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Long Distance Competitors Only Nipping At AT&T’s Ankles

March 1, 1987

WASHINGTON (AP) _ The rough and tumble era of telephone competition has loosened American Telephone & Telegraph Co.’s grip on the long-distance business, but even its largest competitors are only nipping at the giant’s ankles.

Squeezed by AT&T’s price-cutting in the $40 billion a year industry, MCI Communications Corp. and US Sprint Communications Co. are struggling to pull themselves out of an ocean of red ink that is hundreds of millions of dollars deep and is eroding confidence on Wall Street.

Though analysts believe both will survive their financial troubles, many predict more bloodletting in an unpredictable market where the push is on to penetrate the highest revenue-producing segments.

″Sprint and MCI are working on that, but AT&T also knows where the money is and there’s a real roar on for some of the large business and high-billing customers,″ said Joel Gross, a Dean Witter Reynolds Inc. analyst.

Some 516 companies currently are providing long-distance service in the United States, most of which own few or no long-distance facilities but lease lines in bulk and resell within a small area.

″The balance sheets of some of these companies look like Berlin after the war,″ said analyst Jack Grubman of PaineWebber Inc. ″Most of them are barely hanging on and I suspect they will run out of money or patience or both real soon.″

Jerry McAndrews, president of CompTel, a trade association representing all but the two largest long-distance companies, said that while long-distance competition is becoming more intense, ″they’ve been wrong every year about predictions of bloodshed in the industry.″

One of the uncertainties in the market now is the fate of Justice Department recommendations to a federal judge that the local Bell operating companies be permitted to provide long-distance service outside the areas where they control local phone connections.

Kansas City-based Sprint, formed last June as a joint venture of GTE Corp. and United Telecommunications Inc., closed 1986 with pre-tax losses of $198.2 million in the fourth quarter and $356.4 million for the second half of the year.

″The losses have been steeper than we first envisioned,″ conceded United Telecommunications President William T. Esrey.

MCI, the nation’s No. 2 long-distance carrier, posted a $448.4 million loss last year, largely because of a one-time, fourth-quarter writedown in the book value of equipment and creation of a reserve for a cost-cutting restructuring plan. The company laid off 15 percent of its workforce in December.

Analysts expect more losses this year, but H. Brian Thompson, MCI executive vice president, said the company ″knew we were going to be in a position of this kind of pressure and we made provisions.″ He said MCI put about $4 billion into the business over the past several years to reduce the current need for capital outlays.

Analysts estimate Sprint’s losses in 1987 will be around $700 million to $800 million, but they note that Sprint’s parent companies are committed to completing its $2 billion fiber-optic network by the end of the year, which Esrey says will save $300 million a year in line leasing costs.

″If Sprint was a stand-alone entity, then it would be in serious trouble,″ Grubman said. ″However, given that it has two parents with relatively deep pockets ... Sprint has a lifeline that feeds it capital.″

He also likes Sprint’s business strategy, saying, ″They’re aggressive. They’re really going after customers. They’re willing to take on additional costs in order to get customers.″

MCI, however, ″could be stuck in neutral for a long time,″ he said. ″They made a strategic blunder in late 1985 and early 1986 trying to show earnings for shareholders,″ rather than trying to build its revenue base through aggressive marketing and advertising. Excluding the writedown, MCI showed a small operating profit in 1986, Grubman said, but he projects more losses and a further slide in overall profits this year.

Analyst John Bain of Shearson Lehman Brothers Inc. also foresees more losses for MCI this year, but he believes the business is basically sound. ″If there’s going to be competition in this industry, MCI is one of the players.″

Some analysts believe that since MCI doesn’t have a cash pipeline like Sprint’s, it might end up being acquired by a larger company that can afford to finance it until it becomes profitable. International Business Machines Corp. has a minority interest in MCI, but analysts believe IBM is not interested in running a long-distance business.

AT&T is not without financial troubles either, though the world’s biggest telephone company’s long-distance business is profitable. The company, blaming weak sales of its business products, lost $1.17 billion in the fourth quarter of 1986 because of a massive plan to cut jobs and expenses, but ended the year with a slim profit of $139 million.

All of the long-distance companies, but particularly MCI and Sprint because of their head-to-head competition with AT&T, have been squeezed by the market leader’s price cuts, including an 11 percent rate reduction ordered by the Federal Communications Commission at the end of last year. Both companies complain the FCC is moving too fast in deregulating the telecommunications industry.

″It’s like sending a high school football team out against the Chicago Bears or the New York Giants,″ Esrey said.

MCI’s Thompson agreed, saying, ″The profit margins in the business have gone to virtually nil. ... We can’t let the FCC continue to milk the profits out of the long-distance companies″ while the Baby Bells spun off in the AT&T divestiture increase their profits and ″lust after all the other businesses in the world.″

Analysts concede the companies are suffering under deregulatory pressures, but some say many of MCI’s problems stem from a lackluster image and a flawed strategy that is weakening the company.

″MCI doesn’t have the competitive thrust, they’re caught in between Sprint’s quality and price″ and AT&T’s image of reliablity, Gross said.

But he added, ″One has to assume they are smart people and will make a response.″

Thompson says MCI’s strength is in the business community, where the Washington, D.C.-based company has amassed 1 million customers alongside its 5 million residential customers.

Sprint, meanwhile boasts that it has increased its customer base by 2 million since it began operations with 2.7 million customers last June.

Despite its losses, Sprint could achieve its stated goal of overtaking MCI as the nation’s second largest long-distance company, said Gross, estimating Sprint’s current market share at 5 percent and MCI’s at 8.5 percent against 83 percent for AT&T.

Gross’ projections for 1990 show AT&T with 75 percent, MCI with 12 percent and Sprint with 9 percent. ″But if we see growth rates of the last couple of months we may have to go back and redo the figures,″ he said, adding Sprint’s attempt to catch MCI ″is not an unreasonable possibility by 1990.″

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