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Warring
over the Web
PSINet battles to win the fiber campaign
by
Hugh Aston
"The
general who wins a battle makes many calculations before the battle is fought."
Sun Tzu, The Art of War
There's a quiet
war going on in the Internet business -- so quiet that even some of the participants
may not fully realize that it's being waged. Rather than being a skirmish for
a handful of customers shopping at a trendy e-store, or even a major "my browser
is better than your browser" clash of arms, this is a long-term strategic campaign
for the infrastructure that makes the Web work.
Chief among these
infrastructure resources is the actual physical medium along which your digital
data travels, i.e. the optical fiber that is fast developing into the Internet's
neural network, and any company that owns the fiber and the connections to make
it work efficiently will take a lead position not only in the development of the
Internet, but in the development of the world's economy. PSINet, the Virginia-based
Internet giant, can lay a very strong claim to being one of the major players.
Acquiring fiber
capacity
For a number of years now, PSINet has been acquiring fiber capacity, which may
be regarded as the primary means of production for the Internet business. In fact,
it owns so much fiber right now that Vincent Gebes, PSINet Asia Pacific's vice
president of networks and technology, refers to PSINet as a telecommunications
company. In contrast to other global telecom giants such as MCI, Sprint, and British
Telecom, PSINet does not have a single phone line subscriber on its customer list.
Instead, the firm's fiber network is dedicated entirely to the Internet and is
sold almost entirely outside the individual consumer marketplace; either to ISPs,
who resell down the line, or to savvy companies who are running their e-businesses
over the Internet.
Becoming the world's
largest super-ISP has involved Bill Schrader, the chairman and CEO of PSINet,
betting not just one, but several, ranches. Through stock and bond issues totalling
over $1.0 billion in calendar 1998, plus an additional $700 million-plus (reported
during the firm's 1Q99 conference call), PSINet now controls cable links that
span the globe.
At first sight,
the corporate balance sheet appears appallingly spattered with red ink, thanks
to the fund-raising necessary for these purchases. Moreover, the potential of
this investment is almost untapped. Much of the cable acquired has been "dark
fiber" -- laid, but is as yet unconnected -- with the result that at least 90%,
and probably more, of PSINet's capacity is unused. This is a big gamble for any
company to take, and the high tech Internet stock boom has been ignoring PSINet's
issues for some time. Much to the relief of all involved, this is now changing
as revenues increase, and the firm enjoyed 1998 revenues of $260 million, up 113%,
and a 1999 Q1 revenue of $105 million, a 136% year-on-year increase over 1998's
Q1 level of $44 million. Will the continuing gamble pay off?
Vincent Gebes
thinks so. There may be only a finite number of Internet users ("I hope it's not
actually finite," he laughs), but there is an almost infinite number of applications
that demand bandwidth. Relatively speaking, Internet telephony is in its infancy,
as is video over the Internet. Jeffery Shapard, director, strategic development
at PSINet's headquarters, quotes the CEO as saying that 80% of voice telephony
will be carried over the Internet within the next five years. Shapard adds "Bill
[Schrader]'s not always right -- his predictions are sometimes too conservative.
In this case, we might even see 90% of voice traffic carried over the Internet
within two years" -- a figure that may not be realistic, as Shapard himself admits.
Nonetheless, it
is almost certain that there are as yet undreamed-of future applications which
will take up bandwidth and use PSINet's current spare capacity. Gebes explains
that while the telcos, or former dominant carriers -- as PSINet likes to refer
to them, will have to re-tool their cables and switching centers to handle the
increased traffic, PSINet will simply light up a few more stands of its dark fiber,
when and as necessary. In fact, the different attitudes towards the advances in
technology can be seen from the different amortization and write-off periods allocated
to technology by PSINet and by the telcos. While these former dominant carriers
tend to think in terms of up to thirty years' life for "plant", PSINet writes
off routers, switches, and computer equipment over a period of between three and
five years. The implication is clear -- PSINet is determined not to fall behind
in the technology stakes, and is prepared to leapfrog the opposition whenever
this becomes necessary.
The checkbook
comes out
Last year, PSINet bought three well-known players in the Japanese Internet market:
Rimnet, Tokyo Internet, and TWICS. (The links to TWICS go back some years, to
the days when Shapard co-founded and operated TWICS and helped to bring the commercial
Internet to Japan.) Each of these acquisitions brought unique skills and talents
to the PSINet party, and although each of these companies proudly sports a PSINet
banner on its website, their individual identities have been retained, allowing
the Japanese Internet community to maintain a sense of continuity.
On the other hand,
it may be argued that retaining the brand image of PSINet's acquisitions, not
just here in Japan, but in all the other countries where PSINet has invested in
local talent, has resulted in a slight image problem for PSINet -- the problem
being that there simply isn't a public image of PSINet in many people's minds.
In the US, this problem has been resolved through PSINet's highly visible sponsorship
of an NFL expansion franchise, the Baltimore Ravens. PSINet has acquired the right
to set up and manage the official team website, and name the team stadium (now
rather unimaginatively dubbed "PSINet Stadium"). Rabid Ravens fans can now also
use the official Ravens ISP, created and operated by PSINet, as their method to
connect to the Internet, giving them exclusive rights to behind-the-scenes action
of their favorite team (see http://www.ravenszone.net).
Could such a thing be possible in Japan, where corporate sponsorship of soccer
clubs appears to be losing its initial glamor, and Daiei, the owner of the Fukuoka
Hawks ball club, is facing serious difficulties? Could we see a PSINet Fukuoka
Hawks? No one at PSINet Japan seems to rule out this possibility completely, and
we may yet see some interesting developments in the field of corporate citizenship
where PSINet Japan is concerned.
Not that PSINet
Japan should be worried about being perceived as a big bad wolf foreign company,
gobbling up the defenceless local players. Of the 130 employees of PSINet Japan,
a mere handful are not Japanese. The same use of home-grown talent holds true
round the world, in all the dozen or so countries where PSINet has a major presence.
Recently, NHK news reported that in Diet deliberations on the proposed wire tapping
bill (which would allow authorities to intercept communications in cases of suspected
organized crime), PSINet was chosen as a "typical Internet service provider",
and a (Japanese) company representative was chosen to speak for the Japanese
ISP industry on the role of ISPs vis-a-vis proposed e-mail interceptions by Japanese
law enforcement authorities. Pretty cool stuff for a foreign company.
People first
All this reinforces the point made by Richard Ragains, assistant manager in the
PSINet Japan sales group, along with Gebes and Shapard, that PSINet is interested
in making the best use of the best people available. Shapard claims that PSINet
is "not simply acquiring talent. We're providing an environment in which the talent
joining us can expand fully." This attitude is borne out by Tim Burress, who served
as president of TWICS before its acquisition by PSINet, claiming that the opportunities
for him (and TWICS) have been significantly improved since TWICS became a part
of PSINet. "These are extremely smart people," says Burress of the PSINet management
team. "Not just technically, but in terms of business strategy and outlook." While
writing this article, I saw first hand aspects of PSINet's business savvy, as
expressed in its bottom line aim, "to drive costs down through the floor".
PSINet's new premises
in Tokyo, occupying the whole of one floor of a prestigious new development, are
luxuriously spacious and provide a comfortable working environment. However, when
I talked with Ragains, shortly after the move, we had a choice of different styles
of chairs and tables at which to sit, courtesy of the four legacy companies which
now comprise PSINet Japan. This diversity is also reflected in the "cube farms,"
where the different ISPs had retained their office furnishings, rather than PSINet
imposing (at some considerable expense) a standard house style on the organization.
This concern with costs also affected the timing of my interview with Shapard.
In order to produce a good worldwide quarterly result, foreign travel by headquarters
staff was being curtailed for that quarter and I had to wait to the end of the
quarter before I could speak with Shapard. Let me emphasize that this is not counting
pencils, it is a cautious plan to spend money only where it is necessary. For
a dominant market player, PSINet's personnel levels are still remarkably low.
Even though they have leapt from around 500 staff five years ago to well over
2,000 today, they still compare very favorably with NTT Data's 10,000-plus employees,
or NTT Communication's 6,000 (though this may be comparing apples and oranges,
remember that both types of fruit are available at the same store).
Overseas ventures
Shapard and Gebes both take care to point out that PSINet is a "global company,
not just international," and contrast the structure of PSINet with that of the
former dominant carriers. Typically, the latter have lived in a protected environment;
either protected by government fiat, as in the case of NTT, or by sheer size,
as in the case of the pre-Baby Bell AT&T. Their overseas ventures have often either
been joint ventures, cautiously tying up with major players -- and thereby hamstringing
their competitiveness -- or simply taking on the locals at their own game (for
instance, BT Harmonix' price war on direct international dialing). While Shapard
acknowledges that this is good for customers in the short run, it is not ultimately
productive for the carriers. PSINet, by contrast, is doing an end-run around the
traditional defensive line of voice communications, and using its energies to
create a better IP service for its customers.
This is more than
a matter of mere bandwidth. For corporate clients, PSINet is able to handle tasks
which customers are unwilling or unable to handle themselves: IP addresses, DNS
servers, mail servers, etc., with a "server farm" solution on the horizon. As
a turnkey solution, there are very few rivals here in Japan. NTT's OCN comes the
closest in terms of provision of connection to the Internet, but the value-added
services of PSINet make it more attractive to many companies requiring a 24/7
connection to the Net, especially now that connections to PSINet can be made to
over 50 NTT OCN "termini" (a result of deregulation), allowing the customer to
have the convenience of a local connection.
This final mile
connection between the customer and the access point is one over which PSINet
has traditionally had little or no control. The actual delivery to the customer's
door is one which has been done over the local NTT network (be it copper or fiber),
and although costs in Japan have come down, so that a leased line is a little
more attractive than it was, it is still an expensive option (in fact, NTT Communication's
Arcstar offers a somewhat bizarre lower-cost "leased line" service, where a point-to-point
circuit is held open at a certain customer-designated time of day, for a fixed
time -- this could only happen in Japan, and only with NTT). Especially in Tokyo
with its high building density, a PSINet solution to the problem of high leased-line
costs should be available soon in the form of a digital spread spectrum transmission
technology that offers true 128K speeds (512K in the future), whereby the IP traffic
is routed between the customer and PSINet using rooftop dishes, freeing the receiver
from the necessity of a leased line and the subsequent telco fees. (Watch this
space for further details -- Ed.)
And tomorrow?
PSINet is definitely a force to be reckoned with. As the one of the powers behind
the Web, and with front-runner names such as WebTV and Earthlink as major customers,
PSINet is ready to become one of the victors in the quiet bandwidth war. Domination
of a finite, expensive resource is the key to victory in this campaign, and PSINet,
being smaller and more nimble than its rivals, has been able to take advantage
of worldwide deregulation to achieve a key position in this regard. Thanks to
PSINet Japan's acquisition of local names and technologies, Japanese customers
now have a global solution with a local face available to them. All looks set
for PSINet to become the global leader in the first few years of the 21st century.
As Sun Tzu said, "There is no instance of a country having benefited from prolonged
warfare," and "if the campaign is protracted, the resources will not be equal
to the strain." If, as so often happens, Sun Tzu is right in his analysis of conflict,
PSINet must continue to move forward fast, if it is to maintain the tactical advantages
it has won, and convert them into strategic positions from which it can attain
global dominance.
Hugh Ashton
is a regular contributor to Computing Japan, both print and online. Contact him
at hugh@twics.com
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