However, service quality will decreasefurther, and users should act now to minimize their dependence onWorldCom services. They should also have contingency plans inplace for the possibility that WorldCom will eventually go out ofbusiness.
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Even before this week's announcement of massive financialimproprieties, WorldCom was saddled with a huge debt load,irrationally low pricing, a disjointed network, poor operationalquality, account management problems and investigations intofiscal irregularities. All of these problems stemmed fromWorldCom's "growth at all costs," acquisition-happy strategy,which seemed so successful during the late-1990s boom.
WorldCom's new strategic plan, emphasizing growth areas like virtual private networks (VPNs) andvoice-over-IP services, which had been expected this week, willneed to be delayed, if not entirely scrapped, because of thecurrent financial scandal, which together with the company's debtcrisis poses an imminent threat to WorldCom's solvency.
Meta Group now expects that much of WorldCom will be sold off inpieces, with UUNet, comprising a large portion of the Internetbackbone in North America, the only likely surviving entity.Although we do not expect any immediate cessation of WorldComservices, its financial straits along with the pending layoff of28 percent of its work force will result in diminished service levels.User organizations stuck with WorldCom agreements will strugglethrough the sell-off and dissolution period, experiencingproblems including move, add, change and circuit installationdelays, as well as unresolved trouble tickets.
Given WorldCom's previously disclosed problems, Meta Group hasnot recommended this carrier to its clients for months. Userorganizations that are unfortunately now migrating to WorldCom asa new carrier will likely encounter significant delays as localexchange carriers delay circuit installs, fearful of WorldComdefaulting or delaying its repayments. Users that have beenevaluating WorldCom for new deals should instead turn to othercarriers.
The likely U.S. beneficiaries of the WorldCom debacle are AT&T and,to a lesser extent, Sprint. AT&T, still viewed as the qualitylong-distance provider even though its service levels have beendeclining in the current commodity pricing environment, will nolonger need to reduce prices to slow the loss of businesscustomers to WorldCom discounting offers. We recommend thatorganizations avoid Qwest Communications International's out-of-region services because of the company'sfinancial condition.
Surviving former regional Bell companies like Verizon Communications and SBC Communications arealready moving into long-distance services and the corporatemarket, and are potential buyers of WorldCom assets. Verizonin particular is positioned to emerge as a nationwidelong-distance provider in 12 to 18 months and to become a viablenational data service provider within 24 months.
WorldCom international services are at especially high risk.WorldCom had already announced a country-by-country review of itsinternational services, indicating that it would likely sell offsome of these assets. Users should consider migration of theseservices to AT&T, Infonet or Equant. They should also considerfinancially viable local and regional carriers for selectedservices (such as European carriers Cable & Wireless for IP, BTIgnite for IP or frame relay, and COLT for private-lineservices). In Asia, NTT and Singapore Telecommunications are feasible alternatives.
A silver lining, for some
The redeeming feature of WorldCom's meltdown is that it probablymarks the low point of the financial troubles of telecom carriersin the United States. Surviving carriers will be able to raise prices toachieve profitability. However, we expect European carriers tocontinue to struggle, with more companies entering bankruptcyduring the next several months.
With reduced competition, we expect pricing for internationalmanaged services to increase 10 percent to 15 percent during the next year.However, we recommend that user organizations focus not on thecost of telecommunications services, but instead on ensuring the stabilityof their networks. The cost to the business of a network outageis frequently higher than potential savings offered by discountcarriers. Customers should seek services from financially viableservice providers on a local and regional basis.
As the worldwide telecommunications market implosion comes to its naturalconclusion, we believe pricing will broadly increase within 12 to 18months. However, in the near term, as the implosion continues,prices will continue to drop, with stronger competitors drivingweaker carriers from the market, starving them of cash by keepingprices low.
User organizations with WorldCom agreements in force shouldexercise any exit clauses in those contracts before Chapter 11 isdeclared, to avoid the increased difficulties in vacatingagreements that a bankruptcy filing could cause. WorldCom usersthat cannot exploit exit clauses should examine their contractsto determine in what circumstances they can switch to or addother carriers. Business-critical traffic should be migrated assoon as possible to other carriers to avoid the risk of servicefailures and to ensure network stability.
As the worldwide telecommunications shakeout continues, all userorganizations should review the viability of their carriers on aquarterly basis for the next two years. And as a contingency,wide-area network infrastructure should be re-architected for"switchability" (that is, the ability to quickly move data servicesto alternative carriers). If possible, telecommunications services should bedual-sourced, which will increase cost but diminish risk,providing a clear migration path should one telecom providerfalter.
Meta Group analysts David Willis, Donald Carros, Jean-Luc Previdi, Peter Firstbrook, Dale Kutnick, Val Sribar, David Cearley and Jack Gold contributed to this article.
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