didn't have enough problems already, it appears the company is cutting prices again to compete in the business services market.
Some people inside and outside the company who are familiar with WorldCom's pricing plans say the company has been cutting the price tag on its offerings to midsize businesses by a third to a half below
in a bid to gain market share. The talk comes even as WorldCom executives claimed Tuesday that the company is the "leader in price stability."
Evidence of the deepening price cuts is anecdotal; notably, the rollbacks don't appear to affect the big-ticket global corporate accounts that WorldCom gets the lion's share of its business from. Nonetheless, the talk undercuts any hope that the telecom industry is moving toward a healthier balance between supply and demand. And it puts another hurdle in the path of WorldCom's new CEO, John Sidgmore, as he seeks to reverse a steady decline in profits at the nation's No. 2 long-distance carrier. WorldCom dropped 27 cents Wednesday, to $2.21.
Since the excesses of the late '90s Internet buildout, telcos have been confounded by a surplus of services and dearth of demand. With too many competitors selling too much capacity to a nation of downscaling companies, the industry got entangled in a destructive price war. And while some big outfits like
called a truce, others still appear to be locked in a death spiral as they chase prices down.
One sign that lower pricing may be cutting a bit too deep is WorldCom's reduced 2002 cash-flow target. Last month the company
lopped off more than $1 billion from its 2002 target for earnings before interest, taxes, depreciation and amortization. That roughly 14% reduction was far steeper than the 5% cut the company made in full-year revenue estimates.
As analysts point out, when cash flows drop faster than sales, margins are often to blame. And assuming costs haven't surged -- and we'll take 3,000 job cuts and the removal of perks like free coffee as a sign that costs are under control -- then weak prices might well be the culprit.
"Whenever you see margins go down, the indication is that prices are going down," says Robertson Stephens analyst Jim Friedland, who has a strong buy on the stock.
Analysts queried WorldCom executives about their market share and price strategies on a conference call Tuesday. COO Ron Beaumont said that while there wasn't much change in the company's share of the top-spending corporate market, "we will take market share" at the lower end of the market.
Taking share, or winning customers, usually requires better service or lower prices. Beaumont emphasized the better services side of that arrangement, insisting that "WorldCom has been a leader in price stability in the telecom industry and we are going to continue down that path."
Shaking off any comparison with the upstart telcos that have already staggered into insolvency, Beaumont continued, "We do not believe, with the quality of our services and the breadth of our services, that we need to be the low-price provider." The executive added, "We aren't going down and competing with companies that are troubled and in Chapter 11."
But that's just what investors clearly fear the company is poised to do. WorldCom shares have lost more than 80% of their value this year in the wake of the bankruptcy of new-age network builder
; that case appeared to wake investors up to the danger of massive debt loads and eroding cash flows, conditions that are now widely seen as afflicting the entire industry. With WorldCom shouldering a $29 billion debt load and reducing its estimates of the money it can bring in from its ongoing businesses, the prospect of a debt default looms large over a shaken Wall Street.
And skeptics point out that with few options at its disposal to pump up sales, price-cutting is one of the few arrows companies like WorldCom have left in their quiver. As one analyst put it: "Do they have a choice?"