Fading PSINet has users in limbo

ASHBURN, VA. - Just over a year ago, PSINet announced a $1 billion program to help fund Internet start-ups. Now it looks as though the company should have squirreled away some of that cash for itself.

Experts say the once mighty ISP is most likely headed for bankruptcy protection and that customers should prepare contingency plans. PSINet is carrying a debt load of $3.6 billion and has watched its stock plummet from $60 a year ago to a mere 13 cents last week.

If the next part of the PSINet story is Chapter 11 and creditors take ownership of its network, it's unlikely creditors will manage and operate the network, says Steven Harris, an analyst at market research firm IDC.

"Creditors will want to sell the network," he says. "The buyer could be a service provider that may resume services, but there could be a period where the network will be shut off."

While PSINet is trying to avoid defaulting on payments to creditors, the ISP's thousands of small and midsize business customers are left with a heavy dose of uncertainty.

"We've had network contingency plans in place for over a year," says Glenn Botkin, IS engineer at Galaxy Scientific, an Egg Harbor Township, N.J., engineering firm. But the company isn't making any changes just yet.

"They're not going to shut the network off overnight. At least that's what they've implied," says Botkin, whose company is using PSINet's managed IntraNet service to link its seven corporate sites.

PSINet has struggled as a result of many of the same problems of other competitive local exchange carriers, ISPs and even traditional telecommunications companies. It's costly to build and maintain multinational networks while trying to drum up new business. Some say the company's headstrong CEO, Bill Schraeder, probably could have sold the company months ago but never thought any price was high enough. That left PSINet as the only national ISP serving business customers that was not owned by a larger, better-heeled telecommunications company.

Others say PSINet stretched itself too thin, starting the venture fund and going on an international ISP buying spree. The company spent nearly $2 billion on consulting firm Metamore Worldwide and forked over another $720 million for a credit card processing company called Transaction Network Services (a business PSINet turned around and sold earlier this month for $300 million). Though PSINet brought in $353 million in service revenue during its third quarter, the most recent period for which it has reported results, that was offset by a loss of $1.4 billion.

"My personal view is that PSINet's network infrastructure is too valuable of an asset to just go away," says Galaxy's Botkin. "While the company's debt outweighs its worth, I think they will be able to restructure or that another company would come in and buy the network."

Galaxy will order dedicated Internet access from another provider and deploy its own security and monitoring systems when it comes time to make a switch. The company has researched service providers and equipment, but Botkin does not know when it will change its network setup.

"PSINet's financial news is kind of alarming," says another customer, Barney Lejeune, IT manager at Carbo Ceramics, which makes components for the oil and gas industries in Irving, Texas. "I knew they were having some financial problems, but didn't realize how serious it was."

"We're reluctant to jump ship until we see what will happen," Lejeune says. Carbo, nor any of the other users interviewed for this story, have been contacted by PSINet regarding the company's possible bankruptcy.

Carbo is using PSINet's IntraNet managed VPN service to link three of its manufacturing facilities, InterRamp dial-up Internet access for remote users, as well as Web hosting and managed e-mail services. Moving to another provider to support all four services will take much time and energy, which is one reason Carbo is waiting.

Others aren't as patient. Infinetworks, a Naples, Fla., company that was reselling PSINet's InterSky wireless Internet access service, started moving its customers off of PSINet's network last year.

In September, around the time PSINet's third-quarter financials were closing, PSINet notified Infinetworks President Stephen Myers that the ISP was no longer selling InterSky. This wasn't a surprise to Myers, who noted a deterioration in service quality starting as early as February 2000. PSINet promised to support existing InterSky customers, including the 20 Infinetworks served, but Myers started looking for other service options.

"PSINet's service was a great alternative in 1998 because there was a 60- to 90-day waiting period for broadband service from Sprint," the local incumbent carrier in the Naples area, Myers says. "PSINet's technical support was fabulous and the service was affordable at $200 per month for 128K bit/sec service. But when the service started getting slower and slower, we saw the writing on the wall."