THE BRITISH ARE COMING!
NOVEMBER 4, 1996
What are the ramifications of the merger of telecommunications giants MCI and British Telecom? Business Week's Catherine Arnst explains how this could affect your local telephone service and AT&T's plans to expands its global communications network.
ELIZABETH FARNSWORTH: That very big deal is the merger of the American company MCI and British Telecommunications. With BT, as its called, purchasing MCI for around $21 billion, its the largest foreign acquisition ever of a U.S. corporation. Its also the second biggest telecommunications combination and the third largest takeover in U.S. corporate history. Here to explain it is Catherine Arnst, an associate editor at Business Week, covering the global telecommunications market. Thanks for being with us, Ms. Arnst.
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CATHERINE ARNST, Business Week: (New York) Thank you.
ELIZABETH FARNSWORTH: Give us some background on these two companies and why theyre merging.
MS. ARNST: Well, BT is what AT&T once was in the U.S.. It is the former national phone company. It was privatized in 1984. And it owned--it bought 20 percent of MCI two years ago and I think has indicated that evidently always in the back of its mind it wanted to buy the whole thing primarily to expand its global reach. It desperately needed a larger foothold outside of the UK, although it still has 90 percent of the market out there; it doesnt have as large of an international presence. As for MCI, they are--of course have been very successful going up against AT&T. They initially were the ones who started the ball rolling to break up AT&T by bringing a suit to open up the long distance market--always been very entrepreneurial, very aggressive, has about, uh, 20 percent of the long distance market in the U.S.; however, now they are trying to expand into local calling, now that that market has been opened up to competition, or will be soon. And thats a very expensive process, so they desperately needed some capital. And ultimately, I think both companies realized that to be a player in a global telecommunications universe, they both needed to have more clout and to be much larger.
ELIZABETH FARNSWORTH: You said MCI needed capital to really compete in the local market. Why? What do they have to do that they havent been able to do?
MS. ARNST: Well, getting into local calling is very different than long distance calling, um, because in order to really compete, well, you can either resell, you can buy capacity from the baby Bells and the other local phone companies that are out there, but to be effective in that market, you have to build your own network, and thats much more expensive than building a long distance network because you have to have a wire going to every home and business. Uh, for long distance, they just depend on the local phone companies to complete their calls, but obviously, if you want to be a local phone company, you have to own those wires yourself. And thats an extremely expensive process. It took a hundred years to build the phone network the way it is now and to replicate it is going to cost billions and billions of dollars.
ELIZABETH FARNSWORTH: So they idea is they can use the capital that this huge British company has generated to be more competitive locally.
MS. ARNST: Right. Theyve already planned to spend a billion dollars to build out networks in 25 cities, and those are just the bare backbones of a local network. Theyre going to need a lot more money than that.
ELIZABETH FARNSWORTH: So is this how the American consumer will be affected by this--basically, they will see competition at the local level?
MS. ARNST: Yes, ultimately, um, this gives MCI the clout to really go after the, the local phone companies, to go after their markets, um, and to build facilities and not just to resell service, so they can offer lower prices. It should also possibly result in lower international rates because, um, BT will put press--will be able to offer, uh, lower rates to the UK and other countries in Europe, and thats going to pressure other international phone companies to lower their rates, at least in Europe.
ELIZABETH FARNSWORTH: This will really be the first global telephone company, right?
MS. ARNST: Well, you could say that AT&T is also a global phone company. It has, you know, operations in 200 countries.
ELIZABETH FARNSWORTH: Well, how would you compare this then?
MS. ARNST: Um, clearly, this is a very significant presence in the U.S. and in the UK, whereas AT&T, although it has a huge presence--the biggest presence of anybody in the U.S.--in the--in other countries its still relatively small. Um, this--AT&T will still be bigger than the combined BT-MCI, but the two will be fairly equal in being able to go after international customers.
ELIZABETH FARNSWORTH: What does this--what does this tell us about the global telecommunications industry? Weve seen a lot of other mergers, at least here in the United States, with NYNEX and Atlantic Bell and that kind of thing. What does it tell us? Whats happening? Why is it happening now?
MS. ARNST: Well, its happening now because deregulation is sort of rolling around the world, uh, led by the UK and the U.S., and New Zealand is also a very open market, but those are the two main ones. Um, and every country around the world is beginning to realize that they have no choice if they want to particularly attract international businesses but to lower their phone rates and to have more efficient systems, and the only way they can do that is by allowing in competition. So that opens up the doors for foreign phone companies to enter, uh, countries around the world. Its a very different model than we had for the last 100 years, where most phone companies were state-owned monopolies. Uh, now youre really seeing competition all over the world.
ELIZABETH FARNSWORTH: And are we talking about, especially in this country, um, MCI being able to build fiberoptic wires so that all of these interactive kinds of media will be available, is that part of what they want to do?
MS. ARNST: Well, yes, really they want to build a state of the art network, which would involve fiber--it would also involve wireless, either cellular or other kinds of digital wireless. It would involve using the Internet. It would involve, uh, cable networks using--incorporating cable and video into the networks, so ultimately all the phone companies want to offer a bundle of services that includes video and entertainment and Internet and wireless, local calling, long distance international, and thats what all these mergers are--are aiming to provide in the long run.
ELIZABETH FARNSWORTH: Okay. Catherine Arnst, thanks for being with us.
MS. ARNST: Thank you.