How MCI’s revival will affect you

What short-term changes are ahead, how customers can prepare for the sale, and more.

MCI could emerge from Chapter 11 bankruptcy protection as soon as November. That’s thanks in large part to successful negotiations last week between the carrier and two groups of creditors that had been expected to throw up some road blocks during MCI’s confirmation hearings. The next obstacle for the company is getting a federal judge to approve its reorganization plan.

Here are the key questions these developments have raised and, based on interviews with a variety of industry players, the best available answers:

What short-term changes are customers likely to see, assuming MCI emerges from bankruptcy protection?

The carrier’s first order of business will be to keep the customers it has because it simply cannot afford to lose more revenue. Although MCI has not publicly committed to adding staff to its customer service department or new systems to make its network more reliable, those are two areas analysts expect MCI to keenly focus on as it emerges from bankruptcy protection.

Long-term?

Expect some network consolidation, such as in frame relay, where the company is operating two networks. MCI has been cutting costs aggressively, and you can expect it to continue doing so. The carrier says it improved monthly operating income from $44 million in February to $116 million in May by slashing operating expenses through restructured contracts and administrative systems.

There’s also the possibility that MCI might be sold post-bankruptcy. If management heads down this road, the best scenario might be the sale of the company as a whole, as opposed to it being divvied up and sold off in parts, which industry observers say would be most disruptive to current customers.

How should MCI users prepare for a possible sale of the company?

They should change the terms of their contracts when possible. Early contract termination fees should be eliminated in the event of a sale or a significant change in ownership. One analyst says asset sales typically happen after emerging from bankruptcy protection, not before heading into it. MCI’s international users should ask a lot of questions before renewing or signing up for new services. Speculation is that many of MCI’s international assets could be divested.

Would post-bankruptcy MCI be a more attractive option for those who are not currently customers?

It should be easier to justify an MCI contract to upper management if the carrier is not in bankruptcy proceedings. But industry watchers tend to agree it will take the carrier some time to effectively change the industry’s view of it as a fraud-ridden company.

What obstacles must MCI clear to gain customer confidence?

Customer confidence will reach new higher levels once the company’s string of fraud allegations are behind it. While most enterprise network managers we talk to are not terribly concerned with the allegations of illegal least-cost routing made by AT&T, these charges do create doubt. The General Service Administration’s pending ban of MCI for all future federal government contracts also might give non-government organizations reason to pause. As one analyst puts it, “They have to bring closure to all of these open issues.”

Lack of wireless offerings is a big obstacle that MCI needs to address, given that AT&T and Sprint each can bundle voice, data and wireless services. A partnership between MCI and a big provider such as Cingular Wireless, Nextel, T-Mobile and Verizon Wireless by next year is a strong possibility.

Is a post-bankruptcy MCI in a position to provide the service levels business customers demand?

MCI’s network performance has not suffered during its bankruptcy, according to our sources, including current customers. One reason why the company might have been able to maintain good service levels is because it has not been adding a host of new customers to its network or a ton of new traffic from existing customers over the past 12 months.

But some analysts question MCI’s ability to cater to large organizations over the next year or two, given that even Fortune 500 customers need user a certain amount of hand-holding. These are also contracts that are sometimes two years in the making – not the kind of time MCI has.

Acknowledging that it needs to boost revenue as quickly as possible, MCI says it is beefing up its sales efforts to small and midsize businesses that typically make faster buying decisions. Should users expect more service options or choices from MCI as it moves out of bankruptcy?

MCI has “starved” its network since last summer, as one analyst puts it, and observers are not anticipating a lot of new services right out of the gate. In its three-year reorganization plan filed with the bankruptcy court, MCI projects that it will generate $24.5 billion in revenue this year. Analysts say that a carrier of that size should be investing at least $2 billion in its network, but MCI expects its capital expenditures to be $1.2 billion this year.

Meanwhile, MCI has been talking about delivering converged services. But the fact is it was talking about this two years before filing for bankruptcy. As the carrier introduces new services, users should lots of questions about network support, such as, “Where are the physical points of presence that will connect each of their sites to MCI’s network?”

Will MCI slash its service rates to win new business?

Emerging from bankruptcy protection with very little debt, it certainly could. This has been a huge concern of MCI’s competitors over the past year. But given that MCI needs to drive revenue growth and show profitability, the company likely will take a more measured approach, perhaps offering better volume discounts. For example, a customer that spends $2 million annually with MCI might receive the same discount as a customer that spends $6 million with AT&T or Sprint. But be forewarned: If MCI starts to cut service rates drastically in the next 12 to 24 months, that could be an indication that the company is failing to meet its financial goals.

How will MCI’s emergence affect AT&T and Sprint?

Both rivals are pushing to sell more services to existing customers based on the theory that, for example, a frame relay customer is less likely to jump ship if it is also buying Web hosting, managed security and wireless services. Both companies will keep an eye on MCI’s pricing strategy and likely would follow suit if, for instance, MCI were to start offering stronger volume discounts.

David Willis, an analyst at Meta Group; Douglas Jarrett, a partner at Washington, D.C., law firm Keller and Heckman; and David Rohde, an analyst at TechCaliber, all were interviewed for this story.