MCI FIRES BACK AT BELLS WITH LOCAL SERVICE PLAY

But new bundled offering lacks high-speed data component

WorldCom's MCI Group responded to Bell company encroachment on its long-distance territory last week by launching a bundle of voice services that takes the provider into the local market. The Neighborhood plan may provide protection from long-distance revenue erosion, but it has several shortcomings that could prove problematic — most notably the absence of a data element.

The provider also is using the unbundled network element platform (UNE-P) strategy, which hasn't proved sustainable for most competitors.

The new offer, which falls under the MCI umbrella and will be offered in 32 states, packages local and long-distance service for one flat rate.

Sensing the continued erosion of long-distance revenue, the company is offering the bundle despite some missing components. “We are expanding beyond the shrinking long-distance market,” said Wayne Huyard, chief operating officer of the MCI Group, attributing that shrinkage to the proliferation of wireless devices, instant messaging and e-mail.

The objective is to dismantle local monopolies and compete head on with the Bell companies, Huyard said.

But to do that effectively, the offer must be more complete. “There are really four components to a solid bundled offer — local, long distance, high-speed Internet access and wireless,” said a Verizon spokesman.

A WorldCom spokeswoman said the missing pieces are unimportant for the current market. “We haven't seen a huge market demand for DSL,” she said, adding that the RBOCs have had little success with it. “There just isn't huge consumer demand.”

“What would be compelling would be a DSL/local/long-distance bundle,” said Drake Johnstone, telecom analyst with Davenport & Co. Consumers generally change service providers only if they're switching from narrowband to broadband service, he said. “Otherwise, why bother? It's just a hassle.”

The lack of a data offering is critical, according to Aurica Yen, senior analyst at The Yankee Group. “They will have to come up with some sort of strategic partnership or acquisition,” Yen said. “And they should do it sooner rather than later.”

For a company with a heavy debt load, that may be troublesome. WorldCom plans to allocate $250 million in capex for The Neighborhood offering this year. “When you've got SBC spending $9 billion, that's a pretty small number,” said Michael Bowen, principal at SoundView Technology Group.

SBC has been offering a bundled package for several months that has the components WorldCom's plan lacks. “We have the DSL component and wireless discounts,” the spokeswoman said. SBC last week also announced a video element by inking a deal to bundle EchoStar's DISH network satellite television service with DSL access.

Under WorldCom's UNE-P strategy, the carrier will lease portions of incumbents' networks but will be at their mercy in terms of service pricing and provisioning time.

The company is avoiding areas where unbundled rates make The Neighborhood service economically infeasible. To implement part of the offering, WorldCom will resell Z-Tel's local voice service. The Florida-based CLEC, which gave MCI Group 1 million shares as part of the deal, also will offer some OSS services.

Regardless of the difficulty in implementing the service, MCI has little choice but to offer bundles, said Simon Reeves, analyst at Pacific Crest Securities. With RBOCs on the brink of entering numerous states' long-distance markets, MCI will play an important role in the FCC decision-making process and whether it should approve applications and what pricing should be, according to Reeves.

And though leasing isn't an ideal situation, it doesn't make economic sense to build local exchange networks, Bowen said. “WorldCom feels like they just don't have a choice. They have to fight back in local if they're going to survive.”

Some question the ability to make enough margin on local service. “I don't see how they're going to make this work,” said Johnstone. “[Pursuing the local market] is worth doing if they can make it profitable, but it remains to be seen if they can.”

Others are more confident that WorldCom has wholesale discounts at a level where it is profitable to make a local push. WorldCom and MCI were both successful at competing with incumbents in the past, according to Ramkrishna Kasargod, senior analyst at Morgan Keegan & Co. “I've got to believe these guys know what they are doing. It's like going back to the roots for both organizations,” he said.