The names of two MCI Communications Corp. officials were transposed in a Monday Business section caption. They are company president Bert C. Roberts Jr. and executive vice president H. Brian Thompson. (Published 6/24/87)
MCI Communications Corp. Chairman William G. McGowan once said his company's initials stood for Money Coming In. Recently, insiders have been saying another name is more appropriate: More Change Imminent.
Now, in the wake of McGowan's heart transplant in April, company officials have suggested another. "I said we should change it to Medical Communications Inc.," joked V. Orville Wright, the company's new acting chief executive officer, who has been dogged with questions about the health of both McGowan and MCI. "That's a business we want to get out of."
Wright's remark reflects the intense interest in the second-largest U.S. long-distance company, centering on whether MCI is at the brink of a permanent change in leadership and what consumers ultimately can expect from long-distance competition. Long-distance rates have dropped by more than 30 percent since 1984, but the name of the game now is offering something more than just lower prices.
McGowan, 59, suffered a heart attack in December and was released last month from Presbyterian-University Hospital in Pittsburgh after undergoing a heart transplant. It isn't clear when, or if, he will resume his duties at MCI. Wright, 66, the company's vice chairman, was called out of retirement to take over the top job until McGowan comes back or the board elects a new chief executive.
Wright says he doesn't plan to keep the job permanently. "There is not a question of succession," Wright said. McGowan, a man widely considered to be a street fighter to the core, is coming back, he said. But he conceded: "It's true none of us know what Bill's future course will be."
McGowan's chutzpah and determination, more than any other individual's, led to the breakup of American Telephone & Telegraph Co. He turned a small company on the verge of bankruptcy in 1968 into a money machine. MCI more than doubled in size between 1983 and 1986, posting revenue of $3.6 billion last year.
But just as McGowan's health failed him, Washington's fourth-largest company reported 1986 year-end losses of $448 million, compared with $113.3 million in profits the year before -- the first loss the company has posted in a decade. MCI faces price slashing in the long-distance industry, shrinking profit margins, the continuing need to update its network, and a dog fight over large business customers that generate most long-distance revenue.
Way out in front of the pack of AT&T competitors in the early 1980s, MCI may be losing its market share to US Sprint now that the industry's big price advantages over AT&T have disappeared, analysts say. Big discounts given to AT&T competitors for connections to local telephone networks are largely over now that new technologies enable the companies to offer long-distance service with the same ease of dialing. MCI's lowest prices are now 10 percent less than AT&T's, analysts say.
"The basis of winning has shifted from price to quality and product and, unfortunately, MCI created an image in the marketplace early on that it was not the quality product but it was the cheapest product," said Robert Morris III, an analyst with Prudential-Bache Securities. "US Sprint has created in the marketplace the perception of the difference in product."
Sprint is building a nationwide fiber-optic network that uses thin glass strands to efficiently transmit voice and data signals using light pulses. "They have been able to demonstrate . . . that fiber is the transmission of a new generation," Morris said. MCI, which uses a mixture of technologies that it says is just as efficient and more cost-effective, first counterattacked by scoffing at fiber optics, then turned around and said it was the first to complete a long-distance call over a fiber-optic line, Morris said. "They have confused the marketplace as to what product it is they are offering, and they validated US Sprint," he said.
Sprint, a joint venture of GTE Corp. and United Telecommunications Inc., has spent billions on a new network while losing $800 million last year, but its marketing is working. The payoff could be the No. 2 position in the long-distance industry for the company McGowan likes to call "Splint."
MCI now holds nearly 9 percent of the $50 billion long-distance market, but Sprint is creeping up to MCI and now holds about 5 percent, according to Northern Business Information, a market analysis group. By 1987, Sprint will have 7 percent of the market, said Glenn Powers, an analyst with the group. "In the race for No. 2 position, Sprint looks awfully good," he said.
Just the same, Powers said MCI still has an edge over US Sprint. "MCI has more customers, and the best network is the one in place and working," Powers said. But the company's days of dazzling growth are over. "They are making a difficult transition from growth-oriented market share to a cash flow and profit-driven company, and that has got to be a painful one for management," he said.
To get through the next decade, MCI will need a different management style than it had in its first 10 years, said James Mason McCabe, an analyst who follows the company for Nomura Securities International. McGowan was known as "Mr. Outside," a hard-nosed entrepreneur and visionary who fought for MCI on Capitol Hill and in the courts, while Wright was "Mr. Inside," a manager good at motivating the troops, he said. "Now, you need a more professional management group to run it."
Howard Anderson, president of Yankee Group, a research firm, says the company likely will be run indefinitely by a "triumvirate" composed of Wright, who spent 20 years at International Business Machines Corp., President Bert C. Roberts Jr., who is "as good an operating guy as MCI is going to get," and Executive Vice President H. Brian Thompson, a former McKinsey & Co. consultant who is a top-notch strategic thinker. "Orville pulls them all together," Anderson said.
Ultimately, though, insiders who left the company say it isn't clear who will get the top job after Wright leaves.
As president of MCI Telecommunications, the long-distance division of MCI, Roberts wasn't tough enough on the heads of seven marketing divisions MCI created in January 1985, said one insider who left. Division heads contributed money to extravagant ad campaigns and began to compete as if they ran seven independent companies, he said.
"He didn't realize how far the seven crown princes had gone," said Richard Nespola, former vice president of finance at MCI, who joined Sprint as director of revenue and treasury operations on Jan. 1. "He never took a firm hold and reined them in when they started to build their Taj Mahals."
Richard T. Liebhaber, executive vice president in charge of engineering and a 30-year IBM veteran, has been mentioned for the top slot, but insiders who have left the company said the man to watch is Thompson. "He's probably the most political animal at MCI," said one former MCI executive.
Thompson was recently promoted to executive vice president and head of national marketing from his position as president of the Mid-Atlantic division. Some key company positions have now been filled by men hand-picked by Thompson. But Roberts, who became MCI president in September 1985, has a strong vote from Wright for the top slot at MCI. "He is certainly a high candidate for that job," said Wright, who thinks Roberts did a good job of managing the company's decentralization efforts.
Roberts said he isn't bothered by the competition because he views managing MCI as a team effort. "We don't have the traditional management style, and we have never been led by a traditional leader," he said. "We have always been able to funnel people into slots to meet the next objectives and challenges."
But analysts say that meeting the challenges, which now hinge on offering new services to big business customers, is going to be tough. The company needs at least a 13 to 15 percent market share to be truly successful, said Morris. "The way that they have been attempting to achieve it is to just keep hammering away at the market," Morris said. "The problem with that is it's a slow process."
Morris said the best alternative is a merger with US Sprint, an idea he said MCI finds intriguing. "In conversations, they have illuminated for me the benefits of a merger, which include complimentary customer bases, expanded customer base and a back-up in the network," he said. MCI, however, denies any interest in a merger. "Our objective is to continue to be independent and drive this industry forward," Wright said.
The MCI game plan includes sculpting a better regulatory environment that will stabilize long-distance rates and lower what is paid to local telephone companies for connections, while aggressively cutting costs and offering new services, said Wright.
Wright estimates that MCI pays half its revenue to local telephone companies for vital connections to their networks, while the regional companies make profits hand over first, he said. "It's ludicrous what we pay," he said.
MCI is also calling for the deregulation of AT&T in what analysts have said is a pitch for allowing long-distance rates to rise. Wright argues that it's time to deregulate AT&T because MCI now competes with the giant in virtually every segment of its business. But he said it's also a way to stabilize the price of calls that are "really just above the cost of providing service."
On the company side of the equation, MCI cut its work force by 16 percent last year -- down to 13,700 -- in an effort to trim costs. About 20 percent of the cuts were employes of Satellite Business Systems, a business communications company that was purchased from IBM in exchange for a 16.7 percent stake in MCI, Roberts estimates.
MCI also announced a $500 million writeoff to account for outmoded technology that it is replacing and a reduction in annual capital spending from more than $900 million to less than $800 million. The company is reducing internal costs to 25.7 percent by the end of this year from 36 percent of revenue in 1984.
According to Roberts, the company, which has about 1 million business customers, wants to expand the services it offers large accounts. "We do business with over 400 Fortune 500 companies, but that doesn't mean we have a big piece," he said. "We have 4 or 5 percent penetration and would like to be the strategic provider of telecommunications."
MCI has been taking advantage of its relationship with IBM, marketing its services in tandem with IBM products to a handful of very large customers who request it, he said. MCI officials say the IBM connection is giving them vital experience with data communications -- an area that is growing four times faster than voice communications.
MCI has also been introducing cheaper bulk long-distance offerings that provide more precise billing, as well as private network services and toll-free service. MCI now offers international long-distance service to 55 countries, compared to AT&T's 180.
George R. Dellinger, vice president of the market research firm of Washington Analysis Corp., said both the international toll market and "800" services are important to MCI. Each business section is producing between $5 billion and $6 billion in revenue annually, he said.
"MCI could go from $100 million in revenue in 1986 to half a billion in 1990" from international long-distance service, he said, representing about 10 percent of the market. "The same is true for 800 service."
But analysts say MCI can't be all things to all people and that part of its problem has been too wide a reach. "Are they going to be a quality service provider to large businesses or a cut-rate provider of voice services only? . . . " asked Fritz Ringling, an analyst with Booz Allen & Hamilton. "They can't be everything to everybody. They have to define the market and that's what they've failed to do."
One example of spreading itself too thin was the purchase of Satellite Business Systems, said Sprint's Nespola. "They paid a significant price for SBS -- not just in dollars but in momentum and focus," he said. "You can't take a $400 million company and absorb it overnight. It required a great deal of energy . . . and they stopped to take a big gulp" just at the time they were signing up residential customers for long-distance service, he said.
MCI bought a money-losing company that IBM was looking to dump, analysts say. "IBM had a rotten hand, and they traded it in for a slightly better hand," said Anderson. Although MCI has the option of borrowing up to $400 million from IBM, in exchange for convertible securities that could give IBM a 30 percent stake in MCI, Anderson says IBM is steering clear of investing large amounts in MCI.
The bottom line is that the biggest business customers still trust their large private networks and the more complex task of data transmission to AT&T, he said. "The largest clients have decided on the whole that AT&T will be their vendor of choice for large private networks and MCI will be the low-cost alternative," he said. MCI's strategy is to use the edge with business customers that has distinguished it with residential customers -- lower prices, he said.
The consumers are coming out on top, said Powers. "Consumers look great -- whether they are large business consumers or residential consumers," he said. "It's a fiercely competitive market where every pricing move by AT&T is matched and outdone by the competition."