MCI's Joint Venture Gamble Pays Dividends
Some view MCI's partnering strategy as ingenious and others criticize it as unfocused
P> Gerald H. Taylor's pager goes off. He looks down and smiles. "We're at an all-time high," said the MCI president and COO. That day, MCI Communications Corp. stock hit $30 5/8 .
It's tough to argue with that kind of success -- although that hasn't stopped critics. The company has encountered frequent criticism for its policy of promiscuous partnering. Many of its partnerships -- such as a much-hyped union with News Corp. -- have seemingly floundered. Yet MCI continues to please investors.
Taylor can take much of the credit -- or blame, depending on your point of view.
He joined MCI in 1969, just one year after it was founded as Microwave Communications Inc. He credits much of the company's success since then to a joint venture strategy that some laud as ingenious and others criticize as unfocused. During his many years with the company, MCI has fought its way up from an unknown start-up to a $15 billion powerhouse with international name recognition. "We were looked at as an immature teenager who never had a job before," said Taylor. But marketing and technology partnerships changed that. "It was the only way," he said. "We didn't have the deep pockets of our competitors."
MCI started doing joint ventures 27 years ago when it didn't have the money to stand alone. Now, even with its stock climbing, its reputation solid and its coffers running over, the strategy remains. "This is an industry that has a voracious appetite for capital," said Taylor. That is particularly true following telecom deregulation, which has opened up new opportunities and created intense investor pressure for telecom companies to act -- perhaps even rashly.
For MCI, revenues from ventures in 1995 totaled $365 million, up from $68 million the previous year. But of MCI's multitudes of partnerships, some have been blockbusters, and others have been failures.
Marketing successes, Taylor said, include the alliances with American Express and American Airlines. But for profits, he pointed to the partnership with Sun Microsystems Inc.
Concert, the joint venture company formed by MCI and British Telecom, has helped MCI's global expansion, with the Concert network running through 50 countries. Avantel, MCI's alliance with Grupo Financiero Banamex-Accival (Banacci), is expected to do well when Mexico's $7 billion telecommunications market opens for competition in August.
"We're positioned where others aren't [in Mexico]," said Taylor. Last year, MCI began building a 3,200-mile, fiber optic network to connect Mexican cities.
The least successful of MCI's joint ventures, though, is the on-line partnership with News Corp. That teaming hit a particularly low point when MCI formed a separate on-line deal with Microsoft that seemed to eclipse the earlier arrangement. Although Taylor said the problems with News Corp. coincidentally surfaced at the same time as the Microsoft alliance, industry saw the move as dumping News Corp.
"The content side is three to five years away. We don't know how to make money doing that part," Taylor admitted. But America Online CEO Steve Case does, and Taylor gives him credit for that. The value-added side will do okay, he said, but the access suppliers will have a tough time.
MCI received yet another blow against its Internet strategy when arch-rival AT&T unveiled an ingenious strategy to offer five hours of free Internet access a month to customers. MCI immediately matched the offer, but by then, AT&T had won the marketing battle.
"Give the devil his due," said Taylor. "It was a smart move on AT&T's part."
Like personal relationships, healthy business partnerships grow, but require work, Taylor said. "The parents' success is dependent on the success of the venture," he said. "It either needs to enhance the core business, extend it or expand our reach globally. We're not going to get into manufacturing or buy a bread company."
One such target market is systems integration, the business of computer networking, consulting and outsourcing. MCI wants to control a big chunk of that industry, estimated at $250 billion by 1999. In November 1995, MCI departed from its teaming strategy and bought SHL Systemhouse, a large Canadian systems integrator, for $1 billion.
SHL needed capital to expand, and MCI wanted to tie down SHL before another company came along, he said. "They fit our strategy of getting underlying facilities and then building on top."
Similarly, MCI in September 1995 bought Nationwide Cellular Service, the largest reseller of cellular phone service in the country, for $210 million.
"While others are investing billions in wireless infrastructure, the acquisition of Nationwide... has given us access to more than 75 percent of the U.S. population, including all of the top 100 U.S. markets," wrote MCI CEO Bert Roberts in his annual letter to shareholders. Other choice joint venture markets for MCI include paging, direct broadcast satellite and music distribution.
But MCI's laundry list of joint ventures has gotten some stinging reactions. Critics see the partnering as unfocused and hedging bets. "They're squandering their money in the wrong place," said David Goodtree, director of telecommunications strategy at Forrester Research, Cambridge, Mass. "There is a game in integration, but MCI doesn't have the right pieces," he said.
The criticisms from analysts such as Goodtree disturb Taylor. "Everyone is looking for winners and losers," Taylor said. "In this new [post-telecom legislation] world there's always an unknown.
The analysts had been in a very predictable business for so many years." And if things don't work, the COO explained, MCI simply cuts its losses. A great many more are successful, he said.
As for new partnerships, any company is fair game. Even AT&T. "It's probable and very unlikely at the same time," Taylor said. But if Bell South wants to talk, MCI will listen, he added.