WorldCom/Sprint merger on life support

Without Sprint, WorldCom is stuck without a mobile play - again

When WorldCom and Sprint first announced their intentions to merge, many onlookers claimed Sprint's wireless property was a main driver for WorldCom's desire to pair with Sprint. Prior to the planned merger, WorldCom struggled with acquiring a wireless business, with its most notable attempt being its negotiations with Nextel.

Now a dissolution of its merger with Sprint would put WorldCom back to square one with its wireless strategy.

Most analysts see a number of possibilities for WorldCom's wireless future - none of them ideal and some that may dramatically affect the wireless industry. The two most obvious opportunities would be an acquisition of either Nextel or VoiceStream and Powertel. But there are downfalls to both options.

WorldCom tried to make a deal with Nextel when Nextel's stock was less then half the value it's at now and before a stock split. "There is probably some ill will since those negotiations," said Chris Larsen, senior analyst at Prudential Securities. In addition, Nextel is strapped for spectrum, which means WorldCom would have to obtain more to market the service in a big way.

Buying VoiceStream and Powertel would give WorldCom a nearly national play using GSM technology, which may be attractive because those networks would link to European GSM networks. "Given where the European market is going, the ability to port applications and learning from GSM will be a significant advantage," said Andrew Cole, vice president for Renaissance Strategy.

Neither VoiceStream nor Nextel would be ideal purchases from a financial perspective. VoiceStream has negative earnings and EBITDA, said Larsen, who also said it's difficult to know VoiceStream's perspective because the operator isn't very forthcoming with information to analysts.

If WorldCom purchased either Nextel or the GSM players, the affects on the wireless industry could be far reaching. "The level of change can't be overstated," said Rob Norcross, vice president for Mercer Management Consulting.

Just a few weeks ago, the wireless industry had four major national wireless players, each with complementary landline properties: Verizon Wireless, SBC Communications, WorldCom/Sprint and AT&T. Nextel and VoiceStream are in a slightly different category because they have near nationwide coverage but no landline properties. If WorldCom acquired Nextel or the GSM operators, it would essentially add a fifth competitor to the major nationwide player mix. "Based on the modeling we've done here, when you have four competitors, everyone makes money. When you go to a fifth one, it's tough," Norcross said.

Beyond those options, WorldCom could bid on new spectrum and build a new network. While that strategy would appear to place WorldCom behind the established players, most agree that building a third generation system from scratch could be more efficient than building one on top of legacy systems. "The best approach to launching a 3G network would be from the ground up, like Sprint launched its digital network," said Tim O'Neil, wireless analyst at Wit SoundView.

However, WorldCom has other hurdles to entering the upcoming auctions. "You'll see participating in these auctions more of the media and content companies forming strategic relationships with traditional telcos," O'Neil said. Many of those relationships - for instance, a partnership between an operator such as Nextel and America Online or Microsoft - already have been formed. At this point, WorldCom might have difficulty forming such a relationship or entering the auctions alone. "It's a cash game, not a stock game," O'Neil said.

WorldCom has yet another option, which Cole believes is its best: adopt the virtual network operator (VNO) model becoming popular in Europe. VNOs are very different from resellers, which typically build their businesses on voice services and earn very small margins. "VNOs acknowledge that voice isn't it. They are entering the market because they firmly believe that mobile e-commerce is the next great wave," Cole said.

In Europe, VNOs are often composed of banks, credit card companies or content providers or partnerships among such companies. "They are re-architecting the whole value chain," he said. He believes such a strategy would be WorldCom's best bet.

Analysts have suggested a couple of other possibilities as well. "They could drop the whole idea and get rid of the residential long-distance of MCI," Norcross said.

Or, WorldCom could end up with Sprint PCS as well as Sprint's local business, Larsen said.