Users Blast WorldCom Merger

Call it a hit on Wall Street and a bomb on Main Street.

Users last week ignored the celebration of MCI WorldCom Inc.'s planned US$115 billion buyout of Sprint Corp. and denounced the deal as potentially eliminating one of their most cherished options -- an independent supplier of high-quality frame relay, IP, ATM and voice networks.

The gargantuan merger - the biggest ever in any industry - faces a minimum year-long review by antitrust and telecommunications regulators. And there was no immediate indication whether MCI WorldCom would drop or even change any of Sprint's voice and data offerings, except for selling off its Internet backbone to gain the regulators' blessing.

Yet users and analysts fear that the combined company -- to be called simply WorldCom -- could face innumerable obstacles if it even attempts to integrate its collection of at least six frame relay networks and three ATM networks, in addition to the two Internet backbones. One criticism being raised is that the MCI WorldCom/Sprint combo will tighten up contract terms and become stingier about negotiating lower prices because there won't be two firms competing against each other anymore.

"What we're concerned about is that it's going to mean we can't [pit] them against one another," says George Sullivan, senior network architect at Northrop Grumman in Bethpage, New York. Sullivan uses MCI WorldCom packet data services, and Sprint voice and private lines. Sullivan says he fears a repeat of a recent changeover of MCI WorldCom account teams "which didn't go as smoothly as it should have."

"I don't see what it's going to gain for us," agrees George Hallenbeck, until recently the telecommunications director at Marsh & McLennan and now an independent consultant writing requests for proposal for other users. "I need to see these two companies supplying their basic core services independently. I need to have an alternative source of supply."

Some MCI WorldCom customers were enraged that, in their view, MCI WorldCom CEO Bernard Ebbers had again turned his attention to a megamerger rather than customer service.

"In my opinion, they can't deal with the networks they have. I can't imagine what will happen with a new one," says Mark Collins, manager of network services and telecommunications for Bunzl USA, a plastics distributor in St. Louis.

For their part, Sprint customers said they feared a rerun of billing and customer service problems that resulted after WorldCom swallowed MCI. "This merger really gets my goat," said one in an e-mail to Network World. Said another who also asked not to be identified: "What I think about this deal is unprintable."

And Network World Fusion's forum on the merger crackled with denunciations of Ebbers for corralling Sprint. "Will someone please take away Bernie's checkbook?" pleaded one network professional who said he has worked at various companies and always migrated them to Sprint.

Unlike WorldCom's 1997 acquisition of MCI -- which brought together WorldCom's UUNET unit and more than 100 local fiber networks with MCI's long-distance prowess -- the reasons for this deal seemed to have little to do with enterprise networking.

The merger does give MCI WorldCom one of the nation's top consumer wireless networks -- Sprint PCS, which covers 280 local markets around the country. Ebbers also extolled Sprint's recent heavy investment in licenses for the wireless Multimedia Distribu-tion Service. That potentially gives the company a way to bypass Bell company local loops to reach homes for voice and data traffic, just as AT&T is trying much the same thing for residential users located away from its cable plant.

But on the business-services side, the deal seemed to catch Sprint flat-footed. Officials of both merging companies made little effort to hide the fact that they hadn't even begun to discuss how to sort out their fast-packet and IP networks. A Sprint spokeswoman said that even Sprint Chief Technical Officer Marty Kaplan couldn't shed much light on the merger: "I'm pretty much certain he hasn't had the opportunity to talk to anyone at MCI about their plans on this," the spokeswoman said.

Some experts labeled the merger nothing more than a brazen play to restore disappearing profit margins in the long-distance business -- which for consumer calls are now little more than a penny per minute after MCI WorldCom or Sprint pays the Bell-company access charges on both ends of a 5-cent call.

Now MCI WorldCom will have more freedom to set prices without seriously reacting to any competitor other than AT&T, says Frank Dzubeck, president of Com-munications Network Archi-tects, a consulting firm in Washington, D.C. MCI WorldCom wants to buy Sprint simply because Sprint's pioneering consumer offers "were forcing everybody to be honest," he says. "But any textbook that you go to will say you can't do this."

For new deals with large enterprise nets, Sprint is pricing even lower than the 4- to 5-cent deals now becoming common industrywide - as low as 3 cents per minute with a dedicated access line, Dzubeck says. And Sprint has been more flexible on liability, termination and other contract clauses than MCI WorldCom, says Hank Levine, a Washington, D.C., attorney who negotiates user contracts. Both Dzubeck and Levine fear that such attractive deals may be harder to get if the merger goes through.

So You're My Dance Partner

Top MCI WorldCom and Sprint officials say the combination of their companies will enhance their ability to bundle services for consumers and businesses. And the deal would give Sprint the big-city fiber rings in the U.S. and overseas it has lacked. Such rings strengthen a carrier's ability to offer end-to-end services.

But some users said a better idea would have been for Sprint to ally with BellSouth, which made a losing bid for Sprint. That's because even carriers such as MCI WorldCom and AT&T, which have local fiber rings, don't cover nearly as many locations as the Bells do. "If anything, the [long-distance] carriers seem to be losing the cooperation of the local exchanges," says Northrop Grumman's Sullivan, pointing out that many of his manufacturing facilities are located far from city centers.

Regulators and even Sprint employees were reported to be feeling the same way. "[Sprint employees] were hoping to become the long-distance division of someone else," Levine says. "They would have held more of the cards in that situation. Now the MCI WorldCom people are smiling and waiting. They're survivors of this jungle. And the Sprint people are going, 'Oh, damn.'"Sprint officials admitted the mood inside their company was tense. "I can't say that everyone is totally accepted and comfortable with it," says Peggy Arnone, product manager for Sprint's highly respected frame relay class-of-service offering.

Arnone has directed the recent, ultra-quiet rollout of Sprint's voice over frame relay service as another convergence alternative to Sprint's ATM-based Integrated On-Demand Network.

MCI WorldCom said Sprint would get six board seats and MCI WorldCom would get 10, and Sprint CEO William Esrey would become the combined company's chairman. But that's a move long-time WorldCom watchers labeled an old tactic to ease a CEO of an acquired company -- like competitive local carrier MFS or MCI -- out of the picture.

If the Federal Communications Commission and the European Union approve the merger, they are widely expected to require the combined company to sell off Sprint's Internet backbone, which scales from OC-3 to OC-48 among 15 top U.S. cities. But few analysts believe that's the only thing MCI WorldCom will eliminate. Sprint has incumbent local telephone networks in 18 states, mostly in smaller towns. "[Ebbers] doesn't want that, with all the state regulatory problems. He's going to sell it off, too," says Dzubeck.

Levine goes further, predicting a sale of Sprint's regular long-distance network as well. "He doesn't need Sprint's points of presence, and he does not need Sprint's fiber," says Levine. "He just wants the customers."

By contrast, the companies' total of six frame relay networks -- four at MCI WorldCom, two at Sprint -- may be retained. MCI WorldCom officials, having shelved an integration program as a result of the carrier's recent frame relay outage, have held out the possibility of offering users one network as a backup to another in a package.

"Anytime you migrate and merge, you're just asking for trouble," says Cathy Gadecki, a TeleChoice analyst. But Gadecki is skeptical the two companies can position one network as a backup to the other.

"You need to be connected to different software stacks, which means you need to be connected to two different switches," Gadecki says. "It's a nice marketing story, but I don't think it's terribly real."

As an alternative, MCI WorldCom and Sprint are likely to point to some common vendors as an argument that they can integrate their networks. But that argument won't wash, say experts, because those vendors are themselves largely the product of mergers.

For example, the legacy MCI frame relay network and the newer of Sprint's two frame networks are both based on Nortel Networks gear. But the equipment comes from the two different halves of Nortel: the MCI net consists of Bay Networks routers, and the Sprint net is based on Passport ATM switches from the original Nortel.

"The fact that they're under the same roof doesn't guarantee any more compatibility between the two networks," says Stephen Von Rump, a former MCI WorldCom data services marketing chief and now chief operating officer at videoconferencing vendor VTEL.

Another concern for users is that staff levels at the new WorldCom would likely drop, despite Ebbers' protests that the merger would provide new growth opportunities for employees. "You've got so much overlap here it's ridiculous," Dzubeck says.

At MCI, "the only people who have stayed are the lifers," says Deb Mielke, a former internetMCI and MCI System-house official who now runs a Dallas consulting firm. She predicts a massive outflow of Sprint executives.

That prospect frightens some users. "MCI WorldCom staff levels are so low that we are constantly fighting to get jobs accomplished," Bunzl's Collins says. "I constantly have orders that are wrong or haven't even been placed weeks after the request was made. The technical understanding of the network doesn't exist; I have even had their people cutting each other down and admitting that they have no idea what is going on with the network."

Mort Rahimi, vice president of telecommunications at Northwestern University, says that if the field of dominant long-distance carriers is reduced to two, it may be time to unleash the regional Bell operating companies on the long-distance market to ensure continued competition. "We don't want to get back to the days of Ma Bell, with only one provider," he says.

For others, the merger would create unique problems. For example, the federal government's current comprehensive telecommunications contract, called FTS 2001, has two vendors: MCI WorldCom and Sprint. If the merger closes, it would violate a 1980s congressional mandate against dealing with one telecom vendor, Dzubeck says.

"The General Services Administration can't let this occur," he says. "They're going to have to basically go back and recompete [the contract]."

(Senior Editor Tim Greene contributed to this story.)SIDEBARFor nearly a year and a half, Sprint has practically wrapped its entire public identity around the concept of the Integrated On-Demand Network. ION is an ATM-based convergence service based on specialized carrier-managed customer premises equipment and a single broadband access line for voice and data. Sprint CEO William Esrey touts ION everywhere he goes.

But the service has been slow to roll out and has had little effect on the market. And although for now MCI WorldCom officials say they'll find a role for ION in the merged company, analysts are debating what the firm will really do with it.

"It was an interesting marketing ploy for 18 months," says Frank Dzubeck, president of Communications Network Architects, a consulting firm in Washington, D.C. "I don't see MCI following through on it." Sprint has to build separate points of presence for ION, he says, making it an expensive proposition for the carrier; one that has already lost a fair amount of money (see graphic).

TeleChoice broadband analyst Cathy Gadecki agrees. An ATM-based convergence service can help enterprises save money on their internal networks, she says: "But the world has moved on from that."

Many of the same companies that could have bought ION, she says, are now fired up by the prospect of using telecommunications to make, rather than save, money - and that means an IP-based extranet for electronic commerce.

However, Giga Information Group telecom analyst Lisa Pierce says that MCI WorldCom's labs have been working on an ATM-based converged voice/data network similar to ION. So she believes that MCI WorldCom will in fact make ION part of its product portfolio.

But users are also looking for ways to incorporate voice in ordinary frame relay and IP networks, Pierce says. And Network World last week confirmed that over the summer, Sprint quietly rolled out a voice over frame relay service to its sales force even while publicly promoting ION.

Under the new service, Sprint places and manages a Cisco 3810 voice-enabled router on the customer premise -- or allows the customer to install its own Sprint-certified voice frame relay access device, such as those offered by Nuera or Nortel's Micom division. These devices typically produce 8K bit/sec of compressed voice, and Sprint scales up the committed information rate, or guaranteed bandwidth, on the frame relay circuit to a multiple of 8K bit/sec. Under the service, users can even dial in to a remote PBX over the frame relay network and place local calls in a distant city, cutting out long-distance tolls even on calls outside the enterprise.

That kind of incremental service may be an easier one for users to swallow than a full migration to ION, and even loyal Sprint customers may not cry in their soup if ION doesn't make the merger cut. "The arrangement didn't make sense to us," says George Sullivan of Northrop Grumman, who recently had his Sprint representative in to talk about ION. "If you put all your eggs in one basket and you have a single access line, what happens if it breaks? You can't leave a voice mail to say your e-mail is down, and you can't leave an e-mail to say your voice is down."

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