MCI-Murdoch Venture Takes Telco to New Realm

The industry's most pugnacious player wants to replicate its long distance success in cyberspace

MCI Communications Corp., the telecom industry's most pugnacious player, may well become the first telco to render the definition of "telephone company" utterly obsolete.

The Washington, D.C.- based company is already many things to many people, including long distance carrier, systems integrator-style consultant, software developer, Internet backbone and access provider, online services company and cyberspace mall operator.

MCI's latest adventure centers around its proposed investment of $2 billion for 13.5 percent of Rupert Murdoch's News Corp., one of the globe's largest media concerns. The two intend to create a joint venture to deliver News Corp.'s content over MCI's network. The News Corp. deal marks the latest in a long string of moves by MCI as it attempts to become to cyberspace what it is to the long distance industry: An aggressive, profitable, high-profile player with a genius for marketing.

"We see MCI's role as pioneering this new medium, just as we changed the long distance business 25 years ago," said Scott Ross, president of MCI Business Markets. "Our strategy is to help establish the Internet as a place where businesses and consumers want to be, using the MCI name to create trust in this new arena."

The company has a penchant for garnering headlines, a talent it's carefully honed since first bursting onto the national stage during its David vs. Goliath struggle against AT&T.

Having earned its spurs as the gadfly that helped topple the world's mightiest telecommunications monopoly, MCI eventually became AT&T's biggest competitor in the long distance market, with 20 percent of the $70 billion dollar long distance market to AT&T's 65 percent of the market.

The company's 1994 revenues increased 12 percent to $13.2 billion, while net income grew by 36 percent to $795 million. Year-end earnings per share increased by 27 percent to $1.32 per share. During the first quarter, revenues and net income rose 10.6 percent and 16.7 percent, respectively. Smart marketing and the ability to attract media coverage helped transform the upstart start-up into a multibillion dollar telco whose initials, it is often joked, stand for "money coming in."

But MCI, even by its own standards, has been on a roll during the past year, announcing one new initiative, product, service or alliance after another. And while they haven't all panned out, MCI is arguably one of the best-positioned companies in the world to profit from the infobahn.

The company's carefully choreographed makeover from long distance company to cyberspace powerhouse kicked into high gear last year with a series of cryptic commercials featuring Oscar-winner Anna Paquin prancing through tundras and deserts extolling the oblique virtues of "networkMCI."

Bert Roberts, MCI's chairman and CEO, describes networkMCI as a strategic vision into which MCI and its partners will pour $20 billion "to embrace the emerging opportunities of the information superhighway. Under networkMCI, we will lead the drive toward the convergence of communications, computing and entertainment."

The networkMCI vision includes a number of elements, some of which have gelled better than others.

On the less-than successful side, MCI Metro, a subsidiary created to provide local access services, has generated a good deal more attention than business. Last year, MCI boasted it would have local networks in 20 cities by the close of 1994, precisely the number it now says will be installed by the close of 1995. To date, only networks in Atlanta, Boston, Dallas, Los Angeles and Washington, D.C., are complete.

"MFS and Teleport, although they are tiny, are local players; MCI is not," said David Goodtree, senior analyst with Forrester Research.

MCI's wireless strategy, meanwhile, has suffered from a series of false starts. The company originally hoped to become a nationwide personal communications services provider, but a Federal Communications Commission decision not to issue national licenses "scuttled MCI's strategy," said Goodtree. In February 1994, MCI rejuvenated its PCS dreams by announcing a $1.42 billion investment in wireless carrier Nextel, a deal it bailed out of in September. Soon afterward, 11th hour negotiations in November with other potential PCS partners fell apart because MCI demanded a premium for the right to use its vaunted brand name. Earlier this week, however, MCI finally got its wireless act off the ground by unveiling plans to acquire Nationwide Cellular Service Inc., the nation's largest cellular reseller, for approximately $190 million in cash.

Globally, MCI closed its international alliance with British Telecommunications plc last year, under which the UK carrier purchased 20 percent of its American partner for $4.3 billion. The two also created a joint venture, Concert, to market international voice and data services to multinationals, getting a jump on AT&T and Sprint, who rushed to solidify or seek similar relationships with international telcos.

Last fall, MCI beat competitors to the punch by introducing networkMCI Business, the industry's first integrated business software package combining E-mail, fax messaging, videoconferencing, Internet access, paging and information services.

Not long afterward, MCI announced internetMCI, a collection of business and consumer services including high-speed Internet access, an electronic mall for cyberspace shoppers, and an array of online services. Besides employing the expertise of Internet godfather Vinton Cerf, MCI helped manage the Internet backbone, the NSFNet, from 1987 until its recent shutdown. MCI now operates its own Internet backbone, which carries approximately 40 percent of the Net's data traffic, thanks to agreements with several of the nation's major regional Internet access providers.

The MCI-News Corp. connection bolsters MCI's already formidable Internet presence with the addition of News Corp.'s Delphi Internet Services Inc. "Imagine being able to access the innovative internetMCI and Delphi Internet shopping and online information over the same service that brings you first-rate original entertainment," said Murdoch.

The proposed $400 million joint venture will combine the broadcast, satellite, programming and publishing assets of News Corp. with the customer base, marketing acumen and intelligent networks of MCI as well as its other partner, British Telecom. As Roberts pointed out: "Our relationship with News Corp. is in perfect sync with what MCI is already doing with BT."

But for all the talk about News Corp.'s hot entertainment properties, the partnership is not about delivering reruns of "Married with Children" over the Internet. Indeed, unlike the consumer-centric Hollywood and Disney deals being struck by Baby Bells, MCI and News Corp. are going after a customer base already willing to pay for interactive news services, electronic commerce, videoconferencing and other value-added information services: the business community.

"This is a business opportunity, and not about entertainment development," said Jack Grubman, an analyst with Salomon Brothers. "The bottom line is that the link with News Corp. and access to News Corp.'s wealth of content and global reach clearly enables MCI to differentiate itself in the marketplace, especially among business users."

However, not all of Wall Street shares Grubman's assessment. Following announcement of the deal, MCI's stock fell $1.68 to $20.56, while News Corp.'s rose $2.50, to $23. Grubman ridiculed the market's reaction, arguing that MCI wisely spent its BT money on a non-dilutitive investment with excellent long-term long benefits, i.e.; News Corp.'s stock and content. Indeed, Grubman added, MCI's "core business trends are improving everyday," and characterized MCI below $21 as "a steal."

Will MCI become the master of cyberspace? Only time will tell, but as Goodtree points out, few companies are better prepared to plunder the possibilities of the Internet.

"They are among the strongest positioned in the Internet access business right now," said Goodtree. "And the Internet access business will be the biggest Internet revenue generator. So they are in great shape."

MCI Financials

in millions, except per share amounts

19941993

Revenues$13,338$11,921

Net Income$795$582

Earnings per common share $1.32$1.04


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