Internet service provider PSINet Inc. announced that it would spend $1.4 billion on a major expansion of its fiber-optic network in an effort to compete globally as an "Internet super carrier" with the likes of MCI WorldCom Inc.
The Herndon-based company said it had reached an agreement with IXC Communications Inc. to acquire use of 13,900 miles of its fiber-optic system. PSINet will also build 20 service centers to house and support the computers for its network in major cities including New York, London, Los Angeles, Paris, Frankfurt, Tokyo, Sao Paulo, Toronto and Hong Kong.
Chief executive William L. Schrader, who founded the company in 1989, said this will make PSINet--with a global brand name, uniform billing and customer service--more competitive with other Internet giants in the race for traffic, especially corporate traffic. It will also increase PSINet's 3,600-person-strong work force to 5,000 by the end of next year.
Gaining access to the fiber-optic network is critical for PSINet to control costs and handle greater customer volume, Schrader said. "The technology [improves] every year by a factor of tenfold to fiftyfold," he said. Network ownership will allow PSINet to upgrade the equipment more frequently at 30 percent of the current cost of installing better fibers, he said.
PSINet currently leases about half of its U.S. network capacity from companies such as IXC, Ameritech Corp., Bell Atlantic Corp. and BellSouth Corp. PSINet will transfer that traffic to its own new networks.
For consumers who gain access to the Internet through PSINet clients such as EarthLink Network Inc. and NetZero, this will mean fewer glitches that slow down or stall Web connections, said Harold S. "Pete" Wills, president and chief operating officer of PSINet. "It may also mean better pricing for our corporate customers, because we might be able to offer them a greater bandwidth at the same cost," which means a Web site will be able to handle more viewers without system bottlenecks, he said.
Ulrich Weil, an analyst with Friedman, Billings, Ramsey & Co. Inc. in Arlington, said this deal is part of the "bandwidth battle that is raging" internationally between large companies like Qwest Communications International Inc., Global Crossing Ltd., and other companies scrambling to acquire network capacity. In addition to cost savings, PSINet is "stocking up" on network capacity so it can handle increased traffic.
Weil suggested that PSINet is trying to make itself ripe for acquisition by a larger company. With limited cash on hand, it will probably implement only part of the plan announced yesterday, and then look for a buyer, he said.
"In reality, that's as far from the truth as it could be," said Wills.
The company has been on its own acquisition kick, having bought 50 smaller Internet service providers in the past 20 months, a pace it is trying to maintain, he said. "Someday, somebody, somewhere may pay a lot of money to acquire PSINet," but not for the next couple of years, he said.
Shares of PSINet closed down 31 cents yesterday at $32.
CAPTION: Founder William L. Schrader wants a global Internet competitor.