MCI Must Keep Hold on Customers
In and Out of Bankruptcy, Competition Is Tough

By Christopher Stern
Washington Post Staff Writer
Wednesday, April 21, 2004; Page E01

Dayne Sampson was stunned by the announcement, now almost two years ago, that his company's telecommunications carrier had been accused of the biggest fraud in history. He depended on the phone giant to provide access to thousands of computers that are the virtual brains of his company's core business, the Ask Jeeves search engine.

Sampson, vice president of information and technology for Ask Jeeves Inc., couldn't afford a service disruption. "The first thing I did was call up the account representative and ask him what was going on," Sampson recalled.

Then he began considering making a move to another company.

But MCI Inc., formerly known as WorldCom Inc., managed to hold on to the account and thousands of others like it, despite the turmoil of a massive accounting scandal and a record-breaking bankruptcy. MCI lavished attention on Sampson. Several high-level executives called just to check in. Whenever Sampson had a question about service, his calls were answered immediately.

The real clincher for Sampson was MCI's willingness to cut its prices. "They immediately made an effort to be aggressive with their pricing," Sampson said. The sales staff was even willing to open up signed contracts and renegotiate lower rates.

MCI said it emerged from bankruptcy yesterday without losing a single major customer. It boasts a strong balance sheet and debt that has been trimmed from $41 billion to less than $6 billion.

But its willingness to keep customers happy by slashing prices has had a huge and painful impact. This year the company is planning to report revenue of $21 billion to $22 billion -- about $10 billion less than the $32 billion it reported for 2002, the year it filed for protection from its creditors.

Now that it is out of bankruptcy, MCI must begin to please its investors, not just its customers. Some customers, including Sampson, are worried. "Now that they have this bankruptcy behind them, I wonder if they will be as flexible," Sampson said.

Stephen Leaden, a telecommunications consultant for large companies, said he is impressed that MCI is even still standing. After the fraud announcement and the subsequent bankruptcy filing in 2002, Leaden expected the company to be broken up and sold off in pieces. Instead, he watched as MCI, lead by new chief executive Michael D. Capellas, battled to keep its market share among business customers -- a sector that provides MCI with 80 percent of its revenue.

Leaden cited the way MCI wrapped up a contract for one of his large clients by beating out AT&T Corp., Sprint Corp. and Verizon Communications Inc. According to Leaden, MCI consistently came in with the lowest price and highest level of customer service.

When Leaden's client, whom he declined to name, asked for reassurance that a key facility would be protected from outages, MCI agreed to connect the building to its network via two separate high-speed fiber optic lines. And MCI agreed to provide the service at half the existing provider's rate, according to Leaden. "I'm telling you, they were giving it away," he said.

It's not every day that one telecommunications company is able to poach another company's big customer. Large companies often are reluctant to switch carriers because of the cost and complexities involved.

"There is a lot of inertia in this industry," said Susan Kalla, an analyst with Friedman Billings Ramsey Group Inc. "Changing a vendor can take a year and cost as much as $10 million.

That inertia bought MCI time as its worked its way through its bankruptcy and scandal issues. Unplugging from one network and switching to another brings with it the risk of an outage, a huge concern to enterprises such as the Nasdaq Stock Market Inc., Ask Jeeves and insurer Allstate Corp., all MCI customers that must maintain 24-hour communications among hundreds of employees and millions of customers.

Ask Jeeves's Sampson said he surveyed the telecommunications landscape and was not particularly reassured by the financial position of other companies. AT&T was in the midst of a large corporate restructuring of its own. XO Communications Inc., an MCI rival, was also in bankruptcy, as were several other significant players in the market. MCI was hardly the only telecommunications company with ethical issues hanging over its head.

"We actually felt it was better to know the devil we do know rather than the devil we don't," Sampson said.

Having weathered the immediate storm, analysts said, MCI may find it increasingly difficult in the months and years ahead to compete for customers. The telecommunications industry is being roiled by enormous change. Consumers and businesses are growing increasingly reliant on wireless technologies for communication. They are becoming less dependent on the traditional wired network. Several start-up companies have promised deeply discounted calls that can be delivered over the Internet. New providers such as cable television companies are entering the marketplace.

Amid the new competition, analysts such as Kalla believe prices will continue to fall. She estimates that industry revenue will decline to $70 billion from $100 billion over the next two to three years. "The name of the game is managing the half-life," Kalla said.

With so much uncertainty in the industry, the competition for stable, big-spending customers has increased dramatically. The biggest and most stable of all is the federal government. In the past two years, MCI's government sales division has seen revenue increase from just over $500 million to approximately $770 million.

But fighting to hold on to its government sales revenue was one of MCI's toughest battles. Not only did it have to reassure federal officials that it could handle the job, but it also had to fend off an effort by rival companies that wanted MCI disqualified as a government contractor because of its accounting troubles.

Several key members of Congress, including Senate Governmental Affairs Committee Chairman Susan Collins (R-Maine), signed on to the effort and became vocal critics of MCI and its dealings with the federal government. Collins argued that the federal government was effectively rewarding MCI for its unethical behavior.

In the end, MCI prevailed. It kept its government contracts, largely for the same reason its large private customers decided to stick with the embattled telecommunications company -- switching would have been too disruptive.

Washington-based analyst Scott C. Cleland said that over the years MCI has become deeply enmeshed in the everyday business of the federal government. MCI is "integral to our law enforcement and national security apparatus. [MCI] is a strategic asset to our national security," Cleland said. There was just too much risk and too much expense associated with disconnecting from MCI's network and trying to plug into another, he said.

That's one reason many are not counting MCI out. Leaden said some of his clients are beginning to warm back up to MCI, including those who previously didn't want anything to do with it. "A lot of people don't want to be associated with that kind of unethical behavior," Leaden said.

Yet cutting prices and boosting customer service can go a long way toward to reviving the company's image, he said.

"I think [ethics] are a concern until the deal is really sweet," Leaden said.

© 2004 The Washington Post Company