Mega deal hinges on wireless play

Although MCI WorldCom claims that wireless wasn't the basis for the Sprint/MCI WorldCom combination, it clearly played a major role in the deal.

"This merger is about a lot more than wireless," said Bernard Ebbers, president and CEO of MCI WorldCom. Despite that, MCI WorldCom has a history of saying that wireless isn't crucial to its business while chasing wireless opportunities - such as the possible purchase of Nextel.

"Wireless undoubtedly has been a major strategic headache at MCI [WorldCom]," said Andrew Cole, principal at Renaissance Worldwide.

That's because the need for a wireless play has grown increasingly important. "This [merger] is in response to the customer expectation of having the ability to provide both broadband and wireless services in an integrated package," said Joseph Bonocore, partner and national industry director for KPMG's communication industry.

Many large corporate customers would prefer to receive most of their telecom services from one source. "One reason MCI [WorldCom] absolutely needed to obtain wireless assets is they were getting pushback from their core business clients," Cole said. Those clients complained about MCI WorldCom's resale strategy, preferring to use a wireless service owned and operated by MCI WorldCom, he said.

Recent talks with Nextel reportedly broke down because MCI WorldCom balked at the price. While the Sprint deal clearly cost more than Nextel would have, Sprint will offer "financial flexibility" to MCI WorldCom, Ebbers said, and more than a nationwide wireless offering.

Sprint PCS may have had other advantages over Nextel as well. "Sprint PCS hands down is a stronger competitor vs. Nextel," Cole said. The company has a clearer transition to next generation services than Nextel and appeals to both consumer and business users. "[MCI WorldCom] is building on an investment here that probably would not take significant upgrading investments that they may have had if they made other transactions," Bonocore said.

Even before the deal goes through, MCI WorldCom said that it will resell Sprint PCS service. That represents a major opportunity for the wireless carrier, said a Sprint PCS spokesman. The resell deal will introduce Sprint PCS services to MCI WorldCom's large, established business customer base.

While Sprint PCS has been aggressive in its buildout and data strategies, MCI WorldCom is expected to be even more so. "MCI [WorldCom] will push more for data and 3G - faster than otherwise," Cole said. That may be due to increased competition among national service providers, including the recently announced Bell Atlantic/Vodafone AirTouch merger and consolidation in the GSM world. "It will put a new emphasis on speed as it relates to upgrading their wireless networks and also expanding data services," Bonocore said.

As Sprint and MCI WorldCom prepare their honeymoon suite, jilted, last-minute suitor BellSouth picks up the pieces. Deciding whether last week's loss of the potential merger with Sprint will be devastating or just a stumbling block will take some time.

BellSouth's biggest mistake may have been the time that it took to decide to make an offer. The company previously has shied away from large mergers, but the potential of creating an international behemoth forced the company to enter a bidding war that rose to approximately $100 billion.

"BellSouth blinked, and they lost the prize again," said J.B. Haller, a vice president at Current Analysis. BellSouth "has guaranteed themselves a second-rate status."

The loss may be crucial because in the changing long-distance world, size matters. Regardless of how strong the BellSouth brand is throughout the southeastern U.S., competing will be difficult without a national or an international strategy, Haller said.

The company now is left with its original regionally focused plan. "I don't think that this changes anything for us," said a BellSouth spokesman.

"What we will find out now is if that original plan will work," said Rob Norcross, a vice president of Mercer Management Consulting.

With regulatory approval and its 10% stake in Qwest Communications, BellSouth will be able to offer long-distance. However, the company may face problems offering managed services, such as virtual private networking, which rely heavily on a national presence, Norcross said. But not worrying about the national angle may prove profitable as others throw money into building out areas they don't yet cover, Norcross said. "In a few years, we may all say that BellSouth was brilliant."