PSI's Bill Schrader on Worldcom/MCI merger

[James Love <love@cptech.org>]

------------------------------------------------------------
Info-Policy-Notes | News from Consumer Project on Technology
------------------------------------------------------------
March 9, 1998

    Talk with Bill Schrader, Chairman and CEO of PSINet,
    On Worldcom MCI/Merger
 
    Background: 

One of the major areas of controversy over the Worldcom/MCI merger is
the increased concentration of ownership of the Internet backbone
providers.  The merged entity would control somewhere between 40 and 60
percent of today's Internet backbone services, depending upon whose
statistics you use.  Both UUNET (owned by Worldcom) and MCI have
indicated preferences for changes in Internet pricing models which are
usage based, at least at the backbone level. 

An important issue in Internet backbone markets is "peering."   Various
networks which are part of the Internet can transfer data at Network
Access Points (NAPs), which are essentially open to the public, but
often congested and slow.  Plus, networks can connect directly with
"peer" networks, so that traffic to or from a peer can travel faster. 
The peering agreements, which are important, are negotiated privately
between parties. Historically two networks would split the cost of a
connection, and both would benefit from the improved performance.  In
the past year or so, UUNET, owned by Worldcom, and some other larger
backbone providers, have begun denying smaller ISPs new peering
agreements, or insisting on conditions of peering which smaller ISPs say
are anticompetitive, and reportedly involve payments to UUNET.  UUNET
has also required ISPs to sign controverisal non-disclosure agreements,
which have greately reduced informed public debates.

PSI is the primary backbone provider who still offers peering with all
comers, including smaller ISPs, and is resisting efforts by UUNET and
others to impose usage based fees on Internet backbone transit.  


    PSI's position on the Worldcom/MCI merger.

Today I called PSI's (founder) Chairman and CEO, Bill Schrader, to ask
him about his thoughts on the Worldcom/MCI merger.  Bill Schrader said
the Worldcom/MCI merger would give Worldcom significant market power,
and he thought the merger would lead to anticompetitive actions by
Worldcom in backbone markets.  Schrader indicated this was a big deal,
and not a small deal, in terms of where the Internet was headed.  Bill
also said that irrespective of its merits, he doesn't expect the merger
to be stopped by the DOJ, the FCC or the EC.

PSI is seeking an agreement from UUNET for open "line speed" peering,
without settlements.  Thus, for example, an ISP with a backbone speed of
T-3 would peer at T-3 (45 mbps), and an ISP with a backbone speed at OC3
(155 mbps) would peer at OC3.  This would give ISPs an incentive to
build higher speed backbones.  Schrader expects UUNET to resist such an
agreement.

Schrader says that Worldcom and MCI both want to move Internet backbone
pricing to a price per kilobyte model. He calls them "telephone
companies,"  and the price per kilobyte approach a telephone company
pricing model.   Schrader said that the merged entity would control
about half Internet backbone traffic.  I told Bill that some persons
claim the rapid growth of the backbone and low entry barriers will
prevent Worldcom from exercising market power.  Bill said "these people
are fools." 

Bill said that PSI was lining up a number of peering agreements with
smaller ISPs.  He said PSI had more than 100 such agreements now, and he
expected more than 1,000 within a year, that might cover as much as  40
percent of the backbone traffic.  Schrader said the could lead to a
large confrontation with UUNET, and a possible split of the Internet
into two factions, as early as 1999.

   Jamie Love <love@cptech.org> 202.387.8030


The CPT Web page on this merger is at:  

http://www.essential.org/antitrust/worldcom/worldcom.html
The CPT discussion list on the merger (available from 
listproc@essential.org) is worldcom-mci-merger@essential.org.
Archives at http://www.essential.org/listproc/worldcom-mci-merger/


------------------------------------------------------------------
INFORMATION POLICY NOTES is a newsletter sponsored by the Consumer
Project on Technology (http://www.cptech.org, 202.387.8030, fax
202.234.5127).  Archives of Info-Policy-Notes are available from
http://www.essential.org/listproc/info-policy-notes/
Subscription requests to listproc@cptech.org with the message:
subscribe info-policy-notes Jane Doe
------------------------------------------------------------------