MCI Communications Corporation

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MCI Communications Corporation

1133 Nineteenth Street, Northwest
Washington, D.C. 20036
U.S.A.
(202) 872-1600
Fax: (202) 887-2154

Public Company
Incorporated: 1968 as Microwave Communications, Inc.
Employees: 24,509
Sales: $7.68 billion
Stock Exchange: NASDAQ

MCI Communications Corporation is the second-largest U.S. provider of long-distance telecommunications services. The company led the charge in introducing competition in the telecommunications industry and precipitated the breakup of AT&T’s Bell System. In the post-divestiture era, MCI quickly became a multibillion-dollar global enterprise. MCI serves a large and diverse clientele, including large corporations; local, state, and federal government agencies; small businesses; and individual residential customers. The company underwent explosive growth in the 1980s, but may confront slower times as the already fiercely competitive market intensifies, with rivals AT&T, US Sprint, and the approximately 450 other longdistance carriers.

Founded in 1968 as Microwave Communications, Inc. by John Goeken, owner of a mobile-radio business, MCI’s regulatory history began in 1963, when Goeken filed an application with the Federal Communications Commission (FCC) for permission to construct a private-line microwave radio system between Chicago and St. Louis, Missouri. Goeken proposed to erect a series of microwave towers between the two cities that would carry calls on a microwave beam. AT&T had actually developed the technology and used microwaves on many of its long-distance routes. Unlike the Bell System, which had to expend enormous sums to maintain and operate the basic wire-and-cable network, however, Goeken proposed to offer a much cheaper alternative by employing microwave technology exclusively. As Fortune, April 1970, noted, Goeken contended that he would provide a service not offered by any of the existing telephone companies: “wider choice of bandwidths, greater speed, greater flexibility … and prices as much as 94 percent cheaper than A.T.&T.’s.” In addition to carrying voice transmissions, the company stated that its greatest appeal would be to those who wanted to send data or a combination of data and voice messages.

Goeken’s application set the stage for one of the great corporate battles in U.S. history by challenging the prevailing public-service principle that had been developed and applied to telephony during the 19th and 20th centuries. The public-service principle was the philosophy that universal availability of telephone service could be achieved only through one independent and interconnecting network. It was believed by those who built the system and those who came to regulate it that the communications industry was a natural monopoly, in which quality and service were best achieved through one integrated system rather than through the play of competing interests. At the time when Goeken filed his application, AT&T saw him as a small but important threat to its position as the nation’s basic provider of phone services.

In 1964 several corporations, including AT&T, its Illinois Bell subsidiary, Western Union, and GTE’s Illinois-based subsidiary, petitioned the FCC to deny Goeken’s application. The corporations argued that Goeken’s proposed service would be redundant. More important, AT&T charged that Goeken’s service would skim the most profitable segment of the communications market at the expense of universal service provided by Bell. AT&T depended on charging high rates for some of its intercity services—such as private line, WATS, and regular long distance—to subsidize the vast expense of constructing and maintaining the nation’s communications network. AT&T also used the revenue derived from these services to subsidize the price of local service, making the cost of basic phone service affordable to the average customer. If Goeken and others were allowed to compete openly in the market, this delicate system of rate averaging would be disrupted. Although it was in the interest of AT&T and the others to stall proceedings as long as possible in the hope that Goeken would not pursue his plan, most of the delays stemmed from Goeken himself. Filing deficiencies caused endless delays.

The seeds of change in the regulatory climate were sown in the revolution of new technologies that arose during and after World War II. Rapid technological advances in the fields of microwave relay, satellites, computers, and coaxial cable, in addition to other technologies such as mobile radio, recording devices, and answering machines, gave rise to a number of small, aggressive firms seeking to enter the telecommunications field. As these firms, armed with the new technologies, demanded increasingly more access to the telecommunications market, the FCC was compelled to respond. In a string of rulings, the FCC first in 1956 decided that under certain conditions non-Bell terminal equipment could be attached to the Bell System network. In 1959 the FCC permitted firms to operate private microwave communications systems for internal use.

With these two decisions, the FCC paved the way for entry of competitive firms into certain markets. The FCC opened completely the terminal-equipment market in 1968. Almost immediately dozens of small firms entered the market seeking to sell equipment in competition with Bell products.

In this changing regulatory climate of the early 1960s, Goeken arrived on the scene proposing a supplemental service that he claimed was not being provided by any company. Goeken claimed that he was seeking only a peripheral submarket much too small to disrupt AT&T’s system of rate averaging. AT&T, however, opposed the entry, claiming that the ostensibly new and innovative service was merely a variation of a service already offered.

In 1968, as the FCC was still considering the newly incorporated Microwave Communications, Inc.’s application, the fortunes of the small company took a dramatic turn when William McGowan joined the company as chairman and chief executive officer. McGowan saw promise in the company, put his money behind it, and soon devised a strategy that would lead Microwave Communications, Inc. (MCI) to phenomenal success. When McGowan joined the firm, MCI’s major asset was a five-year-old application to provide point-to-point private-line service by microwave between Chicago and St. Louis.

Almost immediately, McGowan set up a new company, Microwave Communications of America, to attract private investors to finance MCI-affiliated companies around the country. At the same time, the company announced plans for an 11,000-mile system that would run through 40 states and be operated by 16 affiliates. Most importantly, McGowan began to orchestrate a legal-political strategy that would serve MCI extraordinarily well in later years when the company lobbied the FCC and Congress to grant its license.

On August 13, 1969, in a four-to-three decision, the FCC authorized MCI’s Chicago-St. Louis application. The decision also assured MCI that it could interconnect with the Bell System network to enable MCI to provide its proposed services. Instead of settling the AT&T-MCI dispute, however, the FCC’s MCI decision set the stage for a major battle over telecommunications policy as a result of the commission’s failure to clearly delineate the boundaries of competition. The market threatened by MCI’s entry was considerably larger than the market opened by the FCC’s 1959 decision, which had allowed individual firms to set up their own in-house microwave communications systems. AT&T repeatedly charged that MCI would not be providing any new technologies or services but only skimming the most profitable routes, which AT&T needed to support unprofitable rural routes and basic local phone service.

It was clear to McGowan that to build MCI into a major national telecommunications network, AT&T’s monopoly would have to be dismantled. McGowan launched a three-pronged offensive, lobbying Congress, the FCC, and the courts. The company hired Kenneth Cox in 1971 as a senior vice president who was assigned to lobby the FCC. Cox was a former FCC commissioner who had voted for approval of MCI’s application in 1969.

AT&T responded aggressively to the FCC’s MCI decision and was joined by Western Union and GTE in petitioning the FCC to reconsider MCI’s application. Since other firms were then seeking entry to provide similar microwave private-line services, the companies argued that MCI could no longer be considered an isolated experiment, and that increased competition would lead to higher prices, interfere with universal service, and undermine the basic system of rate averaging. MCI countered that these concerns were unfounded. The FCC denied the petitions, and in 1971 MCI received final approval to build its Chicago-St. Louis route.

Ultimately the 1971 FCC decision led to open entry into the private-line market. The FCC’s 1971 deregulatory move, however, was narrow in scope and intent, designed to open only a specialized segment of the market. It was not the initial intention of the FCC to encourage full-scale competition with AT&T. The goal was to allow other firms to provide services not available from AT&T.

On June 22, 1972, MCI issued public stock, raising more than $100 million, and, assisted by a $72 million line of bank credit, it began construction of the Chicago-St. Louis route. The company also laid plans for its national microwave network that would run from coast to coast. MCI soon ran into trouble with AT&T, however, over the issue of interconnection with Bell’s basic phone network. The FCC ruling had assured MCI that it could use Bell’s local phone network to provide its service, but it did not stipulate at what cost or how quickly AT&T should install MCI’s lines. At the same time, AT&T announced that it was instituting a new pricing system called HI/LOW to compete directly with MCI and others on private line routes. By 1973 MCI was in financial trouble. Just months away from opening its nationwide microwave network, the company defaulted on its line of bank credit and was on the verge of collapse. Also in 1973 Microwave Communications, Inc. reorganized as MCI Communications Corporation.

Because the FCC’s rulings—especially the decision on MCI—had spawned such competition, the commission had a political stake in MCI’s success. McGowan understood the FCC’s commitment to the survival of competition. To ensure MCI’s preservation he worked quickly to enter the more profitable markets, capitalizing on the FCC’s support. In the fall of 1973, McGowan, badly in need of cash, urged the FCC to authorize MCI to enlarge its services to include FX lines. Such lines connect a single customer in one city to another city, in which any number can be reached. The service, however, required the use of Bell’s switched network, which AT&T saw as a violation of the intent of previous FCC rulings. In the protracted legal battle that ensued, MCI won a major victory that served as a prelude to the company becoming a full-scale long-distance competitor of AT&T.

In 1973 MCI also began lobbying the antitrust division of the Justice Department to file a suit against AT&T to break apart the Bell System. On March 6, 1974, MCI filed a civil antitrust suit of its own, seeking damages from AT&T. Shortly thereafter, the Justice Department filed an antitrust case against AT&T to break up the Bell System.

Even though MCI had succeeded in enlarging its markets by winning approval to provide FX services, the company had yet to make a profit. Between March 1973 and March 1975, the company lost working capital at the rate of $1 million a month. It needed new markets and, in a risky gamble, began to offer Execunet, a service nearly identical to AT&T’s regular, very profitable long-distance service. If the company was successful it could become a wealthy corporation, but if it failed, MCI faced the possibility of bankruptcy.

In 1975 V. Orville Wright joined MCI. Wright soon became president. Also in 1975, AT&T protested to the FCC that by providing Execunet, MCI had flagrantly exceeded its mandate. The FCC concurred, and MCI was directed to cease providing Execunet service. MCI won an appeal, and in 1978 the Supreme Court refused to review the appeal court’s ruling that overturned the FCC ban on Execunet and ordered Bell to offer interconnection service to MCI. The breakthrough Execunet victory saved MCI from possible financial collapse. The company, in opposition to both AT&T and the FCC, had won the right to provide long-distance service. In effect, MCI had cracked the Bell System monopoly. MCI soon began offering its long-distance service to residential as well as business customers. Then a full-scale competitor in the lucrative long distance market, MCI saw its revenues increase sharply. By 1981 MCI’s annual revenues approached $1 billion. The Execunet victory also opened the long-distance market to other small firms. Few, however, could afford to expend the enormous sums needed to build and maintain their own network facilities.

By the early 1980s it was clear that the government was winning its antitrust suit against AT&T. On January 8, 1982, the Justice Department and AT&T announced agreement in the seven-year-old case, providing for the divestiture of the 22 wholly owned local Bell operating companies. MCI’s successful crusade for deregulation and divestiture, however, placed the company under financial strain in the immediate aftermath of the Bell System’s breakup in 1984. AT&T, responding to the competitive inroads made by MCI and others, began drastically reducing its rates. MCI’s profit margins collapsed as it was compelled to reduce rates. Higher access charges also squeezed the company. In 1985 MCI’s stock plunged from over $20 per share to under $7 per share, and in 1986 the company, despite having the second-largest share of the longdistance market, posted a loss of $448.4 million. From the beginning, MCI’s profits derived not from superior technology or innovative processes, but from its cost advantage over AT&T, which it passed on to customers. Once the local Bell operating companies were divested, MCI’s artificial cost advantage disappeared.

In 1985 MCI was awarded a disappointing $113.3 million in its civil antitrust suit against AT&T. Also in 1985, in need of capital to expand MCI’s national network and to finance an aggressive marketing campaign to win new long-distance customers, McGowan struck a deal with IBM, which bought 18% of MCI for cash with the option to later expand its holdings up to 30%.

McGowan continued to argue the need to regulate AT&T for several years before open competition could be considered viable. Whereas McGowan had led the charge for deregulation throughout the 1970s, he now argued that only vigorous regulation could guarantee that MCI and other competitors would be able to compete effectively with AT&T. The following year, MCI called for the removal of all remaining regulatory restraints. The odd alliance was created by the companies‘ shared perception that deregulation would enable both to improve their financial outlook by increasing rates. The two companies also had a shared interest in opposing proposals advanced by the FCC and the Justice Department to relax regulation of the former Bell operating companies, which had become competitors of MCI and AT&T.

In 1985 V. Orville Wright retired as president of MCI, but continued to serve as vice chairman until 1990. He was replaced as president by Bert C. Roberts Jr.

MCI weathered the wake of AT&T’s divestiture and had expanded rapidly into providing a wide range of domestic and international voice and data communications services. The company’s communications services include domestic and international long-distance telephone service; international record communications services between the United States and more than 200 countries; and a domestic and international time-sensitive electronic mail service. Long-distance telephone service accounted for 90% of MCI’s total revenue in 1989. The company had bolstered its position in domestic and international markets through a series of investments, including acquisition of Satellite Business Systems; RCA Global Communications, Inc.; and certain assets and contracts of Western Union’s Advanced Transmission Systems division. In 1990 MCI also purchased a 25% interest in INFONET Services Corporation, a provider of international data services, and acquired for $1.25 billion Telecom USA, then the nation’s fourth-largest long-distance company. With the acquisitions, MCI had approximately a 16% share of the domestic longdistance market. In another move, the company announced it acquired Overseas Telecommunications, Inc., which provides international digital satellite services to 27 countries worldwide, in March 1991.

Since its incorporation in 1968, MCI had profited from its successes in the regulatory arena. The company is well positioned to continue to capitalize on its strategic investments and its expanding digital transmission and switching facilities to further extend its reach worldwide.