America has our number

It won the battle for MCI in the US, and now WorldCom is muscling in on BT's home patch

Polite, charming, high-energy, Michael Butler sits in his office on Gray's Inn Road, London, and tackles his latest task with the concentration and zest that has made him a high-flyer. At 35, Butler is an old hand at selling telephone services to business customers. But now he is selling the story of his company to the media.

He has it made. His company laboured in obscurity to build a presence in Britain between 1989 and 1997. It had zero profile. To those who knew it, it was a weird outfit peddling discounted long-distance phone time via unconventional marketing channels - such as classified ads in cheap magazines.

Then 18 months ago, WorldCom bought MCI, the second largest long-distance carrier in the US, for $37bn (pounds 23bn). Since BT owned 20 per cent of MCI and was negotiating to buy the rest for a discount on its original offer, WorldCom emerged as the company which snatched BT's prize from under BT's nose.

"At last our mothers knew where we worked," says Butler.

Talking up MCI WorldCom, he weaves folklore and statistics. The company was started in Jackson, Mississippi in 1983. Its key founder was Bernie Ebbers, a former basketball coach and motel manager, who sketched the original plan for the company on a napkin in a diner. In the last quarter of 1998, MCI WorldCom had turnover of pounds 5bn, compared with BT's pounds 4.7bn during the same period. BT, of course, has been around since the dawn of the telephone age.

Ten days ago, MCI WorldCom announced it was selling its information technology unit to EDS, the US company built by Ross Perot, for pounds 1bn.

It formed a strategic partnership with EDS to sell integrated communications and IT products and services. This deal has helped focus the emerging picture of how telecoms, computer, broadcasting, entertainment, and internet companies will work together.

Butler's message is simple: MCI WorldCom is New World and BT is Old. MCI WorldCom is thus free of any legacy of costs from the era before the privatisation of BT in 1984 and the break-up of AT&T in the US in the same year. Butler suggests that for all their efforts to shake off this legacy, BT, Deutsche Telecom, and France Telecom are dinosaurs.

Dig deeper, however, and you get the impression Butler's animation stems from fear as well as high spirits. Butler's patch - communications services for companies in the UK and the rest of Europe - is hot. Along with the internet and mobile phone sectors, it is one of the fastest-growing segments in the $550bn-a-year global telecoms market. But it is also one of the most ferociously contested.

In a dramatic move in this battle, MCI WorldCom last July announced the opening of its 3,200km network linking London, Amsterdam, Brussels, and Frankfurt. This network snakes into 4,000 buildings. It ties European businesses into the MCI WorldCom's US network.

Butler is responsible for overseeing the expansion of the UK part of this network. MCI WorldCom has a capital spending budget outside the US of $1.1bn for 1999. "The UK is more than half that," he says. MCI WorldCom last year took 25-year leases on three "dark" (not in use) fibre optic rings built by Racal Telecoms in the south, the midlands, and the north.

It is now busily attaching its advanced (internet protocol-based) routers and switches to these loops. It is also digging up roads around Birmingham and other cities to connect buildings to this network.

An expanded network will boost sales. "We plan double digit growth in the UK in 1999," Butler says. It will also cut costs because the company will pay fewer fees to BT to link its customers to the overall UK grid.

"The UK is the only country in Europe not planning treble digit growth," says Butler.

If all this sounds like a fantastic blue skies story, it is - in theory. The hitch is that BT does not accept Butler's characterisation of it as an Old World dinosaur. Younger, newer, smaller New World telecoms companies tar MCI WorldCom - as the grandfather of New World telecoms companies - with the dinosaur brush.

In the field, meanwhile, everyone is racing to get their pan-European networks in place. On 3 February, BT and its European partners announced that its pan-European network will go live by the end of March. This network has 5,000km of fibre connecting the 27,000km of fibre already in the ground within the BT alliance.

It will enable "BT and its partners to meet customers' rapidly increasing demand for high-quality, low-cost internet and high-speed telecommunications services", declared BT's chief executive, Sir Peter Bonfield.

Colt, the London-based phone company for the House of Commons and Buckingham Palace, currently offers businesses in 12 European cities a high-quality, discounted service. Colt plans to be in 20-22 European cities by the end of the year. Analysts expect its annual results, out on Thursday, to be encouraging.

Colt connects its European hubs to each other via links provided by Hermes, another New World teleco. Hermes is a Belgian carrier which is 17.6 per cent owned by George Soros. Its parent is Washington-based Global TeleSystems Group. In December, GTS announced the $1bn acquisition of yet another New World European teleco service called Esprit.

"Given Europe's history of regional monopolies, no seamless, pan-European telecoms networks were developed," writes Merrill Lynch analyst Simon Carrington in a research note on GTS published on Monday. "Post liberalisation last year, operators' ability to offer a pan-European service is still hampered by bureaucracy and cost. With multinational customers demanding greater geographic coverage, and data traffic growing exponentially, many operators are now seeking to construct Europe's first seamless network. We believe GTS is at least 18 months ahead of the competition."

Carrington notes the cost savings the competing telephone companies can offer. "Depending on the exact route, a cross-border circuit from two old monopolies can cost up to $420,000 a year, even if the distance is very short," he writes. "In the US, the equivalent price can be nearer $10,000."

Merrill Lynch estimates turnover in the European telecoms market, excluding mobiles, at $140bn a year. It says the city business segment of this market is about $30bn a year and growing fast.

As one of Butler's competitors summarises the situation: "We're in a boom. We all have the opportunity to do well. But not everyone will."

The problem is, no one is exactly sure what the determinants of coming out dominant in this market are.

Normally, the City - investors and analysts - would be opinionated. Fundamentally, however, investors and analysts like the telecom sector as a whole, and distinctions they make within the sector are tentative.

"The City waits for the companies' results," says one executive. "They monitor turnover growth, additional kilometres of fibre laid, and new customers. As long as we meet our targets, and our targets are aggressive, our share price goes up."

Rob McLeod, a London representative of Level 3 Communications - based in Omaha, Nebraska - argues that even the Old World/New World distinction between telephone companies is outmoded. McLeod, who left MCI WorldCom to join Level 3 last autumn, says: "We think telecoms technology has entered a state of permanent revolution. By the middle of the year, we will be able to push voice over our internet."

McLeod says it costs $29 to send a CD-Rom across the US using technology employed by BT and MCI WorldCom. He says it costs $1.92 to send the same CD-Rom across the US using the most advanced technology.

Level 3 is laying fibre in Europe differently from its rivals. It is putting ducts into the ground which will allow it to install additional capacity as required cheaply.

Faced with this myriad of challenges, Butler's high spirits show a sharper edge. MCI WorldCom has the right blend of technology, customer services, branding, and faith from Wall Street to ensure it is a winner in the developing battle.

There is industry chatter to the contrary. Recently, MCI WorldCom's Frankfurt sales team decamped to Colt.

"MCI WorldCom is founded in Europe on MFS, a start-up that used to be like Colt. Now the MFS people say MCI WorldCom has grown too big," says a competitor.

MCI WorldCom's growth is under control and is a strength, Butler retorts. The company is not so big it is like BT, but big enough that it has the advantage of scale over its rivals.

Who's right? We'll have to wait and see. The only sure thing is that thirty-something executives at telecoms companies like MCI WorldCom now seem a million miles from the City and CBI establishments. Five years from now, the same men are likely to have become the City and CBI establishments.

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