Verizon's 'Beachfront Property'

Verizon Communications Inc. (NYSE: VZ) CEO Ivan Seidenberg has said repeatedly that his company is well positioned as a standalone company. Even still, Verizon thought a scenic view of the enterprise market was enough to justify its announced intent to buy MCI Inc. (Nasdaq: MCIP) in a $6.7 billion deal announced Monday (see Verizon Wins Tussle for MCI). “Not to use a bad analogy here, but MCI is one of the few remaining beachfront properties," said Seidenberg during a Monday conference call.

Analysts say the most obvious revenue opportunity for Verizon is moving in on an enterprise market where IP-based and wireless services will play a far greater role in the next three years. Seidenberg, along with Verizon CFO Doreen Toben and MCI CEO Michael Capellas, echoed that sentiment in their remarks.

“From our perspective, the enterprise is less congested than the wireless market; we have to create something new for which the marketplace can reward the new company,” Seidenberg says. “The issue is to create something new and compelling.” But given SBC Communications Inc.’s (NYSE: SBC) recent bid to buy AT&T Corp. (NYSE: T), the idea of a regional incumbent swallowing an interexchange carrier is hardly original. “The deal is defensive in that Verizon felt like it had to answer the SBC/AT&T deal, but its also true that Verizon has for some time been trying to move into the enterprise market, but without much success -- its enterprise revenue in 2004 was only 250 million," says analyst Drake Johnstone of Davenport & Co. LLC.

While MCI already has a substantial enterprise business, officials from the two companies suggest that Verizon can bring significant next-generation and wireless service options to enterprise customers as the demand for those services ramps up.

MCI’s Capellas says enterprises will base IP backbone decisions on the breadth of next-gen and wireless services made available to them: “So much of the enterprise investment is going to take place in the next two years -- that’s the reason that the timing of this deal is so important...

“When you talk to CIOs, what they really don’t want to do is invest just for VOIP, but they need an IP backbone to accommodate a whole range of new services; so when you start integrating wireless, you get sort of the ultimate enterprise bundle."

“To me the most obvious way to realize revenue and market share from this thing is for Verizon to begin selling its wireless services into MCI enterprise customers,” Johnstone says. “Verizon wireless services and 3G services are far better than Cingular Wireless, so they could be able to take business away from SBC/AT&T.”

And, in the business of selling carrier service to businesses, Verizon may have an edge. "If you look at the locations of federal agencies and the Fortune 1000 companies, you’ll find that most of them have headquarters or major operations in Verizon’s territory. If you are a corporation, you would rather select the carrier that owns the network where you are,” Johnstone says.

To be sure, MCI is already well entrenched in the enterprise space. Capellas says MCI has dedicated account teams “physically in” 286 large multinational customers where the “account relationships are long indeed;” and it has 91 sales offices across the U.S. for both “big global and large national” accounts. He says MCI now manages some 3,000 networks or pieces of networks, operates a large hosting business, and manages the call centers of “nine of the 12 largest financial services institutions in the world.”

And while the two carriers add their businesses together, there will be much subtracting going on as well. Verizon will consolidate traffic to reduce transport costs. It will avoid the costs of having to build its own long-distance network. And it will cut the workforce of the combined company by 7,000.

Verizon CFO Toben also addressed MCI’s notoriously jumbled back-office systems. “MCI now has 1,100 major systems, which include 170 different billing systems and 180 ordering systems; we believe we can reduce the number of MCI systems by 40 percent through IT reengineering.”

But precious few details are now available on what Verizon and MCI's "ultimate bundle" for the enterprise might look like. During the call with analysts today, Verizon’s Seidenberg stayed away from what he calls “the techy geek stuff” and kept to generalities.

Investors, evidently, were looking to geek out. Verizon's shares fell $0.12 (0.33%) to $36.19 in trading Monday. MCI was also down on Monday; its shares fell $0.82 (3.95%) to $19.93. — Mark Sullivan, Reporter, Light Reading

armchairgeneral 12/5/2012 | 3:26:38 AM
re: Verizon's 'Beachfront Property' According to the report here, MCI has greater market share for IP access than even the PTT in the UK, but is suffering from churn in the hosting business. Anyone else got a view on what Verizon would do with non-US operations?


minnecool 12/5/2012 | 3:26:35 AM
re: Verizon's 'Beachfront Property' This certainly has to be viewed as a defensive move, but will prove to be a great move for Verizon.

Defensive in that it keeps the new SBC-ATT at bay in its incumbunt service areas by being able to offer Verizon Wireless in a bundle with other corporate services. A great move because Verizon territory holds the largest number of Fortune 250 companies in the land and now will be able to poach those ATT customers that were never comfortable with the financial strength of MCI. A nominable price brings big bang for the buck and seriously diminishes the value of SBC's acquisition of ATT.
Fewer competitors, firmer pricing, and greater market share. Not bad, not bad at all.
Sign In