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    Shannon Henry's The Download Live
    Discussion With PSINet's William Schrader

    Thursday, May 13, 1999 at 1 p.m.

    Shannon Henry Welcome to The Download Live. I'm your host, Shannon Henry. My guest today was Bill Schrader (below, left), chief executive of PSINet, one of the world's largest Internet service providers.

    William Schrader He took questions on:

    • How PSINet became a major player.
    • How business-to-business deals work on the Web.
    • The long-term outlook for PSINet.

    For background on Bill Schrader and PSINet, read my column on PSINet's marketing moves and get a stock quote, news and data for PSINet.

    Shannon Henry: Hi, welcome to The Download Live. Submit questions now to Bill Schrader!

    Shannon Henry: Hi Bill. Can you start out telling us what PSINet does? When did you found the company?

    William Schrader: Shannon, I founded PSINet ten years ago, in spring of 1989, we were the first ISP. In fact, I remember an argument over what to call the industry and I wanted it to be ISP, which was PSI spelled backwards.. :-)

    Silver Spring, Maryland: Congratulations on your achievements and your recent award.

    In the last three years, PSI has built a global network covering all the world's continent. However, I couldn't find anything in Africa, especially Nigeria, a country of over a 120 million people. Nigeria seems to be a big market with a high margin. Do you have plans of doing something there? If yes, how soon? Keep the good work going.

    William Schrader: Yes to Africa plans. We do have a presence in the sub-Saharan francophone region, although it is thru a wholly owned subsidiary and is not yet fully converted to IP. So, we will enter, since it IS a large untapped market. But, we don't announce before we have a solution ready. Note the Latin American announcement and then Brazil a few weeks later.

    Shannon Henry: How did you decide to do business-to-business Internet sales, rather than consumer? Can an ISP do both?

    William Schrader: yes, I think an ISP can do both corporate and consumer, but it is very challenging and will require two entire teams. So, we focused on corporate. Higher revenue and margins, lower churn, but the same work.

    Baltimore, md: Was paying all that money for advertising in Ravens Stadium worth it?

    William Schrader: So far, the Raven's relationship is a clear win. We are now being considered by firms that didn't know we existed 6 months ago. Simply name recognition.

    Arlington, VA: How do you see the fight over broadband access affecting PSINet and other ISPs?

    William Schrader: PSINet supports ATT and other large and small cable operators who intend to deploy broadband and, in fact, I testified to the Senate a few weeks back suggesting they NOT change the rules under which CATV operators operate, since I am *adamantly* opposed to regulation.

    D.C.: PSINet's stock seemed invincible last month, then it declined...can you attribute this to anything other than market fluctuations?

    William Schrader: Market fluctuations, a range of investor tolerances to risk, and also our stock offering of over 800 million dollars, which just concluded. All have an effect.

    Shannon Henry: As CEO of the first ISP, you've seen a lot of changes in the Internet industry. What has surprised you most?

    William Schrader: Mr. Gore's support in the early '90's surprised me, since I had not considered how politically enticing the Internet might be, having always figured the Internet would "control" politics eventually, since we Internet folks are giving normal humans a voice and a mechanism to speak it.

    new york city, NY: There have been an increase in ISP advertising on network television primetime slots on the east coast recently, but have not come across any on PSINET. Are there any plans to increase the company name exposure huge corporate sector and mass market on the East Coast and what is the time frame?

    William Schrader: Our goal is to meet the marketplace with products it wants, and to meet the "Street" with financial performance that it wants. EBITDA mid year is the target expectation and we remain comfortable with that estimate. Advertising is important but it costs money, check out the Raven's. Also, our performance in the market for new products, such as wireless local loop bypass "PSINet InterSky" is a classic example of how PSINet leads the industry.

    Silver Spring, Maryland: All your past predictions on the exponential growth of the Internet have come to past.

    Having grown PSI to its current enviable position around the Globe, what is your vision for the company? Any plans to compete for the "Last mile" with the Traditional Telcos who currently dominate that portion of the business?

    William Schrader: Not all of my past predictions have come true. :-) My hope is that we can achieve both financial performance (increasing share price) while improving the industry's performance (incr. customers, incr. revenue per customer, and incr. customer retention rates). We publish our information so that you can all watch. The last mile is regulated. Our wireless "InterSky" and DSL product lines will deal with this opportunity very NICELY for our customers and our shareholders.

    Arlington, VA: Many have postulated that PSINet is ripe for a takeover. Any comment?

    William Schrader: People have asked me this question about 5 times per day for 10 years. :-) Yes and no is the answer. The biggest companies do not understand that time is of the essence in the Internet space. When they do, we'll be "accretive" to them in either EBITDA or eps and still be the fastest growing provider, with the best network, best product line, best customer base and best Internet savvy team. They will pay handsomely for our company, :-)

    Shannon Henry: Internet executives are getting much more political these days. It was interesting to see you and Steve Case have opposite views on cable access regulation at the recent Senate hearing. Why do you think government should leave that issue alone?

    William Schrader: I am opposed to regulation in any fashion if the same results can be achieved by competition. Steve (case) is just not thinking clearly, :-). He wants regulations which it suits him, and then bashes them which he wants them gone. While consistency is not my objective, I DO trust competition. Since I am right, and Case is wrong, then we'll see what the senate does, eh?

    Shannon Henry: What did you think of enormous blame put on the Internet after the Littleton tragedy? How is Internet use changing kids' lives?

    William Schrader: This blame is ridiculous, and everyone who can think knows it. The problems in our schools are real. But, those problems begin with homes and teachers and budgets and children/teens harassing one another without the teachers/parents getting them to stop. The internet is no more to blame than the books they read, the newspapers, the conversations they have. It is foolish.

    Shannon Henry: What technologies do you use personally? Wireless phone, digital camera, laptop? Which could you not live without?

    William Schrader: me? I use a digital cell phone, a one way pager, laptop. As for digital camera, I seldom take pictures. So, I cannot live without phone/pager, and lap top. Well, I can surely live with out them! But, I could not function as a CEO.

    Woodmere, NY: Mr. Schrader, first congratulations on continued success. With the acquisitions of fiber over the past years, PSINet has developed into a dominant player in the ISP arena. Has there been any thought of increasing revenues by leasing fiber?

    William Schrader: hmmm, I think you mean would we begin leasing out our fiber to others? No, we only buy what we need. And, I sure don't want to tie that up with others interests, since that process engenders and *entirely* different market, different products, etc. We are NOTHING BUT NET. :-) We are a "telco for the 21 st century" but I hate to use the word telco. Our revenue comes from customers buying IP services. Not telco stuff. margins, think margins, IP is MUCH better

    Silver Spring, Maryland: Thanks for answering my questions. Will PSI compete with the local Telcos for the "Last mile" portion of your business? I think doing so makes good business sense. It will eliminate the huddle between you and your customers.

    William Schrader: we'll do last mile, local loop using alternative approaches such as Cable, DSL and Wireless. Satellite is very useful for some apps, but not for VOIP. Our wireless product does VOIP well, right now.

    D.C.: Will you be EBITDA positive this coming quarter as the company has repeatedly stated it would be?

    William Schrader: we are comfortable with the analysts who predict we will turn EBITDA mid year. That is as far as I can legally answer.

    Shannon Henry: Looking a year out into the future, how will we be using the Internet differently?

    William Schrader: wow, how many hours do you have? :-) There is NOTHING you do today that involves information or communication that will be delivered by any means other than Internet. All devices will be Internet driven. Extend your imagination, and the answer is YES, that with happen too.

    Shannon Henry: Have you hired some of the people laid off from AOL? Do you agree with other tech CEOs in the area who say a workforce shortage is threatening the region?

    William Schrader: it is hard to hire people in the baltimore/wash/NOVA area, no question. So, we are moving offices to other places like Sao Paolo, and London, :-) Global business, global offices, and people like to move around. We don't have a problem. I don't know if we h ired AOL people, but they are good.

    Woodmere, NY: What market are you aiming at with the new deal struck with Uniview and what kind of customer growth can we expect in the year to come and beyond based on the partnership?

    William Schrader: It all depends on the sell thru and how the customers like it, so I don't exactly know. We never predict this sort of thing and then every success is a pleasant outcome.

    Shannon Henry: What's your biggest frustration these days at work? What's your favorite part of your job?

    William Schrader: Not having much time to just work. That is the biggest frustration. Favorite part of my job? Talking to customers, talking to employees, talking to shareholders. In fact, I even like talking to the press! ha!

    Shannon Henry: Who are your role models, people and/or companies? And why?

    William Schrader: hmmm, they are not the kind of people you'd think. Churchill, and Roosevelt, they had guts, stood their ground, and got the job(s) done.

    d.c.: do you expect your current rate of revenue growth to continue and increase and, if so, at what rate do you expect it to increase? Same question with respect to business customer growth.

    William Schrader: Both the revenue growth rate and the customer growth rates should approximate last years, plus or minus 20%. Remember that growth rates a tough, since the base is twice a as large this year, so we need to sign up twice as many customers in the same time frame, and keep all of them. But, yes, and this is driven by a combo of "organic growth" (just selling new customers) and by "M&A" or merger and acquisition activity around the globe. I don't predict an increase in the rate, but 100% is the boogie.

    Woodmere, NY: Although I am not worried about the long term prospects about your company, I think debt repayment is an issue. I think it will be more in focus once PSI goes EBIDTA +, but can you comment on the ratio of the funds from the SPO which will go towards debt repayments, and those which will go towards expanding into emerging markets-congratulations on the Brazilian ISP acquisitions. Excellent move which I feel, and I don't have any legal obligations, will move PSI to EBIDTA + by Q2-.

    William Schrader: Lots of questions here. Cost of capital is the issue, and debt is cheaper than equity, so a) while we are consuming capital, and b) while the return on our use of that capital is sufficient to justify it, why would we use equity rather than debt? Well, to keep the balance sheet strong, which is why we just closed (this week) on over $800 million in new equity. So, our B/S is strong now. These funds will go primarily to M&A, and facilities buys, not repayment of debt. I Don't anticipate taking debt down until we want to make EPS. "EBITDA by mid year" is the name, not Q2 most likely. The street has us well understood on that score.

    Silver Spring, Maryland: Hi Bill, as a very hardworking and successful business man what do you do to unwind?

    William Schrader: Talk with my family, :-)

    Herndon, VA: What are PSINet's plans to compete with UUnet dominence of the high-bandwidth market -t3 and up?

    William Schrader: beat them at the same game. We introduced our new OC3 product, and after our dark fiber comes up, we'll do higher still. Just watch. IF you own dark fiber and data centers, then you can offer anything. Of course, if you don't then you cannot. Right?

    Shannon Henry: Can you settle a misunderstanding? Doesn't UUNet say it was the first ISP? Which company was really first?

    William Schrader: I founded a not for profit in 1985 called NYSERNet delivering IP. Rick Adams founded a not for profit called UUNET Services (I think) in 1989 delivering UUCP (NOT IP). I founded a FOR profit COMMERCIAL IP services company in 1989. Rick converted his not for profit, at my suggestion, into a commercial ISP in 1990, under the current name. So, we were first, uunet was second. Clear?

    Nova Scotia, Canada: Bill- How are you finding the reaction to PSINet's unique business model- business-only, independent ISP-these days amongst Wall Street, Investors, etc?

    William Schrader: They love it! The word "pure play" is used by them to explain what we do, and it works.

    Shannon Henry: Do you invest in start-ups? Either with a PSINet venture capital fund or as a personal angel investor? What kinds of companies?

    William Schrader: Yes to both. But, since I have not sold any (not one share) of PSINet stock I need to borrow all the money I invest, so I am very cautious. And, I don't know ANYONE who would refer to me as an "angel"... But, PSINet invests in VC funds, and directly in small companies. MPATH is one. But, there are others. The list is confidential until/unless the company goes public.

    Washington DC: what's EBIDTA?

    William Schrader: Earnings Before Interest Taxes Depreciation and Amortization. It is a weird thing, but John Malone invented the concept 20 years ago to explain why cable companies were good investments. EBITDA is, sort of, an estimate of cash movement into and out of the company, and also removes the financial differences between companies with and without debt. See, if you don't count interest and taxes (cash), or depreciation and amortization (which are non cash)you can then compare companies which are funded entirely by equity or entirely by debt. Complicated, I know. But, hey, I didn't invent it!

    washington, dc: With respect to Latin America, what impact, if any, will Desai Nadir's departure from PSINet have on your plans for that region? Has a replacement VP been named?

    William Schrader: Absolutely we respect LA. We should have been in sooner, but could not divert ourselves from AP and EU until now. We have the Best Team in the industry, and while Nadir was like a son to me and Pete (Wills) and we will miss him, we will do fine without his contributions (both in Canada and in LA). We have not announced his replacement in LA, but we have an interim president for Canada.

    Shannon Henry: As a technologist, what lessons have you learned from Wall Street? Does that world make sense to you?

    William Schrader: Well, there are rules to the street and they tell you what they are, just play by them and all will work out. I didn't know that, or rejected the concept early on. I learned, slowly but I learned. Check the results in the stock price..

    Reston, VA: PSInet focus seems to be on the small-to-mid-size business market. Do you think that stronger brand name recogition would help with the emergence of smaller, more aggressively marketed , yet technically inferior ISPs like Verio, Quest, Exodus, and Level 3?

    William Schrader: Yes, we are focused on stronger brand recognition, hence the investment with the Ravens, and the TV ad campaigns of last year and this year. Absolutely.

    Washington, DC: How confident are you about an EBITDA positive announcement mid year? Wall St. won't be very forgiving if you miss, correct?

    William Schrader: I am comfortable with EBITDA mid year. I have never known wall street to be forgiving!

    vienna va: Why should someone who has a mission critical Web hosting application Host with you...and what is your commitment to dedicated Web Hosting....what percent of your rev will come out of this business

    William Schrader: we own and control the fiber and data centers "around the globe" on PSINet. Really, we have a full link around the world. That means we can deliver traffic a) from our data centers which are directly attached at our fiber to b) any customer on our network and c) to any ISP in the world, with reliability, security and speed. But, we also host better than most and arguably the best in the industry. We anticipate 25% of revenue in a few years will be driven by Web and applications hosting. But, it will be a combo of shared, dedicated, managed and colo.

    Shannon Henry: How have you seen the Washington region change as a tech center? What does it need to succeed?

    William Schrader: DC area is a tech center now. It was not when we came here in 89. It has succeeded. All we need now is better mass transit, more roads and more parking!

    Springfield, VA: Bill,

    What has been the most challenging thing PSINet has ever done?

    What has been the most challenging for you personally?

    William Schrader: For the company? Laying people off when we exited the consumer space. That was challenging since we knew those people were great and talented, and of course all were hired immediately. Very challenging.

    For me? At work, removing friends of mine who could not scale with the requirements of the jobs/company. At home, missing my children's and wife's time to spend with me while I traveled.

    Woodmere, NY: Although it is obvious that the Baltimore Ravens Stadium naming deal can not be expanded on-obviously, not every NFL team can play in PSINET stadium, it does seem like a nice relationship that links players with fans. Has there been any talks, progress or vision of PSI becoming the Official ISP of the NFL?

    William Schrader: We are very friendly with the NFL but Sprint currently holds that contract. I will be up soon. Watch and wait, please.

    Shannon Henry: Time's up for today! Thanks for joining us. And thanks Bill for your thoughtful answers.

    © Copyright 1999 The Washington Post Company

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