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Each Retained Customer Is a Victory for MCI

By Yuki Noguchi
Washington Post Staff Writer
Friday, February 11, 2005; Page E01

Late last year, when drugmaker Purdue Pharma LP's contract with MCI Inc. was expiring, Larry Pickett went shopping for a telecommunications provider.

"There were a lot of people competing for that business. They were very aggressive in their approach," said Pickett, chief information officer for Stamford, Conn.-based Purdue, which makes the painkiller OxyContin. He got half a dozen eager bidders offering him price cuts and deals on extra services, but two months later, satisfied with MCI's service and hoping to avoid the cost of switching providers, he renewed MCI's contract.

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It was a small victory for a company whose business is largely under attack and whose future 10 months after emerging from bankruptcy protection remains cloudy. About a quarter of Ashburn-based MCI's business comes from companies like Purdue, but the remaining three-quarters -- from retail consumer customers to international long-distance lines -- is either unprofitable or apt to defect to stronger competitors, according to Wall Street analysts who follow the company.

MCI officials say it is investing in new talent and computing programs designed to retain and expand that corporate customer base, but analysts question whether the company can make enough progress, fast enough, to survive on its own. The company has been courting a buyer, but even that is a race against time: Every week that passes poses the risk that MCI's business will erode, making it less valuable to potential bidders.

Trying to go it alone "would be bloody" for MCI, said F. Drake Johnstone, an analyst with the investment firm Davenport & Co. "It would be a bad situation," forcing MCI to halve its current size, he said. "They'd be a shadow of their former selves."

The company's revenue fell to $27 billion in 2003, down from $32 billion the year before, when it filed for bankruptcy protection. It plans to announce 2004 results sometime in the next two weeks.

Possible suitors include Verizon Communications Inc. and Qwest Communications International Inc., which last week offered $6.3 billion for the company, according to sources close to the discussion. Spokesmen representing MCI, Verizon and Qwest declined to comment.

One of MCI's strengths is its lack of debt. It has $5.6 billion in cash, which nearly offsets the $5.9 billion it owes to creditors. But its biggest asset is its roster of 10,000 large business and government customers, the primary attraction for potential acquirers such as Verizon or Qwest.

"We're going to be an enterprise-focused company," said Jonathan C. Crane, chief strategy officer for MCI. "Consumer has declined; that's the bulk of the decline," he said. The company laid off 16,000 people last year, which primarily came out of its wholesale business and its direct sales and marketing division, once one of MCI's most active groups, Crane said. The company currently employs 41,000.

MCI is focusing on offering computing services such as network security, Internet phone services and other business applications, Crane said. Last month the company purchased Herndon-based security consultancy NetSec Inc. It is dispatching more people to its branch offices to court small and medium-size businesses as customers, and it recently hired between 150 and 200 consultants to help customers with those new services, he said.

But analysts say MCI has not made the necessary investments to get where it wants -- or needs -- to be.

Four years ago the company was plowing 20 percent of its revenue, or roughly $8 billion, back into network upgrades. Now, it spends about $1 billion a year, or less than 5 percent of its revenue, on its network -- an amount that falls far short of what is necessary to fix its problems, much less improve performance, analysts said.

"Their capital spending has been quite minuscule," said Johnstone. "If they're truly turning around the business, you'd expect capital spending to increase. One concern, obviously, is if you're underspending, you're not upgrading the network."

Upgrading the network is a particularly onerous task for MCI, which had grown through acquisition. WorldCom Inc., as the company was previously known, bought about 70 small companies before a massive accounting scandal pushed it into bankruptcy protection. But many of those networks and internal systems continue to run independent of one another, an expensive arrangement, analysts said. It purchased companies such as Laurel-based Digex Inc. and its parent, Intermedia Communications Co., for example, but those networks remains unintegrated with MCI's other systems.

"They have serious inefficiencies and integration issues," said Muayyad Al-Chalabi, managing director of research firm RHK Inc., based in South San Francisco. They still have multiple networks and hundreds of software systems working parallel, which would cost any buyer more to integrate, he said.

MCI's biggest strategic hole is that it does not own a wireless or local network, both of which are considered essential to compete in the telecommunications industry, where power is consolidating around companies that can offer a full range of technologies.

"Their business customer base is declining also because they don't have the newer technologies in the marketplace," said Rich Nespola, chief executive of telecom consultant Network Management Group.

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