World Wide Wobble?

The outlook, and some suggestions, for companies that must reevaluate their reliance on WorldCom.
Scott LeibsAugust 1, 2002

As stunning as the cooked-books angle may be, the WorldCom saga extends well beyond the financial realm. The company’s role as a major telecom provider and operator of vast stretches of the Internet makes its troubles all too relevant to Corporate America.

Shortly after the accounting scandal was revealed, WorldCom CEO John W. Sidgmore said that his company carries about one-third of the world’s Internet traffic on its network, and suggested that WorldCom’s survival was a matter of national security. Administration officials did not seem sympathetic to that view.

But corporate security may be another matter. IT research firms were unanimous in urging companies to reevaluate their reliance on WorldCom.

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While acknowledging that the situation is fluid, Gartner, for example, suggested that WorldCom’s telecom and Web-hosting customers (market leader Digex Inc. is tightly aligned with WorldCom, relying on its network infrastructure) delay signing on for new services, sign only six-month extensions for expiring services, and investigate alternative providers of Internet and wide-area-network services. IDC analysts point out that the collapse of KPNQwest NV had European customers running for the exits, but suggest the WorldCom situation may not be as dire. They do believe that it will inspire a “flight to quality,” but point out that the telecom sector is so beleaguered that there are few if any truly safe havens.

Assessing the stability of a given carrier may be difficult, but customers will have to try. Large companies routinely divide their business among multiple carriers and so may be less at risk, although corporate backbones may suffer because WorldCom controls almost 50 percent of the high-speed “frame relay” traffic that many backbones rely on.

Actual outages, which occurred in the late 1990s and were serious enough to force some corporate clients to cite them as a source of negative financial results, are less likely than a slow erosion of service quality, some analysts say. It remains to be seen whether the massive layoffs at WorldCom affect service.

Costs will rise on two fronts, according to Meta Group analyst David Willis. First, services will be priced higher as telecom companies feel less pressure to win business through large discounts. Second, the internal costs of managing contracts with different vendors will pose an administrative burden. Nonetheless, he says, the costs of redundant, higher-priced services will be worth it.

Longer term, should WorldCom declare bankruptcy or be divided into its constituent pieces, the outlook for truly global services will suffer, since nearly all the stronger players are regional in focus. IDC predicts that AT&T will be the biggest winner, although Sprint and other firms should gain business as well.