WorldCom Debacle Causes Telco Shock Waves

Following last week's fraud charges, WorldCom customers are advised to seek alternative providers.

As WorldCom Inc. faces intense legal scrutiny, customers who depend on the carrier for services ranging from voice and data connectivity to Web hosting are being warned to seek alternate providers.

The warnings follow last weeks fraud charges filed by the Securities and Exchange Commission against WorldCom after the Clinton, Miss., company disclosed about $3.8 billion in improper accounting. More than 17,000 employees were targeted for layoffs as a result.

Sources close to the nations second-largest long-distance carrier said WorldCom likely will not shut down its voice and data networks, which carry about half of all e-mail traffic worldwide, without sufficient warning to customers. Still, many maintain that the companys time is limited.

"Customers have about a 12-month window before they have to worry about any services being shut off," said David Willis, an analyst at Meta Group Inc., in Stamford, Conn. "Everyone needs to be looking at dual sources. Its too late for WorldCom."

With a Chapter 11 filing almost certain, sources said WorldCom divisions will probably be sold, with the carrier maintaining UUNet, its Internet access and Web hosting unit.

"The danger is that there is so much baggage that comes along with buying WorldCom outright [from bankruptcy]," said Courtney Quinn, an analyst with The Yankee Group, in Boston. "Youre probably looking at pieces of assets being bought."

In addition to an impact on voice and data lines, the shake-up could have far-reaching effects on hundreds of Fortune 1000 companies, such as Ford Motor Co., that depend on Digex Inc., a WorldCom subsidiary, for co-location and management of business-to-business Internet operations.

In the near term, there are concerns that the companys plan to lay off 17,000 employees (in addition to the termination of Chief Financial Officer Scott Sullivan and the resignation of Senior Vice President David Myers last week) could have a more immediate impact on customers, but WorldCom officials maintain otherwise.

"This news has no impact on our ability to serve customers," said Debbie Lewis, WorldCom spokeswoman, in Bala Cynwyd, Pa. "The [personnel] reductions will not inhibit our ability to serve our customers."

John Sidgmore, who became WorldCom CEO after Bernie Ebbers was ousted in April, said his team was shocked to discover the accounting irregularities.

"The company remains viable and committed to a long-term future," Sidgmore said in a statement. "Our dedication to meeting customer needs remains unwavering."

Analysts disagree. "You cannot lay off 17,000 people and not have customers being affected," Meta Groups Willis said. "Youll see services degrade, new circuits being installed very slowly, trouble tickets not being answered."

Large enterprises, which are often locked into long-term contracts, put their best spin on the situation last week but indicated they are aware of the depth of WorldComs troubles.

"We dont anticipate any disruption in company telephone service or data transmissions," said Irv Miller, vice president of corporate communications at Toyota Motor Sales U.S.A. Inc., in Torrance, Calif. "While we are cautiously optimistic that WorldCom will weather the current situation, we are developing contingency plans in case the current situation changes."

A customer exodus would not benefit those tied to long-term contracts. "Many organizations didnt build in clauses to let them out of their contracts," Willis said. Meta Group is advising WorldCom customers to examine their contracts immediately because they will lose leverage if the company files for bankruptcy.

However, even many smaller enterprises, which are able to switch service providers without penalty, remain loyal to WorldCom.

"I think theyre viable, and through [bankruptcy] reorganization, they will emerge and do what they do best," said C.J. Widman, co-owner of Advanced Air Technology Inc., a small air pollution control system maker in Arlington Heights, Ill. "As long as they continue to deliver a service at a price I feel is where I want to be, I dont see why I should switch."

The combination of the economic climate and a continued need for consolidation in the telecommunications sector makes all carriers vulnerable, according to industry sources.

"There is no safe haven anywhere," Willis said, adding that AT&T Corp.s debt rating makes it a safer bet than many other carriers and that Sprint Corp.s financial condition is "relatively not too bad."

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