MCI's Backbone Sacrifice: Combined MCI/WorldCom still would be strong Internet player

In a move meant to appease regulators, MCI announced last week that it would sell much of its Internet infrastructure, worth $625 million, to international carrier Cable & Wireless.

"The only reason this was done was to address the regulators' concerns about the Internet backbone," said Fred Briggs, chief engineering officer for MCI. "We think this will address all of their concerns."

The Department of Justice, European Commission and the FCC are examining the antitrust issues of the proposed MCI/WorldCom merger. A primary concern has been whether a combined MCI/WorldCom would dominate the Internet. The sale to C&W will not happen if MCI's merger with WorldCom is not approved, Briggs said.

The agreement with C&W, which also requires approval from the DOJ and EC, would transfer MCI's contracts with its 1300 Internet service provider customers in 76 countries, as well as nodes, ports, network equipment and 40 ISP peering to C&W. MCI would continue to sell Internet access as a wholesaler from C&W for two years, per a non-compete clause.

A key aspect of the deal is that MCI is not selling the fiber portion of its Internet infrastructure, said Joel Maloff, principal of Maloff Group International. That means the combined MCI/WorldCom would have sufficient capacity to ultimately regain much of MCI's backbone business.

C&W doesn't need MCI's fiber because it already has its own nationwide fiber network, currently used to support long-distance services for corporate customers. C&W lacks Internet expertise, said Maloff. MCI's Internet employees will provide consulting services to C&W for two years, he said.

"Two years is irrelevant in terms of retention of customers but is key regarding the intelligence of employees," said Maloff. "Cable & Wireless doesn't have to assemble a team of several hundred experts."

MCI will continue providing intranet, Web hosting and other value-added services to its ISP customers, and it will continue selling Internet access to residential and non-ISP commercial customers, who shouldn't feel the effects of this agreement, said Brian Brewer, MCI senior vice president of business markets. "We're going to make this as absolutely seamless as possible," he said.

C&W has a strong reputation for customer service, which will help retain its new ISP customers, said Richard Yalen, CEO of Cable & Wireless USA. The company already owns leading ISPs in Hong Kong and Australia.

A spokesman for GTE, which is suing MCI and WorldCom to prevent their merger, was less enthusiastic about C&W's prospects.

"This is a partial sale of MCI's Internet assets," the spokesman said. "They're not giving up their customer base, their facilities, customer support or anything else that would allow Cable & Wireless to have a stand-alone business."

Analysts disagreed over whether MCI's move would alleviate regulator concerns.

"This probably will not quite be enough to win the approval of regulators here," said Tom Jenkins, a broadband consultant with TeleChoice. The FCC will take a closer look but likely will want MCI to give up its Internet business customers or an equivalent sacrifice, he said. The move should appease the EC, however, because MCI sold the backbone to an internationally known, non U.S.-centric company, he added.

Maloff had a different view. "The real issue that was raised in terms of complaints about the merger was the dominance of backbone activity. The issue wasn't that MCI and WorldCom had more fiber miles. This should satisfy regulators."

* 22 domestic nodes

* 15,000 interconnection ports

* 40 ongoing peering agreements

* Network support equipment, including routers and switches

* Underlying transport services

* Additional services as required