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Qwest's MCI Bid Born of Need to Expand Its Base

Qwest says it is in better shape now. It cut $700 million in expenses and its wholesale phone business raised prices. The company now says it expects its long-distance business to be profitable again after the first quarter this year. Regulatory changes have reduced the competition in local-calling service in its 14 Western states.

"I think we have stabilized our business operations, and if you look at our numbers, I think we're positioned well, in the key lines of the business," said Tyler Gronbach, a spokesman for Qwest.

Qwest CEO Richard Notebaert said buying MCI could result in $15 billion in savings. (David Zalubowski -- AP)

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The company is growing by offering stand-alone high-speed DSL service and Internet phone service, he said. "We believe that the MCI transaction is an excellent complement to what we did."

Still, without cash, Qwest hasn't been able to invest in its future, analysts say.

"Qwest was not in a position to heavily invest into wireless network infrastructure," said Albert Lin, an analyst with American Technology Research, a market research firm in San Francisco.

Qwest could never really compete with the likes of Verizon Wireless, Cingular Wireless, and other national carriers, so last year it sold its wireless operation to Verizon Wireless for $418 million to raise more cash.

Now Qwest resells Sprint Corp. wireless service at lower margins than it would if it ran its own service, putting it at a disadvantage compared with other carriers as new phone technologies eat away the traditional local phone business.

Qwest has about 15.5 million residential customers, but they are unplugging traditional local telephone service at a rate of nearly 30,000 lines a month, using wireless phones and Internet phones instead.

Lack of money hampers Qwest on another front: It has about $2 billion in cash and cash equivalents -- not nearly enough to lay new fiber-optic cables directly to its customers' homes to sell cable-like television service, as Verizon and SBC Communications Inc. have pledged to do. Qwest resells DirecTV satellite television service.

Notebaert said nearly $15 billion could be saved by consolidating redundant operations between MCI and Qwest.

"That's why I think they're so desperate to win MCI," Lin said, because without those funds, the company has little power to shape its future. "They're trapped in this middle ground."

Staff researcher Richard Drezen contributed to this report.

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