TIME: Almanac 1993/TIME Almanac 1993.iso/time/091889/09188900.022

Text File | 1992-09-23 | 8.8 KB | 171 lines

                                                                                BUSINESS, Page 60

Smooth Operator


No longer a tin-can outfit, MCI has become a telephone giant

By Christine Gorman


    For the go-getters at MCI Communications, the contest was
their big chance to prove that they could whip their nemesis,
American Telephone & Telegraph, at its own game. One of AT&T's
largest customers, Merrill Lynch, wanted to upgrade its vast
communications system to link its headquarters in Manhattan with
an expanding empire of more than 730 branch offices around the
world. If MCI could beat AT&T for the $150 million contract, it
would rank as the biggest single deal in MCI's history.

    Starting at the top, William McGowan, MCI's co-founder and
chairman, flew to New York City early in 1988 to pitch the deal
in person to Merrill chief William Schreyer. In laboratory tours
in Washington, the phone company showed Merrill Lynch executives
MCI's research on artificial intelligence. Company President
Bert Roberts handpicked a group of analysts and technicians,
dubbed the Swat team, to develop an unbeatable package deal. The
MCI crew even agreed to adapt Merrill Lynch's own equipment to
the new network -- a provision at which AT&T balked, since it
manufactures its own gear. Last June, after more than eleven
months of negotiations, Merrill Lynch made up its mind. The
winner: MCI.

    The champagne corks are popping like machine guns at MCI
these days, as the scrappy No. 2 phone company celebrates one
giant-killer success after another. Long dismissed by AT&T as
a tin-can operation and wavering at the brink of financial ruin
less than three years ago, MCI has transformed itself from a
consumer long-distance carrier into a full-service
communications giant. The company has become a marketing
innovator as well, offering consumers perks such as
frequent-flyer miles on American and Northwest airlines as a
reward for using MCI's long-distance lines (five miles for every
$1 of service). At the same time, MCI is carrying out a $6
billion equipment overhaul in which the company is replacing or
upgrading every piece of gear, from switches to trunk lines.

    As the industry's most aggressive upstart, MCI is riding
the crest of a worldwide boom in telecommunications volume.
Long-distance revenue in the U.S. alone has zoomed from $33
billion in 1984 to a projected $56 billion this year. While AT&T
still dominates the U.S. market with a 69% share, down from 95%
in 1984, MCI accounts for 12% of today's burgeoning market, up
from 5% five years ago. The No. 3 carrier, US Sprint, lays claim
to an 8% share.

    MCI has suddenly become a profit machine, posting earnings
of $285 million for the first half of 1989, a 138% increase from
the same period last year. The big breakthrough at MCI stems
largely from its aggressive pursuit of corporate business. In
the past two years, the Washington-based company has wooed away
such prestigious AT&T customers as Chrysler, United Airlines,
Westinghouse and Procter & Gamble. "MCI is starting to hurt AT&T
where it hurts the most: the Big Business customer. By stealing
the big accounts, MCI is giving AT&T fits," says Michael Miller,
who follows the industry for the Wall Street investment firm
Northern Business Information/DataPro. "MCI is no longer the
98-lb. weakling of the telephone industry."

    Not bad for a company that McGowan and John Goeken, an
electronics expert, founded only 21 years ago as a private
microwave-radio service for truck drivers in the Midwest. By
1980 MCI had begun offering discount long-distance service to
residential customers in major cities. When AT&T tried to
throttle its newfound competition by refusing to connect the
company to the public telephone network, MCI sued the giant
under the Sherman Antitrust Act. The Government followed up with
its own lawsuit. In 1984 AT&T settled the cases and agreed to
break up, under Government supervision, into one long-distance
carrier and seven Baby Bells.

    MCI emerged victorious from the long court battle, but it
nearly went broke afterward. As deregulation swept the
telephone industry, prices for toll calls fell as much as 38%.
The slide devastated MCI because two-thirds of its business came
from residential customers. By contrast, AT&T counted on
noncorporate customers for about 40% of its revenues; the rest
came from Government and business contracts.

    Moreover, MCI had won direct access to local telephone
grids, which simplified customer dialing by reducing the number
of required digits from 22 to eleven but increased the access
charges that MCI had to pay. Result: in 1986 MCI posted the
first loss in its history -- a whopping $498 million. The
company laid off more than 2,400 of its 16,000 employees. Then
in December of that year, McGowan suffered a near fatal heart
attack and soon afterward underwent a heart transplant. The
company's future looked so bleak that senior executives
considered putting MCI up for sale.

    Instead the top brass made a gutsy decision. During a
four-day marathon planning session in a suite at the Westin
Hotel in Washington, they agreed to mount an all-out offensive
on AT&T, with McGowan's blessing. Led by V. Orville Wright, a
former MCI president who had been summoned out of retirement to
serve as acting chief executive during McGowan's convalescence,
MCI determined to steal the giant's bread and butter -- its
corporate accounts. Says Daniel Akerson, MCI's executive vice
president: "We decided to go where the money is."

    MCI leaders planned a two-pronged attack that emphasized
high technology and new services. The carrier replaced virtually
all its old-fashioned microwave transmitters, which could handle
only 8,000 simultaneous calls per route, with fiber-optic lines
that would allow 100,000 calls. New services, such as a special
network for fax messages and a system of discount private lines,
called Vnet, were developed for corporate users. MCI's software
engineers took care to design their toll-free 800-number service
so that customers could find out where their clients were
calling from and even determine their phone numbers -- a service
AT&T did not provide.

    Service innovations were a crucial part of the Westin plan,
as the scheme hatched at the hotel has become known, because the
MCI officials thought telecommunications companies would soon
be offering the same quality and price. "Competition will come
down to who can satisfy the customer. It will come down to
service, and we're prepared for that race," says McGowan, 61,
who received the heart of a 20-year-old during his 1987
transplant surgery and has been back at MCI's helm for two
years.

    MCI's salespeople have earned a reputation as tigers, which
they need to be. While the company can sell to residential
customers and small businesses over the phone or by mail,
selling to a major corporation requires a lot of firepower. So
MCI beefed up its sales force by recruiting a small army of
hard-nosed salespeople from IBM, Digital Equipment and even
rival AT&T. The group, says Akerson, is divided into "hunters"
and "farmers." Says he: "The hunters shake the trees and find
prospects. The farmers maintain the accounts and work day to day
with customers, while the hunters go back out and find new
customers."

    So far, MCI's strategy has worked brilliantly. Commercial
customers now account for more than 60% of MCI's revenues, in
comparison with about 30% five years ago. AT&T has noticed the
change and is fighting back. After MCI walked off with the
Holiday Inn account late last year, AT&T applied to the Federal
Communications Commission for permission to provide special
discounts to selected customers. (The Federal Government still
regulates AT&T because of its dominant position in the
industry.) The behemoth won the right to change its prices, and
it regained the Holiday Inn account.

    MCI is still growing fast in the consumer market, adding
some 70,000 customers a week. Last year it offered its first
pay-phone service and added a flat-rate discount program called
Prime Time, to compete with AT&T's Reach Out America. In July
MCI scored another hit by announcing that it would allow
customers to charge domestic long-distance calls directly to
their Visa cards.

    MCI's success goes to show that in the phone business,
deregulation has proved its worth. "Five years ago, MCI offered
only five major services," says Akerson. "Now MCI and AT&T each
offer more than 50 kinds of telecommunications features." In
another five years, Akerson boldly predicts, MCI will rival
AT&T in size, providing an even more competitive environment.
While some Americans may mourn the loss of the old Ma Bell, they
now have an innovative No. 2 that tries harder than almost
anyone else to keep up with the push-button age.