MCI reborn, with new game plan

MCI wants to come back, but can it? And if it does, what will happen in the market?

Driven by accounting scandals and, in the view of many, fraud and other criminal acts, WorldCom plummeted from second-largest interexchange carrier and king of the Internet to a discredited and dispirited shell reorganizing under Chapter 11 protection. Now, with a new CEO, it has filed its reorganization plan and abandoned its old name, tainted with what an insider called “Ebbersmirch,” in favor of the MCI name that was linked to the popular and charismatic Bill McGowan, the company’s founder and the father of long-distance competition. MCI wants to come back, but can it? And if it does, what will happen in the market?

Johna Til Johnson is encouraged by what she sees of the new MCI.

Classical wisdom says an MCI cleansed of debt and purged of financial sins will arise like some sort of holy avenger in the industry, sweeping competitors aside by virtue of its now-debt-free structure. I don’t hold much with classical wisdom, and here in particular the pundits seem off the track. In their conference call announcing the reorganization plan and name change, MCI management wasn’t talking like Jack the Giant-Killer.

What MCI says it plans to do can be stated simply in two points: build revenue by dodging the very head-to-head competition the financial experts predicted MCI would win, and lower costs by attacking the real cost problem – operations.

MCI is strong in the government, financial and international communications sectors. All of these will be strengthened in the new regime, and nothing whatsoever was said about precipitous price cuts to drive competitors out of the market. That’s not a very profitable strategy, after all. It’s clear that MCI hopes to actively avoid discounts by targeting markets where it can win deals on grounds other than price.

Growing business in sectors that MCI already dominates is OK, but it’s not a prescription for runaway success. To further improve revenue growth, MCI wants to go after the small and midsize business (SMB) market. Its major competitors generally have not done well there, so there’s no head-to-head competition to drive down prices and profits.

Going after the SMB sector poses a major problem, though. Data services based on traditional frame relay and ATM switches have poor operations cost efficiency, and this problem is more acute when the customer is smaller and the per-customer revenue lower. MCI proposes to attain low operation costs by converging all its traffic onto an IP backbone. While MCI is specifically not going to displace existing Class 4 and 5 voice switches, it is going to try to sell consolidated access via IP for services of all types, including voice.

Another element in the cost management strategy is operations support systems and network software. Like many large carriers, MCI has dozens of different operations software and network management platforms, and these not only add to ongoing license costs, they reduce operations efficiency. MCI wants to be the first player in the industry to really consolidate the operations software market and presumably to engineer a new set of human processes around the new tools.

This is where MCI might change the landscape, not by creating (as some have suggested) a rush for carriers to file Chapter 11 to shed debt, but by creating a new operations paradigm that tackles the real cost problem carriers face. Bits are cheap; humans are expensive. If MCI can reduce the human cost of services targeted at the SMB market and earn a profit, it will put enormous pressure on the other IXCs to respin their own networks and even greater pressure on the now-being-designed regional Bell operating companies long-haul networks.

Where’s the Internet in all of this? It’s interesting that MCI management didn’t talk about the Internet at all, other than to mention that UUNET would be a “sub-brand” of the MCI name. This doesn’t mean that MCI won’t leverage its Internet assets; the infrastructure it’s converging on is the one UUNET built, and Internet data services disproportionately influence the SMB market. It does mean that just saying “Internet” isn’t enough to create financial credibility any more.

If MCI has learned that in its fall from grace, then it’s learned a lot. Now we’re going to find out if it’s learned enough.