MCI WorldCom has been one of the biggest success stories in
telecoms over the past few years. The company has gained
prominence through an aggressive acquisition strategy and an
ability to serve millions of US business and consumer customers
with a fully integrated package of long distance, local, data,
Internet and other communications services. It has one of the
largest fibre-optic nation-wide networks in the US spanning
over 45,000 miles. The company has over 100 fibre-based, high
capacity local networks with direct connectivity to more than
33,000 office buildings. Its seamless network also spans Canada
and Mexico. Its Internet business is growing at 70% annually
and yields over $2 billion in annualized revenue.
Stephanie Comfort, principal telecoms analyst at Morgan
Stanley Dean Witter, explains why she believes that the company
has been so successful: "They have been able to heavily focus
on the business market. They have been able to focus on a
high-margin mix of products. They have been able to
successfully integrate a flurry of acquisitions of all sizes,
without really stumbling at all. So they have a great track
record of execution, a great mix of assets and they have a
record of expanding margins that we like."
Bernard Ebbers, the CEO and President of MCI WorldCom, has
been the main architect behind the company's rapid rise to
prominence. Tom Aust, a telecoms equity analyst at Chase
Securities, talks about his acquisition strategy: "Bernie
Ebbers certainly has a very strong sense of value in the market
and has identified excellent assets. His record demonstrates a
very good eye. MFS was right in the heart of a very fast
growing, very strategic part of the telecoms business. The same
thing with UUnet which had an excellent reputation with its
customers. Ebbers saw that was also going to be a real driver
for growth, combining those two facilities-based companies with
his long-distance customers and network. There is a lot of
potential to leverage those businesses. What he did with MCI
was to seize on a much bigger US and international platform
that they already had."
Comfort believes that MCI WorldCom is now at the forefront of
the new telecoms order: "We think that they are one of the best
competitively positioned companies in the industry. They have a
very attractive mix of assets, both domestic and international.
They have been shifting their business from lower margin to
higher margin businesses very elegantly over the last couple of
years. They will continue to do so: they have some of the
highest margins in the industry. They have a scenario that can
even see those expanding further. They run a very lean ship
from an operating perspective. We definitely think that they
are a key holding for any telecoms investor."
MCI WorldCom has adopted a wide-ranging international
strategy. It has developed a pan-European telecoms network
linking commercial centres such as London, Paris, Frankfurt,
Brussels, Amsterdam, Stockholm and Rotterdam. It is developing
nation-wide networks in the UK, France and Germany. By the end
of 1999, its all-fibre, high-capacity network will span over
7,000 miles. According to Comfort, Europe will be key to MCI
WorldCom's international strategy: "I think that they are
definitely focused on Europe. The key is to make Europe the
central part of their CLEC strategy abroad. I think that is
where most of their opportunities are from a growth and
regulatory perspective. So I think that you may see them do
some ancillary transactions there. They are in a fairly good
position in terms of their assets and their role in the Ulysses
backbone in interconnecting those networks."
MCI WorldCom has also been scaling up its presence in Latin
America and the Asia Pacific. In Brazil, the company has
acquired a controlling interest in Brazilian operator, Embratel
which has the only nation-wide network in Brazil and one of the
largest networks in Latin America.
It has also formed a joint venture with Telefonica
Internacional to build an all-digital network to link major
business centres throughout Latin America. In the Asia Pacific,
the company has ten offices and is looking to expand its
presence as the markets slowly start to deregulate.
Wireless is one area where MCI WorldCom has yet to employ its
aggressive acquisition strategy. This is likely to change, as
Comfort explains: I think their vision of wireless early on was
correct, in that it was really a consumer product. To stay away
from wireless was the right thing to do. But the paradigm has
really shifted. The digital one rate has sort of changed the
decision-making process. Clearly, a lot of businesses, both
large and small, are making their wireless decisions for their
employees and their products. I think that it really does force
MCI WorldCom's hand to look at some of the wireless products
and some kind of wireless strategy."
Comfort believes that MCI WorldCom may focus on a wireless
operator with a nation-wide presence: "The whole idea of a
national player with a national footprint has become very
important. Our wireless analyst has drawn the following
analogy: when you go travelling and stay in a hotel, you always
want a hotel that offers a pool and a gym, even though you are
never going to use it nine times out of ten, you want to have
the feeling that it is there when you pick the hotel. The same
holds true of a national footprint. A lot of people buying
wireless services are never going to go to Iowa. But they want
to know if they ever go to Iowa they can use a phone there and
that it will be covered by the rate plan. So they have created
this national premium. For that reason I think that MCI
WorldCom would go after a national player or somebody that has
a pretty broad national footprint."
In an exclusive interview, the President and CEO of MCI
WorldCom, Bernard Ebbers describes his views of the industry
and the reasons for WorldCom's success.
How do you view the recent period of consolidation
within the US? Do you believe the recent merger activity that
has taken place is healthy for the customer? Why did you decide
to oppose the SBC/Ameritech merger?
Ebbers: Well, some of the mergers that occur are
healthy for the customer. If those mergers end up providing an
opportunity for the customer to have lower rates and increased
services, I think that it is a healthy thing. We opposed the
SBC/Ameritech merger, as we felt that it did none of those
So in your eyes the SBC/Ameritech merger is
Ebbers: Yes, it is anti-competitive, as it performs
the following function. SBC states that it intends to compete
out of the region. And now the region is half the US. And
Ameritech, who had started to compete with SBC in St Louis,
suddenly withdrew. So it makes a bigger local company, which
certainly won't compete with itself.
What cost-cutting measures are you implementing in
order to make MCI WorldCom more efficient? Will you be making
reductions in the work force?
Ebbers: It is not cost cutting in the traditional
sense, where senior management arbitrarily gets rid of this or
that expense. It is a process. Under this process every
department comes up with its business plan or budget. Each
department expects that it is going to have to provide the
services attributable to its area. We have virtually completed
that process. It is a very thorough process. And we are
noticing that appropriate measures are being taken through the
organizations: where we have two offices and can consolidate
into one office, we do that. Every expense that any department
incurs is examined.
Are you selling off surplus real estate for
Ebbers: Well, we don't own real estate, we usually
lease it. So we are either sub-leasing or getting out of some
of the leases, where we can. That constitutes just one example
of where we are investigating every opportunity to save money.
Which areas are providing the biggest synergies?
Ebbers: On the line cost side, where we now have
access to each other's networks. This is the core synergy that
makes the merger work from the numbers perspective.
If I could turn to reports earlier this month about
the sale of your IT arm. Does this imply a recognition that you
cannot alone deliver the services that corporations need? What
are your views on outsourcing?
Ebbers: Well, it is a recognition that SHL was not
big enough to compete in the high-end integration services
packages that big corporations would like. We have a partner
that is in our opinion fully capable of working with us on that
As to outsourcing, this is a cost issue. Can you outsource
less expensively than you can in-house, while at the same time
guaranteeing the same performance levels? WorldCom has done a
substantial amount of outsourcing in its history and we are
confident that in the right circumstances it works.
Why did you decide to back out of the bidding for
AirTouch? Do you feel the company was overvalued?
Ebbers: It is not for us to judge whether any company
is overvalued. The stockholders of a company determine whether
a company is overvalued. From our perspective it is a matter
of, if we were to combine the companies, would it be accretive
to our earnings? And we ascertained that it would not be
Are you looking to acquire a wireless operator?
Ebbers: Well, we have said this a number of times:
would we like to have one? Yes? Do we feel that we need a
wireless operator? No.
Do you believe that the paradigm has shifted to
Ebbers: For the consumer I believe that there will be
an increased usage on the wireless side. I do not think that is
the case for business customers.
How do you view Nextel as a company?
Ebbers: I don't know a lot about them. They are
certainly growing their subscriber base. I read the public
reports, but that is about it.
How do you view AT&T's digital one rate
Ebbers: I think that it is a very compelling plan.
What was the significance of the recent announcement
that sees nation-wide deployment of DSL?
Ebbers: The significance of this recent announcement
is that it involves a nation-wide deployment of broadband
capability which we need to provide for ourselves, for the
benefit of our customers as well as for our large wholesale
customers, such as AOL.
How will it change the on-line experience of
Ebbers: It simply provides more bandwidth and
bandwidth is the key commodity for the new class of competitive
How do you react to claims that, in view of the
capital coming on-line, considering Level 3 and Qwest, for
example, that the return on incremental investment could
decline below the cost of capital?
Ebbers: If that is a reasonable theory, then it
certainly would be advantage for a company making those
investments with cash flow, as opposed to borrowed money.
Given the high level of investment in the business, is
a there a risk that MCI-WorldCom would be unable to obtain a
reasonable return on that investment?
Ebbers: No. Our twelve year track record proves that
getting a better than reasonable return is our core management
And you believe that will continue basically
Following the acquisition of MCI, you had to sell
MCI's Internet business to Cable & Wireless. How are you
replacing the loss of this business?
Ebbers: Well, we never missed one day of selling.
UUnet, which was a subsidiary of WorldCom, had all the
capabilities and even more than MCI-Internet did. In fact it
helped us a lot, as we now sell one product instead of two
Why have you decided to make Europe the focus of your
Ebbers: We made this choice, because deregulation is
only just beginning to occur in Europe. A competitive
opportunity is being developed and Europe is a very significant
market on a world-wide basis. And nobody there has any market
share to any degree. We think that, given WorldCom's
construction of facilities, we have a tremendous opportunity to
increase revenues and profits there.
What are your pan-European ambitions?
Ebbers: We want to be a facilities-based provider in
all the significant cities across Europe, tying those cities
together on an intra-country basis and then across country
Who do you see as your main competitors in
Ebbers: There are going to be several competitors.
British Telecom is patching together a network. You have COLT
on the local network side and Hermes on the cross-border side.
A lot of competitors are emerging in Europe.
What do you perceive to be your competitive advantages
over other new, alternative pan-European operators and
incumbents with pan-European ambitions?
Ebbers: Well we certainly have an advantage in that
we are substantially ahead of them in the construction cycle.
We are the only provider of services in Europe to have not only
a European network, but also a significant network in the US
and our own trans-atlantic cable, where we can provide services
between companies that have offices in Europe and the US,
without it ever leaving our network.
How do you view the regulatory environment in Europe?
How does it compare with the US?
Ebbers: Well the regulatory environment is about the
same. It is the same business and is adhering to substantially
the same model as the US followed. I would say that in some
instances Europe has arrived at a better solution than the US,
in that there is a telecoms Czar in each country in Europe,
charged with the mission of developing a competitive
environment. So you are working with one person who knows what
his assigned job is, rather than five political appointees that
we have to deal with in the US.
What regulatory obstacles have you faced in
Ebbers: We have only faced one regulatory obstacle
when we merged with MCI. The European Commission insisted that
we sell off Internet-MCI, which was to our thinking bizarre.
Why did you consider its attitude to be bizarre?
Ebbers: MCI did not have one minute of business in
Europe. It is preposterous to think that the European
Commission took it upon themselves to regulate two American
companies, one of which has no business in Europe.
How are you looking to increase your presence within
Ebbers: Well, we are building more and selling more.
Are there any services that you are focusing on which
are in your opinion of particular interest to the client?
Ebbers: The service that we are offering, because we
have built the facilities, is on-net services - products where
customers receive larger discounts, if they use our network
from end to end, whether that be from Brussels to Dusseldorf or
Brussels to New York.
What opportunities are there for MCI-WorldCom in the
Ebbers: We are building networks in Japan and
Australia. We are doing everything we can in Hong Kong and
Singapore. You are very limited in what you can do in those
environments because of the regulatory constraints. Those are
going to be great opportunities over a period of time. But you
can't go faster than the regulators will permit.
How much progress are you making in Japan? Is the
market liberalizing more quickly now?
Ebbers: It is liberalizing. We have a licence to do
business there. The construction of a network is always a
time-consuming and tedious business. We are going as fast as we
can, but it does take time.
Are you building different networks, depending on the
Ebbers: It is the same network.
How do you view the Chinese market?
Ebbers: We have not participated in that market at
But would you consider investing there?
Ebbers: Yes, if it becomes a viable market, where you
can your own facilities. We probably would not become involved
in some joint ventures there.
Why did you decide to invest in Embratel in
Ebbers: Because it is a fantastic opportunity. Brazil
provides a great opportunity for us to try and do what we are
doing in Europe, and that is, operating as a facilities-based
provider of services in those countries. Brazil is a great
market: it was a phenomenal opportunity for us.
Do you perceive other opportunities in Latin
Ebbers: As you know, we already have a joint venture
with Banamex in Mexico. And we are certainly investigating
other opportunities in conjunction with our relationship with
Telefonica in the rest of central and south America. But the
density determines by and large the potential market size in
telecoms. There are not that many densely populated areas in
central and south America.
How have you found that recent events in Latin
America, such as the devaluation of the real, have affected the
levels of return that you would expect to see on your
Ebbers: When we made our investment in Brazil, some
of the things we took into consideration were currency
fluctuations and possible devaluation of the real. While we
have already paid 40 percent of our tender in US dollars, the
remaining payments are scheduled to be made in reals.
One of the good things in telecommunications is that in
critical times like these, use of telecom systems increases.
Obviously, for Brazil's sake, we hope that it will recover.
What was the significance of a recent agreement which
saw MCI WorldCom provide global long-distance networking
services for federal agencies?
Ebbers: The agreement is significant, because it is a
tremendous revenue stream for us.
How hard was it to win those contracts?
Ebbers: Working with the government is usually not an
easy thing. But MCI WorldCom has a very capable government
sales and service unit, that handles those types of
transactions and they did a very good job.
MCI WorldCom has a history of having a very aggressive
acquisition strategy. Are you planning any major acquisitions
How will you counter the risk of high attrition,
following the acquisition of MCI?
Ebbers: We haven't seen any problem with people
leaving the organization. I don't see any problems in terms of
different company cultures.
How will the acquisition of MCI affect SG&A
Ebbers: Well, MCI WorldCom will operate eventually at
an SG&A level, which will maximize efficiency.
What is your projected capex for 1999 and where will
you invest it?
Ebbers: It is $6.6 billion. About $1.2 billion is
being invested in international operations. Another $600
million is being invested in the long-distance area, about $1
billion in local service.
How do you go about selecting a network supplier?
Given that level of expenditure, do you have a set procedure?
Is it based on cost?
Ebbers: Obviously it is based on cost, but also on
quality. We have a whole department that does nothing but
evaluate and certify new types of equipment that come to market
that we may need. And once those pieces of equipment have
passed our lab, then they can be considered for purchase. And
at that point in time, it becomes an issue of how does it fit
in with the rest of the network and what is the cost?
What do you perceive to be the benefits of
technologies such as DWDM?
Ebbers: It has been tremendous for people that own
facilities, because it helps you increase the capacity of your
facilities, without having to build any more.
What is your EBITDA target for 1999?
Ebbers: Between $11 and $11.5 Billion for 1999.
What new data services are you planning to launch in
Ebbers: Well, we don't announce services before we
What percentage of overall revenues do you expect to
come from data services?
Ebbers: Already one-third of our revenues are
provided by data, Internet and international of which about 20%
is data. This portion of our business - data, Internet and
International - will represent roughly two-thirds of our
projected growth in 1999.
Which data services have proved to be most attractive
to high end users?
Ebbers: All data services are part of a package of
communications services that meet high-end users business
needs. Obviously we have success with our ATM and Internet
services - particularly when delivered on-net. These products
offer value in themselves. That value is greatly enhanced
Where do you expect to be the sources of future
Ebbers: From all the areas where we do business:
local service, long distance, Internet and international.
What do you consider to be the new value paradigm in
telecoms? Do you see any shifts in the way that telecoms
services are being provided?
Ebbers: We are certainly seeing significantly faster
growth in data services, Internet services than we are seeing
in voice services. So the capacity of the network is becoming a
significant issue for telecoms providers, because these data
and Internet services take so much more capacity.
How do you respond to criticisms that you have a
legacy network and you need to divert surplus cash flow to
Ebbers: I find it hard to respond to something that
couldn't be further from reality. That is so ridiculous. We are
free cash flow positive. And for 1999 we will cash flow more
money than we are spending on capex. One of the good things
about having such a significant customer base, as MCI WorldCom
does, is that it pays for its capex with cash flow, instead of
We don't have a legacy network. We have a network that is
absolutely up. People talk about the networks at Level 3: of
course they haven't built any yet. We all build the same
network and then exchange parts of it. So our network is just
as modern and new.
You said over a year ago: "If you bought $100 of
WorldCom' stock in 1989, it would be worth $3,337 today. If you
had bought $100 of BT stock, it would be worth $190." How do
you explain your phenomenal success on the stock market,
compared to that of BT?
Ebbers: Well, BT has done pretty good lately.
Fair enough. But, if we leave aside the management
issue, what has in your eyes pushed you so far ahead of the
Ebbers: Obviously I don't spend a lot of time
thinking about what we've done. More about what we have to do.
I think that it is a combination of things.
First of all, it is a focus on producing revenue from the
revenue opportunity areas, where we can grow our revenue most
rapidly with the least amount of dollars that it takes to
acquire that revenue.
Secondly it is just like any other company: you have to be
able to control your operating costs. And WorldCom has been
able to do that ever since its inception.
How do you view companies like Level 3?
Ebbers: Well, Level 3 is going to be a good company.
They aren't much of a company yet, because they haven't had
enough time to build much network. They are in the process of
doing that. They are deploying what they call an IP-based
network - everybody else is going to do the same thing, it is
just a matter of electronics. There is nothing unique in the
fibre that they are putting into the ground.
The issue for companies such as Level 3 entering the market is
that they claim they will have a lower cost to sales and they
are going to have to price their product at substantially less
than market levels to obtain business. The question is: how
much will it cost them to acquire that business? People talk
about the costs involved. But the significant cost, what is
going to make the differentiation between companies that are
successful or not, is their overhead cost, their SG&A cost.
- transport is a relatively small part of the total cost of
delivering a telecoms service.
What kind of benchmarking tools do you use for
Ebbers: We benchmark ourselves against ourselves: do
we accomplish what we set out to do from our budgeting process.
What do you consider to be MCI WorldCom's key
Ebbers: I think that is quite evident: our ability to
produce revenue at a very significant cost advantage over
others, our much more efficient overhead structure and as a
result a much better return for our shareholders.
What are your hopes and ambitions for the company over
the next few years?
Ebbers: To continue doing what WorldCom has done in
Where do you hope to position the company on the US
and international telecoms landscape?
Ebbers: We intend to continue to operate and attempt
to produce for our shareholders the best return of any telco in
this country and for our customers, the best service at the