MCI declares war on 'Baby Bells'

January 05, 1994|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- In what amounted to a declaration of war on the nation's local telephone companies, MCI Communications Corp. said yesterday that it is building a $20 billion telecommunications network that will allow consumers to choose their local phone company just as they now choose their long-distance carrier.

Drawing a parallel with MCI's successful battle a decade ago to introduce competition for long-distance telephone calls, which used to be monopolized by AT&T, MCI officials said the "Baby Bells" would find their local monopolies challenged over the coming years.

"We are kicking off an aggressive thrust into the local access area. We are going to break the Bells' stranglehold on local access and offer choice," said Bert C. Roberts, MCI chairman and chief executive.

About $2 billion of the $20 billion total will be earmarked for building the local phone network,which will be run by a new subsidiary called MCI Metro, Mr. Roberts said. The rest will be spent upgrading MCI's fiber-optic network so it can offer video on demand, electronic imaging and greater data capacity.

"This will be viewed eventually as more important than the Bell Atlantic-TCI deal. It's a rare, defining moment in the telecommunications industry," said Peter Bernstein, an analyst with Probe Research, a New Jersey institutethat studies the telecommunications industry.

Bell Atlantic announced in October a $30 billion merger with Tele-Communications Inc. If approved by federal regulators, the

deal would make a company capable of creating and delivering interactive programming to customers through televisions, personal computers and telephones.

Although MCI's plans do not involve producing programming, it aims to be a major player in the telecommunications industry by offering the hardware that will carry the sophisticated programming.

Construction will start this year in the 20 largest metropolitan areas, including the Washington-Baltimore region, company officials said. They would not specify, however, if initial work would be limited to the District of Columbia or would also include Baltimore.

MCI acquired rights of way in 200 U.S. cities and access to 2,000 buildings from Western Union four years ago.

DTC MCI Metro's newly named chief executive, Gary Parsons, said regulatory restrictions mean that MCI will be able to offer only limited local telephone service to businesses. In Baltimore, this will put it in competition with Bell Atlantic-Maryland, the new name for Chesapeake & Potomac Telephone Co. of Maryland, and MFS Communications Co., an Illinois-based company that specializes in business telephone services.

But MCI vowed to lobby state and federal legislators to change regulations so it can provide full local services to businesses and, in several years, to residential customers. "We will wage war" to change the rules, Mr. Roberts said.

At the same time, the company will spend $18 billion upgrading itsfiber-optic network so it can offer high-speed data services -- the much-touted information superhighway -- to universities, businesses and, also several years down the road, to residential customers.

The company billed the project, which is currently being used by the National Science Foundation, as the nation's first coast-to-coast data highway. Competitors AT&T and Sprint, however, each said they already have a similar system in place.

The regional phone companies, which were given monopolies over local telephone service when AT&T was broken up 10 years ago, were critical of MCI's planned expansion. Bell Atlantic President James G. Cullen said MCI cannot expect to offer local phone service and still argue that the regional Bells should not offer long-distance service.

Mr. Cullen predicted that legislators would rewrite telecommunications laws this year so that regulations are simultaneously lifted on the regional Bell companies and long-distance carriers. This would allow Bell Atlantic to offer long-distance service and AT&T, Sprint and MCI to offer local service.

Yesterday, the White House said Vice President Al Gore will give a speech next week outlining the Clinton administration's plans to deregulate the telecommunications industry.

One of the outstanding issues is how to finance money-losing phone service -- or "universal" service -- to remote areas, which the regional phone companies say they currently subsidize from more lucrative services to businesses, said Richard Cimerman, director of the Maryland Public Service Commission's Telecommunications Division.

"The issue is not so much whether to allow competition -- that will happen -- but what are the appropriate rates and what to do about universal service," Mr. Cimerman said.

While analysts agreed that MCI's announcement would help speed up construction of the electronic data highway, they were less sure if the deal was good for MCI. Liam Burke, of Baltimore's Ferris, Baker Watts Inc., said he had mixed feelings about MCI's decision to spend $20 billion.

"It's a huge commitment, even for a strong company like MCI," Mr. Burke said.

Robert X. Cringely, an editor with InfoWorld, added: "The financing is amorphous. Their partners are amorphous. It's not clear what the specifics of this are."

MCI's stock dropped $1.875 yesterday, to close at $26.625.

MCI could save some money in the long run because it currently must pay the regional Bells 40 to 45 cents of each dollar that it collects on a long-distance call. The regional Bells say they need the money to provide MCI and other long-distance carriers with the telephone switching and to subsidize service to money-losing areas. But if MCI builds its own network, it can bypass the regional Bells and save the payments.

In addition, the upgrading of its fiber-optic network that it announced yesterday should allow it to sell more services to existing customers, Mr. Burke said.

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