Sunday, February 13, 2005

Network Implications of Verizon + MCI Merger

Verizon Communications confirmed its plans to acquire MCI for $6.7 billion. The companies said the deal was driven by the rapidly changing dynamics of the U.S. telecom market, by operational synergies, as well as by the opportunities presented by next generation IP services -- especially enterprise services. The merger is expected to lead to a reduction of about 7,000 employees involved in network engineering and operations, sales, and corporate functions. The companies estimate $2 billion in CAPEX savings through the third year of the merger.

Some of the network implications of the merger include the following.

Cost savings will be gained by eliminating duplicate facilities and bringing all traffic onto one network. Verizon currently uses a number of wholesale carriers for its long distance traffic. The joint company expects $100 million in annual savings as LD traffic is moved onto the MCI backbone. MCI's network assets include 100,000-miles of fiber, 4,500 Points of Presence (POPs) throughout the world, with 3.2 million global dial modems and high-capacity connections to more than 100,000 lit buildings. It has ,ore than 2,400 ATM, Frame Relay and voice switches. It operates 130 data centers in 22 countries on five continents.

Verizon plans to continue its Enterprise Advance build-out, especially in out-of-region markets. The Enterprise Advance initiative, which was launched in 2002, included the nationwide rollout of new optical and packet infrastructures. In May 2004, Verizon completed deployment of a national IP MPLS backbone, which provides the basis for Enterprise Advance. The MPLS network consists of some 200 routers deployed in 56 markets. The core network has routers in 13 cities across the country. Verizon uses the Cisco 12000 Series Router platform in its national IP VPN network. Verizon also uses Juniper Networks' E-series edge routers for consolidating traffic.

At the transmission layer, Verizon built nine regional rings connecting the company's local networks. Verizon is using Fujitsu's FLASHWAVE 7600 regional WDM system, FLASHWAVE 7200 transponders, and FLASHWAVE 4500 core transport MSPP system for the nine regional rings. Fujitsu's FLASHWAVE 4500 MSPP platform was also used extensively throughout the network as a Multi-Service Provisioning Platform (MSPP) to provide advanced services, like Ethernet over SONET, and aggregate traffic generated from Enterprise Advance business. Verizon is also using Fujitsu's FLASHWAVE 4500 core transport system, the FLASHWAVE 4300 aggregation system and the FLASHWAVE 4100 access system in their regulated network. The FLASHWAVE 4000 products feature advanced data functionality and traffic grooming to enable a wide range of multiservice solutions for metro interoffice and access applications.

In July 2004, Verizon awarded a three year contract to Lucent Technologies for its LambdaXtreme Transport DWDM platform. Lucent's LambdaXtreme supports both 10 Gbps and 40 Gbps signals. Verizon was the first U.S. service provider to deploy the Lucent platform.

Verizon said it will also continue its FTTP residential strategy.

In July 2004, MCI embarked on a Converged Packet Access (CPA) strategy for its business customers that leverages Ethernet and MPLS. The architecture aims to consolidate all services - Frame Relay, Private IP, IP VPN, Ethernet, Private Line, and voice - onto a single, customer Ethernet interface (10bT, 100bT and Gig E). Once an initial physical connection is established, MCI customers can logically provision capacity and services as needed without requiring physical changes to the network. MPLS tunneling technology is utilized to create logical channels that securely separate customer's services. MCI's CPA architecture has four key components: (1) an Ethernet traffic aggregator; (2) a new Layer 2 and TDM grooming infrastructure; (3) an optical add-drop multiplexer; and (4) a packet-enabled service edge. This equipment allows MCI to aggregate traffic originating from one large business customer or many small business customers in a multi-tenant business building across a single, secure network access circuit. MCI is using an Ethernet over SONET infrastructure.

Earlier in 2004, MCI announced several major network building projects. First, MCI selected CIENA and Siemens as key suppliers for a new Ultra Long Haul (ULH) DWDM optical network to serve as the foundation for all MCI services. MCI is already carrying traffic on its first ULH network route deployment in the western U.S. and expects to complete its domestic network build-out over a three to five year period. MCI is using Ciena's CoreStream platform for optical ULH backbone that leverages software-configurable wavelength switching. MCI has also tested 40 Gbps transmission using equipment from Ciena and Mintera.

Second, MCI awarded a multi-year Global Master Purchase Agreement to Movaz Networks covering the rapid deployment of its next generation optical transport solutions across its global network. MCI began field deployment of the Movaz RAY product suite in 2002 and is carrying live traffic in major metropolitan regions for a variety of applications including carrier-to-carrier, enterprise and core infrastructure applications.

Third, MCI announced an expansion of its MPLS backbone using Cisco System's equipment. In the first stage of its MPLS network expansion, MCI worked with Cisco on a multi-phased, edge-router deployment in 48 countries throughout North America, Latin America, Europe, the Middle East, and Asia Pac. Specifically, MCI is deploying the Cisco 10000 Series Router as its IP/MPLS Edge Label Switch Router for its Private IP service platform. Completion was expected by year-end 2004.

In a conference call with the investment community, Verizon and MCI executives said they would work quickly once the merger was completed to eliminate redundancies and build a unified network.

  • MCI traces its lineage to Microwave Communications of America Inc., which was founded by Jack Goeken in 1963. In 1968, the company was joined by Bill McGowan, who led the regulatory fight to challenge AT&T in long distance communications.

  • In September 2004, MCI retained the services of three investment banks, Lazard, Greenhill & Company and J. P. Morgan Chase, as well as the law firm Davis Polk & Wardwell, to explore a possible sale of the company

  • In July 2004, MCI resumed trading on NASDAQ under the new symbol "MCIP".

  • In April 2004, MCI emerged from Chapter 11 protection nearly two years after the resignation of WorldCom CEO Bernard Ebbers and the discovery of one of the largest accounting frauds in U.S. history. The company emerges from bankruptcy with about $5.7 billion in debt and $6 billion in cash.

  • In February 2004, AT&T and MCI reached an out-of-court resolution of all claims of fraud relating to call routing manipulation. In September 2003, AT&T had filed a lawsuit accusing MCI/WorldCom and ONVOY of orchestrating a scheme called the "Canadian Gateway Project," in which they worked with other telecommunications companies to reroute MCI customers' domestic phone calls through Canada to deceive and defraud AT&T into paying hefty termination fees for terminating calls to high-cost independent telephone companies in the U.S.

  • In June 2002, news broke that WorldCom had fraudulently inflated its earnings and manipulated its costs and capital expenditures by billions of dollars. This kicked off the investigation into the biggest accounting in U.S. history and led to the bankruptcy of the company. Criminal prosecution of CEO Bernie Ebbers and CFO Scott Sullivan remains underway.

  • In October 1999, MCI WorldCom and Sprint announced plans for a mega-merger, although the deal ultimately fell through due to regulatory concerns.

  • In November 1997, WorldCom announced plans to acquire MCI in a deal valued at $37 billion at the time. As part of the transaction, the merged company sold the MCI Internet backbone to Cable & Wireless, while retaining the UUNET network.

  • In December 1996, WorldCom acquired MFS Communications in a deal valued at $14 billion

  • MFS Communications acquired UUNET in May 1996 in a deal valued at $2 billion


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