WorldCom/MCI will exit bankruptcy intact and with a sound plan



On 14 April 2003, WorldCom filed its reorganization plan with the U.S. Bankruptcy Court. The court’s approval will allow WorldCom to emerge from Chapter 11 protection from creditors. WorldCom also announced that it will change its name to MCI.

First Take

In our view, MCI will almost certainly emerge from Chapter 11 by its new, more aggressive target of September 2003. Moreover, the company will remain largely intact. According to MCI, it will emerge in a strong financial position, with lots of cash on hand (US$2 billion today), low debt levels and pragmatic profit targets. Hence, MCI will feel less pressure to shed businesses. The lingering uncertainties include finishing the Chapter 11 process, and resolving lawsuits brought by shareholders and competitors.

MCI recently briefed Gartner on its strategy and business plan, which Gartner views as solid. The company will concentrate on classic network services (such as transport), with some value-added services such as MCI Advantage (formerly WorldCom Connection), its converged voice/data service. MCI’s strength lies in its IP backbone, with which it will serve large enterprises, other carriers, small and midsize businesses, and consumers. In enterprise markets, MCI will avoid competing on price and will instead offer standardized service bundles that will allow enterprises to reduce their costs without MCI necessarily reducing its profits. MCI is one of the few carriers that understands the impact of grid, or networked, computing. MCI plans to add intelligence to its network to enable IT firms to operate such computing services over it.

Some weaknesses persist. Although MCI won’t cut major operations, we believe it will cut some units – the Skytel paging unit and the Digex hosting unit are likeliest to go, along with some Latin American operations. MCI still lacks a wireless strategy, and its IP access strategy relies heavily on digital subscriber lines. Apart from Advantage, Gartner did not see many value-added services in its business plan. We expect MCI to develop more products in this area, where other carriers see new growth opportunities. But financial constraints mean MCI can’t tackle everything at once. MCI must do substantial internal work to drastically improve operational efficiency. As the legacy of the dozens of acquisitions through which the company was built, MCI says it has more than 1,000 back-office systems. It will take until 2006 to reduce that number to less than 100. Finally, MCI must bring greater price discipline to its sales efforts.

We believe MCI has overcome the worst of its problems. Now it must execute a multifaceted business plan. Enterprises should reconsider MCI as a transport network service provider (NSP) with some interesting add-ons such as Advantage. MCI customers should negotiate contracts now; they should not expect MCI rates to improve as it exits Chapter 11.

Analytical Source: Jay Pultz, Gartner Research

Recommended Reading and Related Research

“WorldCom’s $80 Billion Write-Off: Don’t Worry, but Watch Service Levels” – Enterprises should disregard the size of the write-down. With WorldCom in Chapter 11, these accounting measures will not affect day-to-day operations. By Jay Pultz and David Neil

“U.S. Network Service Provider Magic Quadrant: 1H03” – The turmoil in the U.S. NSP market will continue until at least 2005; enterprises can expect mergers of old and new NSPs, while other NSPs will cease operations. By Jay Pultz

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