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International Issue: July 2005
Michael Capellas - Global thinking, local hurdles
MCI focuses on global accounts for higher margin revenue but local access challenges remain
by Ken Wieland
It was a rare opportunity. Michael Capellas, president and CEO of MCI, was in London last month and made himself available for a chat with a small group of journalists. No one-to-one meetings were granted to the invited few but Telecommunications® International was more than happy to break its view-from-the-top tradition of ‘exclusivity’. After all, he is in charge of one of the biggest telcos in the world (despite the company’s recent troubled history) and a key personality in the drama of Tier 1 consolidation that is unfolding in the US.
Yet, predictably, Capellas did not see this particular get-together as a time for revealing his proposed merger timetable with Verizon; nor did he view the occasion as an opportunity to explain the deal’s strategic merits compared with a Qwest hook-up. Instead, he saw the meeting as a chance to underline — in broad terms — his prime focus for MCI: providing multi-national corporations with value-added services on the back of its global IP network. “Post-merger [with Verizon] the new company will be committed to the global marketplace,” said Capellas.
He shrugged off the suggestion that Verizon, with all its network assets based in the US, was not an obvious way for MCI to enhance its international presence. “Verizon has already committed to a multi-billion dollar investment over the next couple of years [regarding] MCI network expansion and capabilities,” he said. “Many of our Fortune 500 customers are also based in Verizon territory, which means we’re now in a better position to offer them bundled packages of fixed and wireless local access. I don’t have to be defensive about the deal in terms of international presence.”
MCI, too, appears more urgent about expanding its global IP network (which comprises over 4,500 PoPs spread across 140 countries). Earlier this year, MCI announced it was increasing its capex budget for 2005 from US$1 bn to between US$1.2 bn and US$1.3 bn. Capellas explained that the extra funding was needed to install MPLS nodes in Russia, China, India, Africa the Middle East and Eastern Europe. “Being truly global is, we believe, one of our competitive advantages,” he said.
To increase higher-margin revenue from existing global accounts, as well as trying to attract new customers, MCI is banking on four types of value-added services gaining traction in the marketplace: web-based call centres, security, managed network services, and hosting.
To enhance its security offering, MCI purchased NetSec in February 2005, a US-based company whose portfolio includes ‘end-to-end’ analysis of customers’ network vulnerabilities. In the managed network space, through a strategic alliance with Microsoft to deliver securely ‘collaborative solutions’ — based on Microsoft Office Live Meeting — MCI is also aiming to increase its appeal to enterprises.
“As much of the intelligence that was once in the computing architecture moves to the network, the network becomes more relevant,” said Capellas. “We are not trying to move into application outsourcing [to compete with the likes of IBM and Accenture] but we are very close to the application layer and understand [its network requirements].”
While Capellas acknowledged his market positioning statements on global presence and managed network services capability were hardly unique — AT&T, BT Infonet and Equant make similar assertions — he argued that by virtue of having around 65 per cent of Fortune 1000 companies as MCI customers, there was proof of genuine market differentiation.
Even so, MCI can hardly be described as being on a solid business footing, a fact implied in its own SEC filings. ‘We expect revenues and expenses to decline in 2005’ reads its 10-Q statement, filed 9th May 2005, with the caveat that there was ‘no guarantee’ it would be able to outflank revenue declines with sharper falls in costs.
Part of the explanation for the anticipated fall in revenue lies in MCI’s decision (following restructuring in March 2004) to place less marketing emphasis on the mass-market consumer business in the US and not to chase low-margin international wholesale revenue. But even in its Enterprise Markets business segment, which contains MCI’s global accounts, revenue is in decline (albeit at a slower pace than other parts of MCI’s business). In 1Q 2005, Enterprise generated income of US$1,157 m (out of total MCI sales for that quarter of US$4,789 m), which was a three per cent fall year-on-year.
These downward revenue trends highlight the need for MCI to reduce operating expenses, the largest item on the list being local access charges. (Of MCI’s total operating expenses of US$4,674 m during 1Q 2005, 54 per cent were accounted by access costs.) “We have various strategies to tackle this, as not all markets are the same,” explained Capellas. These strategies include lighting up more MCI fibre to the building; increasing rollout of its CPA (converged packet access) technology, which puts all access services — including legacy TDM — on one access link; rolling out IP-based business products (such as MCI Advantage Integrated Access, launched last month in the UK but to spread further in Europe later this year); and increasing investment in wireless broadband technology. “We see WiMAX as a very promising technology,” said Capellas, adding that MCI has so far undertaken 150 WiMAX trials.
But it is not only high access costs that threaten MCI’s competitiveness; securing access facilities in a timely manner from PTTs could also be a problem. While this issue will no doubt be resolved to some extent in the US with its merger with Verizon, MCI’s international operations are still vulnerable to a lack of PTT cooperation. To address this problem, MCI says it will announce a number of partnerships with DSL and wireless broadband players in Europe in the second half of this year.
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