War of the Wireless

By THOMAS McCARROLL

Five years ago, MCI Communications was approached by two eager entrepreneurs with an offer to take a 20% stake in a risky venture. Their plan was to transform a local radio-dispatch system, used primarily by taxicabs and truckers, into a state-of-the-art cellular-telephone network. MCI declined the $40 million opportunity, preferring to concentrate on its core business: long- distance service.

Times change. In a stunning reversal last week, MCI announced a deal to acquire 17% of the same venture, Nextel Communications, for a whopping $1.3 billion. "Things were different then," says MCI chairman Bert Roberts Jr. "MCI faces an entirely new world today."

New indeed. While MCI's principal business strategy -- to beat AT&T -- is undiminished, the revolution in the wider world of telecommunications, coupled with the company's own success, has brought MCI to new battlegrounds and face- to-face with a greater array of competitors. The long-distance contender must now worry about cable-television operators, power utilities and 400 other rivals in addition to its longtime foes, AT&T and Sprint. In response, MCI has rounded up some powerful partners and launched a counteroffensive designed both to defend its turf and to expand well beyond it. In January, MCI announced that it would spend $20 billion to upgrade its network with fiber optics and build its own "driveways" onto the national information superhighway. As part of the plan, MCI would also enter local telephone markets. Earlier, the Washington-based firm formed a global alliance with British Telecom, once a partner of rival AT&T, which agreed to buy 20% of MCI for $4.3 billion.

By hooking up with Nextel, MCI becomes an instant force in the emerging market for wireless communications. While wireless will not make up the backbone of the information superhighway, whose basic construction material remains fiber-optic or coaxial cable, portable phones, along with pagers and beepers, will be powerful extensions of the electronic network. Companies ranging from AT&T and Motorola to Time Warner and Bell South are racing to develop their own new portable-telephone systems, which will one day compete with existing cellular networks and traditional wall-jack phones. The wireless market is expected to increase sixfold in the next 10 years, as the number of portable-phone users grows from 15 million today to 90 million by 2004.

With Nextel and its other new partners, however, MCI joins the intense jockeying for position on the information highway. For many companies, the jam-up has had an unnerving effect. Last month's breakup of the planned Bell Atlantic-TCI merger came about after the two sides failed to agree on a purchase price. Last week Liberty Media, which is controlled by TCI chairman John Malone, said it wants to form an alliance with Blockbuster Entertainment in a deal that could threaten the already shaky Viacom-Paramount-Blockbuster merger. Another contender, Time Warner, announced that an expected spring start-up of its experimental interactive television networks in Orlando, Florida, will now come in late fall.

MCI's grand plan may not go altogether smoothly either. In Nextel, MCI is buying into promising but yet unproved technology. To rebuild the dispatch system, called specialized mobile radio, or SMR, into a communications network that can compete with cellular, Nextel and its partners will have to invest at least $1.8 billion. And even then there is no guarantee that SMR will be able to match or catch cellular, an already proved technology with about 13 million subscribers. In addition, cable and phone companies are developing so-called personal communications networks, or PCNS, a futuristic portable-phone service that is expected to be more ubiquitous and cheaper to operate than conventional cellular. Analysts are also concerned that MCI may be driving a bit too fast. Says Blake Bath, a telecommunications analyst at Sanford C. Bernstein & Co.: "MCI may be spreading itself too thin by trying to cover too many bets at the same time."

MCI had little choice. AT&T's $12.6 billion acquisition of McCaw Cellular Communications, which is still awaiting approval by regulators, put sufficient competitive pressure on MCI that it went out and found its own wireless partner. In an ironic twist, MCI exited the cellular-phone business eight years ago by selling its licenses to McCaw for $120 million. The company is also financially pressed to reduce the $5 billion in fees that it pays to the local Baby Bells for the right to connect to the local telephone network. A wireless system would allow MCI largely to bypass the Baby Bells as well.

Richard Liebhaber, MCI's chief technology strategist, notes that the company is not alone in its support of Nextel. In addition to MCI, Nextel is backed by Motorola, Comcast, Northern Telecom, Nippon Telegraph & Telephone and Matsushita. "We're part of the telephone version of a dream team," says Liebhaber, dismissing Nextel naysayers. After all, once there was another start-up company that began as a radio dispatcher for truckers and also defied the odds: MCI itself.

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CREDIT: TIME Graphic by Steve hart

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