MCI revolutionized industry, only to be overtaken by rivals

History

February 16, 2005|By NEW YORK TIMES NEWS SERVICE

From audacious startup to industry innovator to an insatiable acquirer that came to symbolize the corporate greed that brought down other high-fliers, MCI's story had it all.

In 1968, William G. McGowan saw the potential to make history with the fledgling MCI, which had begun five years earlier as an 11-employee company that went on to build a row of microwave towers to connect truckers with dispatchers.

McGowan set the seemingly impossible goal of breaking the stranglehold that American Telephone and Telegraph Co. held on telephone lines in the United States. At the time, AT&T controlled 90 percent of the nation's local calls and nearly 100 percent of long-distance traffic.

After a decade-long legal struggle, MCI won. In 1984, a court ordered the breakup of AT&T and, in the process, ushered in unprecedented competition in the telecommunications industry. But MCI never found its next big frontier to conquer, and in losing its vision of the future, it could not escape the whirlwind that competition unleashed.

Verizon Communications Inc.'s announcement Monday that it would buy MCI for $6.75 billion in cash and stock is hardly the biggest deal in the latest wave of consolidation among telecommunications companies. Still, the deal marks the end of one of the most pioneering companies in recent American history.

The MCI story also serves as a lesson in corporate complacency. As it took on millions of new customers, extended its network overseas and signed up dozens of corporate accounts in the 1990s, the company fell prey to the kind of bureaucratic malaise that had once made AT&T vulnerable.

MCI watched as other, more nimble competitors, including Sprint Corp., began to make inroads into the market that MCI had helped open. In 1998, WorldCom, led by Bernard J. Ebbers, took over a weakened MCI for $30 billion in cash and stock at the height of a merger frenzy fueled by the rapid growth of dot-com companies.

Ebbers' growth-through-acquisition strategy failed, and WorldCom declared bankruptcy in 2002. Ebbers is on trial in U.S. District Court in Manhattan, accused of accounting fraud, and the MCI Inc. that emerged from bankruptcy last year is a shell of the company that Ebbers took on.

"MCI invented the idea of attacking AT&T and then forgot that all new business ideas eventually become overcrowded and you have to move onto something else," said Dan Reingold, a former MCI executive and Wall Street analyst who is now project director for telecommunications finance at Columbia University's Institute for Tele-Information.

The competitive forces that MCI unleashed will prevent a single telephone company from ever again dominating all levels of service and equipment, said Henry D. "Hank" Levine, a regulatory lawyer who was an outside lawyer for MCI in the mid-1980s. "MCI kick-started the market for long-distance services, and what it started can't be undone."

In one way, MCI's fade from the corporate scene reflects what has happened to other large companies in fast-moving industries.

"In every era, the titans that dominate one political and technological system seem incapable of transiting to a new era," said James E. Katz, a professor of communications at Rutgers University and former senior scientist at Bellcore, the research arm of the Bell regional phone companies.

"As technology develops there is something about these large corporations that prevents them from being able to adapt, and they become the dinosaurs and mastodons of their respective eras."

Katz recalled the fate of the New York Central Railroad, whose enormously influential monopoly was eaten away by the boom in trucks and cars.

Western Union Telegraph suffered a similar fate. Shortly after the telephone was invented in 1876, one of Alexander Graham Bell's business partners offered to sell rights to the telephone patents to Western Union for $100,000. The president of Western Union, William Orton, passed on the deal, saying, "What use could this company make of an electrical toy?"

In 1909, American Telephone and Telegraph bought a controlling interest in Western Union.

Today, International Business Machines Corp. has struggled to find its niche in the Internet age, and even the software titan Microsoft Corp. finds itself fending off fast-moving innovators such as Google Inc., Katz said.

From the beginning, MCI butted heads with AT&T. In 1963, John D. Goeken, a General Electric Co. manufacturer's representative selling two-way radios from Springfield, Ill., created Microwave Communications to build a communication system for truck drivers between St. Louis and Chicago.

Soon after, AT&T filed a petition to shut down the company because it was a competitive threat to phone service along that route.

In a landmark ruling in 1969, the Federal Communications Commission approved MCI's project, unleashing more than 1,000 applications for microwave networks across the country.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.