addressed, then MCI has called the regulators' bluff, according to one analyst who wished to remain anonymous. And MCI has protected itself. The proposed deal with Cable & Wireless only goes through if the MCI/WorldCom merger is approved according the MCI and Cable & Wireless' agreement, MCI's Briggs said.

Most of the direct pressure for the MCI divestiture really came from the EC, not the FCC, said Len Elfenbein, president of Lynx Technologies, Inc., an international consulting and network integration firm based in Fairfield, N.J.

"At the present time, American companies dominate the Internet in Europe," Elfenbein said. "The Europeans are concerned about the overall threat of American dominance, not any one player." MCI and WorldCom had little choice to act the way they did, he said, even though most of the legal pressure was coming from abroad. The reason: The FCC and the EC always coordinate and largely defer to each other's wishes on major regulatory approvals.

"The FCC and the Europeans play out their agendas over each deal," Elfenbein said. "It's like a high-stakes poker game, and each player gets to play the card they want." He added, "This is something MCI and WorldCom would have preferred not to do, but it's a minor thing in the scheme of the entire deal."

Because MCI and WorldCom have been forced to ante up part of Cable & Wireless' Internet business, Cable & Wireless may come out as one of the jackpot winners. Here is a company that has no substantial Internet assets to speak of, but will hold a leading position in the worldwide Internet market once this deal is final. Cable & Wireless will be second only to WorldCom in the amount of Internet traffic it supports, experts agree.

While Cable & Wireless offers some Internet services, they are not considered a top-tier player. The companies have a two-year non-compete clause, which means Cable & Wireless can take its existing, so far low-key, Internet operations and get them into shape before MCI starts competing directly with Cable & Wireless. After two years, it'll be sink or swim for Cable & Wireless' Internet business.

Some existing MCI Internet access customers are not jarred by the fact that Cable & Wireless will be taking over their service.

"We really don't have any concerns about the change of ownership," said Mark Sanders, director of MIS at MetaCreations Corp., a Carpinteria, Calif.-based graphic software company. The service has been working well but the performance or reliability suffers, we then will consider changing services providers, he said.

Due to the constant changes going on in the technology arena, Sanders said he's not surprised that MCI sold part of its business. "We've come to expect change, in fact if our vendors are not going through changes for some time, we tend to thing something's wrong," Sanders said.

The change in owernship may actually improve service, said Peter Hundt, information systems manager at Klukawan, Inc., a Native American owned construction and tourism company in Juno, Alaska. Kluckawan has been happy with MCI's Internet access services, but Cable & Wireless may be more focused on new services and management, he said.