Who gets MCI, and who cares?

Someone should tell MCI, Qwest and Verizon that the debate over who buys MCI is losing its audience. At this point, most people have reached the "Who cares?" phase. Too bad, because although the "who" has been answered (Verizon won), it's the "why" that we should care about.

Someone should tell MCI , Qwest and Verizon that the debate over who buys MCI is losing its audience. At this point, most people have reached the "Who cares?" phase. Too bad, because although the "who" has been answered (Verizon won), it's the "why" that we should care about.

Verizon and Qwest didn't have the same motives for wanting MCI. The two RBOCs are sharply different. Verizon has pretty good growth, strong financials and the premier business territory in the U.S. Qwest has a mountain of debt and the least-valuable region (in total spending) of any RBOC. So what gives here? The answer lies in about the year 2008.

In the European Union, managed services are the rule. Even though EU carriers are faced with things such as unbundling, they still have money to launch aggressive network expansion programs that include enterprise service improvements. Managed services were suppressed in the U.S., largely because leased lines were so inexpensive in the 1980s that private networking developed more. You can see by the growing popularity of outsourcing that managed services will be picking up in the U.S., and by 2008 are likely to make enterprise networking profitable again.

Then why buy in now and participate in the near-term decline? Because SBC bought AT&T. The RBOCs all knew that if one of them made a move to get into the enterprise market, the rest would have to follow. SBC did the deed because it knows that Verizon has sales credibility - almost half the major corporate headquarters sites are in Verizon's region. SBC needed to jump-start its enterprise program, and it did.

Qwest needs even more jump-starting. The U.S. is going to end up having three RBOC-based super-carriers. SBC is one, Verizon the second. BellSouth has the most-credible basis for the third, which leaves Qwest waiting to be picked up at some future point, not participating in the growth phase of enterprise networking at all. By picking off MCI, Qwest could have hoped to be the foundation for that third competitor, or at least be more interesting to BellSouth in a down-the-line merger.

For winning bidder Verizon, MCI is more a convenience than a necessity. Verizon could have called on corporate accounts in its region, but with most companies locked in multi-year contracts with an interexchange carrier (IXC), it wouldn't have gotten immediate success. Verizon also would have had to build out its own national network or wholesale pieces of it from others. All of this would have added up to a lot of early cost and not much early revenue.

This raises the question of what Qwest, Sprint, Level 3, Global Crossing, Williams Communications and other enterprise players might now do. Qwest still needs a partner to move forward and is said to be courting BellSouth and Sprint. For sure, there's more mergers and acquisitions to come. Rumors of a deal between Level 3, Electronic Data Systems and Cisco suggest that at least one of the companies may be looking to get into higher-level enterprise services long before 2008, hoping that enough early adopters can be picked off to pay for the cost of developing a new network.

That new-network cost is the main reason we should care about this acquisition debate. No matter which RBOC buys which IXC, the result has to be a program of network modernization based on IP, not only to position for those 2008 managed services but also to stem the hemorrhage of revenue loss by lowering network capital and operations costs. This activity will bridge the equipment vendors through the period needed to get consumer broadband and content ramped up.

It's also interesting that the carriers everyone declared dinosaurs are now the ones climbing the evolutionary ladder. Could it be our standard for evolutionary success needs clarity? Maybe we should have paid more attention to that boring mergers and acquisition debate after all.

Nolle is president of CIMI Corp., a technology assessment firm in Voorhees, N.J. He can be reached at (856) 753-0004 or tnolle@cimicorp.com.

Learn more about this topic

Qwest moves on after MCI rejection

Network World, 05/09/05

Verizon raises bid for MCI and retains favor of board

Network World, 05/02/05

Qwest bows out of MCI bidding

05/02/05

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