MCI’s chief seeks fresh start in ’04

CEO Michael Capellas talks to us about the FCC, customer loyalty, post-bankruptcy challenges, industry consolidation and more.

MCI will soon shed its Chapter 11 bankruptcy shackles, and that freedom can’t come soon enough for Chairman and CEO Michael Capellas. Since taking charge late last year, Capellas has worked nonstop to address questions of solvency. Now his focus is on the future. He spoke recently with Network World Senior Editor Denise Pappalardo and Associate News Editor Paul McNamara.

How do you answer critics who argue MCI’s punishment hasn’t been tough enough?

Who do you blame? The hard-working people who have given great things to the industry every day and brought value to the industry or individuals who did something wrong? You blame the individuals who did something wrong. They should be subject to the maximum penalties of the law and it’s up to the legal process to sort that out. The question is whether MCI is a relevant company with good people that serves a relevant and important role. It is.

If an enterprise organization has quotes from AT&T, MCI and Sprint for an IP VPN, why should it choose MCI over companies that haven’t had similar problems?

First, people look to the relationship they’ve had with their account team. We’ve had very low attrition in our field salesforce. Second, our service quality has been outstanding. When I first came here we had this theme of customers, customers, customers. We made sure we put quality of service up top. Third, people remember the MCI that offered decades of innovation. These two to three years have been very difficult, but a lot of customers view that as an aberration of the long history of the company.

Has MCI lost any significant customers over the past couple of years?

We have seen great customer loyalty. If you look at our top 100 customers, we haven’t lost a logo. There is another reason for this too: the cost of switching is quite high. There is, however, some technology displacement whether it’s voice going wireless or frame relay users moving to IP, which inherently has some price reduction. We’ve picked up some and we’ve lost some.

How’s MCI doing at acquiring new business?

We saw steady progress [starting last summer]. The period between July and December of 2002 was really tough. It’s not really a question of acquisitions vs. disconnects. It’s whether the industry is running hard enough to offset rate reduction. Rate reduction has three big factors, including lower prices, displacement by IP and a significant amount of network grooming.

Will rate reduction have a more serious impact at MCI than at competitors with higher profit margins?

No, it’s the opposite. We traditionally have operated at a lower price point in the market; some say 10% to 15% lower. But whenever you have absolute dollars of revenue leaving an industry it ain’t good for anybody.

What’s MCI doing to boost its margins?

There are three or four things in the works, such as debt reduction, restructuring and pushing very, very hard to move more of our traffic to IP.

What are you doing to integrate the 40-plus acquisitions that MCI made during its WorldCom days?

We are being pretty aggressive. Because of the nature of continued consolidation of the industry, integrating multiple networks is inherent whether its Verizon, BellSouth or MCI. The question is, how you deal with it. We’re putting our frame relay networks together and our ATM networks together. Everyone is moving to more consolidated billing and common portals. [This all] makes us more efficient, reduces costs and it’s great for customers. It has my attention.

Are there technologies or services that fall by the wayside during this process?

The effect of voice over IP is gaining momentum at an incredible pace. I have a different opinion now on VoIP than I did 120 days ago. On the other hand, customers integrate at their pace. People are not going back and ripping out their PBX infrastructure, tearing their networks apart and completely displacing frame relay. If you’re looking for [me to say] in 12 months ATM will be history and in 18 months frame will be irrelevant, that is a very simplistic view. There is an orderly transition going on and it will take time.

What’s your outlook for industry consolidation over the next year or two?

Everyone [in the industry] has been talking about [mergers and acquisitions] since I got here. It’s true as the industry matures there are dollars leaving the industry. But just because you have to be more efficient doesn’t mean you have consolidation. In our space there are really only two substantial enterprise players. That’s not very many. I don’t give it a lot of thought. We have a very clear internal plan that we are marching to, and that’s what we’re going to stay focused on. There is a great risk in allowing yourself to get distracted.

What’s your take on the latest RBOC efforts in the enterprise services market?

They are looking at leveraging their base to move into new markets. We are seeing some competitive IP VPN stuff by Verizon, SBC and BellSouth. They are trying to move into the mid-market to establish a baseline, then move to the enterprise.

What’s your view of the FCC?

That’s really a tough job. No one is going to tell them they’re doing brilliantly no matter what they do. The tariff system does really need major modifications. They are trying to step forward to solve an unsolvable problem. They are trying to encourage the industry to have more collaboration.

Are they making your job easier or more difficult?

I take an opposite view of what some of my predecessors have. I’m trying to come in, not in a real in-your-face type of advocacy position, but talking about where the market is going from a technical and economic perspective. They have been very open to that.

MCI just fully acquired Digex. What’s the integration plan?

Digex will be incorporated into the company. Our sales force will sell Digex services. We’ll integrate it from operations and administrative functions. We are going through a plan to integrate everything as opposed to keeping it separate. They will be integrated on day one. That is happening as we speak.

When you took the job many people asked: What is he thinking? What were you thinking?

I have believed we would see the effect of the Internet as one of the most important technologies of our lifetime. Inherently the intelligence had to move to the network. I’m a technology guy through and through so the idea of working for an advanced network company – particularly one that was part of the foundation of the Internet – was attractive. There was a part of me that said, ‘Gee, here’s this great company that’s been hijacked by a handful of bad people.’ I was a little naive in the belief that all of the problems had been identified. We’ve had a few additional wrinkles I hadn’t anticipated.

One of those “wrinkles,” which gained public attention last summer, was MCI’s call routing through Canada to avoid certain connection fees. How has that issue been addressed?

We have done a lot of internal analysis. We immediately went in and said least-cost routing is not particularly meaningful for our economic model and completely shut it down.

Reports had surfaced that you actually threatened to resign when this problem came to light under your watch. Is that true?

No. What I said was, I want an independent review with internal and external people, and anything that needs to be done I want corrected immediately. There was no threat to resign.

Another issue that popped up was the General Services Administration’s proposed disbarment of any new MCI contracts. Where does this situation stand?

They put two parameters in front of us. We had to put a world-class ethics program in place. And we had to get our internal control project done, which we needed to do anyway. We are very respectful of the process. I’m not going to comment on what [the GSA] may or may not do, because it would be inappropriate.

What has to happen for MCI to put these and other such issues behind it so that the company can focus on the future?

We just have to be unrelenting. We have to do the right thing because it’s the right thing to do. We just have to do it every day. We have to hire the right people and reward the right behavior. Getting out of bankruptcy is also quite helpful. Will we still have to continue to operate at a standard higher than everyone else? Yes. Is that inappropriate? No. That’s part of the punishment and we’re fine with that.

Where does MCI stand with offering wireless?

It makes sense for us to do a wireless partnership for the distribution of capabilities, but it doesn’t make sense for us to own the network. There is nothing imminent, but we are having conversations. There’s a lot of interest and we continue to move it along. Margins are tough, portability is an issue and it has to work for both sides. But we’re further along than the last time we talked.

Are you paying attention to VoIP upstarts such as Vonage and Skype?

Absolutely. Goes back to the question of why would a customer need an incentive to go to IP. That’s the way we write applications and it’s the way people are working. It’s inherently a better cost structure. Are we paying attention in a big way? You bet.

How close are they to being real players rather than just curiosities?

The little guys are getting there first. Verizon or SBC or AT&T or MCI, we are all looking at VoIP as playing a relevant role in redefining ourselves. And we are an industry that needs to be redefined. This change is very fundamental.

Does it affect pricing for traditional voice services?

It affects pricing for everything because it is a different way of designing and deploying telecommunications.

Is MCI losing market share to companies such as Vonage, 8×8 or Skype?

I don’t know how you count it anymore. On some level you must be losing some kind of share because those customers are coming from somewhere. I would argue it ultimately gives us an opportunity to make up share. We are obviously going to maximize our position, as regulatory rules allow. We will be as aggressive as anyone. Obviously with [our] IP backbone you would expect that [from us].