PSINet's stealth drive for Net dominance

Ten-year-old PSINet has pursued a kind of stealth campaign over the years, ceding big company contracts to the telco giants while building a solid business serving mid-sized firms worldwide.

But after raising $1 billion in bond capital two years ago, the company began an international acquisition binge. After buying ISPs and fiber optic networks, PSINet now claims a global reach that beats all but a few of the biggest telcos and communications consortiums.

The Herndon, Virginia-based company is also expanding its technological reach, rolling out wireless Net access in 50 U.S. markets--largely outside the biggest cities. Here too, Schrader is proceeding with caution, targeting what he calls the "first Wal-Mart cities," where local telephone companies have yet to provide consistent high-speed Internet services.

Nevertheless, Wall Street and other analysts have remained cool to the company's efforts, while noting that larger international companies like AT&T and Global One offer a broader range of services, and can thus attract the most profitable businesses.

In an interview with CNET News.com, Schrader predicted that the financial world should change their tune when PSINet begins posting positive earnings, which he said is likely to happen later this year.

CNET News.com: How do you see yourself competing in a world where the big guys--AT&T, MCI WorldCom, and even the Baby Bells--are getting into the same game with clearly far more resources?
That's a classic question. It was a question asked in 1985, and in 1989, and every year since then.

This is the ninth time AT&T has entered the Internet--and each time they've spent a lot of money and put a lot of people on it, and each time they've done a wonderful job. And they have zero percent market share.

But there's always a threat, because AT&T has a lot of resources, and you never underestimate people with billions of dollars in cash.

Bell Atlantic and the other babies, now not so baby-like, are under serious threat from every respect. The cable operators are going to carry voice, and attack their monopoly, the long distance carriers are coming in with their own approach. The local exchange carriers are desperate to increase their revenue stream when it's being cannibalized by everything else.

They are still burdened by regulation and they like being burdened by regulation. They enjoy the environment of stability.

So this is not a cultural thing for them to embrace. They just can't deal with the culture. They do not understand the Internet. They still don't. The Baby Bells are in deep yogurt, both from a competitive pressure on themselves, and from a,'How are we going to embrace this perspective?'

My perspective is--how can they survive? I don't know any way that Bell Atlantic can survive this.

As Sprint and AT&T starts offering integrated services, where they're giving voice and data and maybe video someday all over one line, does it spur you to start offering traditional phone services, or become a reseller?
I think so. The only trick is how we do it. We can either buy phone companies, we can sell our company to a phone company, we can resell normal minutes, or we could just deliver it over IP as an application.

So under that scenario, you're looking at moving all these things that Sprint, MCI WorldCom, and AT&T are starting to offer into an IP world, in your service, rather than buying a telephone company.
Well, we might do that so that we get the assets of a telephone company, or the customers. When we buy a company it's normally to get good people, good customers, and to get good financials.

Is PSINet solid enough to stay independent, or would you consider an overture from one of the larger companies?
We certainly are large enough to remain independent during the growth phase. The challenge comes when the Internet is fully penetrated in the business market, and then the businesses that are buying our services say they want fully integrated services. If we don't have the fully integrated services and AT&T does, then we're going to wish we were part of AT&T, or we're going to wish that we had purchased AT&T--not likely to happen, you see?

[AT&T CEO] Armstrong would be surprised.
Actually I would be more surprised?

In the end I can see us getting very large, or being acquired just prior to becoming very large, or being acquired after we become very large. The best value for our shareholders, and our bondholders, and our customers, and our employees, is to always steer this vessel to be able to stand alone, and to be consistent and to be a pure play in the Internet. That's what the buyers want.

When PSINet offers voice over IP services, they're offering it for corporations to use within the connections you provide them, right?
Correct. That's the only product we've announced. They have to be on our network.

What's the interest level in that?
A lot of interest, but a lot of fear. Just mostly fear. What we've seen with in the Internet is that the new applications that nobody's ever played with before can be adopted in microseconds. Migrating legacy applications is a multi-year process.

When do you see your IP voice services going outside the intranet?
To do that we need a gateway, and we're studying gateways. We're just not satisfied with the quality.

With it comes a business model that says where are you targeting. What we're going to target is the high margin areas, which is not from New York City to New York City. It's from New York City to London. Or better from London to Munich, or Munich to Tokyo. So luckily, we're in London, Munich, and Tokyo, and a lot of our competitors are not.

Would you characterize yourself as an ISP for business, or a competitive local exchange carrier (CLEC)?
We're an ISP for business?

Emerging as a CLEC, possibly?
No, don't ever think that. Because CLEC has a certain image to it. And we're not that image.

A business doesn't call up a CLEC. A business wants an Internet connection, they don't say 'I want a CLEC.' In fact we've never even announced that we're a licensed CLEC, because we don't think it's a big deal.

CLEC values are very high on Wall Street. If we had spun off our CLEC company it would be worth the same price we are. It's a dumb move, because in the end--and the end is near, like two years--you need to be integrated. You need to own the fiber, you need to have the network, you need to have the customers on the network, and you have to be global, and you need to have the team to make that work. Otherwise, you can't play.

Right now the sum of the parts is less than the value of the whole, which is bad.

But just wait. I'm a very patient man.