WAN Services /

WorldCom users weighing options

Accounting scandal fans fears about viability, service levels.

By Michael Martin and Jennifer Mears
Network World, 07/01/02

WorldCom's $3.8 billion accounting shocker left customers reeling last week, worrying about what the resultant layoffs will mean to service levels and questioning the carrier's long-term viability.

National Semiconductor, which has relied on the No. 2 U.S. long-distance carrier for remote-access services for the past three years, is considering other

suppliers.

"We are definitely giving other suppliers more attention now, and we are including some that previously appeared significantly less financially stable than World-Com," says Ulrich Seif, National's CIO. "It's not clear yet whether we have to do something this minute, or even whether we have to do anything. We need more information about the ability of World-Com to pull through, even in bankruptcy. But we are preparing."

Putnam Lovell, a WorldCom voice and data customer for three years, will scrutinize the level of service it gets.

"The risk of short-term loss in service is minimal," says CTO Rodric O'Connor.

He is concerned that the rumored 17,000 job cuts World-Com officially announced last week could hurt the carrier's customer service.

The cuts represent one-fifth of WorldCom's workforce.

Users should expect customer service levels to go down be-cause of the cutbacks, says Hank Levine, a partner in Levine, Blaszak, Block and Boothby, a firm specializing in telecom contract negotiations.

"You could expect a degradation over time in installation intervals and the time it takes to re-solve things like billing errors," he says.

Like O'Connor, Levine says it's unlikely that World-Com's network will disappear overnight.

"WorldCom's network is not going down," he says. "That wouldn't serve the creditors' purpose."

Levine is advising his clients who use WorldCom to be certain they have redundant connections from other carriers running into their primary sites. That's something all businesses with mission-critical locations should have regardless of their carrier's financial health, he adds.

WorldCom customer AFLAC, a supplemental insurance company in Columbus, Ga., says it's not worried about losing telecom service, in part because it has other carriers in place.

"Telecommunications is at the core of our business, and as long as we continue to receive service that meets our needs and expectations, we will continue our relationship [with WorldCom]," a company spokeswoman says. "We have no reason to anticipate any disruption in service, but we would be able to obtain services from other telecom providers if necessary."

Revealing numbers

WorldCom's financial health, al-ready publicly known to be shaky, was shown to be much worse last week. An internal audit, ordered by the company's new management, revealed that the carrier overstated its cash flow for 2001 and this year's first quarter by $3.8 billion.

Instead of recording charges made by local phone companies for terminating WorldCom's long-distance calls as expenses, the company acknowledged it had been recording the charges as capital expenditures - an illicit practice so egregious that President Bush spoke out against it and the Securities and Exchange Commission (SEC) filed a civil suit alleging fraud.

Once the expenses are properly recorded, WorldCom's $1.4 billion profit in 2001 and its $130 million profit in the first quarter of this year will be restated as losses.

While it remains to be seen what affect WorldCom's situation will have on a struggling telecom industry, the company's size and scope suggest it will be major.

WorldCom operates one of the world's largest Internet backbones, encompassing more than 3,800 points of presence around the world. WorldCom says it serves millions of business customers.

The company also is the primary voice and data provider to the U.S. government and its agencies. (In a statement, the U.S. General Services Administration says it has received assurances from WorldCom that service would continue, but the GSA says it will monitor service quality.)

WorldCom's fall has been largely the result of the same sorts of problems bringing down other carriers. WorldCom spent billions of dollars building a high-capacity nationwide network, only to see prices plummet and demand for data services fall well short of the carrier's expectations.

What's next?

When John Sidgmore took over in April for deposed CEO Bernard Ebbers, he insisted he had no intention of filing for bankruptcy. But the recent turn of events makes a Chapter 11 filing a real possibility, observers say.

WorldCom's lenders have said they will not be calling in their loans immediately. And the carrier has about $2 billion in cash on hand, which will allow it to continue operating for the short term. But without more credit, World-Com would have trouble meeting its bond payments next year when $2.6 billion in bonds come due. The carrier has $30 billion in debt.

Don Carros, an analyst with consulting firm Meta Group, says he thinks WorldCom will file for Chapter 11 protection in the near future. Bankruptcy would let WorldCom borrow money - something the company has little chance of doing now with the accounting revelations.

Chapter 11 also would give World-Com a chance to reorganize and establish some credibility with its customers, possibly preventing them from jumping ship.

Meta Group had already been advising its clients to avoid World-Com if possible, because of concerns over the carrier's financial condition. Now Meta Group is advising those companies with exit clauses in their WorldCom contracts to see if those clauses will allow them to leave.

If WorldCom files for Chapter 11 bankruptcy though, clients will not be able to get out of their contracts even if they have a contract clause saying they can escape in the event of a bankruptcy filing. Once a company files for Chapter 11, customers can only get out of contracts if the bankruptcy court officials and the bankrupt company's creditors allow it.

WorldCom's woes could benefit other long-distance carriers.

Meta Group says Sprint and AT&T will be among the largest beneficiaries, because among large long-distance carriers in the U.S.,they are the most stable.

Levine says Broadwing could benefit, because most companies already have AT&T as either a primary or secondary provider.

Qwest is unlikely to benefit much from WorldCom's problems, given that it also is in a precarious financial position and, like WorldCom, is under scrutiny from the SEC for possible accounting irregularities involving bandwidth swaps.

What’s at stake?
Given the new size and scope of WorldCom’s network, the company’s financial turmoil will be far reaching.

2001 revenue	More than $35 billion.
Local operations	In 65 countries.
Network	96,000 network route miles, including terrestrial and undersea cable, in North America, Europe, Asia, Latin America, Australia and Africa; more than 3,800 points of presence and more than 2.1 million Internet access dial ports.
ATM	Available in 21 countries.
Frame relay	Available in 67 countries.
Internet access	Available in more than 80 countries.
Network operation centers	Five NOCs -- three in the U.S., one in Amsterdam and one in Sydney -- provide 24-7 monitoring and management of networks globally.
Share of Internet transit revenue	About 35%
Internet network capacity	About 30%, or more than the next four largest providers combined.