William G. McGowan Monopoly Buster
William G. McGowan
Founder of MCI WorldCom
Founded: 1968
"The meek shall inherit the earth, but they'll never increase market share."-William G. McGowan
When William G. McGowan set out to take on AT&T, people thought he was crazy. Time and again he was told that AT&T was simply too big and too powerful. But through a combination of dogged determination, hard work and a healthy dose of chutzpah, McGowan shattered AT&T's monopoly, kicked open the door to free competition in the long-distance market, and transformed a struggling company into the world's second-largest long-distance carrier.
McGowan was already a multimillionaire when he decided to go head-to-head with AT&T. He'd spent nearly 10 years on Wall Street as an independent financial consultant specializing in the reorganization and turnaround of failing companies. His most notable success was Powertron Co., which he took over for $25,000 in 1959 and sold for $3 million in 1962.
In 1968, a friend introduced him to John D. Goeken, an Illinois entrepreneur who sold mobile radios. Goeken wanted to expand his service by building a microwave system between Chicago and St. Louis. But the Federal Communications Commission (FCC) had held up approval of the project for five years because of strong opposition from AT&T, and Goeken was practically bankrupt.
McGowan realized that if the FCC granted Goeken's application, his firm could eventually compete with AT&T for long-distance telephone service throughout the nation-something no one had ever tried before. As McGowan later told Money, "The fact that it had never been done before made the idea all the more irresistible." McGowan bought half interest in Goeken's company, Microwave Communications Inc., for $50,000 and changed the name to MCI Communications Corp.
One year later, the FCC approved MCI's petition to provide "private line" telephone service along the Chicago-St. Louis route. There was only one problem: To implement its long-distance service, MCI's networks needed to be connected to local telephone networks, which were owned by subsidiaries of AT&T. When AT&T refused to allow any interconnections except at exorbitant prices, MCI filed a lawsuit against the company in 1974, charging that it was violating antitrust laws by restricting access to its local telephone network.
But it would take six years for the suit to come to trial. During that time, McGowan helped develop and get approval by the FFC for a new type of service called MCI Execunet. This ingenious system allowed MCI customers to call up MCI's computers, which would then connect the caller to any other telephone number, completely bypassing AT&T's long-distance facilities. Priced at a fraction of the cost of AT&T's long-distance service, Execunet was a tremendous success. This did not go unnoticed by AT&T.
By approving Excunet, the FCC had unknowingly permitted MCI to implement general long-distance services. AT&T pointed this out to the FCC, which ordered MCI to drop the service. MCI appealed, and a federal court ruled that MCI or any other carrier had the right to offer long-distance service.
When MCI's lawsuit against AT&T finally came to trial in 1980, the court found in MCI's favor, awarding the company $1.8 billion in damages. AT&T appealed, and the damages were reduced to $113 million. However, during the trial, MCI had presented numerous AT&T documents that revealed a long-standing policy to destroy any long-distance competition.
This prompted the U.S. Department of Justice to file its own lawsuit against AT&T. To avoid a trial, AT&T negotiated a settlement in 1984, agreeing to divest its local "Baby Bell" companies and give up control of the local telephone networks.
After more than 10 years of fighting, McGowan had finally broken AT&T's stranglehold on long-distance service. But it was a Pyrrhic victory. Up to that point, MCI had a basic advantage-it was allowed to transmit its calls across the local operating companies' lines at prices 70 percent lower than what AT&T charged. Under the agreement, all long-distance telephone carriers, including AT&T Long Distance, were granted equal access to the Baby Bell lines. The discounts that had so favored MCI were phased out by the FCC.
For MCI, the change was a disaster. The company had always been a niche-player, billing itself as the low-price provider. It was completely unprepared to compete with AT&T on quality of service. MCI lost millions. The troubles took their toll on McGowan, who suffered a heart attack in December 1986; the following April, he received a heart transplant.
McGowan was sidelined for nine months, but when he got back, he was ready for action.
Spurred on by McGowan, MCI management improved quality and service, and pushed for more corporate customers. MCI also digitized its phone network, allowing for faster transmission of both voice and data. The company quickly gained a reputation for excellent service and soon boasted the Pentagon, Westinghouse, Chrysler and IBM among its corporate customers. MCI returned to profitability in 1987, and by late 1991 had regained its position as the nation's second-largest long-distance carrier. His dream fulfilled, McGowan stepped down as CEO. He died of a second heart attack a year later.
During his 24-year tenure as head of MCI, William McGowan grew MCI from a nearly defunct mobile radio service to a $9.5 billion telecommunications juggernaut. Today, the company he founded, now called MCI WorldCom, is the largest telecommunications company in the world, with annual earnings of $17.6 billion. But his real legacy is that more than any other individual, McGowan brought about the breakup of AT&T and sparked a telecommunications revolution.
Home Field Advantage
One of the keys to William G. McGowan's success was that he moved the headquarters of MCI Communications Corp. from Illinois to Washington¬, DC, knowing that the war with AT&T would be primarily a battle of lobbyists. "I didn't concern myself with technology," he recalls, "just the regulation of the industry."
Junk Bonds Make Good
To finance MCI Communications Corp.'s expansion after the breakup of AT&T, William G. McGowan convinced junk-bond king Mike Milken and his now defunct firm, Drexel Burnham Lambert Inc., to raise more than $2 billion for MCI in the 1980s. Milken often cited MCI as evidence that the high-risk, high-yield junk bonds they used to raise cash played a major role in enhancing U.S. business, opposing his critics' contention that junk bonds were responsible for scores of corporate bankruptcies.
