No longer a tin-can outfit, MCI has become a telephone giant

By Christine Gorman

For the go-getters at MCI Communications, the contest was their big chance to prove that they could whip their nemesis, American Telephone & Telegraph, at its own game. One of AT&T's largest customers, Merrill Lynch, wanted to upgrade its vast communications system to link its headquarters in Manhattan with an expanding empire of more than 730 branch offices around the world. If MCI could beat AT&T for the $150 million contract, it would rank as the biggest single deal in MCI's history.

Starting at the top, William McGowan, MCI's co-founder and chairman, flew to New York City early in 1988 to pitch the deal in person to Merrill chief William Schreyer. In laboratory tours in Washington, the phone company showed Merrill Lynch executives MCI's research on artificial intelligence. Company President Bert Roberts handpicked a group of analysts and technicians, dubbed the Swat team, to develop an unbeatable package deal. The MCI crew even agreed to adapt Merrill Lynch's own equipment to the new network -- a provision at which AT&T balked, since it manufactures its own gear. Last June, after more than eleven months of negotiations, Merrill Lynch made up its mind. The winner: MCI.

The champagne corks are popping like machine guns at MCI these days, as the scrappy No. 2 phone company celebrates one giant-killer success after another. Long dismissed by AT&T as a tin-can operation and wavering at the brink of financial ruin less than three years ago, MCI has transformed itself from a consumer long-distance carrier into a full-service communications giant. The company has become a marketing innovator as well, offering consumers perks such as frequent-flyer miles on American and Northwest airlines as a reward for using MCI's long-distance lines (five miles for every $1 of service). At the same time, MCI is carrying out a $6 billion equipment overhaul in which the company is replacing or upgrading every piece of gear, from switches to trunk lines.

As the industry's most aggressive upstart, MCI is riding the crest of a worldwide boom in telecommunications volume. Long-distance revenue in the U.S. alone has zoomed from $33 billion in 1984 to a projected $56 billion this year. While AT&T still dominates the U.S. market with a 69% share, down from 95% in 1984, MCI accounts for 12% of today's burgeoning market, up from 5% five years ago. The No. 3 carrier, US Sprint, lays claim to an 8% share.

MCI has suddenly become a profit machine, posting earnings of $285 million for the first half of 1989, a 138% increase from the same period last year. The big breakthrough at MCI stems largely from its aggressive pursuit of corporate business. In the past two years, the Washington-based company has wooed away such prestigious AT&T customers as Chrysler, United Airlines, Westinghouse and Procter & Gamble. "MCI is starting to hurt AT&T where it hurts the most: the Big Business customer. By stealing the big accounts, MCI is giving AT&T fits," says Michael Miller, who follows the industry for the Wall Street investment firm Northern Business Information/DataPro. "MCI is no longer the 98-lb. weakling of the telephone industry."

Not bad for a company that McGowan and John Goeken, an electronics expert, founded only 21 years ago as a private microwave-radio service for truck drivers in the Midwest. By 1980 MCI had begun offering discount long-distance service to residential customers in major cities. When AT&T tried to throttle its newfound competition by refusing to connect the company to the public telephone network, MCI sued the giant under the Sherman Antitrust Act. The Government followed up with its own lawsuit. In 1984 AT&T settled the cases and agreed to break up, under Government supervision, into one long-distance carrier and seven Baby Bells.

MCI emerged victorious from the long court battle, but it nearly went broke afterward. As deregulation swept the telephone industry, prices for toll calls fell as much as 38%. The slide devastated MCI because two-thirds of its business came from residential customers. By contrast, AT&T counted on noncorporate customers for about 40% of its revenues; the rest came from Government and business contracts.

Moreover, MCI had won direct access to local telephone grids, which simplified customer dialing by reducing the number of required digits from 22 to eleven but increased the access charges that MCI had to pay. Result: in 1986 MCI posted the first loss in its history -- a whopping $498 million. The company laid off more than 2,400 of its 16,000 employees. Then in December of that year, McGowan suffered a near fatal heart attack and soon afterward underwent a heart transplant. The company's future looked so bleak that senior executives considered putting MCI up for sale.

Instead the top brass made a gutsy decision. During a four-day marathon planning session in a suite at the Westin Hotel in Washington, they agreed to mount an all-out offensive on AT&T, with McGowan's blessing. Led by V. Orville Wright, a former MCI president who had been summoned out of retirement to serve as acting chief executive during McGowan's convalescence, MCI determined to steal the giant's bread and butter -- its corporate accounts. Says Daniel Akerson, MCI's executive vice president: "We decided to go where the money is."

MCI leaders planned a two-pronged attack that emphasized high technology and new services. The carrier replaced virtually all its old-fashioned microwave transmitters, which could handle only 8,000 simultaneous calls per route, with fiber-optic lines that would allow 100,000 calls. New services, such as a special network for fax messages and a system of discount private lines, called Vnet, were developed for corporate users. MCI's software engineers took care to design their toll-free 800-number service so that customers could find out where their clients were calling from and even determine their phone numbers -- a service AT&T did not provide.

Service innovations were a crucial part of the Westin plan, as the scheme hatched at the hotel has become known, because the MCI officials thought telecommunications companies would soon be offering the same quality and price. "Competition will come down to who can satisfy the customer. It will come down to service, and we're prepared for that race," says McGowan, 61, who received the heart of a 20-year-old during his 1987 transplant surgery and has been back at MCI's helm for two years.

MCI's salespeople have earned a reputation as tigers, which they need to be. While the company can sell to residential customers and small businesses over the phone or by mail, selling to a major corporation requires a lot of firepower. So MCI beefed up its sales force by recruiting a small army of hard-nosed salespeople from IBM, Digital Equipment and even rival AT&T. The group, says Akerson, is divided into "hunters" and "farmers." Says he: "The hunters shake the trees and find prospects. The farmers maintain the accounts and work day to day with customers, while the hunters go back out and find new customers."

So far, MCI's strategy has worked brilliantly. Commercial customers now account for more than 60% of MCI's revenues, in comparison with about 30% five years ago. AT&T has noticed the change and is fighting back. After MCI walked off with the Holiday Inn account late last year, AT&T applied to the Federal Communications Commission for permission to provide special discounts to selected customers. (The Federal Government still regulates AT&T because of its dominant position in the industry.) The behemoth won the right to change its prices, and it regained the Holiday Inn account.

MCI is still growing fast in the consumer market, adding some 70,000 customers a week. Last year it offered its first pay-phone service and added a flat-rate discount program called Prime Time, to compete with AT&T's Reach Out America. In July MCI scored another hit by announcing that it would allow customers to charge domestic long-distance calls directly to their Visa cards.

MCI's success goes to show that in the phone business, deregulation has proved its worth. "Five years ago, MCI offered only five major services," says Akerson. "Now MCI and AT&T each offer more than 50 kinds of telecommunications features." In another five years, Akerson boldly predicts, MCI will rival AT&T in size, providing an even more competitive environment. While some Americans may mourn the loss of the old Ma Bell, they now have an innovative No. 2 that tries harder than almost anyone else to keep up with the push-button age.