Right out of the gate, an MCI price hike

Washington, D.C. - Cost savings from the MCI Communications Corp./WorldCom, Inc. merger may be a long time coming.

MCI is raising private-line prices across the board by about 4% on Dec. 1, according to documents filed at the Federal Communications Commission. Analysts said the move reflects the ongoing shortage of broadband capacity in the U.S. and indicates that user cost savings from the merger may be far off in the future.

The MCI price hike will follow hard on the heels of a 5% to 10% increase in AT&T private-line prices earlier this month (NW, Nov. 10, page 14). Like AT&T, MCI also is raising the price of key voice services, particularly its Vnet virtual private network service for large users and its Vision bundle of outbound and inbound toll plans for midsize businesses.

"Demand for bandwidth far exceeds supply right now," said Rick Malone, president of Vertical Systems Group, a Dedham, Mass., market research and consulting firm. Existing and new carriers are building new high-capacity circuits, he said, but "supply won't approach demand until well into 1998 and maybe the end of 1998."

Unlike AT&T, MCI is not changing its frame relay prices. But it is increasing prices for its Switched Digital Service, with rates rising for dial-up 64K bit/sec to 1.536M bit/sec circuits.

The competition for dial-up and dedicated WAN bandwidth is even feeding on itself, Malone said. Because of tight supply, "a lot of enterprises and (Internet service providers) are ordering from multiple sources," he said. The carriers may feel pressure to raise rates "to ferret out the hard orders from the soft orders."

The merger plans of MCI and WorldCom may not immediately provide new capacity but could shift the construction plans of the two companies.

The aggregate bandwidth of new circuits between certain large cities could actually fall if MCI and WorldCom discover they are both building Synchronous Optical Network (SONET) lines or rings between the same pair of cities and decide to avoid duplication, Malone said. On the other hand, that may free up capital for new construction between small and midsize cities, he added.