Local fiber-link buildouts expected by BT/MCI merger

Local fiber-link buildouts expected by BT/MCI merger

george kotelly

Taking advantage of the foreign ownership and open competition provisions of the Telecommunications Act of 1996, British Telecommunications plc (BT), in London, has agreed to extend its 20% ownership of MCI Communications Corp. in Washington, DC, to 100% for approximately $21 billion and to form a new company called Concert Global Communications plc

The proposed merger bestows MCI with a billion-dollar benefactor to expand its Synchronous Optical Network (Sonet) fiber rings. This will allow it to compete closely with AT&T in the long-distance carrier market and to accelerate the buildout of fiber-optic networks needed to aggressively compete in the local-access loop with the regional Bell operating companies and GTE Corp. In the local market, MCI should also benefit from BT`s 90 years of experience in providing local telecommunications services.

In turn, BT gains access to the North American telecommunications market, which represents 40% of the world`s international telecommunications traffic, and to MCI`s expertise and success in capturing more than 40% of the growth in the U.S. long-distance market during the past five years.

Industry analysts generally forecast positive effects from the merger due to expected gains in joint system communications costs and efficiencies of hardware and software operations, management, planning and design; lower service rates and prices; and increased expansion of fiber-optic network deployments. On the downside, though, most analysts expect delays in mutually sponsored fiber-based installations as BT and MCI address the awesome legalities of an international mega-carrier merger. Meanwhile, MCI plans to continue moving ahead with its established fiber-optic network commitments in the long-distance arena. Similarly, BT is anticipated to keep pushing the expansion of its fiber-optic partnership networks in Europe.

A concise summary of the merger comes from Sandra Cook, principal of the San Francisco Consulting Group, the telecommunications unit of kpmg Peat Marwick: "The infusion of cash from British Telecommunications will allow MCI to realize tremendous growth in the United States. It would seem reasonable that MCI would use some of those financial resources to move closer to its goal of becoming a major player in local markets. To accomplish this, it will need to build a local network, most likely using fiber-optic cable. In this way, MCI will not only be able to get into the local exchange, but also become a local Internet provider, as well.

"British Telecom, on the other hand, was already committed to fiber optics before the merger. The company has been partnering with utility companies to lay fiber-optic cables along out-of-way utility companies in Germany. In this way, the company hopes to claim a large portion of the German market, much as it is doing in other countries, when telecommunications is deregulated in Europe in 1998."

With combined annual revenues of nearly $42 billion and serving 43 million customers in 72 countries with an integrated set of local, long-distance, and international services--including voice, data, wireless, Internet and intranet, information technology, and outsourcing--Concert will become the third-largest telecommunications company in the world. The largest are Nippon Telegraph & Telephone Corp. in Japan, at $68 billion, and AT&T Corp. in the United States, at $51 billion.

However, the merger is subject to multiple approvals by the European Commission, the U.K. Offices of Fair Trade and Telecommunications, and the U.S. Federal Communications Commission (FCC) and Justice Department as to legal and regulatory barriers and antitrust violations. Although rulings will likely take at least a year, it is expected that the merger will be approved in time for Concert to be up and running when the European Union opens its telecommunications industry to competition in January 1998.

Stay the course

Until the merger is completed, MCI plans to execute its existing fiber-based network plans without interruption. Says Jim Collins, corporate communications office spokesman at MCI Communications Corp., Washington, DC, "We will continue to increase the power of our networks, not only adding new fiber but also doing wavelength-division multiplexing. In terms of how much more fiber we are going to purchase to build out local, it`s too soon to tell.

"Until the regulatory cloud is lifted on the FCC stay that was granted by the Circuit Court in St. Louis [see "U.S. appeals court stays FCC`s pricing rules," page 30], it`s difficult to tell how much infrastructure we are going to build on our own, and how much infrastructure will come from leasing, interconnection or resell agreements. But that doesn`t mean we will be slowing down or stopping.

"The merger won`t close at the earliest until the fall of 1997. Until it closes, whatever capital expenditures we have committed for 1997 will stay the same. We are going to continue the buildout of our Sonet fiber rings. But nothing dramatic will happen until 1998.

"MCI continues to operate as MCI until the merger becomes official. We`ll continue to devote as much time and energy to both our national and international infrastructures, and also to both local and long distance as we have in the past. We are still pushing hard into the states that have already opened their markets to local competition."

Upon close examination of the merger, some analysts diagnose a trend to facilities-based end-to-end telecommunications services. Gary Kim, principal, Itibiti Ventures, Littleton, CO, offers this viewpoint: "MCI always has believed that a facilities-based approach to competition is essential. It can be expected to back that belief with new levels of spending on optical and other loop infrastructure on top of the $1 billion it has already plowed into the ground in some two dozen cities. Of that amount, optical transport may represent about $155 million. Over the next several years, MCI probably will install another $100 million in new optics to support its local telephony moves.

"Although the bold merger is a clear threat to AT&T`s long-distance business, it is a more noteworthy challenge to the regional Bell operating companies. Huge amounts of BT cash are expected to work into the U.S. local loop, as BT challenges the North American telephone companies that have attacked BT at home. In the United Kingdom, cable-TV firms controlled by U.S. and Canadian local telephone companies have hammered away at BT`s local telephone customer base."

Another facilities-based outlook comes from Mike Smith, lead analyst, network services, Datapro Information Services Group. He contends, "The bt/mci merger will enable the merged company to provision facilities-based, end-to-end telecommunications services on an international basis. MFS and WorldCom are chasing the same goal, and the reason is clear: Fiber--and, specifically, owning fiber--is king.

"Resale has been a much-talked-about strategy in recent months, particularly for service providers hoping to crack local markets in the United States. The reality, however, is that resale translates into lack of ownership of--and, therefore, lack of control over--transmission facilities.

"Resale presents problems from both an operational and economic perspective. For telecom operators hoping to provide services to business customers, owning and operating fiber-optic transmission facilities is vital. The bt/mci merger will result in a merged company accelerating the deployment of fiber in local markets in the United States and in select markets around the world. This is the exact model under which MFS and WorldCom also will be operating."

The combination of international fiber capabilities and value-added services resulting from the merger intrigues Traver Kennedy, director, wide area network services and research worldwide, and Dan Taylor, senior research analyst, both at Aberdeen Group, a Boston-based strategic planning and business consultancy. They jointly state, "BT and MCI have complementary characteristics. MCI has become the second-biggest long-distance provider in the United States during the past five years. During that time, BT has become a major international telecommunications player. Given that 40% of all international calls originate in the United States, the merger is logical for BT and MCI to deliver seamless international service.

"[The merged company] Concert will be large enough to compete with AT&T. In the short run, competition may slow down investment in new fiber for voice circuits in the United States. However, Concert will also have an international infrastructure to grow, meaning new fiber internationally.

"As the leading carrier of U.S. Internet traffic, MCI will remain the leader in network bandwidth. This position will drive its networks to OC-12 [622 Mbits/sec] and beyond. BT will expand this capacity across the Atlantic and internationally. Furthermore, MCI Systemhouse [a global information technology outsourcing/systems integration firm] has strong IT skills and will drive users onto bigger and better pipes as users migrate to corporate intranets and extranets.

"Concert will grow because of two major forces. First is the combination of a major international player with a carrier in the biggest telecommunications market today. Second is the synergy created when value-added systems integration is provided by a telephone company. Not only will Concert have an international capability, but it will also create demand for network bandwidth via its value-added services. This is an unusual combination."

Strong fiber buildouts

A strong move to new fiber facilities is also predicted by Richard G. Tomlinson, president, Connecticut Research Inc., in Glastonbury, CT. He suggests, "With the bt/mci merger on the table, MCI may be ready to step into its long-expected role as a major player in the deployment and use of fiber networks for competitive local exchange carrier [clec] operations. Some uncertainties still hang over the opening of the local exchange market, such as the court challenge to the FCC`s proposed rules for implementing the Telecommunications Act of 1996. An important issue in the litigation is the size of the wholesale discounts that local exchange carriers must provide on services to be resold by competitors. The lower these discounts, the more attractive becomes the construction of alternative network facilities.

"Whatever the outcome, MCI is now positioned to launch a new national program of building local fiber networks, and BT`s financial strength could provide plenty of muscle. With such a move, other long- distance carriers and potential clec players will be under strong pressure to accelerate their own construction of local networks, bringing a new wave of capital investment in fiber facilities."

Also seeing a surge in fiber deployments is Don Dittberner, president of Dittberner Associates, Inc., a telecommunications management consultancy in Bethesda, MD. He advises, "The impact of the bt/mci merger will likely not be felt in the near term, particularly not in any major reduction of international voice calling or leased circuit prices. Rather, the strong cash financial position of BT will allow more rapid investment in U.S. local service access buildout for MCI. This will significantly increase the demand for optical fiber and electronics because MCI will choose optical fiber for most, if not all, of its local access facilities.

"Overall, this should be a favorable development for the optical-fiber transmission supplier, but even more so for medium and small businesses that need more local bandwidth at reasonable prices. Most large firms in large buildings have already been `fibered` by one or more carriers for local access. Now, the benefits of improved quality and speed are likely to be extended to a larger segment of the business community." q

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