Telecommunications Convergence:Differing Strategies

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Telecommunications Convergence:
Differing Strategies

By Bob Starzynski

MCI Communications Corp. of Washington has the communications industry's attention as it watches British Telecommunications, GTE and WorldCom salivate over its business.

The suitors are waving stock and cash in MCI's face - to the tune of $30 billion - in hopes of creating a converged market. They want to bundle local and long distance services, wireless and wireline services, voice and data services, and domestic and international services. And they are willing to pay a hefty price to have the biggest and most advanced networks in the industry.

Meanwhile, the rest of the players in the communications market are not just sitting around watching the grass grow. They simply are building their converged networks a little more quietly.

The idea of converged telecom services strongly appeals to the residential and small-business customers. They do not have the time or resources to handle multiple services from multiple companies.

Large companies and government agencies, on the other hand, are not as concerned with convergence. They have the size and clout to bargain for lower prices with multiple vendors.

"There is a propensity for the small customer to prefer one-stop shopping," said Riyad Said, an analyst with Friedman, Billings, Ramsey & Co. in Arlington, Va. "That is probably not the case with the government."

Regardless, telecom companies are intent on convergence and want to sell the idea to all customers. It is a way for them to increase services without much addition of infrastructure, which in turn lowers their customer churn.

Two of the largest long distance providers in the country, Sprint Corp. and LCI International Inc., have taken different approaches to building converged networks for the next millennium.

Sprint, based in Westwood, Kan., actually has one of the most integrated businesses to date in the industry. Its wireless business is leading the personal communications services march in replacing outdated cellular networks. Its data network moves more Internet traffic than almost all its competitors. Its Global One international partnership situates the company nicely overseas, especially in Europe. And Sprint has been in the local telephone business longer than it has been in long distance.

The Early Bird Doesn't Always Get the Worm

LCI, of McLean, Va., on the other hand, does not want to be on the bleeding edge of technology. Its
approach has always been to provide services in well-developed markets, with easier pricing and better service than the competition. Because of this strategy, LCI has not gone into wireless service yet. It joined the data market after the pioneers. And it just started reselling local telephone service earlier this year.


LCI photo

Lawrence Bouman, senior vice president of engineering, operations and technology for LCI

"We don't subscribe to the Field of Dreams philosophy of 'If you build it, they will come,'" said Lawrence Bouman, senior vice president of engineering, operations and technology for LCI. "But, we're growing five times the industry rate and we're profitable. So, we must be doing something right."

"Some companies want to be the first into a market," said Tom Morabito, a telecommunications analyst with Ferris, Baker Watts Inc., a Washington investment bank. "But others want to wait and see how a market develops before coming in."

LCI has built a billion-dollar business in the long distance market; a market that was controlled by the AT&T monopoly just 20 years ago. Its revenue has grown more than 40 percent annually in recent years. It is now the sixth-largest long distance company in the United States.

But LCI is diversifying its business and offering its customers the one-stop shopping that they demand.

Most telecommunications companies are betting that customers want all of their needs handled by one company. Until now, a customer had to have one company for local telephone service, another for long distance, another for wireless, another for data (or Internet), and possibly another for international. To offer all of these services, telecom companies are teaming, partnering, merging and acquiring, in trying to put all the services under one umbrella.

LCI has made acquisitions and partnering agreements, just on a smaller scale than WorldCom, GTE or MCI.

But Bouman does not rule out such deals in the future.

"We will be making an awful lot of investment in new technologies over the next 12 months, especially on the data front," he said. "We will be more aggressive in building through acquisitions. But we don't want it to be dilutive for shareholders."

LCI has made four acquisitions in the past two years. Most recently, the company announced that it will buy U.S. Long Distance of San Antonio for $331 million in stock. That deal, announced in September, should close by the end of the year.

"You may not want to spend years building your way into a market if you can buy your way in faster," Morabito said.

As LCI has grown to be a more formidable player, the company has built and bought more of its own fiber networks. Most smaller telecom companies start out by leasing or borrowing space on fiber networks owned by larger companies. But once they reach a certain point - say $200 million in revenue - it becomes more cost-efficient to own their own fiber.

Owning its own fiber naturally moved LCI into the data market. Bouman calls it a natural outgrowth. Although the company was not the first to offer such services, it now has data capabilities in 50 countries. "We don't necessarily do it first," Bouman said. "We just do it quicker, faster and better."

After data, LCI moved into local telephone service. But, because the local markets are still in the process of being deregulated, LCI must resell those services for now. Since starting local resale service in February, the company has grown its business to include service in 29 markets around the country.

LCI officials admit that reselling local service is not a large revenue generator, but they argue that it's a good segue into a new business.

Still, two untapped markets remain for LCI - wireless and the federal government.

Bouman said that the company is not uninterested in wireless service. However, it is waiting for the market to mature. "We don't want to try to sell new technologies to a [skeptical] marketplace," he said. "We want to sell products that people understand and need." Bouman did not give any specifics as to when LCI will enter the wireless market.

As for the government market?

"That is clearly an untapped market for us," Bouman said, "especially since we're based in the Washington area."

LCI is not currently on the General Services Administration schedule for selling products or services to the federal government. Bouman said he is not aware of any effort by LCI to enter that market. But, he said, government work is definitely worth evaluating. LCI does do business with state governments, and the state of Ohio is the company's largest customer.

GSA has a number of ways for telecom companies to sell products or services to the federal government - from maintenance and installation of systems to wireless and network services.

However, local and long distance services are not handled on the GSA schedule. They are handled through another contract vehicle, Federal Technology Service, or FTS 2000. Government agencies have freedom in whom they choose for local telephone service. But for long distance, government agencies are limited by FTS 2000 to buying from either AT&T or Sprint. That 10-year contract is set to expire next year.

Why Converge Tomorrow? ... We Did it Yesterday

The only reason that all eyes haven't been focused on Sprint's convergence strategy is because the company is not currently the target of a multibillion-dollar merger.

"We're well-positioned in each of the areas that you must be in to succeed," William Esrey, chairman and chief executive of Sprint, said in a September interview on PBS Television's Charlie Rose show. Those areas, Esrey said, are local, long distance, wireless, global and data. "This is such a big industry on a global basis. I don't think anybody can go it alone."

Ever since British Telecommunications offered to buy MCI a year ago, speculation on Wall Street has been, "When will Sprint be bought?"


Sprint photo

William Esrey, chairman and chief executive of Sprint

After all, the company has all the pieces in place for a converged system. The only thing that Esrey said is lacking is that Sprint is not the largest in the industry. "We have to try harder in that respect," he said.

Sprint actually started out a century ago offering local telephone service. Like the Baby Bells or GTE, it has licensing to be the sole provider of local service in certain parts of 19 states. It serves part of Orlando and Las Vegas, two of the country's highest growth markets over the past 10 years. While it will be losing the monopolies of those local markets, it will be able to expand its local service into other markets.

Unlike LCI, Sprint has not gotten into reselling local service in the Baby Bells' territories. "Initially, we saw reselling as a way to enter those markets, but it doesn't give us a competitive advantage to overcome the local provider," said Bill White, a spokesman for Sprint. He said that the company is likely to enter those markets when they become competitive.

Even though Sprint got its start in the local telephony business, which remains its most profitable division, most of its revenue comes from long distance service. The company started building one of the first nationwide fiber networks more than 10 years ago. Today, that network makes Sprint the second largest long distance carrier, behind AT&T and MCI.

The company has pushed aggressively into other new markets, too.

White estimates that the company moves more Internet traffic on an international level than any other data access provider. "Our fiber network was constructed with data in mind," he said. "That's why we have an advantage there."

Also, Sprint owns 40 percent of Sprint PCS, a national leader in wireless telephony. And, last year, Deutsche Telekom and France Telecom each bought 10 percent stakes in Sprint. Together, but in a separate deal, the three companies created Global One, one of only three such international telecom alliances.

On the federal market side, Sprint has a strong presence, too. The company does about $500 million a year worth of business with the federal government.

"Doing government work is like the rest of our business," said Don Teague, vice president and general manager of the company's government systems division. "The difference is how we get to the customer. A consumer may go into Radio Shack to sign up for Sprint service. A government agency won't."

With all of Sprint's business units combined, company officials believe Sprint ranks high on the already converged list.

"We think we're better positioned than any other company in the industry right now," White said. "What other companies are trying to create [through these acquisitions] is a model of what Sprint has already created."

Still, Sprint is not likely to stay out of the merger mania for long.

"Consolidation in the telecom industry is expected to continue for some time," said Guy Woodlief, an industry analyst with Prudential Securities Research in New York. "Everyone in the industry is a potential partner of someone else."n

Sprint Corporation

3rd Quarter Ended
Sept. 30, 1997
3rd Quarter Ended
Sept. 30, 1996
Revenue
$3.8 billion
$3.5 billion
Net income
$212 million
$312 million
Income per share
$0.49
$0.72
Source: Sprint

LCI International Incorporated

3rd Quarter Ended
Sept. 30, 1997
3rd Quarter Ended
Sept. 30, 1996
Revenue
$365 million
$289 million
Net income
$23 million
$20 million
Income per share
$0.26
$0.23
Source: LCI

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