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Convergence Calling

In the scramble following telecommunications deregulation, there will be casualties.Bert C. Roberts r. is determined that MCI Communications, the scrappy long-distance carrier that challenged the Bell system monopoly, not be among the wounded. Rather, he plans to do a little roughing up of his own.

Even before Congress passed the Telecommunications Act of 1996 last February, the scrum among local, long-distance, and various media companies was rough. Now it promises to be bruising. In yesterday’s world, households and businesses relied on separate suppliers-a phone one will receive anything from any provider-whether it’s a telephone company, cable operator, or even an electric utility. When it’s all digital, the pipe can come from any source, and customers, in theory, may want a single source for a bundle of services.

How this works in the real world is anyone’s guess. In sheer size and market power, AT&T is the behemoth to beat (see chart). The former regional Bell operating companies, hardly baby-size, are beginning to combine-witness the recent merger between Pacific Telesis and SBC Communications. But market presence doesn’t always translate into marketing power. MCI Communications, the second-largest long-distance carrier, started in 1968 challenging the Bell system monopoly. Since then, it’s built a reputation as a savvy marketer, taking one-fifth of long-distance telephone calls away from AT&T.

But the challenge is no longer about fighting over a $75 billion long-distance market; it’s competing on all fronts in a $500 billion converging communications and media market. To do this, 53 year-old Bert C. Roberts Jr., MCI’s CEO since 1991 and chairman since 1992, aims to put as many hooks into customers and market opportunities as possible-many of them big-stakes gambles. He’s jumped into the arms of News Corp.’s Rupert Murdoch and Microsoft’s Bill Gates in forming alliances du four. He sold a 20 percent piece of the company to British Telecom for $4.3 billion in June 1993. Last year, he bought a 13.5 percent stake in News Corp. for $2 billion. News Corp. and MCI own the frequencies needed to start a satellite TV service (provisionally known as MCl/News Corp. DBS Joint Venture). They have discussed links with cable giant TCI, which is the leader in PrimeStar, another satellite consortium. For $1.1 billion, MCI bought SHL Systemhouse, a Canadian computer-systems integrator, to handle corporate telecom networks. MCI’s broad alliance with Microsoft makes the telecom the primary distributor of Microsoft’s online network and a new range of Internet services. Its joint ventures with the U.K.‘s BT and Mexico‘s Grupo Banamex led to Concert and Avantel, both global networking services. MCI Metro, a local service unit, is building fiber-optic loops in 25 major U.S. cities to provide local and long-distance links. Roberts has decided that MCI will not build or own a wireless network; instead, in September of last year, he bought Nationwide Cellular, the U.S.‘ largest independent reseller of cellular phone service, for $210 million.

Is this a strategy or convergence adventurism? Roberts, a 24-year MCI veteran who played a key role in transforming MCI from a start-up to a $15 billion long-distance carrier, says he’s not afraid to take risks or change course when necessary. The trouble is, MCI still nets most of its current income from long-distance service, and most of these new ventures will take time to pay off.

According to Forrester Research, the entire U.S. telecom market will grow by 250 percent in total traffic over the next 10 to 15 years-but only by 30 percent in revenues, of which AT&T will have the largest share. The price wars among AT&T, MCI, and. Sprint have proved costly to all three. Loyal long-distance customers (assuming that phrase isn’t an oxymoron) come at the price of multimillion-dollar ad campaigns. With local telephony-the much-coveted plum-now being deregulated, MCI is no longer playing long distance’s David to AT&T’s Goliath. As MCI poaches on the Baby Bells’ local turf, they, in turn, salivate over long distance.

Roberts says half of MCI revenues in the year 2000 will come from products the company doesn’t offer today. He hired Internet guru Vincent Cerf to launch a major online effort and create future products for the Net. Last October, the company opened an interactive outlet store in Arlington, VA-MCI Connections-hoping to familiarize consumers with a variety of technology products, from paging to Internet surfing. Eventually, MCI hopes to expand the outlet and market an array of packaged services.

CE caught up with the Kansas City, MO, native and amateur magician at MCI’s Washington, DC, headquarters.


When the smoke clears, how much of the $500 billion convergence market do you think MCI can get?

The industry is changing so fast, and the market is still a work in progress. From a strategic standpoint, we’d like to double the company’s revenue by 2000. Now we’re a $15 billion company; by then, we’ll be pushing $30 billion. Growth will come from new businesses: 50 percent from services that currently aren’t on the table-which implies that we will be gaining from industries that are converging, including computers, entertainment, software content, telecommunications.

What are some of the services you might offer?

International is the fastest-growing segment of the market, and I don’t think that’s going to change. Together with British Telecom, we are putting in the networks that will be the platforms for the delivery of new services. Our recently announced partnership with News Corp. will give us an important link to worldwide satellite capability that encompasses the U.K., and in the future, Europe, the Far East, India, and South America. This partnership will be able to provide services to customers in this era of converging technology with information and data services.

MCI’s partnership with News Corp. is content-oriented. That goes against the rule of thumb, since as a distributor, you want to be a vehicle for many kinds of content.

We have never looked at conventional wisdom or rules of thumb as the way we were going to do business. These convergent markets have had nicely defined splits-content on one side, distribution on the other. And telecommunications also had nicely defined splits: local, long distance, wireless, and international. That’s all starting to merge. Content and distribution were monopolistic in the way they were approached. Cable companies in theory are not monopolies, but they operate as unregulated monopolies. And content companies had many monopoly characteristics. MCI always has been able to go into monopoly markets and capitalize on them.

Since it’s not a core competence, how can you get the most out of content?

By recognizing that it’s not a core competence, and partnering with someone who’s very good at it. MCI works well through partnerships; most other companies have to control, to dictate results. I don’t think we can be the best movie makers or content generators, and I don’t think Rupert [Murdoch] would look at MCI’s network and say that was his company’s strength. We both know the winners will be those who combine their strengths.

MCI has been regarded by some observers as something of a promiscuous alliance-maker: You form an alliance, stop it, and reconnect with another partner. Does this make you an unreliable partner?

Is the ability to change direction a weakness or a strength? Some companies have such large egos that they could never change direction. But we consider that ability a strength.

As fast as convergence changes things, our ability to refocus will save us from taking the wrong strategic courses of action. Success in this new world will come to those companies that can be flexible, quick in decision making, and quick to change courses as required.

What are your plans for your satellite TV service with News Corp.?

I see a series of opportunities using a high-powered satellite that can be added to the traditional services of home entertainment, pay-per-view, traditional television, and so forth. The other component will concentrate on business markets.

First, there is a whole spectrum of products and services we’ll offer to businesses that want to sell products into the home. And in businesses themselves, there’s a need for information in an increasingly sophisticated format: video news clips to distribute information between plants using broadcast high-powered satellite capacity. And new fields: medical care, health care, the ability to distribute medical imagery. A doctor’s office in Hayes, KS, can have access to sophisticated expertise by pulling up databases that can help diagnose from afar.

There’s also the corporate use of new technologies-new ways to train personnel by downloading broadcast information, digital satellite into LANs, or using PCs.

Will the money be made in business or entertainment applications?

Business. Why would this be different than any other market?


Is the Internet friend or foe?

I’m very much of a bull on the Internet: I believe it’s going to play a tremendous part in this company’s future as well as that of those companies involved in convergence. And that will be because of the value-added; the advertising components; the reality of services you deliver to customers; the way you sell, market, and merchandise to those customers.

The economics of how the network grows, who pays for what piece, and what are the value-added services you might charge for-versus what are subsidized through dictate-are evolving.


When will your alliances with British Telecom and Avantel be profitable?

With BT, we are moving very aggressively. We have a network in place, we have services extended to some 48 to 50 countries, we have a backlog of sales. We’re ahead of everyone else in the pack, and we’re looking at break-even in about three to five years. That we started earlier, selling earlier, putting the network in earlier, makes us a joint enterprise to be contended with. We’re looking for perhaps a third party, a Far East company, to work with us.

Who might your partners be in Asia?

A large Japanese partner, NTT, would be great. But that’s not doable yet, since Japan is still in the process of determining its rules and regulations.

What are MCI’s critical areas of international focus?

Mexico and South America. Take Avantel as an example. In Mexico, a $4 billion to $5 billion market, we put together a venture; agreed to commit $450 million; and all of a sudden, the peso devaluation caused a lot of people to pull back, stop, think, and not move forward. We continued to move forward aggressively. Today, we have about two-thirds of our fiber plant installed; we’ve wired up all the major areas and continued intense negotiations with Tel-Mex over interconnection costs, rates, terms, conditions. And what happens on January 1, 1997? Fully 60 percent of the Mexican market opens up to competition on an equal access basis, and we’ll be the only player with an installed network. It is similar to what happened in the U.S. with the Bell system. I look at it as a wonderful opportunity.


One of the interesting things that will come out of the telecommunications bill is the fight for local service. Are you and the regional Bells destined to compete with each other for both business and residential services?

The short answer is, absolutely yes. And I hope it’s more than regional Bells. I hope cable companies become more competitive, too, since the more competitive you can make the local monopoly, the better off everyone is. We write a check to the local exchange carrier for fully 45 cents on every dollar we take in. It doesn’t take a rocket scientist to ask, “How can I lower the cost and deliver more profits?”

The question is whether there is any market that we can’t take 10 percent or 20 percent of. The regional Bells need everything. They already have 50 percent of the long distance. I know because I write them the checks. They need the other 50 percent. We don’t need it. We just need 10 percent or 20 percent of that market.

Yes, but while that’s happening, they’re targeting your long-distance service. So you need not only to be offensive, but defensive.

When the Bell operating companies get in the business, they’re going to be selling yesterday’s product. Anyone can come in and commoditize the long distance. Today’s product has evolved into much more sophisticated offerings and packaging. Nynex may have great name recognition in New York, but I don’t know if in Little Rock, AR, it would have the same name recognition.

Will MCI team up with a regional Bell?

Possibly. Since there will be a whole new set of rules, we are going to explore all the options. The difficulty would be cultural. You will see some interesting alliances. We’ve even talked to AT&T about trying to open up the local exchange market faster.


Now that telecommunications is being deregulated, what will prevent telephony from becoming commoditized?

You can’t look at this converging market any longer in its little bitty compartmentalized niches. “This is commoditized, this is not, this is not.” You’re trying to sell a spectrum of things.

So you’ll bundle and reconfigure…

And add new values. For example, under our agreement with News Corp., we’ll be able to offer promotions that work something like this: For MCI customers, there will be premiere showings nationwide in 50 cities of the new XYZ Fox movie. Or, as an MCI customer, you’ll be able to buy the video for “Die Hard 15” or whatever it might be three months before anyone else.

And there’s no single market out there: Some people like one option, some people like another-and the key for us is knowing what the customers want. We came from an industry in which your choice was to buy a black telephone. But what if I wanted a red one? The answer was, “No, we’ll give you a black one, and you’ll be happy with a black one.” That’s the monopoly mentality. And we’ve had to win each MCI customer by asking what he or she wants and being flexible enough to provide it.

Yes, but the world after the Telecommunications Act of 1996 has a lot of nimble companies that consider themselves just as customer-driven as you, some not even in telephony. How do you intend to keep up?  

It’s going to take a number of years to shift some of these competitors, including regional Bells, from a monopolist to a competitor mentality.

Meanwhile, I have to keep this company thinking small. We need to keep communications wide open. We don’t  want to restrict how information flows up and down the company. There are a few essentials about thinking like a small company: One is that everyone, including me, is responsible for selling the customer. Or if something goes wrong in the installation or the provision, I’m in the loop.

But you can’t be everywhere at once.

My point is that I must have a sales director’s mentality, a sales vice president’s mentality, a divisional president’s mentality. Look at another big company with three letters in its name, starting with an “I” and ending with an “M.” In the ’60s, ’70s, it was the premier marketing company in the world. Now, Lou Gerstner has turned the company around, but what happened to cause it to fall? It’s not as if the computer industry were falling down. Two things: The decision making between the customer and the top got too far apart; there were too many layers to respond effectively to the customer, regardless of whether you were looking at product development or responsiveness. Second, the company lost sight of its strategic initiatives and didn’t respond to an evolving industry. It became bureaucratic.

My challenge for MCI is to keep it from becoming bureaucratic. When I find bureaucracy within our ranks, I put a stop to it immediately.

About J.P. Donlon

J.P. Donlon
J.P. Donlon is Editor Emeritus of Chief Executive magazine.