News

PSINet CEO Schrader: An ISP Maverick

6/13/1999 8:00 PM Eastern

William L. Schrader -- chairman and CEO of PSINet Inc., a
$400 million-per-year Internet-service provider aimed at the business market -- is an
outspoken critic of America Online Inc.'s call for an open-cable-system Internet strategy.
He delivered that message to the Senate Commerce Committee April 13, while AOL chairman
Steve Case was seated at the same witness table. In an interview with
Multichannel
News Washington bureau chief Ted Hearn, Schrader explained his reasons why the
government should not intervene in the Internet-access market.

MCN: You don't side with AOL and MindSpring Enterprises
Inc. in attacking cable's Internet strategy. Could you explain your reasoning?

WS: Certainly: 99.9 percent of the Internet-service
delivery in the world is delivered over the telephone-company plant. Less than one-tenth
of 1 percent of the traffic, the revenue, or the customers are connected using cable.
Therefore, the issue is in higher-speed access through the telephone-company plant.

To get that, we need access to certain features of the
telephone-company system -- which have funny names like dry copper or the copper local
loop -- and access to collocate at the telephone company's central office.

Sorry for using jargon, but the technology that we need to
use is called DSL, digital subscriber line. And in order to use DSL, you must have access
to the central office to install what are called DSLAMs [DSL-access multiplexers]. So we
need to have access to that facility in order to provide high-speed access to the customer
base.

MCN: Is that in doubt?

WS: Yes, it's absolutely in doubt, world-over. This is not
just a United States phenomenon. The telephone companies are a monopoly in the local loop.
They are a monopoly, and they always have been a monopoly, and if something doesn't
change, they will always be a monopoly.

I believe that the only way to turn [telcos] into a
competitive contributor to society is to take a Bell Atlantic [Corp.] and a Bell Canada
and a BT [British Telecommunications plc] -- all of them are monopolies in the local loop
-- and provide them with serious competition.

There's nothing that an ISP or a long-distance provider can
do to compete with them except using an alternate path into the home or into the business.
That alternate path is sometimes called cable and sometimes called wireless and satellite
and other things. But the only thing that's really comparable is cable television.

The cable-television suppliers do not have the wherewithal
-- here, wherewithal means money, political power, technical expertise, customer base or
anything else -- to go against the monopolists in the telephone industry.

MCN: Do you think maybe AOL and MindSpring might have a
good point, but their focus is in the wrong place right now?

WS: Yes.

MCN: Are you surprised at how quickly this whole open-cable
issue has come to the forefront of Washington policy circles?

WS: No.

MCN: Why is that?

WS: It's totally predictable.

MCN: Could you elaborate?

WS: Policy-oriented people tend to want to solve problems
that they see, and they want to solve everybody's problem at the same time with a stroke
of a pen. It's a flawed approach, and I applaud people who wrestle with difficult issues
and do a true analysis and have an honest approach in solving problems, as opposed to a
politically resolved solution.

The example is: Nobody likes child pornography. I'm
referring now to [former] Sen. [James] Exon's [D-Neb.] bill of several years ago, which
was clearly an irresponsible act by politicians to pass because it was unconstitutional.

MCN: Are you referring to the Communications Decency Act?

WS: Yes. A senator like Exon, while his motive might have
been reasonable, his approach was flawed, and he knew it. And so did everybody who voted
for it. But everybody voted for it.

That was a cowardly act. And what I see happening is that
people always want the easy approach to solve a problem, instead of the right approach.

Well, I'm not like that. I want the right approach. The
right approach is to get competition in the local loop. That means to create a competition
environment that is balanced. That means to support AT&T [Corp.] in its evolution to
being a local-loop competitor.

MCN: Are you a revolutionist or an evolutionist in terms of
broadband rollout? In other words, do you think broadband penetration will take many years
to happen, or could it occur quickly?

WS: If I have my way, it will occur quickly. If AOL and
MindSpring have their way, it will never occur.

MCN: Some analysts think cable's strategy of bundling the
ISP and high-speed transport is self-defeating. Kevin Werbach, a former FCC analyst who is
now managing editor of newsletter Release 1.0, argues that broadband penetration
won't take off unless consumers have their choice of ISPs. What do you think of his
analysis?

WS: He's right.

MCN: Can you explain why?

WS: How many hours do you have? Let me try to do it in
brief. You either believe in a capitalistic society, or you don't. I'm a believer in
capitalists. I'm a believer in competition. If the customer is allowed to choose, then the
suppliers will perform, compete, innovate and do the things that all competitors do, which
is to drop prices and improve service.

The winners are usually those who are the most innovative
and the most successful at marketing and selling. And, always, the consumer wins.

Nowhere in there it is said that a regulator needs to tell
somebody to be a common carrier. I believe that you have two systems that are
high-performance, and they are competing side-by-side -- such as a competitive,
nonregulated common carrier using telephone-company twisted pair, versus the competitive
cable operator using coaxial but nonregulated -- the two of them will choose to serve the
customers well.

They will do surveys of their customers, and one-half of
the customers will say to the questioner, 'I want to do what I want to do, and I know what
that is, and you're not giving it to me. So I'd like access to PSINet, MindSpring,
EarthLink [Network Inc.], [Microsoft Corp.'s] WebTV [Networks] and anybody else I choose,
and I don't want to tell you who that is, and I don't want you to tell me who it is.'

The other half will say, 'I don't know what I want, but I
sure don't want you telling me what I want' -- 100 percent of the customers will want
their choice. I trust people's need to compete and win.

MCN: Are you saying then that consumers who have their
choice of ISPs over a broadband-phone network will be turned off by cable operators that
force the consumer to take their ISP as a condition for getting their high-speed
transport?

WS: That's a negative way to say what I said positively.
Correct.

MCN: Your point then is that ISP choice over the phone
network may ultimately force cable operators to allow ISP choice over the cable network.
And that will be a market-driven phenomenon, in your view. Is that right?

WS: You're applying cause and effect, which I didn't apply,
so let me try it again. Maybe it's a fine point and I don't need to make it, but the
driving force with the cable operator will not be the common-carrier telephone company
plant with DSL. The driving force will be the need to compete effectively.

The customers will talk to the suppliers. The customers
will tell them what they want, and the suppliers will listen. And the customer has the
ability to go somewhere else.

I like to say things positively. The way you characterized
it sounded very negative. The motive here is to serve the customer well. I believe that
AT&T and all of the cable operators are motivated to serve the customers well.

They have never seen a competitor in their space until two
or three years ago, when satellite distribution became very apparent. As soon as you saw
that come in, prices got stable or started dropping, performance went up, investment
continued, innovation -- there's new programming, there are more [channels]. There are a
lot more things. What a surprise!

MCN: In recent Senate Commerce Committee testimony, Case
called for a "light-touch" approach to opening cable facilities to multiple
ISPs. Is there such a thing?

WS: That's a foolish thing to have said. It doesn't exist.
You either have a government regulator, or you don't. I'm in favor of regulators in the
common-carrier space writing their memoirs and moving to other, more productive work.

MCN: Two House bills were introduced May 6 that would allow
AOL, for example, to file an antitrust suit against AT&T if AT&T were to
discriminate against an unaffiliated ISP. What do you think of that approach?

WS: I think it's flawed. It's short-term thinking, and I
think Mr. Case had better rethink what we would do if we wanted access to the DSL
contracts that he has negotiated and not made available to us and to all of his
competitors in the consumer space through the DSL telephone-company plant.

I don't see him doing exactly the same thing he's asking
the government to do as far as regulating somebody else. So why don't we regulate Mr.
Case?

MCN: The authors of the bill said one benefit of their
approach was that it would keep the Federal Communications Commission out of all this and
leave access issues to the companies, and if they couldn't agree, one could take the other
to court. Any thoughts on that one?

WS: It's flawed. We do not need any more government laws or
any more government regulations or anything else. We need a straight competitive spirit
and a competitive landscape. The fact that Mr. Case is trying these different techniques
means that he's using every trick in the book. Most of them are wrong. And I think they're
wrong for his business, and they're wrong for the industry combined.

MCN: You emphasize the need for the FCC to lean on the Baby
Bells to open their networks. Are you concerned that the FCC might allow the Baby Bells to
bundle their ISPs with their DSL services and use their monopoly power to discriminate
against other ISPs that may not get to employ DSL facilities on the same terms?

WS: Yes, and the reason is that the monopoly that the
telephone company has enjoyed for the past 100 years has been profitable for the past 70
years -- wildly profitable -- and abusive of all of its customers for the past 70 years.
They have stifled innovation, and they have done everything in the book to slow down
anything that looked like competition, and they are still continuing.

The cable industry, on the contrary, has never been a
successful industry when you look at earnings per share. None of them has ever made a
dime. They have stifled innovation, they've done other things, but they certainly have
never made a profit, and they have no access to capital the way that the telephone
companies do.

I have no fear at all of cable-company operation. I have
tremendous fear of the monopolists that control the telephone companies because they can
do anything they want.

MCN: It's clear that FCC is concerned that AT&T -- with
ownership interests in cable systems that reach 60 percent of all U.S. households -- is
too big an operation with anti-competitive incentives in a number of markets. What's your
view?

WS: I think AT&T is properly motivated as a new,
heavily competed-against long-distance company struggling to survive, in my opinion, in
the 21st century. It has embarked on a very reasonable path to become a serious competitor
in end-to-end provisioning and service delivery. And they're doing it the way they can
because they have enough money to do it. I applaud them.

The FCC is worried because it is in the business of
worrying about monopolists gouging their customers the way Bell Atlantic and PacBell
[Pacific Bell] and Bell Canada and BT have done forever.

And they are regulated by guaranteeing the return on
investment that the Bell companies make. That's a mistake. Bell companies, if they were
normal businesses, would have been bankrupt years ago.

I am not opposed in any way to cable companies having the
option of exerting unfair competitive practices because they have never done so.

Don't regulate an industry in anticipation of it maybe
someday becoming competitive if it is successful, when you have in front of you an entire
army of people who have been monopolists, who will always be monopolists, and who would
die to have you begin to regulate their only serious threat. All of you just don't get it,
you know?

MCN: Do you see any downside aspects of AT&T's
cable-system-buying spree?

WS: Sure. If [AT&T chairman and CEO C.] Michael
Armstrong is stupid, then he will exert an unfair, noncompetitive environment over the
Internet's suppliers. But he'd have to be stupid. I don't bet on that. I bet the man's
pretty smart, and he will open it up to competition without a regulator's requirement.

MCN: What do you think the impact would be if the FCC
denied the merger or forced AT&T to divest a lot of cable systems?

WS: I would anticipate a serious lawsuit, which the FCC
would lose, and the FCC would fall from grace from everyone, including me. It appears that
I'm the only one defending the FCC, so if they change, then I don't think anybody would
agree but Steve Case. [MindSpring chairman] Charles Brewer will appreciate it because
there will be no Internet over cable. There will be no incentive to roll out high-speed
cable access. It won't happen.

MCN: What has been the impact in the ISP community of
AT&T's aggressive move into cable?

WS: Well, none, except for whining by Steve Case and
Charles Brewer.

MCN: Is your company looking to make deals with cable
companies in terms of high-speed access?

WS: PSINet doesn't offer any direct consumer products in
most of the United States, so that's not our space. If the cable operators were to allow
us to have access to their cable plant the way that I predict they will once they make
their investments, which they have not done -- did you get all of those conditionals in a
row there? -- then I would very much like to obtain a 6-megahertz channel on every cable
plant in the known universe. It's a great way to distribute Internet.

MCN: Are there any cable facilities that you would want to
use now to get to your U.S. customer base?

WS: If they opened it up now, I'd take it all, yes.

MCN: Any final thoughts?

WS: I'm just amazed at how difficult it is to get what I
think is the right approach conveyed in this setting. The senators couldn't understand --
well, maybe they chose to take the easy approach. Maybe they have to take an easy
approach, I don't know.

MCN: Some in the cable industry said to me after the
hearing, 'I hope you noticed that none of the senators endorsed anything that Steve Case
said.' Do you agree?

WS: I thought Sen. [John] McCain [R-Ariz.] didn't like my
argument to rely on the FCC. I did get a sense that no one believes Steve Case, and that
was very encouraging.

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