Internet Pioneers Step Aside
Internet access provider founders are making way for the financial and marketing experts
P> Internet access providers are finally making money, and the competition is scalding. So it makes sense that the latest trend in the industry involves a shift in focus from the technical to the business side. And the business issue that is driving recent decisions by leading access providers is raising capital to improve their competitive position in a marketplace ripe for a shakeout.
UUNET Technologies Inc., Fairfax, Va., which hit $44.5 million in revenues in 1995, said it would hold a second public offering of about 6.6 million shares of common stock. PSINet Inc., Herndon, Va., which follows a bit behind UUNET in 1995 revenues with $32.9 million, announced the departure of co-founder Martin L. Schoffstall who will start a new venture in April. And the much smaller -- and for now, only private company of the three -- Beltsville, Md. -based Digital Express Group came out with a plan to move its founder Doug Humphrey from CEO to chief technical officer, replacing him with Christopher McCleary, now vice president of American Mobile Satellite Corp., Reston, Va. DIGEX had 1995 sales of $10.7 million.
Although the companies are all at different stages in their lives, these coincidental announcements illustrate the maturing of the industry, a process whereby the founders and masterminds of the companies must step aside and make room for expert financiers and marketers.
"The technology alone is not enough to drive the service any longer," said Brian Muys, spokesman for PSINet.
"What you're seeing is a trend within the Internet community toward marketing and away from technology."
PSINet's departing co-founder Schoffstall said he plans to start a new company that will focus on content.
PSINet will be a founding investor in the new company. Schoffstall's move is being watched closely by those who think he has tapped "the next big thing" in the Internet business. "PSINet has been one of the most exciting things I've ever been involved in, and I'm looking forward to a new, but related, endeavor," said Schoffstall.
DIGEX's founder, however, said he wants to stay at his company, but doing what he does best: Thinking about technology.
"DIGEX has grown from being a few guys [in an office] over a Chinese restaurant to over 100 people," said Humphrey. "I realized I myself couldn't handle the whole company -- there's nothing wrong with that."
Humphrey said the appointment of McCleary will prepare the company to go public or, at least, attract major investors.
"I need experienced management now, management that has done a [public offering] before," said Humphrey.
DIGEX also is considering partnerships with phone companies, although Humphrey would not disclose company names.
A main goal, he said, is to make DIGEX a national player in a market where regional providers are expected to lose.
That project will take about a year, Humphrey said.
The reason to go national is simple: A provider with points of presence all over the country or the world can offer cheaper service.
And as name-brand recognition is becoming more important, the broader the scope of business the better.
All these strategic changes come at a time when the Internet access market is expected to generate a lot of money, but also experience a major shakeout and consolidation. Internet access providers will fall from about 250 today to 50 by 1998, predicted a study by Alex. Brown in Baltimore.
The study also foresees the access industry growing from $2.2 billion in 1995 to $5 billion in 1998.
"We realized we're going to be playing in a much more serious financial game," said Humphrey.
Just as in any other new industry that grows up, the founders eventually leave, usually about a year after the company goes public. However, as is the case with everything about the Internet, it is happening faster than in other, more traditional industries.
"A lot of these founders are finally stepping aside... and bringing in some fresh blood," said Muys. "Like in baseball, there are starters and closers," Humphrey said. "The guy who starts a new company is not necessarily your best pick as an executive vice president of a 1,000-person company."
And theoretically, the founder of an Internet access company is an innovator, not a manager. Humphrey said he looks forward to figuring out what the Internet will look like a year from now. He is also eager to research technologies such as the transmission of voice over the Internet, which he thinks has tremendous potential.
While PSINet is older than DIGEX, UUNET is the eldest of the three.
The company's second public offering is designed to pull in capital for expansion of UUNET's international network infrastructure. The company is partly owned by Microsoft, and this year it plans to acquire other Internet service providers and to buy undersea fiber optic cable capacity.
Using this technology is expected to decrease UUNET's bandwidth cost.
"You need significant capital for this," explained UUNET CEO John Sidgmore in a conference call with reporters and investors last week.
But, he said, the time is right to pour money into the Internet business.
"The international environment is probably the greatest single growth opportunity we have over the next couple of years," Sidgmore said.