Ma Bell’s Rival

MCI battles with AT&T

A Lilliputian among telephone companies (1980 revenues: $205 million), MCI has spent most of the past decade battling the industry’s Gulliver, AT&T (1980 revenues: $50 billion). Not only that, but the tiny competitor has often been successful. Since its founding in 1968, MCI has steadily chipped away at Ma Bell’s lucrative monopoly in long-distance business calls. Now, with the help of American Express, it is aggressively entering the long-distance market for household phone calls.

In an experiment begun last month, Amex is offering MCI’s cut-rate telephone service to about 120,000 of its 9.5 million cardholders. Early interest has been encouraging. The MCI offer has drawn three times the usual response for a direct-mail campaign. The new agreement will enable American Express to move deeper into the communications business, where it has already been active through a cable TV partnership with Warner Communications. It will also help MCI by giving the company a new market for its already existing telephone service. Says Chairman William McGowan: “With its cardholders, American Express can fill our phone system for the next couple of years.”

Washington, D.C.-based MCI was founded by McGowan, 53, a Harvard Business School-trained entrepreneur who correctly foresaw a market for cheaper long-distance phone service using new microwave technology. In 1972, MCI began selling business clients its telephone service between a few heavy-traffic cities, including New York, St. Louis and

Chicago. The calls are beamed by microwave among the 3,200 communities in the MCI network, then transferred to local Ma Bell lines and carried to customers.

Modern technology and lower overhead have dramatically reduced the cost of long-distance calls for MCI’s clients. For example, a 4½-minute daytime business call between New York and Boston costs Bell customers $1.74, but those who use MCI only $1.28.

The new company, though, had to file long pleas with the Federal Communications Commission and wage endless court battles with AT&T before its service could be established. In landmark decisions in 1969 and 1971, the FCC allowed MCI and all other competitors to break Ma Bell’s 50-year monopoly on long-distance calls. Last June a Chicago federal court ruled that AT&T had to pay MCI $1.8 billion in damages, because the telephone giant would not allow it to use AT&T lines to relay calls between 1971 and 1975. It was the biggest antitrust judgment ever, and AT&T has appealed the ruling.

On the basis of its success in attracting 85,000 business customers, MCI is now going after private clients. Since last March, MCI has used sometimes stinging advertisements to attract 200,000 new household customers. Example: “If you’re still using Bell for long-distance calls, you must be one of their major stockholders.”

Subscribers pay a $5 or $10 monthly fee for access to the MCI telephone network.

By punching 22 digits (twice as many as the usual eleven) on a push-button phone, customers are connected with a computer that routes their calls along MCI’s microwave relay system.

Even though it is expanding its service areas, MCI still does not reach the entire country. Some customers report that connections are often not as clear as with AT&T and that MCI’s circuits are sometimes overloaded. But lower long-distance tolls can make the frustration and double dialing worthwhile. An evening residential phone call via MCI usually costs only about half as much as with Ma Bell.

Other companies are also trying to get a share of the long-distance telephone business. IT&T, Western Union and Southern Pacific are competing in the residential market. And Satellite Business Systems, a joint venture of IBM, Aetna Life & Casualty, and Comsat, will soon launch a second satellite that will beam business telephone calls around the country.

So far, McGowan’s strategy for taking away business from the Bell System has been paying some handsome returns.

Between September and December, the company’s revenues jumped 63%, to $61.6 million, and profits rose 46%, to $5.1 million. McGowan now plans to expand MCI service into Florida, Oregon and Washington. The Lilliputian of the telephone business is starting to grow up.