TMCI WorldCom's On-net Pressures Competitors, Regulatory Framework

November 1, 1998

22 Min Read
TMCI WorldCom's On-net Pressures Competitors, Regulatory Framework

By Khali Henderson

Posted: 11/1998

TMCI WorldCom’s On-net Pressures Competitors, Regulatory Framework

By Ken Branson and Khali Henderson

Two weeks after completing its merger, the pairing of MCI Communications Corp. and
WorldCom Inc. launched its On-net global end-to-end network product–a move that analysts
say all at once proves the synergies of its pairing and intensifies pressure on its
competitors, primarily the AT&T Corp./Teleport Com-munications Group Inc. combination,
as well as the continuation of regulated local markets.

"Their ‘local-to-global-to-local’ strategy raises some interesting
questions," says Jeffrey Kagan, president of Kagan Telecom Associates, Atlanta.
"What can a company do if it can carry a call from end to end without involving the
Bells or other third parties? End-to-end control not only gives them quality control, but
a much lower cost structure."

The On-net service offers business customers estimated savings of 15 percent to 30
percent when their voice and data traffic is processed on MCI WorldCom’s company-owned
network, thus avoiding access charges paid to the local exchange carriers (LECs) and
eliminating intra LATA (local access and transport area) toll calls.

"Given the merger’s vision to provide integrated communications services to
business customers, the company needed to be first to market [ahead of AT&T/Teleport]
with a national, end-to-end, bundled telecom service," says Jonathan B. Haller,
principal analyst, network services, for Current Analysis Inc., Sterling, Va. He says the
offering demonstrates the synergies of combining MCI, the large business long distance
leader, with MFS WorldCom, one of the world’s largest competitive local exchange carriers

"At a minimum, [AT&T/Teleport] needs to respond to the announcement by
debunking it. Better yet, match it," he says.

Haller says On-net also represents MCI WorldCom’s first attempt to ward off next-gen
competitors, such as Qwest Communications International Inc., Denver, and Level 3
Communi-cations Inc., Omaha, Neb., that are building national packet-based networks that
promise low-cost services.

While On-net is a significant announcement for the MCI-WorldCom merger, it is not
without its drawbacks. From a user standpoint, it is not a panacea. First, MCI WorldCom’s
network is not ubiquitous. Secondly, On-net is geared toward high-volume users, and most
small and medium-sized businesses won’t be able to cost-justify switching, Haller says.

From a regulatory standpoint, MCI WorldCom may force the Federal Communications
Commission (FCC) to consider opening long distance markets to the regional Bell operating
companies (RBOCs). "Although the competitive landscape has favored the RBOCs in the
past, this local-long distance play by MCI WorldCom tips the scales," Haller says.
"How can the FCC justify allowing MCI WorldCom to deliver end-to-end local and long
distance service without allowing the RBOCs to play in the long distance game?"


Although its On-net launch is generally viewed as positive, there is some concern among
analysts that the merger is in for some rocky times ahead. Integration of the two
networks, two sets of internal systems and two cultures may not go off without a hiccup or
two, analysts say.

"I think that integration, especially of the network, will be a significant
issue," says Sanjay Mewada, senior analyst at The Yankee Group, Boston. "How do
you integrate billing systems, OSSs (operations support systems) and so forth? It’s not
going to be plug-and-play, by any stretch of the imagination."

Mewada believes the merger will work, however. He sees a new, healthy competitor on the
market, rolling out new products and services. However, he thinks the blend of cultures
will cost the merged company something. "I’m not sure the merged company will be as
aggressive as MCI was or as nimble as WorldCom was," Mewada says.

Analyst Kagan is sure the merger will work, and that the marketplace will see it
working in a hurry. He doesn’t think integration will be anything the two companies can’t
handle. "If this were the first time for WorldCom, I might be worried," Kagan
says. "But they’ve done this, what, 50 times in 10 years?"

Kagan believes MCI WorldCom will make new product and service announcements "one
after another" in the first few months of the new company’s life. He believes these
products and services will embody a holistic view of the network and of the new company’s
place in the world.

"WorldCom was a company based on acquisitions," he says. "MCI was a
company built on marketing. It was the first long distance company to think of itself as a
marketing company that happened to market long distance service. It would have been as
successful if it was marketing shoes. You’ll see that attitude remain and be

Cable & Wireless Finalizes MCI Internet Acquisition

Having agreed to purchase the U.S. Internet division of MCI Communi-cations Corp. to
clear the way for MCI’s merger with WorldCom Inc., Cable & Wireless Inc., Vienna, Va.,
closed its deal with the carrier immediately following the MCI-WorldCom merger approval on
Sept. 14.

Regulators had expressed concern that the combination of MCI’s Internet division and
WorldCom’s UUNET subsidiary would create a monopoly in the Internet market, thus forcing
MCI to divest its Internet business. Cable & Wireless announced in July it would buy
the business for $1.75 billion, contingent on the completion of MCI’s merger with

Elements acquired in the agreement include a U.S. nationwide Internet backbone, 3,300
dedicated Internet access providers, 1,300 Internet service provider (ISP) customers and
more than 300,000 dial-up customers.

Vendors, NMF Back New Multivendor Network Management Interface

By Peter Meade

Fujitsu Network Communications Inc., Lucent Technologies Inc., Northern Telecom Ltd.
(Nortel) and Tellabs Inc. have joined forces to develop a software interface that would
let service providers manage their multivendor networks from a single vantage point.

The move to create an off-the-shelf package that would allow vendor-specific element
management information to be swapped via an open network management system is being backed
by the Network Management Forum (NMF). The resulting product should be able to
interoperate with the element management systems from all the NMF members, according to
Jeff Schmitz, group manager for Tellabs, Lisle, Ill., who also serves as the spokesman for
the NMF’s working group on the project.

The first prototype of the interface, which was unveiled at the National Fiber Optic
Engineers Conference (NFOEC) in September, demonstrated interoperability between an OC-3
ring from Fujitsu, Richardson, Texas, and a Tellabs Titan 5500 digital cross-connect and
an OC-3 ring from Lucent, Murray Hill, N.J.

"We need to better define the element management system and network management
layers and let them all talk to an open interface," Schmitz says. "In this
competitive environment for service providers, it is increasingly important that they can
rapidly deliver service. Customer decisions on service many times depend on who delivers
service first."

Just as important as speed is quality of service (QoS), says Tom Orlofsky, a product
management director at Lucent. "Today’s networks can be made up of 10,000 to 100,000
network elements," he says. "The only way to consistently deliver quality is to
simplify the process at the element level."

The open interface contributes to this process, freeing service providers from being
bound to a certain vendor or vendors as well as specific equipment. Being liberated from
these limitations has never been more important with vendor and carrier mergers, as well
as to expand the prevalence of multivendor networks, says Tim Fritzley, vice president of
network solutions for Tellabs.

Legacy systems have proved to be monolithic and limited in function, so any move toward
a standard that could be adopted widely must serve as a step in the right direction.
Service providers no longer can rely on "the smart guy in the swivel chair" when
it comes to network management, Schmitz says.

"We need an end-to-end management solution across growing multivendor
networks," he says.

Retrofit VoIP Solutions Speed Telcos’ Time to Market

Lucent Technologies Inc., Murray Hill., N.J., announced an upgrade to its 5ESS switch
to support Internet protocol (IP) with availability this fall. The announcement is the
most recent among switch vendors, making it possible for traditional telephone companies
to more quickly convert their existing circuit-based infrastructure to support voice over
IP (VoIP) services.

Northern Telecom Ltd. (Nortel), Mississauga, Ontario, announced in June that the vendor
will make available its VoIP/IP telephony portfolio for carrier-grade networks by
first-quarter 1999.

"The key beneficiaries here are traditional telcos," says Chris Nicoll,
senior analyst, carrier infrastructure for Current Analysis Inc., Sterling, Va.
"Everyone thinks [the telcos] are going to be very slow to convert to voice over IP,
but being able to take existing Nortel DMS switches or Lucent 5ESSs and leverage their
existing infrastructure to support the new services obviously will enable them to support
the new services faster."

According to Lucent, enhancement of its AnyMedia switch module will allow service
providers to offer data services from their existing switching systems, including modem
pooling, VoIP, voice over asynchronous transfer mode (ATM), Internet access, frame relay
or private line data.

While the add-ons will speed time to market for traditional telephone company IP
telephony offerings, testing and evaluation will push back rollout for nearly one year,
Nicoll says.

USA Brings Flat-Rate Long Distance to Market

By Jennifer Knapp

In an unprecented move, USA Inc. will start offering residential and business
customers long distance service under the flat-rate-per-month model popularized by
Internet access providers. The service will be available nationwide this fall, following a
beta test in California of the San Diego-based Internet telephony service provider’s
(ITSP’s) new network.

Pricing schedules for USA’s service vary from a 24 hours-a-day, seven
days-a-week professional calling plan at $30 per person, per month, to an economy calling
plan at $20 per month for nights and weekends. All plans include a registration fee.

Callers will be able to access the network by dialing a local USA number,
entering a personal identification number (PIN) and speaking the destination number. A
sampling of each subscriber’s voice functions as a password for the account. While network
access is available from any wireless or wireline phone, full U.S. coverage will not be
available until first quarter 1999, says Margaret Yates, director of marketing for USA

While this is a unique offering in the United States, AT&T Corp. and Sprint
Communi-cations Co. have been putting the business model to the test in Canada since July.
According to statements from telephone company executives in a Sept. 21 article in The
Toronto Star newspaper, $20 Canadian-per-month, flat-rate long distance plans are
extremely popular in Canada–so popular that they have exceeded network capacity.

"It’s a case of the marketing guys not talking to the network planners,"
telecom analyst Miro Forest told The Toronto Star. "The impacts were not
forecast properly, and it has the potential to be really startling."

The Canadian experience with flat-rate calling tells us "that the appetite for
conversation has only the limits of needing to sleep," says Judy Reed Smith, CEO for
Boston-based strategy consulting firm Atlantic-ACM. Add in a quality of service (QoS)
guarantee on a flat-rate plan and telephone companies are going to make money, Reed Smith

Another obvious obstacle to flat-rate pricing is local access fees paid by long
distance companies to local exchange carriers (LECs). While in its initial trial, USA thought it would be able to avoid the LEC networks entirely, but now finds it
will have to deal with some of the regional Bell operating companies (RBOCs) at some of
its delivery points, Yates says.

"We may incur some destination charges, but we’ll still be able to offer our flat
rate even with these charges," she adds.

USA’s pricing strategy is in line with the average spending for residential
long distance in the United States, which is approximately $18 per month, according to
ATLANTIC-ACM estimates.

RateXchange Launches Real-Time Bandwidth Exchange

By Khali Henderson

San Francisco-based RateXchange, a web-based exchange for wholesale telecommunications
capacity, launched its Real-Time Bandwidth eXchange (RTBX), which allows carriers to trade
minutes multilaterally through switches that are integrated with the RateXchange website, The announcement was the second such debut in as many weeks,
signaling the growing trend toward commoditization of bandwidth.

New York-based Arbinet Communications Inc. unveiled Aug. 27 its real-time LCR (least
cost routing) International Rate Ticker on its website, The
patent-pending ticker quotes Arbinet’s lowest rate to global destinations available to the
carriers that are connected to the Arbinet Global Clearing Network (AGCN). AGCN provides
real-time authentication, authorization, LCR, call placement and settlement, on a
transaction-by-transaction basis, allowing carriers to access the best rates and routing
options without having to negotiate and contract separately with each supplier.

"The RTBX launch is an evolutionary event for the international wholesale spot
market," says RateXchange President Sean Whelan. "We have already brought
together a disparate and fragmented market, lowered carrier transaction costs and matched
over 100 million minutes. RTBX brings our service full circle by providing a new
distribution model with payment and quality control."

David Cooperstein, a telecom analyst with Forrester Research, Cambridge, Mass., says
such bandwidth exchanges are going to start popping up with increased frequency, first in
spot markets and then in all markets as technology to transfer bandwidth easily from one
user to another allows. "Essentially, it’s going to start with small,
over-provisioned markets, but over time as the technology improves, then you might see
down time being bought on a route, for example, like Los Angeles to New York as the big
backbones get built out," he says.

By interconnecting to a RTBX switch at the 60 Hudson carrier hotel in New York or the
One Wilshire carrier hotel in Los Angeles, a carrier has access to all other
interconnected parties and routes as trading partners.

Bell Atlantic to Terminate ITXC’s IP-Based Calls

By Brandy Pfalmer

An agreement between ITXC Corp., a wholesaler of Internet protocol (IP) telephony, and
Bell Atlantic Corp. makes Bell Atlantic the first regional Bell operating company (RBOC)
to accept calls in IP format.

"For the first time [Bell Atlantic is] getting the traffic while it is IP instead
of it having to be converted to PSTN (public switched telephone network) first," says
Tom Evslin, ITXC chairman and CEO. "Those minutes [now coming from ITXC] probably
would have ended up on their network one way or another, but if we didn’t have the
agreement with them, they’d end up getting converted to PSTN."

Bell Atlantic will provide ITXC with "last-mile" connections or termination
for international telephone calls destined for the New York metropolitan area. The service
will be available later this year.

"ITXC’s business is 100 percent international," Evslin says. "A huge
fraction of the international calls that come into the United States are destined for the
New York area, so the first place that you want to have this capacity is New York."

It works like this: An IP telephony call is placed via a standard telephone or computer
through an originating carrier that is an affiliate or member of ITXC’s WWeXchange
network. The call then goes to ITXC, which reroutes it over an IP network to Bell
Atlantic. Next, Bell Atlantic translates the data call back to voice and sends it to the
local network and finally to its destination.

ITXC’s WWeXchange serves as a link between Internet telephony service providers (ITSPs)
worldwide. Using both IP and PSTN, the service connects affiliates to any phone number at
a lower rate.

The Bell Atlantic and ITXC agreement comes on the heels of BellSouth Corp.’s
announcement that it will impose access charges on ITSPs.

"There is an ironic contrast between the actions of BellSouth and the actions of
Bell Atlantic in the last week," Evslin says. "BellSouth seems to be saying, ‘I
have a God-given right to collect a toll on all of this traffic; whether I add any value
or not, whether the marketplace accepts my toll or not.’

"Bell Atlantic is saying, ‘We want to provide value and we are willing to provide
value at a good price and let the marketplace make the decision,’ " he continues.
"Nobody forced us to use Bell Atlantic. They didn’t set themselves up as tollgate.
It’s just they were offering a good service at a good price."

Sprint to Launch Wholesale Frame Relay Service

By Khali Henderson

After 16 months in beta testing, Sprint Wholesale, a business unit of Sprint
Communications Co., Kansas City, Mo., has finally set a launch date for its wholesale
frame relay product–the missing piece of its wholesale data portfolio, which was
announced in May and includes dedicated Internet, virtual private network (VPN) and online
account access services.

The company’s offering, scheduled for early October, comes nearly two years, in some
cases, behind that of some of its competitors. LCI International Inc. (now owned by Qwest
Communications International Inc., Denver) was first out of the gate with a wholesale
frame relay service in November 1996. IXC Communications Inc., Austin, Texas, and WilTel
(then WorldCom’s wholesale arm), Tulsa, launched theirs in January and April 1997,
respectively. But, analysts say, the latency of the Sprint offer is less a reflection on
Sprint, or even its competitors, and more on its resale customers.

Given that Sprint’s resale customers are primarily switchless and serve smaller
business subscribers, it is likely that they weren’t pushing Sprint Wholesale to bring a
frame relay product to market, says Judy Reed Smith, CEO of ATLANTIC-ACM, the Boston-based
consulting firm with expertise in long distance resale markets.

In addition, Reed Smith says that Sprint Wholesale ranks well with its resale
customers. The 1998 edition of ATLANTIC-ACM’s Wholesale Carrier Report Card shows that
Sprint Wholesale’s performance rating among resellers improved between 1996 and 1998.
"They are the most improved of the wholesale carriers, so they have to be doing
something right," Reed Smith says.

Neil Lichtman, president and chief operating officer of beta-test customer Claricom
Inc., Milford, Conn., says his systems and networks services firm has been pleased with
the results of its 16-month trial of the wholesale frame relay service. Ability to sell
frame relay service has saved Claricom from losing a $50,000-per-month voice customer,
Lichtman says. He also says that Sprint Wholesale has provided the training and technical
support his 300-plus sales force has required to sell the product.

Sprint Wholesale product managers say they have designed their wholesale frame relay
service with an education-centric approach. In fact, the company has a certification
program that resellers are required to pass before selling the service.

Sprint’s wholesale frame relay service is available in the United States and throughout
North America. Basic features include access, permanent virtual circuit (PVC) connections,
instant bursting for peak-traffic loads, full-service provisioning and coordination of the
local carrier services, automatic network rerouting and redundancy, and 24-hour network
control center and customer service availability. Advanced service options also are

Image: Deals

Williams Acquires $27 Million Equity in UniDial

Williams has invested $27 million to obtain equity in UniDial Corp., a Louisville,
Ky.-based telecommunications provider, helping finance UniDial growth and funding a
special distribution to its agents. Williams shares, which are in preferred convertible
stock, are worth about 10 percent to 12 percent of UniDial once converted to common stock.

UniDial will begin provisioning telecommunications traffic immediately to Williams’
wholesale-focused national fiber optic network. A spokesperson for UniDial said that the
relationship enables UniDial to substantially increase its ability to bring more
data-oriented services to its customers. The company also will be working with Williams
retail equipment division to bring communications hardware to its base and network
services to Williams’ systems users.

The cash injection will enable UniDial to offer a special distribution to agents
participating in its original Bonus Program, which offered agents 25 percent ownership of
their base for a $25,000 agency fee. The program was discontinued in April 1997. Agents
can remain under the original program or opt for an accelerated payout schedule, and a
reduced bonus upon the sale of its accounts to 21.875 percent. A third option eliminates
an agent’s rights to a bonus commission on the sale of its accounts in exchange for a
refund of the agency fee paid. More than 200 agents are eligible for the special
distribution, which UniDial estimates to be $8 million to $10 million.

While UniDial says its plan is helping to capitalize small agents for their continued
success, the change also decreases the company’s obligations to compensate agents upon the
sale of the company or its customer base.

US WEST Preps for Long Distance

In preparation for its pending entrance into the long distance market, US WEST Inc.’s
long distance subsidiary has formed a three-year agreement to resell AT&T Corp.’s long
distance services. Once US WEST Long Distance receives regulatory approval to offer
interLATA services, it will jointly market long distance with other services to customers
in its 14-state region. US WEST already has filed applications for interLATA (local access
and transport area) operating authority in Montana, Wyoming, New Mexico and Nebraska, and
intends to file applications for all states in its territory early in 1999.

Bell Atlantic to Resell Intermedia Frame Relay Services
Although Bell Atlantic Corp. negotiated in September to resell frame relay
transport services from Intermedia Communi-cations Inc., Tampa, Fla., end users will have
to wait for their service indefinitely. Terms of the agreement provide that Bell Atlantic
frame relay service will not begin until Bell Atlantic gains approval to enter the long
distance market under either sections 271 or 706 of the Telecom-munications Act of 1996.

Billing Concepts Augments Internet Services with Acquistion
Looking to expand its Internet billing ser-vice capabilities, Billing Concepts
Corp., San Antonio, has agreed to acquire Glendale, Calif.-based Expansion Systems Corp.
(ESC) The acquisition will bring ESC’s Totalbill and InstantReg billing and registration
systems for the Internet to Billing Concepts’ product suite. ESC also will enhance the
company’s billing solutions to include both UNIX- and Windows NT-based platforms with an
Oracle database.

Intel, UUNET Offer Resale Program
Intel Corp., Santa Clara, Calif., and WorldCom Inc.’s UUNET Technologies division
launched a reseller program in September to bring Internet access and network management
solutions to small- and medium-sized businesses. For the resale of UUNET’s Internet access
and Intel’s Business Internet Station or Express Routers, the program offers salesperson
incentives and company commissions of up to $2,300.

IXC Taps European Market
Having secured a substantial piece of business from the American top-tier
carriers, IXC Communications Corp., Austin, Texas, now is looking to provide network
services to global corporations operating in Europe. Provision of these services,
coordinated through IXC’s new London-based joint venture, Storm Telecommunications Ltd.,
will be offered through IXC’s purchase of fiber capacity on the TAT-14 transatlantic
cable, which will link the United Kingdom, France, the Netherlands, Germany and Denmark
with the United States by 2000.

Storm, IXC’s European venture with Telenor International and Clarion Resources
Communi-cations, will offer international switched telephone, fax and data services to
carriers and resellers in Europe.

English Channel Brings DWDM to London, Paris
NETs, a European international service provider, has partnered with Lucent
Technologies Inc., Murray Hill, N.J., to launch voice and data transport services between
London and Paris along the English Channel’s Euro Tunnel route. NETs will lease channels
on the WaveStar networking system offering data transport at speeds up to 2.5 gigabits per
second. Based on Lucent’s dense wave division multiplexing (DWDM) system, each NETs fiber
can carry more than half-million calls at one time.

Teleglobe Opens Network to Spain
Looking to take a slice of the 3.3 billion minutes of international traffic
entering and exiting Spain, Teleglobe Inc., McLean, Va., recently opened network access
points in Madrid. Future enhancements to the Teleglobe network will include a local
Internet access node in Madrid and new network sites in Miami and Japan.


US WATS Inc., Bala Cynwyd, Pa., announced in August the retirement of Stephen Parker,
co-founder and CEO of the company. Coincident with his retirement, Parker has resigned
from US WATS’ board of directors.

ConQuest Services Corp., Dublin, Ohio, recently promoted John Burchett to
president of the company. Burchett has been with the company for more than five years.

AvTel Communications Inc., Santa Barbara, Calif., has appointed Scott Hall
senior vice president, consumer markets. Most recently, Hall was vice president of sales
and marketing for One Call Communications of Carmel, Ind.

Joe Lynam has joined Integretel Inc., San Jose, Calif., as CEO. Previously, at
AT&T MultiQuest, Lynam served as national billing director, overseeing information
services, customer care, client care and local exchange carrier (LEC) billing relations.

American Communications Network Inc., Troy, Mich., has named David Thomas CEO.
Formerly with IXC Communications, Thomas coordinated service initiation and operations
development as president of the company’s retail business.

Premiere Technologies Inc., Atlanta, has named Ronald Gorland vice president and
treasurer. Gorland served for 11 years as treasurer and investor relations officer for
Blount International Inc.

Barry Cook, formerly with British Telecom plc (BT), has joined Amdocs Ltd.,
London, as president of the company. At BT, Cook was director of computing services and
operations and director of information systems development, where he was responsible for
delivery of information services throughout BT’s international corporate network.

USP&C, Kansas City, Mo., a billing clearinghouse and information management
services provider, has named three new members to its team: James E. Brown, vice
president and chief information officer; Webb Roberts, vice president and chief
financial officer; and Linda Benito, vice president of sales and marketing with
additional responsibilities for client services, carrier relations and regulatory

TIA Names New Chairman of the Board

The Telecommunications Industry Association (TIA), Arlington, Va., has appointed
William J. Cadogan chairman of TIA’s board of directors.

Formerly TIA’s vice chairman, Cadogan is ADC Telecommunications Inc.’s chairman and

TIA also has brought in Derek Khlopin, formerly an attorney with the Federal
Communications Commis-sion’s (FCC’s) Wireless Telecommun-ications Bureau, to fill the
newly created position of regulatory counsel. Khlopin will monitor and file comments on
all the FCC policy proceedings of interest to TIA members.

In addition, TIA promoted Jonathan Streeter to director, global technology policy and
Latin America programs. Before joining TIA, Streeter was director of external affairs at
the Optoelectronics Industry Development Association.

ACTA Names New Executive VP, General Counsel

Carriers Telecommuni-cation Association (ACTA), Cassel-berry, Fla., recently appointed Robert
M. McDowell executive vice president and general counsel. This is the first time ACTA
will have a full-time, in-house legal representative to serve the association’s
membership, says Jennifer Durst-Jarrell, ACTA’s executive director.

McDowell formerly was deputy general counsel for ACTA while he worked for Helein &
Associates, P.C., a law firm based in McLean, Va.

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