MCI Communications Corp. last week surprised the telecommunications industry when it announced a major new business pact with International Business Machines Corp.
Under the $1 billion agreement, IBM will become MCI's largest stockholder, holding a 16 percent stake in the Washington-based long-distance company, with the option to hold as much as 30 percent. In return, MCI will take over Satellite Business Systems, the McLean-based IBM offspring that specializes in satellite communications for large businesses.
William G. McGowan, chairman and chief executive officer of MCI, discussed the implications of this alliance and his new association with rival SBS with Washington Post staff writers Caroline E. Mayer and Elizabeth Tucker.
Q: Is this a new era for MCI?
A: It's certainly a chapter. I think that the era already started for MCI on Jan. 1, 1984 [with the breakup of American Telephone & Telegraph Co.]. That's the point where it became very evident that the industry had changed from the telephone industry to the information-technologies industry.
We've been preparing for that change since '82 [when the AT&T breakup was announced], trying to build up a separate, distinct group to deal with national, major accounts. . . .
Q: What will be different about MCI . . . when this deal is done?
A: I think there's a number of different effects on us. One is that they [SBS] have about 200,000 customers today, providing $35 million a month in revenue. It's about 1 percent of all the long-distance market.
Secondly, we get the organization and the assets -- including three satellites plus the terrestrial facilities. It's a quality shop, and we get all these assets essentially debt-free. . . . We will, in addition, have available, we think, an extremely talented company in digital communication, networking and large corporate sales. Large corporate and systems sales are what they're very good at.
Q: Looking back at conversations with you through the years, you could never ever say anything good about SBS. Here you are buying the company. . . .
A: We're buying it in a manner, though, that makes it very favorable to us. It improves our financial ratios and secures very favorable financing in the future. . . . How can I say no if they take away all the costs, take away the debt and enhance our credibility in the marketplace? I say, 'Wait a second, now, this is interesting!' . . .
All of a sudden we get depth from SBS in both national marketing and in large data network management. . . . We see them really helping us sell large systems to large users primarily, rather than help us in the residential and small-business market, where we clearly have done better than they have.
SBS [never profitable in its 11 years] will be profitable from day one. . . . If you take the reduction in interest [that MCI no longer will have to pay because there no longer will be any debt], and if you take the reduced depreciation because what we're paying for SBS is less than what's on their books -- substantially less -- and if you take the 25 percent of their revenue that they're now paying to AT&T for the WATS lines to complete the calls which they can't complete and switch most of that traffic over to our network, the company should be profitable from the first.
Q: What about your alliance with IBM?
A: Any affiliation with IBM, I think, is going to enhance our credibility and confidence. We have been successful in selling some communications to most large users. We have 407 of the Fortune 500, but where we haven't been that successful is in the major penetration in that market. We've got a handful of people who give us most of their communications, but I think we'll get more and more. I think all of a sudden they're going to say, 'Well, I have confidence in you guys. . . . '
The other thing I think it enhances for us is that we've done our financing -- a substantial amount of our future financing -- ahead of time and on very favorable terms. We have about $800 million in cash ourselves. . . . We figure between that and the cash we generate -- which is pretty substantial -- we can finance ourselves probably through '87. But I think this clearly probably takes us through '88. . . . They have committed to a $400 million investment, at least so far over the next three years . They said verbally there may be more financing.
Q: Do you think IBM is going to buy MCI out eventually, entirely?
A: I don't think they will. I think they've made a decision that we're better off independent to run this business. They think we're a better choice than what they [had with SBS]. Does that mean some time in the future? Well, the stand-still agreement says they cannot go beyond [owning]30 percent of the company. And if you look at their history, you look at their style, I can't envision anything other than a very friendly relationship. They don't believe in hostile relationships. . . .
Q: What's to keep this relationship from becoming another Rolm? Last year, after IBM acquired a 15 percent stake in Rolm Corp., a leading manufacturer of telephone equipment, IBM bought out the entire company.
A: Well, if you look at Rolm, you realize that [Rolm President M. Kenneth] Oshman was the one that asked to have it taken over. And the reason he gave for doing that was that their [IBM] engineers were having terrible fights with Rolm engineers about their view of how things should be. . . .
We're in a different situation. . . . We bring the telecommunications services at which we obviously have proven to be much better than they've been. Their interest is in hardware. Hardware is what they're selling; it's not competition.
Q: What happens with AT&T? Is this AT&T-IBM wartime?
A: That is what it's always been. It's just its intensity and the visibility may be greater. We won't be reluctant warriors in that. . . .
Q: What should AT&T be scared about now?
A: Nothing. The sheer percentage of the market they have is their strength. That's what gives them the power they have and makes me concerned about their comments that this deal should now permit that to become deregulated.
A: You don't deregulate a monopoly. I think their market share of long-distance telephone business is basically 85 percent. That is not low enough that people really had a choice. Let's suppose that AT&T is deregulated. Tomorrow, it could double all of its prices and services in Washington. But we would reach a point where we'd say, 'Stop. We can't handle it.' Who would have the capacity to carry the long-distance business communications of Washington, D.C., if AT&T suddenly decided to double their prices? Everybody would want to get rid of them. Customers would say, 'Ha, ha, to hell with you, I'm gonna go to MCI or whoever.' We'd be really thrilled. We could probably double or maybe triple our size, but that's it folks, I just don't have the capacity, nor does anybody else. In this business, you have to plan years ahead of time.
Q: What does this IBM alliance mean to the other long-distance companies?
A: It really doesn't affect them all that much. If they didn't have financing by now, they weren't really going to get it.
Q: But doesn't this rule out IBM as a possible option for financing? GTE Corp., for example, can't now turn to IBM to finance its GTE/Sprint service.
A: The way GTE is structured, I don't think that was an alternative. . . . I don't think IBM would ever be interested in getting into the local telephone business or utility business, which is what GTE is in primarily.
Q: Should GTE be shaking in its boots today as a result of this pact?
A: No, come on, I don't know. They're a billion-dollar company. They've been involved in the telephone industry a long time.
Q: How do you see the shape of the long-distance industry in the future? Is it just going to be you and AT&T?
A: I assume there's going to be more consolidations. . . . I think there's going to be a handful of companies.
Q: What is your working relationship going to be with IBM?
A: We will be working with them as we probably would have in some cases, anyway -- on making bids for major awards, for example.
Q: Are you bidding for the government contract, for example, here in the District?
A: We plan on it. It can mean attractive business. The government is a very large user of our network. We supply all long distance for the House and Senate. We've got a lot of business at the Department of Defense and supply a good deal of big suppliers. We want to supply more. We're obviously not near as big as AT&T, so we want more.
Q: Wouldn't you be going after this contract even without the IBM connection?
A: Yes. We would have latched up with somebody because they're really looking for a combination bid. As a matter of fact, we're on two bids already with Rolm. . . . This makes it easier, though. . . . Clearly, that's where we and IBM will be very viable competitors.
Q: With SBS, will you be able to offer your own network to bypass local phone companies?
A: Certainly more than we could have.
Q: Does the acquisition of SBS' assets mean that you can relax your construction plans to build your network?
A: Absolutely not. All the requirements stay the same. This doesn't reduce our demands or needs. It just means that we've funded ourselves ahead of time.
Q: What do you do with SBS management?
A: I hope to be able to use most all of them. For three or four years, we built up depth in management and talent in this company. Then last year I took all that away and sent it out to seven [newly created regional] divisions. I need more depth in corporate management, and I think they can bring it. . . .
It's really a different sell [than residential phone service] . . . Mass merchandising is a field unto itself, and the other field unto itself is the sophisticated user -- the large, corporate organization or government. That really is two industries. We're good in one, and we're learning how to be good in the other.
Q: Is the SBS acquisition an acknowledgement that your large accounts, your national accounts program really hasn't been as successful as you would have liked it to be.
A: No, we've been very successful. But where we've been successful has not been in these large data networks.
Q: And that's really where the future is, where the money is, isn't it?
A: That's where SBS will help, they really will. They weren't really in a position to really develop it themselves because they didn't have the network to be able to support it. They had the bright people, but they just didn't have anything to do with them. . . .
One of their problems is they've been playing violin with one string on it using only satellites for transmission . It obviously doesn't make sense as the only thing to have -- not unless you're in television distribution and one-way communication. We have the fiber-optic system, the digital microwave system -- not the satellite. In two-way communications, which is all voice and data networks, it makes sense to have it all. . . .
Q: With all the emphasis you are putting on the large business customers, where does it leave your residential customer?
A: We want to serve both. The way the industry turns out, you've got to have both -- to have people use your system at nights and weekends. The smaller user gives you enormous strength just in numbers of people. Look at AT&T's strength today. . . .
Q: What happens to SBS as an entity? Is it going to continue to stand alone as SBS or be made part of MCI?
A: I think they're going to be an entity for four or five months. . . . We're not even sure that we should [get rid of SBS]. We should perhaps use the name, Skyline, and use the name SBS as a marketing way of describing, for example, our large corporate activities. . . .
Q: What are you going to do with all the SBS facilities in McLean? Is everything going to be merged in Washington and Pentagon City?
A: I'd like to think there's a point where we'd be slowing down in acquiring real estate. But the truth of it is -- that's going to be an ongoing, continuing business and what they bring is already negotiated space and leases.
Q: What happens to SBS customers, especially its residential customers? Its Skyline service has gotten terrific ratings from consumer groups -- better than MCI's. Will you continue SBS' rates and tariffs?
A: I don't know. They've just started explaining to me the structure of the tariff. They have a pricing system totally different than MCI's -- different rates for calling nearby states than further states.
Q: The method of billing is different, and they have a minimum monthly fee, too.
A: If it turns out to make sense for people -- if they really like it -- we may want to continue it. If it fills a niche of people who say 'I prefer that kind of telephone service,' be my guest.
Q: Can you keep both rate packages?
A: Sure, sure. . . .
Q: IBM's investment in MCI, like it or not, has dramatically changed the perception of MCI from that of a David challenging the giant. Now, you are allied with another giant. How does it feel to be part of another Goliath after fighting a Goliath for so long?
A: I need stockholders -- preferably wealthy, preferably willing to stay a long time and willing to buy more -- and then willing to bring extra things to the table.