MCI: Rich and spry Has cash, will deal: MCI Communications Corp. has grown into a fidgety Goliath that occasionally packs a slingshot of its own.

Whatever happens in the murky future, MCI Communications Corp. managers can always take comfort in the glowing memory of the fourth quarter of 1995.

Profits rose 17 percent as the company recorded its largest increase in phone traffic in five years. Its long-distance business grew 22 percent -- almost three times the rate of AT&T.; Its paging business was booming, and annual operating profits broke the $1 billion mark.


Those are already the good old days. Now it gets tough.

Two days after MCI's rosy earnings report on Jan. 30, Congress gave its final approval to landmark legislation that is expected to end the comfortable oligopoly that has dominated the long-distance telephone business for the past 12 years.


MCI Chairman Bert Roberts hailed the event as "independence day for American consumers" and "a tremendous opportunity for MCI."

But where Mr. Roberts professes to see opportunity, others in the telecommunications business see little gain and much pain for the nation's No. 2 long-distance provider.

William Vogel, chief telecommunications analyst at NatWest Securities Corp., believes that MCI is one of the biggest losers under the legislation. He predicts that at least one in 10 long-distance customers will jump to the regional Bell operating companies (BOCs). Mean while, he says, the hefty margins that MCI has enjoyed in recent years will evaporate under the heat of real competition.

But the folks at Washington, D.C.-based MCI know something about competition, too. After all, this is the company that ripped almost an 18 percent residential market share out of the hide of one of the world's most powerful corporations -- building a $15 billion-a-year business in the process.

Gerald H. Taylor, MCI's chief operating officer, told analysts last month that MCI expects to double its revenues by 2000, with half its business coming from products and services that don't exist today. He boasted that, because MCI was not born a monopoly, it will be able to compete far more effectively than the Bell operating companies.

"The difference between MCI's culture and the BOCs' is the same difference between a Saturn dealership and the Motor Vehicle Bureau," Mr. Taylor said.

Investors are obviously paying at least some attention. The stock reached an all-time high on Jan. 30, when it broke the long-elusive $30 mark and has since leveled off, closing Friday at Some analysts, notably Jack Grubman of Salomon Brothers, insist that the stock should sell for 30 percent more than it does.

But MCI is not universally admired. Critics see an ill-prepared company that lurches between boldness and timidity and switches partners with the fickleness of a Las Vegas showgirl.


"I don't see a coherent, focused strategy from them. They seem to bounce around a lot," said Clyde Heintzelman, a veteran telephone company executive who is now chief operating officer of Digital Express Group in Beltsville.

Mark Plakias, president of Strategic Telemedia in New York, said MCI is not as well managed as it was in the days when it was run by the legendary Bill McGowan, who founded the company and built it into a telecommunications giant before he died in 1992.

"They're constantly reorganizing the company," Mr. Plakias said. for one am not prepared to say the inmates are running the asylum -- at this time."

MCI's top managers say they do have a basic strategy, though they admit that the connections between the company's various ventures are often not immediately apparent.

Simply put, MCI is trying to expand from its threatened domestic long-distance business into "contiguous markets" in all directions. Then it plans to "bundle" the new services with its core business and use its vaunted marketing skills to take business away from its rivals.

With its healthy cash flow, MCI has been able to finance a variety of deals without taking on a heavy debt burden.


Through partnerships such as its alliance with British Telecom, which owns 20 percent of MCI, it is earning impressive profits in global markets. By breaking through regulatory barriers, it is seeking to enter the local telephone business. And, through strategic alliances and acquisitions, it is moving into unfamiliar industries such as video entertainment, Internet commerce, software and even music retailing.

Inevitably, this flurry of activity has created some internal turmoil. But MCI insiders contend that's only natural in the turbulent telecommunications arena.

"Things get shaken up all the time here," said a company spokesman, Robert W. Stewart. "The people who succeed here are the people who are able to deal with chaos and uncertainty."

Certainly MCI cannot be accused of standing still in the face of competition.

Just within the last month, the company has spent $682.5 million for a direct broadcast satellite (DBS) TV license and has formed a partnership with Rupert Murdoch's News Corp. to provide programming for that venture. Days later, MCI formed a new marketing and technology alliance with Microsoft Corp., under which it will promote Microsoft's new on-line service, shifting its primary allegiance from the on-line service it has been developing in cooperation with News Corp.

Meanwhile, the company's presence in Maryland has been growing at a time when other telecommunications companies have been shedding jobs. Last fall, in separate announcements less than a month apart, MCI said it would add 400 jobs at its Hunt Valley service and sales center, where 700 already work, and 280 in Linthicum Heights to sell its business and residential long distance and paging services.


But the most significant of its new Maryland ventures is one that hasn't yet had a big impact on employment. On the day that Congress passed the telecommunications bill, MCI's new MCImetro subsidiary began an effort to lure business customers in downtown Baltimore away from Bell Atlantic Corp., marking the beginning of its nationwide invasion of the local phone business.

Few industry analysts would quarrel with MCI's push to enter the local exchange business. Though the obstacles are many and the costs of building a network are formidable, the business opportunity is too lucrative to pass up.

How fast MCImetro will be able to gain market share is questionable, especially because it will not be offering huge discounts on the regional Bell's rates. But Nate Davis, MCImetro's president, is confident.

"I don't have to get every customer. I have been in a competitive market for a long time. Only Bell Atlantic thinks they have to have every customer," he said. A 20 percent market share, he said, "would be beyond my expectations."

The deal that has raised the most questions about MCI's strategy is its $2 billion investment in News Corp. Mr. Plakias spoke for many when he called it "probably the single most misguided thing MCI has done in a long time."

"There are no examples out there of telecommunications-based carriers making a success of content," he said.


At the same time, some analysts have wondered whether MCI shareholders will rue the day their company "won" the Federal Comminications Commission's recent DBS auction. In addition to the $682.5 million for the license, MCI could end up spending $1 billion or more to launch a satellite that will deliver the third or fourth DBS service to reach the market.

Meanwhile, they note, AT&T; has bought its way into a relationship with Hughes Electronics' DirecTV, which is already in operation, with a much smaller initial investment.

But Mr. Stewart said many critics are missing the point of the ventures. He contended that the MCI-Murdoch DBS venture will not be just a flying Fox network, but will also deliver a variety of high-capacity data transmission services. One of them, he said, would let Microsoft deliver its software directly to customers without middlemen.

One aspect of MCI's strategy that troubles many people is its floundering approach to the wireless telephone market, a critical element in the evolving telecommunications market.

Stampeded by AT&T;'s landmark acquisition of McCaw Cellular Communications, MCI rushed into an ill-fated $1.3 billion investment in Nextel Corp.'s attempt to build a nationwide wireless network in a low-frequency band of the spectrum. Within months, the deal collapsed.

"We got into a deal. We figured out that the technology wouldn't work, so we got out," Mr. Stewart said. "We're quick to make corrections."


After the bold Nextel move, MCI turned cautious. Instead of bidding in last year's auction of spectrum for digital personal communications services (PCS) licenses, MCI made a relatively low-cost purchase of Nationwide Cellular Service Inc., the nation's largest reseller of cellular capacity.

The high-level decision led to an exodus of MCI's top wireless executives, who felt resale was no substitute for owning a network.

"A lot of cellular providers today will not let you connect into their switch," said Kevin Inda, a former MCI spokesman who left to work for DCR Communications Inc. in Washington, a company founded by a former MCI executive to compete in future PCS spectrum auctions.

But MCI is betting that that within a few years wireless telephone spectrum will be a commodity with six to seven providers in each market. Its calculation is that it will then be able to stitch together a national network for much less than its chief rivals have paid.

"Is that a reasonable scenario? Yes. Is that the way it is going to play out? We don't know," said Michael Balhoff, veteran telecommunications analyst for Legg Mason Wood Walker.

One area in which MCI is generally conceded to have been far ahead of other large telephone companies is its early recognition of the business potential of the Internet. But recognition doesn't bring in money, sales do. And, for all the talk about the Internet out of MCI, actual sales of Internet-related products and services have been slow.


According to Mr. Heintzelman, MCI simply has not been much of a factor in his business of hooking companies up to the Internet. "We don't even see them," he said.

Greg Wester, director if the Yankee Group in Cambridge, Mass., said the Microsoft deal is intended to let MCI expand its range of product offerings for business. "MCI had sort of struggled with a narrow set of Internet-based services, where their competition was really catching up," he said.

Frank Governali, telecommunications analyst with CS First Boston, hailed the Microsoft alliance as "positive for MCI on a number of levels." He wrote that it ties in well with MCI's $1 billion acquisition of the SHL Systemhouse software company last fall and with its venture into direct broadcast satellite.

"MCI's grand strategy may be coalescing before our eyes," Mr. Governali wrote.

Meanwhile, the First Boston analyst credited MCI with "deftly separating" itself from Mr. Murdoch's on-line plans, which were "going nowhere fast."

"In the rapidly changing world of the Internet, more important than being right the first time with a service, is knowing when to change horses quickly," Mr. Governali wrote.


In the same deal, MCI agreed to use Microsoft's World Wide Web browser software, in effect disavowing its previously announced plans to use Netscape Corp.'s market leading Navigator program. Meanwhile, memories of MCI's quick exit from the Netscape deal are still vivid.

"What's the next partner in line that they approach going to think about them?" said Mr. Heintzelman. "It just seems to be the deal of the day."

Nevertheless, MCI's moves fit a pattern. The company has always placed more of a premium on nimbleness than on predictability, and its strong financial results are a testament to the success of that approach.

The MCI of 1996 is no longer a small, scrappy David fighting for its life. With 40,000 employees, it ranks as one of the Goliaths of its industry.

Top company executives say they are well aware of the tendency of big companies to become more bureaucratic. They vow to resist.

"I'd like to think we're every bit as entrepreneurial as we've ever been," said Douglas Maine, MCI's chief financial officer. "We're a large company with a small-company culture."