WorldCom alternates sought

Company's customers lining up replacements

Contracts have escape penalties

July 06, 2002|By Joseph Menn | Joseph Menn,SPECIAL TO THE SUN

Some of WorldCom Inc.'s big corporate customers are scrambling to line up alternate suppliers for systems that transmit company data internally and to business partners and customers, but analysts predict that many companies will suffer one way or another from WorldCom's problems.

The majority of the largest clients have long-term contracts with WorldCom that set steep penalties for switching, even if WorldCom files for bankruptcy reorganization. As a result, many companies might be forced to choose between paying those breakup fees and letting their vital communication networks deteriorate.

Only about 20 percent of the big corporate customers have escape clauses in their WorldCom contracts that allow them to walk away if WorldCom's financial condition slides past a certain point, said analyst David Willis of Meta Group.

Because penalties for the remainder of customers can run as high as 50 percent of the cost of staying in the contract, many will likely put up with problems.

"We'll have more outages, and we'll have outages that last longer," Wills said. "It will be a gradual decline in service levels."

At the end of the line, consumers will see slower Web site connections, because WorldCom carries more than 40 percent of Internet traffic.

The good news is that almost no one believes WorldCom's system will be allowed to go dark, which would be catastrophic for the Internet backbone. If WorldCom enters bankruptcy proceedings, it likely will emerge debt-free or sell its networks to other vendors.

But corporate customers are already seeing a slowdown from WorldCom, which is laying off 17,000 workers, analysts said.

Companies are beginning to make back-up arrangements and are steering at least some of their traffic to WorldCom competitors. A full-scale switch can take months, depending on the complexity of the system.

"They're getting other suppliers lined up, because you want to have options ready to go," said telecommunications analyst Jeffrey Kagan. "You have to dig your well before you're thirsty."

WorldCom, beset by an accounting scandal that has drawn a lawsuit from the Securities and Exchange Commission and a congressional inquiry, said it has seen little flight by major customers.

But competitors AT&T Corp., regional phone companies including Pacific Bell parent SBC Communications Corp. of San Antonio and data-traffic specialists such as Atlanta-based Equant are seeing an increased number of inquiries from nervous WorldCom clients.

"We've had many dozens of calls from lots of big names who have been using WorldCom," said Equant spokeswoman Stephanie Willerton. "Many are just trying to understand what their options are, how long it would take for contingency plans to go into effect."

After WorldCom's bombshell announcement that it had overstated operating profits by more than $3.8 billion, Equant formalized a U.S. version of European programs designed to speed credit checks of new customers and install equipment faster.

AT&T and SBC have increased sales efforts and launched not-so-subtle advertising campaigns. Recent newspaper ads from SBC say the company brings "Peace of Mind. And infinite reliability" to corporate information officers.

"We're seeing a 25 percent increase in call volume to those centers handling customers returning to SBC," said company spokesman Joe Izbrand.

If WorldCom does go to bankruptcy court, legal rules could make moving to another service provider even more complicated: for that reason, those customers that can afford to get out soon may choose not to wait.

WorldCom's 20 million customers include many Wall Street powerhouses, large manufacturers and government agencies.

Joseph Menn is a reporter for the Los Angeles Times, a Tribune Publishing newspaper.

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