Revival of the AT&T-MCI feud

Posted: Jul 31, 2003 12:00 AM

The former WorldCom, under new management and an old name (MCI), is scheduled to go to court Aug. 25 to begin emerging from bankruptcy. But competitors seem intent on using public accusations and political influence to keep MCI down, if not down and out.

The latest round began with heavyweight AT&T against the injured lightweight. AT&T claims MCI diverted federal agency calls through Canada to avoid paying access fees to local carriers. AT&T called this "fraud and racketeering," and impugned its rival's patriotism, saying MCI "demonstrated their willingness to play fast and loose with our national interest to line their pockets." Similar disputes about creative routing and unpaid access fees have long been commonplace, with AT&T often the accused rather than the accuser. But such squabbles have heretofore been settled quietly, rather than through intemperate press releases.

"Whether true or not," The New York Times observed, these accusations "could make it harder for the company to keep some of its current customers and sign up new ones." After two more MCI rivals piled on, Accounting Web remarked, "This latest fraud charge, levied by three of MCI's chief competitors -- AT&T, SBC Communications and Verizon -- could derail the company's efforts to resolve its Chapter 11 bankruptcy case with the federal government."

Perhaps the idea of derailing MCI never occurred to AT&T, SBC and Verizon, though it happens to be in their interest. The Atlanta Journal-Constitution reports, for example, that SBC "lost 249,000 residential and business lines in the (past) quarter to rivals such as AT&T and MCI." Since MCI is vulnerable and AT&T is not, it makes commercial sense for SBC to now make common cause with AT&T against MCI.

The new accusations follow a suspicious trail of several previous efforts to damage the MCI brand. When something smells this fishy, it is time to do a little fishing.

On July 7, the SEC imposed a record $750 million fine on the remnants of WorldCom. Predictably, MCI's competitors attacked that huge fine as being far too lenient. Jim Cicconi, general counsel to AT&T, called it "a travesty of justice" that MCI should be able to "emerge from bankruptcy at a competitive advantage." The complaint that bankruptcy is an "unfair advantage" presumably means MCI will be relieved of unpayable debts. But debt relief is an unavoidable part of any bankruptcy, and a recent bankruptcy is certainly no advantage in the market for new capital.

Whether and how MCI emerges from bankruptcy is for its creditors to decide. It is not the proper concern of rival firms with an unhealthy interest in slaughtering wounded competitors. Nor is it the proper concern of politicians who have nonetheless staged one mock hearing to publicize MCI rival's self-interested complaints and plan to stage another. Unfortunately, USA Today spoiled those shows by demonstrating that AT&T, Verizon and SBC are major contributors to those most active in the campaign to punish MCI into oblivion -- Sens. Susan Collins, R-Maine, Orrin Hatch, R-Utah, and Edward Kennedy, D-Mass; and Rep. Henry Bonilla, R-Texas.

The fishiest issue is the campaign to prohibit the federal government from doing business with MCI. As The Wall Street Journal noted, "For many (bond) investors, the biggest concern is whether the new assertions will hurt MCI's effort to bid for government contracts."

Media stories quote Tom Schatz, president of Citizens Against Government Waste, who wants the government to boycott MCI. Schatz worries that "MCI could emerge from bankruptcy with an unfair advantage," which "could force prices across the industry to nosedive." But why is a lobbying group that claims to worry about federal spending now suddenly more worried that MCI might charge the government less money than AT&T?

Interest groups trying to use the government to abuse MCI are insufficiently coy about their intentions. A Washington Post query to Verizon found "the regional phone giant has no plans to drop its strident lobbying campaign against WorldCom in Washington."

The Communications Workers of America want MCI sold to "responsible companies" -- specifically, AT&T or Sprint. Columnist Deroy Murdock saw right through that ploy: Unlike MCI, AT&T and Sprint are unionized. Selling MCI to AT&T would be the easiest way to expand union membership (and to give antitrust officials a heart attack).

What AT&T, Verizon, SBC and the communications workers union have in common is that they were once part of the government-enforced "MaBell" monopoly. While it lasted, you could not even choose your own telephone. Long-distant calls were exorbitant, ostensibly to subsidize local calls but more likely to subsidize administrative overstaffing, lavish offices and fat paychecks.

An antitrust suit from 1974 to 1982 resulted in the AT&T long-distance service spinning-off Western Electric, Bell Labs (now Lucent) and seven regional monopolies, which have since reassembled themselves into four -- Verizon, SBC, Bell South and Qwest. Justice cited an essay of mine from The Harvard Business Review of December 1974, "A Kind Word for Cream Skimming." But I was never a fan of the break-up. I just thought anyone should be free to buy telephones and long-distance services from anyone who offered them. That would have been a matter of deregulation rather than antitrust.

What ultimately undid Ma Bell's monopoly, as I predicted in 1974, was legal and technological innovation. The technological challenge came from MCI, which began in 1963 and spent the next six years persuading the FCC to let it use airwaves to transmit computer data between St. Louis and Chicago.

Long before the antitrust deal, MCI had already made significant inroads into AT&T's long-distance business. That meant AT&T could no longer count on monopoly profits from long-distance to subsidize local service. And that made spinning-off local services to the Baby Bells look like a good deal. MCI was thus a key part of the beginning of the end for a cozy monopoly.

The recent sniping at MCI may be nothing more than a revival of this old feud -- a grudge match. Whatever it is, it looks like bullying. And the nasty chatter about "punishing" the new MCI for the old WorldCom malfeasance is as unreasonable as it is irrelevant.

WorldCom executives accused of accounting fraud are reportedly close to being indicted, including former CEO Bernie Ebbers, former controller David Myers and former CFO Scott Sullivan. Having the government boycott the new MCI that would do nothing at all to punish anyone who is guilty, but it would do a lot to punish many who are innocent.

If the newest attacks on MCI turn out to be as dubious as previous ones, any damage they inflict will fall on MCI's 50,000 employees, 20 million customers and numerous bondholders. That would not be fair, and it would not be smart.