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Opinions Split on Impact of MCI-British Telecom Marriage

November 4, 1996

NEW YORK (AP) _ Phone rates are sure to cheapen. The $20.8 billion marriage of MCI and British Telecom will create a marketing free-for-all, goading global rivals to slash prices to get customers.

But wait, rates may get more expensive. A combined MCI-British Telecom could squeeze out foes from local and long-distance markets it controls, smothering the competition.

Both scenarios were peddled as the likely result of the biggest foreign takeover ever of a U.S. company. Which ultimately is deemed more accurate could not only affect consumers’ monthly bills, but determine whether government regulators approve what may turn out to be a test case for more such trans-national deals.

In joint announcements Sunday, British Telecommunications PLC and MCI Communications Corp. agreed to create a ``communications powerhouse,″ with annual revenue of $42 billion and 43 million business and residential customers in 72 countries. They will call the merged business Concert, named after a joint venture begun three years ago when British Telecom bought a stake in MCI.

While both say they expect government approval within a year, the proposal is sure to get extraordinary scrutiny because of questions over foreign influence in the U.S. telecommunications industry and whether Britain’s market is equally open to U.S. competition.

Shareholder approval also is needed.

British Telecom shares surged 8 percent early today in London in reaction to the deal. On Friday, MCI stock soared 20 percent on confirmation from the companies that they were in talks.

Moody’s Investors Service also said today it will review British Telecom’s debt rating for a possible downgrade.

The issue of whether telecommunications marriages are good for consumers has flared with increasing frequency since the Justice Department in 1982 broke up AT&T, separating long-distance from local phone companies and granting all long-distance carriers equal access to customers.

What was new on Sunday, however, was that the biggest protests came from the old mother of monopolies herself.

AT&T chairman Robert E. Allen warned in a statement that the unprecedented proposal could ``negatively impact competition and reduce customer choice″ and as such should be closely scrutinized by government regulators.

In a statement that clearly reflected AT&T’s concern, Allen objected to what he called obstacles to competition in the British market, which could give AT&T’s rival a big advantage.

Indeed, the combination comes at a vulnerable time for AT&T, the world’s leading long-distance phone service provider, which has been struggling with a leadership succession problem and is in the midst of completing a major reorganization of its own businesses.

The uncertainty is driven by intensified rivalry with the ``Baby Bells,″ other long-distance companies and telecommunications players such as cable TV companies. All are racing into partnerships and combinations to help build high-technology networks that blend traditional long- and local phone service, mobile communications and Internet services.

In particular, the MCI-British Telecom deal may well magnify competition in U.S. local phone markets, opened to fresh rivalry from long-distance companies by a telecommunications reform law passed early this year.

MCI and British Telecom had a clearly different view than AT&T.

``Simply put, rates will come down,″ MCI chairman and chief executive Bert Roberts told a news conference in Manhattan, referring to local phone service in the United States. ``I wouldn’t be surprised if, over time, they came down by a factor of two.″

With the deep pockets of British Telecom, MCI hopes to intensify its drive into local markets, boosting spending for marketing and lowering rates in an all-out drive to woo consumers and businesses.

MCI also will increase spending on marketing its mobile-phone services, which it sells mostly by leasing other companies’ equipment. In addition, MCI hopes to offer more volume discounts to businesses that buy its all-in-one communications, which combine local, long-distance, mobile phone and other services in one contract.

The view that a bigger push will lower phone rates was echoed by another telecommunications aggressor, U S West Inc., a regional Bell company that is in a major partnership with Time Warner and is seeking to complete a merger with Continental Cable that will create the second-largest U.S. cable company.

And through a partnership with Denver-based TCI, U S West also is Britain’s second-largest provider of so-called ``telephony,″ which uses cable networks to deliver telephone and television services to consumers.

``It’s the wave of the future and any company that’s not preparing for major mergers and even smaller mergers, they’re not doing prudent management,″ said Nanci Bernstrom, a spokeswoman for U S West.

``Competition should lower prices and it should become a good deal for consumers,″ she said. ``See what’s happened with long-distance phone services _ companies offer sign-up benefits, bonuses.″

Another regional bell company, Bell Atlantic Corp., is hoping to get a proposed $23 billion merger with Nynex Corp. approved by year-end despite criticism from consumer advocates about the new company’s power and plans.

Is Bell Atlantic worried about MCI’s potential advantage?

``I don’t want to say it’s not a concern, because clearly it does change the ability of one player to do these sorts of things,″ said Bell Atlantic spokesman Eric Rabe.

However, other players like AT&T and Sprint ``are 600-pound gorillas″ and ``that dynamic existed in the market before.″

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