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Qwest, MCI Leaders Set to Capitalize on Internet Phone, Data Services

Posted on: Wednesday, 9 February 2005, 00:00 CST

Feb. 8--A Qwest marriage to MCI would pair two companies whose leaders -- Qwest's Richard Notebaert and MCI's Michael Capellas -- have staked out futures in the Internet telephone and data markets.

Notebaert, Qwest's chief executive, set his company on a course to capitalize on Internet phone service with a move last year toward offering so-called "naked DSL," a high-speed line from Qwest without an obligation to pay for a local phone line as well.

By offering naked DSL, Denver-based Qwest keeps some revenues from a customer who might otherwise leave the company entirely to get less expensive Internet telephone service, commonly called Voice-over-Internet Protocol, or VoIP. High-speed Internet is required for VoIP.

"What you have to do is retool to be highly competitive and nimble," Notebaert said last year, noting that phone number portability, mobility and price competition are issues changing the telecom landscape.

Qwest is the only one of the four regional Bell companies to offer the stand-alone DSL. BellSouth, Verizon and SBC, Qwest's beefier peers, have so far not taken the same approach, preferring to try to hold onto land-line customers by coupling DSL with phone service.

Capellas, MCI's CEO, has touted a world where an Internet backbone links innumerable servers and data-storage devices. He's the former president of Hewlett-Packard and former CEO of Compaq, which was sold three years ago to H-P.

One of his goals, he has said, is to see telephone service "completely embedded" into the computer desktop. "And we want to be the company that enables the next generation," he said last year.

MCI's consumer-phone business has declined as low- priced calling options such as wireless and VoIP have proliferated.

The company is working to transform itself as quickly as possible into a technology company that provides phone and data services to business and government.

This year, MCI acquired computer security company NetSec Inc. of Herndon, Va., for $105 million in a move to become a leader in the growing network-security segment of the data service industry.

Ashburn, Va.-based MCI has said since it emerged from bankruptcy in April that it wants to increase its focus on service to Fortune 500 companies and on high-end technology services, particularly network security.

"Capellas has helped push MCI to think of itself as an (Internet technology) company rather than a classic telephone company, because more of MCI's revenues are going to be coming from data services," said Phil Weiser, an associate professor of law and telecommunications at the University of Colorado at Boulder.

VoIP isn't the key driver behind the proposed acquisition of MCI by Qwest for $6.3 billion, but a combination of the two companies could make them more competitive in providing the service, said Janco Partners analyst Donna Jaegers.

"They could get there a lot faster than working on their own," she said.

The combined company would also save between $2.5 billion and $3 billion annually by consolidating networks and personnel.

LATEST ON THE QWEST BID FOR MCI:

Developments Monday following last week's disclosure that Denver-based Qwest Communications is seeking to acquire long-distance giant MCI for $6.3 billion: Status of talks: MCI reportedly talked with Verizon over the weekend, leaving Qwest's representatives uncertain when MCI might contact them, according to a source familiar with the negotiations.

Stock prices: Shares dived Monday for Qwest and MCI, signaling doubts by investors that Qwest could seal a deal. Qwest shares fell 46 cents a share, or 9.5 percent, to $4.39. MCI shares lost 3 cents a share to close at $21.

What they're saying: "We think investors should sell (Qwest) shares. The fundamentals of the company are worse than its peers and the stock is overvalued," said Todd Rosenbluth, equity analyst, Standard & Poor's in New York.

Elsewhere: A.G. Edwards & Sons also downgraded Qwest stock to "sell" from "hold." Of 27 analysts following Qwest's stock, 11 have "sell" recommendations, 13 say "hold" and only three recommend "buy," according to Bloomberg.

By Aldo Svaldi

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Q, MCIP,

Source: The Denver Post

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