Ebbers's job has only just begun

The bidding war for MCI Communications Corp. may be over, but WorldCom WorldCom, Inc.'s difficult job of blending its massive network with MCI's has only begun.

pending $37 billion buyout of the No. 2 long-distance company will unite networks comprising 100,000 route fiber miles, a hodgepodge of network equipment and a service portfolio that runs the gamut. WorldCom and MCI executives said the combined company, to be named MCI WorldCom, will foster increased competition in local and long-distance markets and result in lower costs and more services for customers.

These are bold claims, but if any company is up to the task, it may be WorldCom. After all, the company has built itself into a telecom giant over the past decade by snapping up some 50 other carriers and tying all the networks together.

WorldCom knows how to converge networks, but they have not dealt with a company close to the size of MCI, said Traver Kennedy, manager director at Aberdeen Group, Inc., a Boston-based consulting firm. "MCI WorldCom is predicting a lot of cost savings based on economies of scale, but it's yet to be seen if they will be able to pull it off."

Brave new WorldCom

WorldCom has a colorful CEO in Bernie Ebbers, but until recently the company has kept a fairly low profile.

Things started to change last year when WorldCom bought out competitive local exchange carrier MFS Communications Company, Inc. and gobbled up Internet service behemoth UUNET Technologies. WorldCom then kept itself in the spotlight by announcing plans to buy parts of America Online, Inc. and CompuServe, Inc. earlier this fall. By the time the MCI bid was launched, WorldCom and its broad portfolio of local exchange, Internet and data services were becoming pretty well known.

WorldCom is hoping that its efforts in the local loop will soon make the company a household name.

The company's strategy has been to buy carriers that already have spent the money to get fiber in the ground. That is the case, for instance, with Brooks Fiber Properties, Inc. in St. Louis, a company WorldCom re-cently announced plans to buy for more than $2 billion. When the MCI and other pending acquisitions are completed, WorldCom will have a total of 30,000 route fiber miles solely dedicated to local services.

The combination of WorldCom, Brooks Fiber and MCI local phone facilities will cover nearly 90% of the local service areas in the U.S., said John Sidgmore, chief operating officer at WorldCom and CEO at UUNET.

WorldCom's local loop strategy contrasts with that of MCI, which has learned the hard way that building out local networks can be expensive. In deploying its MCI Metro service, the company has incurred deep losses, including about $800 million in the past year.

Among the users who were most bullish on the merger were those who have sampled MCI's recently introduced local service. Many users said they have been confined in the amount of local business they can throw MCI's way for various reasons, the most important of which is MCI's limited coverage. WorldCom's larger network of local exchange networks could provide users with just the right amount of competition needed to keep the regional Bell operating companies and GTE Corp. honest.

For example, Allied Van Lines, Inc., last June switched two T-1s worth of outbound local trunks from Ameritech Corp. to MCI at its headquarters in Naperville, Ill. But all of the inbound calls still come over Ameritech trunks. The reason?

"At this time, they [MCI] still don't have the facilities to handle number portability," said Rich Parker, director of technology and telecommunications at Allied Van Lines. "We're not going to change nearly a thousand phone numbers just to switch carriers."

Other users said they have provided MCI with a list of their locations and have been disappointed with the number of places MCI said it can really provide local service. Charles Murray, telecommunications director of The Travelers Group, said that so far MCI has only been able to provide local service at Travelers headquarters in Hartford, Conn. If a merger is completed with WorldCom, Murray will attempt to see how much the combined company can do to compete with the RBOCs.

MCI and WorldCom officials would not provide details on how their existing local facilities will be merged, but observers said the job of integrating WorldCom and MCI's local networks should be less of a technical issue than merging, say, the carriers' Internet backbones. The focus in the local loop will be more on operational issues, such as billing and order processing, analysts said.

But it seems clear that MCI's local business customers should reap benefits. Today, for example, MCI's local customers have access to dedicated trunks up to 155M bit/sec as well as dedicated access to MCI's frame relay and switched multimegabit data service networks. But MCI only has local service in 25 cities.

WorldCom provides the same types of local services in 52 metropolitan areas and also offers Intelenet, a package that includes local, long-distance, Internet and data services with a single bill. MCI is not offering such integrated billing today.

Holy Internet backbones

No doubt, local services are what Ebbers and MCI Chairman Bert Roberts want the federal watchdogs to keep their eyes on. But the fact is, WorldCom's growing dominance in the Internet market will be increased dramatically with MCI's backbone and customers.

Between WorldCom's pending acquisitions of ANS Communications, Inc., CompuServe Network Services and MCI's Internet network, WorldCom's Internet properties will expand to more than 1,800 point-of-presence sites worldwide. WorldCom will be carrying more than half of all business traffic that goes over the Internet if the MCI deal goes through, said Thomas Nolle, president of CIMI Corp., a Voorhees, N.J.-based consulting firm."

This could cause trouble for the WorldCom at the Department of Justice and the Federal Communications Commission, but it may not be bad news for users, who are expected to benefit from an even more reliable and farther-reaching 'Net backbone.

MCI has a long heritage in the Internet, as one of the original four network service backbone providers for the 'Net. The company has strong Internet engineering know-how, but has not been first to market with innovative services as has UUNET. While both companies offer intranet, Web hosting and high-speed dedicated access services, UUNET's product portfolio is more diversified, with digital subscriber line access and Internet fax services among its offerings.

Both carriers' Internet backbones are fast, supporting data rates up to 622M bit/sec. But exactly how the networks will be combined and how that will translate into customer benefits has yet to be determined. Because the backbones are not based on exactly the same equipment, observers said the integration process could take a while.

"[WorldCom] will probably run both Internet backbones parallel for a while and then start migrating them together as they do upgrades," said Dan Taylor, an industry analyst at Aberdeen Group, Inc., a Boston-based consulting firm.

UUNET's backbone is based on Cisco Systems, Inc.'s series 7000 routers and Cascade Communications 9000 frame relay switches, but the carrier has stated its plans to move to an ATM core. MCI's Internet backbone also is based on Cisco 7000 routers, but it also features FORE Systems, Inc. ASX ATM switches at its core.

So it looks as though the combined carrier will progress with an ATM-based Internet backbone, which would be able to carry higher speed traffic and provide support for multimedia traffic. But the companies declined to specify what their Internet backbone integration plan will be and analysts said any sort of significant integration would take at least 18 months.

Even without merging the Internet backbones, WorldCom plans to take advantage of its combined facilities by purchasing high-speed Internet trunks in bulk, Sidgmore said.

And they've got data

On the data network service side of the business, WorldCom and MCI have made significant investments.

Today, WorldCom has 7.1% of the frame relay data services market share and MCI has 16.3%. Both carriers also have respectable ATM service market shares based on revenue - WorldCom has 4.9% and MCI has 14.8% - according to Vertical Systems Group, a Dedham, Mass.-based consultancy.

The carriers offer many similar services, though WorldCom does offer one advantage to frame relay users not interested in switching to ATM. WorldCom's frame relay services range from DS-0 up to 45M bit/sec, whereas MCI's frame relay speeds hit a 12M bit/sec ceiling.

Then again, MCI is offering frame relay prioritization features that let users give time-sensitive traffic, such as SNA, priority over other types of traffic. MCI also is the only interexchange carrier offering Switched Multimegabit Data Service services, which run at speeds from 56K bit/sec to 45M bit/sec.

One challenge MCI and WorldCom will have going forward is integrating their data nets given that the services are based on different platforms, said Rick Malone, principal at Vertical Systems Group. The carriers have three different frame relay switches deployed between them.

But one advantage MCI WorldCom would have over another provider trying to unite two huge data nets is that they both already employ User-to-Network Interfaces and Network-to-Network Interfaces for linking frame relay networks.

Still, Malone said "they have a tremendous technical challenge ahead of them, and the only way to ease that process is to reduce the number of platforms in the network."

The carriers' ATM data networks also are based on different vendors' products. MCI is using General DataComm, Inc.'s (GDC) Apex and Newbridge Networks, Inc.'s MainStreet ATM switches. WorldCom is using StrataCom's BPX domestically and GDC Apex switches internationally.

Even though frame relay and ATM are standard-based data network technologies, many of the switches that carriers have in their networks are first-generation devices, Malone said. This makes it difficult to support pricing, billing, ordering and provisioning systems on all switches, he added.

In the end, MCI WorldCom raises the prospect of combining high-capacity Internet access services with other data services plus voice on a single contract and setting telecom giants against one another.

"That's why the MCI/WorldCom merger is of interest," said Ronald West, president of the Communications Managers Association, a group of several hundred corporate users based largely in the Northeast. "It really is a different merger."