MCI Puts Its Stamp on AT&T Fight

A price war for business customers grows fierce with MCI's direct-mail campaign.
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MCI

is taking the direct approach in its fierce struggle with

AT&T

(T) - Get Report

over big business customers.

The Ashburn, Va., phone giant is sending letters to coveted corporate users of its rival's service. The MCI mailings offer to beat AT&T's prices by as much as 40%, according to a

pitch letter

obtained by

TheStreet.com

.

Though price wars are nothing new in telecom, MCI's move shocked even some jaded industry watchers. They view the latest maneuver as a sure sign that prices will fall even further in the already brutal business-communications sector. Meanwhile, MCI's gloves-off approach seems to undercut comments made earlier this week by CEO Mike Capellas -- while confirming the arguments made by critics of its reorganization.

During an earnings conference call with analysts Monday, Capellas was asked if the ravages of service rate cuts were receding. "We are starting to see some stability of pricing, particularly on the higher end of the market," Capellas answered.

An MCI representative confirmed that the letters were sent to targeted AT&T customers, calling them a response to AT&T's recent vow to lower prices to win business.

"It was never our intention to start a price war, but AT&T was first to say they'd fight on price," says the MCI rep.

The move comes just a month after MCI emerged from the nation's largest-ever Chapter 11 case, and just days after the company pledged to

tighten its belt in a push to return to profitability in the second half of the year. The new austerity regime at MCI calls for the company to slash 7,500 jobs this year.

MCI's aggressive pricing move recalls criticisms of its Chapter 11 reorganization. During the company's nearly two-year-long restructuring, big telcos like AT&T and

Verizon

(VZ) - Get Report

repeatedly took issue with the advantages they said MCI would win by slashing debts and costs under court protection. The financial overhaul, they claimed, would give MCI a leg up on the competition -- notably by giving it more room to cut prices.

Source: MCI letter to AT&T customers

Meanwhile, they argued, companies that hadn't been brought down in $11 billion accounting scandals would be penalized with the burden of paying off their obligations in full.

It was no secret that MCI's re-entry into the telecom free-for-all would be an unwelcome event for competitors. Prices for phone and data services to business customers were already falling steeply as the Bells -- eager to offset eroding revenue in their local consumer operations -- sought to win over businesses as another source of income. Regional Bell companies such as Verizon,

SBC

(SBC)

and

BellSouth

(BLS)

have staked their prospects on expanding beyond the eroding local-phone area into ventures like business services, fast Internet access and wireless service.

Now, with AT&T and MCI both recently lowering their financial targets, the health of the industry appears to be wavering. On Monday, MCI blamed severe price-cutting in the wholesale and business services markets, along with continued customer defections and competition in the consumer division, for its first-quarter loss.

Some observers say that the renewed price war will only hasten the industry's path toward another round of bankruptcies and consolidations.

MCI is certainly familiar with that path.