Analysts said the deal, which for the first time genuinely brings together entertainment, broadcasting and telephony under one corporate roof, marks the biggest step yet toward creation of the information superhighway.
Together, the two companies said they would aim to provide films, television, financial data, educational material and other services directly to the businesses and consumers, using News Corp's stable of entertainment and information assets and MCI's telephone network and marketing prowess.
"It's a very sweet move for News Corp," Paul Wignall, head of the multimedia consulting group at Ernst & Young, said. "They've lined up a very established player in the telecommunications business, and have generated cash at the same time."
MCI shares fared less well, losing ground in early trading in New York. "For News Corp, this is a win-win situation," one analyst said.
"They get cash and a window on the telecommunications market. MCI will have to wait to see how the investment works out. It certainly won't show up in earnings any time soon."
Some industry observers were equally critical. "There seems to be a steady stream of telephone companies prepared to pay over the odds for a bit of tinsel," one senior media executive said.
But most analysts applauded the deal. "This gives MCI access to content at a time when there is a shortage of content," one leading media analyst said. "All telecommunications companies are looking to join content providers, and MCI didn't want to be left out."
A senior News Corp insider said the company's entertainment assets would be the "locomotive" of the alliance. "Down the road, interactivity and digital TV will be important, but it is the entertainment that counts."
Under the deal, MCI, 20 per cent-owned by BT, will pay up to $1bn for preferred stock in News Corp, with an option to acquire an additional $1bn worth. The initial investment will pay a dividend after tax of $38.7m. Each $1bn investment entitles MCI to 38,834,951 American depository receipts; if the full $2bn is paid, MCI will end up with 13.5 per cent of News Corp.
The shares will carry voting rights, but these would lapse if MCI were to sell its stake. In addition, MCI must vote the shares in the same proportion as shares voted by other owners, including those held by Mr Murdoch and his family, who own 36 per cent. MCI will also be invited to raise its stake to as high as 20 per cent through open market purchases.
Although the Murdoch interests will be diluted through the acquisition, Mr Murdoch's own control will remain secure.
Company insiders said the alliance was the result of several months of talks between a small team of executives from both sides. Toward the end, Mr Murdoch and MCI chief executive Bert Roberts were actively involved.
The two men were said to have a healthy respect for one another. Mr Roberts, an engineer by training and a 20-year veteran of MCI, is known internally as a legendary marketer and one of the company's true visonaries.
He represented the telecommunications industry on the US government's National Information Infrastructure Advisory Council and has been widely and flatteringly profiled in the American trade press.
Under his leadership, MCI, with annual sales of $13bn, has eroded AT&T's hold on the long-distance telephone market and pushed into ancilliary markets such as data and video communications, electronic mail and network management.
For his part Mr Murdoch, at least since his brush with bankruptcy in 1991, following an acquisitions binge, has seen his fortunes rise and rise, as any shareholder who bought the stock at its 1991 low can attest.
News Corp, now one of the world's largest media companies, owns the Hollywood studio Twentieth Century Fox as well as Fox Television, a controlling stake in Star TV, the Asian satellite broadcaster, and 130 newspapers in the UK, Australia and the US. It also has a stranglehold on the UK pay-TV market through 40 per cent-owned BSkyB.
The MCI-News negotiations, while long, were amicable, insiders said. One sticking point was Mr Murdoch's insistence on attaching voting restrictions to the shares MCI was to buy. MCI might have paid more than $2bn had it not been for the restrictions. As it was, MCI paid a 20 per cent premium to the market price on the day the deal was announced.
News Corp declined to specify how the cash will be spent. Mr Murdoch is thought to be building reserves to help pay for the expected transition to digital television in Europe and the US, which will allow several signals to be broadcast over a single channel. He has also hinted that he would like to invest in the music business, where News Corp has no presence.
At least initially, News Corp will not be putting much of its new cash into his link with MCI. At the core of the alliance is an agreement to establish a joint venture to market multimedia services globally.
Capitalised at $400m initially, on a 50-50 basis, the new venture will provide a range of services, most of them linked to News Corp's existing "software" products, such as films, TV programmes and news services.
"This is a concept," Katherine Pelly, analyst at Kleinwort Benson Securities, said. "There is no product launch, no revenues, no infrastructure."
Despite the lack of detail about the joint venture's commercial prospects, most analysts agree the future for multimedia companies is bright. The prospects have enticed several companies to strike alliances, most recently Disney and AT&T, the largest long-distance operator in the US, and Microsoft and DreamWorks, the film, television and multimedia joint venture created by famed director Stephen Spielberg, former Disney chief Jeffrey Katzenberg and David Geffen, the music impressario.
The MCI-News link dwarfs the other alliances, however, given the size of the two players and the range of their interests.
Comment, page 33
Recent multimedia marriages
Viacom-Paramount film, television, cable
Time-Warner electronic publishing, magazines, films, television, cable
Pearson-Mindscape publishing, theme parks, television,broadcasting, electronic publishing
Disney-AT&T films, television, theme parks, telephony
MCI-News Corp. cable, satellite, telephony, publishing, electronic publishingReuse content