NEVER MIND THE HEADlines. AMERICA ON- LINE BUYS COMPUSERVE. KNOCKS OUT LEADING RIVAL. WOWS WALL STREET. The story behind last week's big deal was something else entirely--the rise of a little-known company called WorldCom and what it portends for the Information Revolution.
If you've never heard of WorldCom, don't be troubled. Most people haven't. Its business--building fiber-optic networks--isn't very glamorous. But consider this. Through a series of nearly 50 mergers and acquisitions over the past decade, WorldCom has grown from nowhere to become the nation's fourth largest long-distance phone company--as well as the world's leading provider of Internet services. Last week's deal with AOL and CompuServe ""cements its position in that fastest-growing segment of the telecommunications industry,'' says Robert Rosenberg of Insight Research Corp. in New Jersey. With a market value exceeding $30 billion, WorldCom is already bigger than such household names as Sprint, even though its $7 billion in sales is only half as large. Some analysts say it's now positioned to challenge mighty AT&T for dominance in the dawning digital age.
Here's what's going on. Last week's deal was really an artfully choreographed asset swap. WorldCom bought CompuServe from its owner, H&R Block, for $1.2 billion. It then turned around and sold the consumer side of this second-ranking online service (its content and databases as well as its 2.6 million subscribers) to America Online. That grabbed the media's attention, for the transaction put AOL firmly at the top of the heap in providing online information and entertainment to homes and businesses. Archrival Microsoft Network is now barely a sixth its size.
Next to that, WorldCom's side of the equation seems boring--even though it's of potentially far greater significance. For its share of the deal, WorldCom kept CompuServe's sophisticated hardware network--the so-called ""backbone'' of computers, wires and fiber-optic cables, routers and transmitters that constitute the mechanical heart and soul of the company's Internet links. In addition, as payment for CompuServe's online service, WorldCom picked up AOL's hardware backbone, a leading networking and Internet company called ANS. While long distance still accounts for 95 percent of WorldCom's business, these acquisitions are important because they help position the company for a profound shift in the telecommunications business. Chief operating officer John Sidgmore, who put together last week's deal, likens it to the switch from telegraph to the telephone. Right now, he says, 90 percent of the world's telecommunications are ""voice.'' But that will soon change. Digital transmissions of data in the form of e-mail, fax, computer telephony and electronic commerce will grow to the point of overwhelming dominance. Industry reports show that digital communications are growing by nearly 40 percent a year. At that rate, says Sidgmore, voice phone calls will account for less than 10 percent of all telecommunications traffic by the year 2002.
The implications for traditional phone companies are immense. None have an Internet presence rivaling WorldCom's. Perhaps more important, they are saddled with huge costs--the expense of maintaining legacy systems that lack the efficiencies of newer technologies. Newcomers don't have those costs. As a result, WorldCom can undercut the biggies on price. (Its long-distance rates are already 15 percent lower than most of its rivals'.) ""When this shift hits,'' says Insight's Rosenberg, ""the traditional telephone companies will lose a huge chunk of their business.''
That doesn't necessarily ensure WorldCom an automatic victory, of course. Sooner or later AT&T, Sprint and MCI (now allied with giant British Telecom) will move more aggressively into the growing Internet market, just as with deregulation the regional Bells will push into the long-distance markets in which WorldCom has hitherto thrived. WorldCom has problems of its own, as well. Its extraordinary appetite for acquisitions has made it essentially a holding company of independents. Melding them into a single, streamlined operation capable of taking on AT&T will be no small task for the future.
All that said, WorldCom is clearly a force to be reckoned with. Wall Street certainly thinks so. Analysts are fond of noting that $100 invested in WorldCom a decade ago would be worth $2,378 today. (The same sum invested in AT&T would be worth $158.) If its Internet bets pay off, WorldCom may even get some headlines.
The cold-war "hot line" linking Washington to Moscow was run by a little company that became WorldCom. Recent deals:
1997: After a $1.2 billion stock swap with H&R Block and an asset shuffle with American Online, WorldCom ends up with the Internet "backbones" of both AOL and CompuServe
1996: Worldcom pays $14 billions for MFS Communications and gets its giant Internet provider UUNET Technologies.
1995: $2.5 billion merger with Williams Telecommunications Group brings an 11,000-mile fiber-optic cable network.
1993: A Three-way $1.2 billion merger with Metromedia and the Resurgens Communications Group makes WorldCom a major league long-distance player.