June 26, 2002 1:20 PM PDT

WorldCom customers scramble

Herb Peyerl, network manager of Calgary-based Internet service provider Middle Digital, blanched when he heard about WorldCom's $4 billion accounting fiasco.

Peyerl's largest customer, a large international division of a Fortune 500 company, is hosted in a WorldCom facility in Europe. And while the service over the last four years has been better than he hoped for, he's not sure what to do now.

"We're worried," he said. "I can't imagine that in the next week or two they're just going to shut down the facility. But now I'm calling other providers and getting quotes."

Peyerl may have plenty of company. With news of WorldCom's financial shenanigans and its pending 17,000 layoffs sending shockwaves through world markets, thousands of customers and partners are wondering whether it might be best to take their business elsewhere.

It's a difficult calculation. A substantial number of WorldCom rivals, in the United States and elsewhere, are also facing bankruptcy or financial investigations. WorldCom, with its international network and respected UUNet data division, has typically provided trustworthy service for many technology and communications customers, despite the last few months of financial turmoil. But now there's no guarantee.

"There is no safe refuge," said Brownlee Thomas, an international telecommunications analyst for advisory firm Giga Information Group. "All the telecoms have far too much debt."

WorldCom disclosed late Tuesday that it had improperly accounted for almost $4 billion, booking regular expenses as capital expenditures, thus blowing out of proportion financial results for the last five quarters. Taking the new information into account, the company said it would have reported a net loss for 2001 and the first quarter of 2002.


Related story
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threaten to drag down tech companies.


The company issued a statement saying it was "shocked" by the revelation and had fired its chief financial officer and accepted the resignation of its controller. But the shares, which hit a $64.50 high in 1999, tumbled to 9 cents before being halted in premarket trading Wednesday. World markets tumbled on the news. Separately, the U.S. Justice Department said it is reviewing the case.

WorldCom's rivals are already moving to capitalize on the crisis. Cable & Wireless has said it will actively pursue WorldCom customers, and other companies are likely to quickly start working behind the scenes, analysts said.

Wait and see
Despite early pressures, many of WorldCom's customers are simply holding steady. Many large companies have several providers and are now making sure those alternative networks can serve as ample backup in a worst-case scenario.

"We're going to monitor the situation, but we feel confident that we have multiple providers," said Dan Greenfield, a spokesman for EarthLink. The Internet service provider also buys network access from Sprint and Level 3 Communications, he said.

Speakeasy, an ISP based in Seattle that recently signed a business DSL (digital subscriber line) deal with WorldCom, is similarly confident--but is checking its options, too. The company has only a few customers using WorldCom, spokeswoman Kat Oak said.

"Of course they're not going to tell you that there's looting and burning in the hallways."
--Herb Peyerl, network manager, Middle Digital
"We don't have a great concern," Oak said. "We're looking for ways to transition customers," just in case there is a problem, she added.

The WorldCom layoffs were a bigger concern than the accounting issues for Troy Settle, president of Virginia-based ISP Pulaski Networks. He was about to sign a deal with WorldCom this week but says he's changed his mind and is looking for a new provider.

"The fraud doesn't really bug me, as long as they can restructure financially," he said. "But 17,000 layoffs does disturb me." Those jobs might come from areas of the company needed to support his business, Settle said.

And customers weren't exactly reassured by WorldCom sales staffers' promises that business will go on as usual. Peyerl said he'd been told "this was just a minor blip, and that everything's fine."


Gartner analyst Eric Paulak says the huge staff cuts will inevitably hurt WorldCom's service quality. Companies should therefore make contingency plans.

see commentary

He's not ready to take that at face value. "Of course they're not going to tell you that there's looting and burning in the hallways," he said.

Analysts said it is the world's largest companies--drawn to WorldCom for its international networks--that are likely to be most affected. WorldCom has been drawing refugees from KPNQwest, the bankrupt Qwest joint venture, for example.

WorldCom Chief Executive John Sidgmore and other senior executives have spent much of their time in recent months flying around the world trying to reassure their largest customers of WorldCom's continued viability. Just a few weeks ago, Sidgmore said he hadn't lost a single one of his top 100 customers.

Tuesday's news, however, may well tip many of those customers over the edge, said Kate Gerwig, an analyst at Current Analysis. "My guess is that if they don't have (competing) bids already, they're getting them now."

And analysts warn that it's likely to get worse for WorldCom and its customers before it gets better.

"There are more shoes to drop," said Scott Cleland, CEO of The Precursor Group and a longtime telecommunications analyst.

Financial misrepresentation on this scale is unlikely to have begun out of the blue in 2001, Cleland said. It's likely that WorldCom may find similar issues in previous years. "I don't think they've gone back that far" yet, he said.

 

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