[2491] in Commercialization & Privatization of the Internet
my testimony, House Subcomm. on Science (long)
daemon@ATHENA.MIT.EDU (William Schrader)
Thu Mar 12 19:17:01 1992
Date: Thu, 12 Mar 92 19:14:24 -0500
From: wls@psi.com (William Schrader)
To: com-priv@psi.com
Cc: wls@psi.com
The House Subcommittee on Science held a three hour hearing on March 12
Hearing on the Management and Operation of the NSFNet by the National
Science Foundation. There were two panels, with a total of seven panelists.
Each provided written and oral testimony, answered questions and were
given an opportunity to offer other comments verbally. Since this hearing
is in line with the topic of this list, I am including the entire written
testimony (10 typed pages) for your review. I hope that the other panelists
will place their testimony here as well.
Bill Schrader
----------------------------------------------------------------------
Testimony
invited by the
U.S. House of Representatives
Committee on Science, Space, and Technology
Subcommittee on Science
Hearing on the Management and Operation
of the NSFNet by the
National Science Foundation
12 March 1992
By
William L. Schrader
President and CEO
Performance Systems International, Inc.
11800 Sunrise Valley Dr., Suite 1100
Reston, VA 22091
703.620.6651, wls@psi.com
Executive Summary: The Internet, the most innovative mass
communications infrastructure of this century, was begun by DARPA
and is now primarily managed by the NSF. This testimony briefly
describes my knowledge of a series of actions, agreements, and
events resulting in the inappropriate privatization of the NSFNet
backbone. Given the private nature of the agreements, the delay in
revealing the agreements, and the apparent conflicts of interest
shared by the principals, I am providing this Subcommittee with my
understanding of the dates, involved parties, public rationale, actual
results, and my conclusions regarding this privatization of the NSF
resource. These actions were unfortunate and unnecessary and
should be repaired before the government invests even more heavily
in attempting to achieve the goals of the NREN.
Mr. Boucher, Committee Members and staff:
My name is Bill Schrader, and like my carpenter father and his
father before him, I am a builder. In 1989, a long time friend,
Martin Schoffstall, and I saw an opportunity to build a company to
sell computer networking services to colleges and businesses around
the world. With our spouse's and children's full support, we
borrowed against our houses, withdrew our savings, worked two
jobs, raised money from our parents, family and close friends and
founded Performance Systems International, Inc. (PSI). We now
employ 40 people in offices in New York, Virginia and California,
serve 1,500 organizations plus 3,000 individuals in forty states and
ten countries. In terms of marketshare, we are about 15% of the
world-wide network of networks called the Internet. We are
profitable and pay taxes.
Prior to PSI, I helped start NYSERNet, one of the first Regional
Networks, with Dr. Richard Mandelbaum, Marty Schoffstall and
others. I also helped start two supercomputer centers, one at Cornell
University with Kenneth Wilson and one at Syracuse University
under DARPA. My career for the past 12 years has included many
areas covered by the HPCC.
We operate our own public data internetwork, called PSINet,
consisting of a nation-wide T1 network using leased telephone
circuits and PSI owned equipment. PSINet is interconnected with all
similar U.S. commercial networks through the Commercial Internet
Exchange Association, (CIX) which we helped found to ensure an
open and level playing field for this new industry. The CIX is headed
by Mitchell Kapor as Chairman of the Board. We connect to the
NSFNet backbone for research and academic activities, and to several
international networks. Through these many connections, our
customers communicate electronically with all of the 7,500
organizations on the global Internet and the 20,000,000 people who
read electronic mail regularly. Our services range from unlimited
electronic mail for an organization at $25/month (suitable for high
schools and small businesses), to high performance full service
supercomputer connections at over $50,000 per year.
We are technology builders, having led the industry in the design of
network management software, now licensed to DEC, SONY and over
two hundred other computer and telephone systems manufacturers,
resellers, and consumers. We are actively helping many small and
large computer software, hardware and service companies begin to
offer their products over the network. We are pleased to be
competing in this industry and believe it is one area where American
companies enjoy a lead and are well positioned to keep it.
The information I am providing today covers three topics:
1 NSF Policy Decisions
2 The Economics of the NREN
3 Recommendations for Congressional action
1. NSF Policy Decisions
The NSF initiated and operated the NSFNet program during a rapid
evolution of the technology and the demand in the marketplace.
Below is a brief review of some decisions made by NSF.
Decision A NSF Signed Merit/IBM/MCI contract - 1987
% Rationale - Achieve a national backbone network rapidly by
leveraging the NSF budget by inducing private contributions of: a)
equipment, b) personnel, and c) bandwidth, and encourage the
development of high speed networking technology.
% Actual Events/Impact - One year was required to bring the
network up reliably, because IBM computer equipment was used as
routers, and new software had to be written. All the existing
Regional Networks and other networks were using commercial grade,
off-the-shelf routers available at that time. No IBM routers were
ever marketed based on the design used in this project, and thus did
not contribute to the nation's commercial position. MCI and IBM
provided staff, but all network engineering, operations, and
management work was performed by Merit staff (paid by NSF).
Discounted bandwidth was paid for by NSF budget.
% Conclusion - The IBM equipment contribution was valued at
about $100,000 per site, but could have been supplied commercially
for $25,000 per site. In contrast to openly bid DARPA R&D programs
in advanced technology, this program produced no useful prototypes
and was delivered by IBM which was not leading in the field nor
using any innovative designs. Except for the R&D staff converting
computers to routers, the staff contributions by MCI and IBM were in
sales and marketing. NSF essentially funded an IBM R&D project
which never produced a product, and was justified on the basis of
cost sharing to leverage the NSF budget.
The success of the NSFNet and of the industry is not to be
confused with the success of any individual contractor or grantee.
NSF leveraged their budget by a factor of two by obtaining cost
sharing in equipment and staff overvalued and not particularly well
suited for the task. It is clear to many that the same amount of NSF
budget spent without such leveraging would have produced a better,
more reliable network, sooner, and would not have unduly shifted
NSF policy to favor a single entity.
Decision B NSF requires international connections at backbone
switches - 1989
% Rationale - To produce organized international connectivity
which is cheaper and better than marketplace decisions made by
others.
% Actual Events/Impact - For all new connections using any NSF
funds, all connections were terminated at Merit/ANS nodes, allowing
ANS to own the connection to a foreign market. Free market
decisions by non-NSF funded parties were delayed up to 6 months,
while NSF insisted on seeking approval from foreign PTTs for these
"non NSF connections". Connections from the UK, Germany, Singapore
and Korea which involved no NSF funds were denied access to
NSFNet for up to six months. According to NSF, this delay was caused
by State Department regulations.
% Conclusion - NSF has effectively given ANS indirect control over
many international connections, while free market connections
continue to be delayed.
Decision C NSF approves ANS organization, (and privately authorizes
ANS's exclusive use of NSFNet for commercial use) - 1990
% Rationale - ANS was formed by the Merit, IBM, MCI team to
leverage MCI/IBM equipment, staff, and bandwidth and to position
itself for competition in the future. Private ANS meetings with NSF
and select Regional Networks, and public comments about a complex
shared "infrastructure pool", introduced a packet charging concept
(called settlements) which ANS would fund by charging commercial
customers attaching through the Regionals. There was no public
mention or debate of the exclusive commercial use by ANS, which
was the key element of their earlier private agreements with the
NSF. Yet, these private agreements between NSF and ANS drove
these complex agreements with the Regionals.
% Actual Events/Impact - This situation publicly positioned ANS
as a not-for-profit, public spirited company willing to share its
"profits" with Regional Networks which were willing to sign
additional (complex) agreements. NSF approved this subcontracting
arrangement without prior public notice, debate, or open bidding.
Further, NSF helped provide visibility with press releases quoting
Senator Gore and Dr. Wolff.
Once approved, ANS took over the NSFNet leadership from
Merit in the marketplace by hosting all negotiations and discussions
with Regionals, and issuing policy/contract related statements which
represented NSF backing. ANS began competing for commercial and
non-commercial customers by telling prospective customers that
they could "connect directly to the backbone" without using the
Regional Networks, and that they should connect to ANS since "at any
time, ANS could disconnect PSI or any of the Regionals which had not
signed the ANS agreements".
In 1991, ANS represented itself as the only network which
could guarantee full commercial use of the NSFNet. This was true
then and is true now. One example of this is Dialog, a large
commercial supplier of electronic information to academic,
government and commercial users. It appears that ANS first
convinced Dialog that it should connect to NSFNet (ANSNet) for
"commercial only" traffic. ANS then attempted to use Dialog to
attract the Regional Networks to sign the complex ANS connection
agreements, preventing those who did not sign from reaching Dialog.
Few Regional Networks signed, and when Dialog discovered that it
could access fewer than 5% of the Internet users it converted to a
normal ANS customer, and agreed to comply with the NSFNet policy
of supplying only research and education traffic.
% Conclusion - NSF has thus positioned the
ANS/Merit/NSF/IBM/MCI partnership to approach commercial,
government, and academic customers with significant advantages no
one else can offer, without disclosing this to the public or allowing
anyone else to bid.
ANS's handling of Dialog's attachment, and subsequent month
long delay in disclosing Dialog's request to change, was seen by many
as clear positioning for ANS's for profit subsidiary ANS CO&RE to gain
marketshare.
Decision D Upgrade T1 to T3, and Privatize the NSFNet - 1990
% Rationale - Push networking technology to avoid congestion on
the T1 backbone. Leverage NSF funds by allowing some private use.
% Actual Events/Impact - NSF negotiated the T3 upgrade
arrangement with no apparent technical compliance specifications
and no penalty clause for non-compliance. To date, less than half of
the T3 nodes are operational beyond test mode, after 15 months of
full payments, despite intermittent claims of full operational status
by NSF and the contractor.
ANS used IBM-provided T3 equipment which was not the same
as that used on the T1, had no significant R&D preparation, and failed
when deployed. As during the earlier T1 IBM router design, the
commercial R&D on T3 routers had been underway for two years by
other router vendors using their own limited funds (eg. Proteon,
Cisco) and could have been used. The use of IBM computers
produced a poor quality network, and damaged these leading
commercial suppliers investment in R&D.
In November of 1990, ANS's president claimed in a public talk
at a Harvard workshop that "in essence, we have privatized the
NSFNet". Although few understood, he meant that the NSF was now
buying its NSFNet service as a portion of ANS's private network,
rather than paying him to operate the NSF's network. While the NSF
had sole use of the NSFNet T1, the NSFNet T3 was provided through a
"cloud" and could also be used by ANS for their own customers.
After the agreements which the NSF had signed creating ANS, and
providing it with exclusive commercial access were released in
December of 1991, it was clear that ANS's president was correct, the
T3 had been privatized. This occurred without public discussion or
disclosure, and was effectively hidden for a year.
% Conclusion - NSF perceived a need to leverage its budget
further, enlarged the scope of the contract from T1 to T3, upgraded
the financial size from $4 million to $10 million per year, and
privatized the original contract, using private agreements, without
additional bidding, and without notice once it was completed.
Privatizing a federal facility without notice, and at no cost to
the recipient/contractor is improper and should be illegal for any
agency of the government.
Decision E NSF and other FNC agencies accept apparent conflicts of
interest, and unclear boundaries, routinely
% FNC/ANS - The Federal Networking Council (FNC) consisting of
NREN agencies created an Advisory Council (FNCAC) charged with
helping agencies understand how to best spend NREN funds. On the
FNCAC are the venture funding directors of ANS (John Armstrong
from IBM, and Richard Liebhaber from MCI), and another member of
the ANS board, Mr. Joe Billy Wyatt from Vanderbilt University. No
private providers are represented.
% ANS Formation - The Chairman of the Board of Merit, Inc., Dr.
Douglas Van Houweling, negotiated the multimillion dollar
government subcontract with his newly formed subcontractor, ANS,
for which he serves as co-founder and Chairman of the Board. When
ANS formed its for-profit subsidiary ANS CO&RE, he also became its
Chairman of the Board. He remains on the Board of Merit, and as
Vice Provost for the University of Michigan, oversees the President
of Merit, Inc. He sits here today representing Merit, Inc. to Congress.
% NSFNet Operations - For both operational and oversight
questions, Merit retains the prime contract for the NSFNet. It
subcontracts 100% of it's responsibility to ANS, which operates the
T1 network as an NSF facility and the T3 network as ANSNet. ANS
then sub-subcontracts some, or all of, the technical and operational
aspects of the NSFNet and ANSNet back to Merit. This apparently
includes ANS's non-commercial customers as well as its commercial
ANS CO&RE customers. ANS staff use computers at Merit, Inc. and
the University of Michigan for their work. ANS can subcontract to
any new subcontractor without NSF's approval. When something
fails to work on this network, finding the person (or organization)
who has an "arms length relationship", that is, who will withhold
payment for non-compliance, is not possible.
% ANS/ANS CO&RE - An ANS salesperson who is selling a
commercial or non-commercial connection to ANSNet does not know
whether he/she is charging travel and labor hours to ANS or ANS
CO&RE until after the sale is made. ANS CO&RE pays tax on profit,
which is revenue in excess of cost. However, does ANS CO&RE's cost
include the circuits paid for by MCI's donation to ANS (the not-for-
profit), space rented by ANS for its offices, ANS CO&RE's prorata
share of the depreciation of equipment donated by IBM to ANS, the
travel costs by its Chairperson/Board member to testify before
Congress when wearing at least three hats? Do funds received from
government contracts pay for attorneys, accountants, and public
relations firms to keep these involvements straight and attempt to
present the correct image to the government and the marketplace?
% Standards Process - ANS hired a number of well positioned
people in the industry, including the head of the Internet's public
open technical group, the Internet Engineering Task Force, as one of
nine vice presidents. Dr. Phillip Gross continues to hold his position
in IETF. This provides ANS (and ANS CO&RE) with advanced
knowledge of industry technical developments as well as some
influence in guiding the timing and structure of emerging standards.
% Conclusion - Clear or apparent conflicts of interest situations
occur in many aspects of ANS, Merit, NSF, IBM, and MCI. The entire
group, which is now publicly self-characterized as a "partnership"
has total control over the $50 million NSFNet backbone contract, now
privatized, and well positioned to win any NREN contracts in the
future.
In my opinion, there is little question that the actions of the
ANS, Merit, NSF, IBM, MCI "partnership" have:
1) interfered with international and interstate commerce;
2) used the structure of the arrangements to influence NSF to
make extraordinary decisions, privately;
3) planned their actions together, in advance; and
4) provided unfair advantage to ANS for the duration of the
contract and beyond.
These arrangements do not provide a distinct separation
between the role of the NSF oversight and the operation of the
network by private parties. The lines between the government and
the contractor (grantee) have confused the regulators with the
regulated.
Decision F NSF extends the Merit contract for 18 months, announces
a rebid - 1991
% Rationale - More time is needed to plan the follow-on. NSF
must provide the backbone because the Regional Networks do not
want to take responsibility for buying their own connections, even
with NSF funds. There is concern that two backbones cannot operate
together smoothly with today's technology.
% Actual Events/Impact - Extending the current contract
provides up to $15 million more to ANS without competitive bidding,
assuring ANS and Merit a steady revenue stream for 28 more
months. ANS maintains its exclusive rights to sell direct backbone
connections and guaranteed commercial use of NSFNet to all
commercial and non commercial customers.
When, and if, a follow-on contract is signed and implemented,
the NSF rebid plan calls for the same bandwidth, and a reduction of
payments for each successful bidder to $3 million (down from $10
million).
% Conclusion - It seems that the NSF will save at least $4 million
per year ($10 million current cost, $6 million for two suppliers after
the rebid) if the rebid is completed before the Merit/ANS contract
expires in November 1992. ANS continues to establish its own
policies, representing them as NSF policy, such as settlements and
infrastructure pools described earlier. There is a danger that this
appears to be NSF policy which it is not.
In my opinion, NSF hired a contractor and then allowed that
contractor to unfairly influence its policy, funding, and technical
decisions through the period of the contract and beyond. Many
decisions were made, but some of the more serious policy and
contracting decisions failed to recognize the larger market, were
made privately without open discussion, did not allow full
participation, and did not follow proper contracting procedures.
2 The Economics of the NREN
Sound economic principles may have been considered in the design
of the NREN legislation. However, the market has evolved more
rapidly than planned. Basic market forces have shifted the
geographic, economic, technological and political realities of the NREN
to their natural equilibrium of ubiquitous networking. Therefore,
rather than investing NREN's hundreds of millions of dollars in the
technology, it is better to invest in connecting people to the network,
making it easier to use, and teaching them how to participate.
NREN is still built on the principle of "putting money into the
backbone". It has been proven by the ANS contract that doing so
produces little innovation and results in no self-sufficiency, since
organizations will not pay for a free good. The correct method for
government involvement in a burgeoning industry like this is to
subsidize individual target organizations: colleges and public
libraries at first to ensure public access, then high schools and
elementary schools to ensure access for children.
A program using "Yellow Stamps" was first proposed in 1989 by the
National Research Council's report "Toward a National Research
Network", and again in 1991 by Dr. Wolff. In this program, NSF
would directly fund these organizations' networking projects, and
could be traded in with any network supplier which had met the
criteria established by NSF. This program would require serious
work to handle thousands of organizations, but would create the
most stable results and still allow the national network to reach
gigabit speeds in the same time frame. The difference is whether the
NSF feeds the market at the bottom, or attempts to lead the market
with advanced technology. Since the market has been reliably ahead
of the NSF's technical program for the entire five year term of the
current contract, there is sufficient reason to believe NSF cannot lead
the market and, therefore, should feed it from demand.
If this program is created, I believe in five years we will see:
% local control and interest, where users come to value the
network
% local leveraging of funds, 100 to 1 as seen in the university
sector
% local control to buy from provider(s) of choice, on local
schedule
% opportunity for all competitors to offer services, build
economies of scale on their own initiative.
% a natural, permanent aggregation of traffic from hundreds of
thousands of small and large NREN target organizations
% a natural convergence of commercial and NREN traffic on the
highest speed "gigabit highways", taking advantage of fiber
economies of scale
% no single monopoly, but instead a working, integrated
commercially built operation provided with the service distinctions
required by each market segment
% a smooth way for government funds to be ramped down after
the five year program, for those organizations which participated in
the early days
% direct political recognition of NREN's value in each local area, by
parents, teachers, local political leaders and taxpayers.
3 Recommendations for Congressional action
Overall: Direct the NSF to A) remove the unfair advantages ANS
has acquired, B) to consider industry and economic trends in future
policy decisions, and C) to cease signing large contracts without
administrative due process.
Specific Actions:
% Terminate the ANS contract on schedule. Congress should
direct NSF to force ANS to either:
A) remain under contract for NSFNet funds for the duration of
the contract and extension, providing a service only to NSF, or
B) sell commercial and academic access connections on the open
market, but terminate the NSFNet contract on schedule in 1992.
ANS cannot be allowed to continue both the contract and the
private use, since it will then be able to continue to use its
government subsidized backbone network to offer its service to
commercial and academic customers at prices which do not reflect
actual cost.
% Open Commercial Access. Congress should direct NSF to either
remove ANS's right to sell commercial access to NSFNet funded
gateways or to allow other commercial carriers equal access at no
cost.
% Make NSF the NREN lead agency. NSF is best equipped to
handle thousands of small proposals involving colleges, K-12,
libraries, and similar NREN activities.
% Require accountability for NREN funds by NSF. NREN funds
have few controls now, being split over four agencies. There is no
direction or control in the implementation strategies among the four
agencies, each of whom can spend it any way they wish. At the very
least, agencies should be directed to report how the money was
spent.
% Request that Dr. Wolff develop his "Yellow Stamp" program to
distribute funds directly to institutions. America's libraries, colleges,
secondary, and elementary educational institutions and non-profit
research centers would then be able to use the funds solely to
purchase internetworking services.
% Maintain "research funding" but do not confuse operational
network access with network research. It is clear that the
commercial marketplace is properly motivated to invest its own
resources without government R&D subsidy. The government should
limit its R&D scope to innovative industrial/academic research in
high speed communications technologies and applications at the
frontier.
