If approved by federal regulators, the proposed $115-billion acquisition of Sprint by MCI WorldCom would be the biggest corporate combination in history. It would give the new company, to be called WorldCom, a market value of some $200 billion, which is larger than that of AT&T. It would also significantly alter the hotly competitive telecommunications landscape.
To assess the potential impact of the proposed acquisition, Knowledge at Wharton spoke with two telecom experts: Gerald Faulhaber, professor of public policy and management at Wharton and a former manager at Bell Labs and AT&T, and G. Anandalingam, professor of information management at Wharton and National Center Professor of Systems Engineering at Penn’s School of Engineering and Applied Science.
Knowledge at Wharton: Why is this the right deal for MCI WorldCom and Sprint?
Anandalingam: It’s a good deal for MCI WorldCom because MCI WorldCom wants to be a major player in the communications industry and the name of the game now is convergence. The company wants to be a player in wire and wireless, but also become an Internet service provider and perhaps move into the cable market. The one area where MCI WorldCom had a deficiency was wireless. By getting Sprint, MCI WorldCom would have a very good wireless system. The second thing is that the combined company becomes a more dominant long-distance player in getting Sprint. Although both companies separately have eroded AT&T’s market share over a period of years, they haven’t made major inroads recently. Due to its roots as a local telephone company, Sprint has about eight million access lines. This gives MCI WorldCom enhanced local presence as well. Further, Sprint has recently invested $2.5 billion in ION [integrated on-demand network], which can bring fast Internet access and multiple phone lines to houses and small businesses through a single connection. The merger makes sense from a strategic point of view, but there’s another question: Can these two companies coexist? WorldCom will emerge as the leading company. The merger will succeed only if the people at Sprint can work at WorldCom and only if the wireless capability that Sprint brings can fit seamlessly with the services provided by WorldCom.
Faulhaber: It’s a good match between Sprint and MCI WorldCom. WorldCom has little wireless presence and Sprint does. That jumps WorldCom into that end of the market, which is where it needs to be to be a world player. But long-term, long-distance is not the most important issue. Increasingly, long-distance is a commodity business with thin profit margins. The bigger issue is where companies go from there. AT&T has been aggressively pushing itself in both wireless and as a high-bandwith, cable supplier to residential customers. That’s a revolutionary thing. A merger would put WorldCom in a position to respond to AT&T. Eventually, we’ll all have fat pipes into our homes that will carry everything: cable TV, interactive video, the Internet.
Knowledge at Wharton: If approved by the Federal Communications Commission and the Justice Department, how would the merger affect other telecom companies?
Anandalingam: My sense is that AT&T would prefer that its competition not be as large as itself, and I’d be surprised if AT&T didn’t lobby hard to stop this from happening. Otherwise, I’m not sure AT&T has to do anything different from what it has been doing.
Knowledge at Wharton: What about the impact on telecom companies in Europe?
Faulhaber: Both Deutsche Telekom and France Telecom had 10% stakes in Sprint and couldn’t do anything with them. There’s a chance this merger could blow them out of the water, especially if you subscribe to the notion that companies have to be big to compete. If there would be any hope that the Europeans would have a presence strong enough to counter the Americans it would be a Deutsche Telekom-France Telecom merger. But that’s just not going to happen.
Knowledge at Wharton: What about the Baby Bells?
Faulhaber: To the extent that the Baby BellsBell Atlantic, SBC Communications, the two powerhousescan get into the long-distance world, they increase their product set. But looking to the future, what AT&T and MCI WorldCom are doing is potentially very dangerous to the Baby Bells. At the time of the AT&T divestiture the Baby Bells talked about being competitive, but I don’t think they knew what they were talking about. They still depend on regulators and on their core business of local phone service. They’ve done little that’s new. I don’t see them as an innovative force in the industry. For example, Bell Atlantic talks about the importance of the Internet, but has sat on DSL [digital subscriber line] technology, which could put them into the broadband business big time, for almost a decade, and done nothing with it.
Anandalingam: Bell Atlantic is trying to become a national communications company but it can’t provide long-distance service. The company has a wireless presence on the East Coast but nowhere else. Now it can’t even pursue an alliance with Sprint to strengthen its wireless business and be a player on the national level. BellSouth wanted Sprint for the same reason. So, the regional Bell operating companies are being forced to consolidate in local areas. They also might lobby the FCC and Justice to disallow this merger. There’s no question their future has gotten bleaker. They will have to deal with two major players in every segment of the market except local phone service. The merger makes things much harder for them.
Knowledge at Wharton: Will we see further consolidation in the industry?
Anandalingam: It’s likely that some of these companies, like AT&T, will try to strengthen their alliances internationally. MCI WorldCom has tried to do that. But AT&T already has an alliance with British Telecom and has been on a shopping spree more recently than WorldCom. AT&T may also try and flirt with acquiring new entrants into the facility-based long-haul market such as Qwest Communications International, Level 3 Communications and Williams Communications Group, a publicly traded company, 86% of which is owned by Williams Cos. However, given its recent purchases, I don’t expect any big moves by AT&T.
Knowledge at Wharton: How will the FCC and Justice respond to the proposed acquisition?
Faulhaber: In the short run, the merger increases concentration in the long-distance market. But in the long run, the merger poses a real competitive threat to AT&T. If the regulators are more focused on the long run, this merger could run into trouble. But if they take a longer-term view, they may well encourage it. I would expect the merger to be approved in no more than six months. The government really can’t keep the parties hanging longer than that. As I said, the real action in the future won’t be in long-distance, it’ll be in all those other services. If you look down the road 10 years, there won’t be any identifiable phone business. There will be companies that have pipes to send bits of information into your home. The big issue will be how regulators deal with the emergence of broadband services.
Anandalingam: I think the FCC is disinclined to encourage the formation of huge companies. The commission has been working tremendously hard to encourage competition in all segments of the market. A huge merger like this puts things closer to the way they used to be when AT&T was a monopoly. Regulators want to know whether the merger will cause the price of services to go up or down. My sense is there’s significant downward pressure on telephone prices and I don’t see that trend changing in the next one or two years. The second thing regulators will want to know is whether a merger would lead AT&T to try to acquire other telecom companies like Qwest and Level(3). Another issue is whether a merger would slow down technological development in wireless. But the only way for MCI WorldCom to respond to competition from AT&T is to be in every segment of the market of this industry. MCI is doing what it has to do to survive. So, ultimately, I don’t see why the FCC would disallow this merger. Approving it makes sense.
Knowledge at Wharton: Since the breakup of AT&T in the early 1980s, it seems we’ve moved from having a monopoly in telecommunications to an oligopoly. Is this a good thing?
Anandalingam: When the government broke up AT&T, it really expected to see lots of different companies competingand that happened for a short time. But technology is so different today than in 1984. Who foresaw the rise of the Internet? Who thought wireless would become so popular? Breaking up that monopoly has not been fruitless. In the long run, the FCC has to continue to be a watchdog. In an oligopoly situation, it’s natural for prices to creep up and for companies to share the market in a way that may not be good for consumers.