Guaranteed profit for MCI, rivals placed on hold


August 04, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

New York -- There comes a time for every remarkable company when it becomes vulnerable to even the most ordinary of all events -- a slowdown in the economy.

That recently occurred for MCI Communications Corp., the Washington-based telecommunications giant whose revenues rose during the past decade at the spectacular rate of about 49 percent annually.

"In the past, many of us believed the economy had little impact," MCI President Bert Roberts Jr. recently told analysts here. "It does."

The impact of that shift remains to be seen, but it could be profound. MCI's profits have never had the consistency of its revenue growth. The company has often been thought to have extraordinary promise -- once an extraordinary amount of investment was in place. Yet any interruption in the growth of the core business, long-distance communications, could be unsettling.

In retrospect, the critical change became evident in the fourth quarter of last year, when the recession affected consumption of a product thought to be immune to the business cycle: long-distance calling. Christmas arrived, but the usual barrage of year-end calls did not.

Perhaps people sent cards instead, or shifted to faxes, or used computer modems. Whatever the reason, the impact was clear. For the first time in four years, MCI reported no quarterly gain in revenues. And, unlike the last plateau, there was no change in access charges or a regulatory oddity to explain it.

MCI wasn't the only long-distance company affected. "I would categorically say the entire telecommunications industry was caught off guard," said Craig Ellis, an analyst with C. J. Lawrence.

Mr. Ellis noted a more disturbing, long-term trend. Annual growth in long-distance calling peaked at 14 percent in 1988, then fell to 12 percent in 1989 and to 7 percent last year. It is now estimated to be growing about 6 percent to 7 percent.

With the overall economy now perceived to be expanding -- albeit only marginally -- the question is whether telecommunications use will once again mushroom.

The optimistic view -- shared by many -- was expressed by MCI's Mr. Roberts. He contends that it should grow at about 8 percent more than the expansion in gross national product -- in other words, somewhat more than 10 percent a year. With additional market share, growth could be 15 percent to 20 percent.

Mr. Roberts can be reassured by the industry's historic record of growth. Gregory Sawyer, an analyst with Sanford Bernstein & Co., notes that the industry hasn't expanded by less than 5 percent annually since the Korean War or had a down year since the Depression.

And even at its current level of growth, it outpaces the overall economy.

There's a pessimistic perspective, too. The overall rate of growth may have begun a sustained decline. And potential profits from the remaining growth may be consumed by competitively driven price cuts.

In the 1980s, notes Mr. Ellis, there was a tremendous boom among service companies, which make heavy use of telecommunications to transfer data. Banking, for example, is at the tail-end of a transformation. Instead of dealing with money in the form of currency, which required vaults, banks now deal with money in the form of electronic notations, which requires computers and phone systems.

But the service industry -- particularly the financial segment -- has been badly damaged recently, and its prospects have dimmed. That, Mr. Ellis contends, could force telecommunications companies to substitute gains in market share for overall market expansion.

"What we have seen is that if unit growth declines, the competitive environment gets nasty," Mr. Ellis said.

The greatest risk for the companies involved, mainly AT&T, US Sprint (United Telecommunications Inc.) and MCI, comes if that competition becomes focused on price. That, Mr. Ellis contends, depends on whether long-distance telecommunications is merely a commodity -- a service with the only differentiating characteristic being price.

The companies' marketing stresses quality first -- but price is never left out of the picture. Recently, MCI has been adept at devising a barrage of new products and continued improvements in billing systems.

Sprint and AT&T have tried a similar approach, emphasizing service. Upbeat analysts, such as Bernstein's Mr. Sawyer, contend that type of competition is more likely in the future than price-cutting.

But Joel Price, an analyst at Donaldson Lufkin Jenrette, says the three big companies have been tying up major accounts by negotiating long-term contracts with substantial discounts. Margins have only been preserved because of increased productivity in the work force and the equipment. In the future, companies may not be able to find such internal savings to offset price cuts, Mr. Gross adds.

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