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By Keith Epstein,
Special
to Washington
Techway
Tuesday, April 17, 2001; 11:21
AM
Bill Schrader's home is more than two centuries old. A pale
yellow, colonial-style mansion with huge pillars, it reigns
imposingly over the same landscape that greeted Northern
Virginia's first wave of pioneers, back when cutting-edge
meant cutting edge: the cutting edge of an ax. At first, it
seems a strange house for one of the founding fathers of the
electronic superhighway, a maverick whose gigabytes of astute
premonitions and daring acquisitions once earned him millions
— and cover-story monikers such as "Internet mogul" and
"golden geek."
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PSINet's
William Schrader has seen his company's fortunes tumble
in the last year. (Illustration by Zachary
Pullen) | For William L.
Schrader is by many accounts a man always on the move and
pushing ahead. He has always been turned on by the
possibilities of the future — fast supercomputers, global
networks, ISPs, stringing together so much fiber optic cable
that it would reach the moon and back, twice over. He's the
kind of person who owns a Harley but would rather work late at
night on the high-speed lanes of technology and Internet
commerce. Even as treasurer of his senior class, he'd sell
yearbook ads instead of going out with his girl and their
friends.
"I'd be surprised if he went out on that Harley a dozen
times last summer," laughs Ed Postal, a former member of his
management team. "Hobbies? Bill? His hobby's his life's
obsession — the Internet."
To be sure, the house, built in 1750, has a tennis court,
swimming pool and — one suspects — the latest in comforts and
connections. For all its bucolic isolation, Schrader is only
minutes from the spiffy headquarters of PSINet, where he has
presided over one of the brightest commercial successes and
fastest-burning disasters of the high-tech age.
Suddenly — with once-soaring shares frozen at mere pennies,
markets tumbling, angry shareholders filing lawsuits, business
assets sold off, litigators and creditors circling, his own
family's paper profits petering out, the corporate jet gone
now — the company's location seems most aptly named: Ashburn.
If nobody buys the Internet access provider soon, the company
intends to file for bankruptcy.
But why this old mansion and hay barn? What is Techtopia's
crown prince doing here?
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Col.
John Singleton Mosby nearly met his end at the house in
which William Schrader now lives in Sterling. But he and
his band of raiders survived a surprise Union attack to
take more than half the attackers prisoner. Friends say
Schrader is now fighting just as hard on his own rally.
(Photo by Olivier
Douliery/Techway) | Schrader
himself will not, for now, provide answers. In recent weeks,
the 49-year-old CEO has declined repeated requests to talk
about himself — though, as with the markets, this is a big
turnaround. There was a time when Schrader seemed to want to
appear everywhere, banter with everyone, especially reporters
who loved his brash quotes. Though Schrader sometimes shot
rifles at firing ranges, he preferred taking aim at telephone
companies for being "monopolist pigs" and "dinosaurs" —
lumbering, slow to adapt, deserving of extinction.
At the moment, though, Schrader is keeping more to himself,
behind a firewall of lawyers, public relations personnel,
restructuring experts and other guardians. Outnumbered,
surrounded, battered, he's hunkering down — something that's
happened in this house before.
Perhaps the clue lies right there, on the historical marker
that stabs into Schrader's front lawn. It commemorates the
upset victory by the commander of Mosby's Raiders, one of the
most infamous guerrilla bands of the Civil War. Bypassing
traditional Army conventions, Col. John Singleton Mosby
captured generals and destroyed railway lines the same way
Schrader has aimed to take out competitors — with aggression
and flamboyant disregard for the usual conventions and
policies or even, sometimes, the amount of cash in the bank.
Mosby, like Schrader, had a reputation for pursuing his ideals
fiercely, independently, innovatively — and stubbornly. Like
Schrader, he took risks. And, on one fateful morning in 1863,
Mosby also found himself at this same pale yellow Virginia
mansion, surrounded and outgunned, with the odds against him.
Back in the 1980s, after dabbling in a home improvement
business and project management of Cornell University's
biology department, Schrader was persuaded by Kenneth Wilson,
a Nobel physicist at Cornell, to build a supercomputer center
at the university. Originally, the idea was to attract
researchers to Ithaca. But Schrader and his colleagues figured
it would be easier to move bytes than brains. Plans evolved
into high-speed, cross-country connections between five
supercomputer centers — Internet 1.0.
Schrader worked fast. So fast, in fact, that he once put in
an order for a supercomputer costing millions of dollars
without getting anybody's permission. Money hadn't been
budgeted. Never mind procedures — Schrader believed in the
supercomputer's necessity. He got his wrist slapped, but no
matter: By then, the center had its computer.
He also rushed headlong into stringing together that first
Internet — the minute his contact at the National Science
Foundation agreed he might use NSF funds. He didn't wait for
NSF sign-offs. Never mind assembling a team of engineers to
study the project first. Schrader grabbed the phone, dialing
AT&T's salesman in Ithaca and designing on the fly. He
ordered 56-kilobit lines. Within weeks, the nation's first
high-speed network was finished.
"He's what I'd call, in Yiddish, a beetzuist — someone who
does something first and gets permission later," observes
Richard Mandelbaum, one of Schrader's earliest partners.
Another old associate from those days of stringing together
big universities, PSINet co-founder Martin Schoffstall, used
to say Mandelbaum "provided air cover" for Schrader. "If Bill
went too far, I'd clean up. I'd take care of the messes,"
recalls Mandelbaum. "There were all kinds of things he did
that got the NSF annoyed. He wouldn't follow rules. Things
would get sticky. People would be offended. So I'd tell them,
'Look, that's just his way. He's a determined guy.' And of
course he enjoys being outrageous."
Clearly, academia was not for Schrader. People would debate
how many angels danced on the head of a pin, when he could
actually make things with objects that fit on the head of a
pin. And make money doing it.
Now that they'd linked supercomputers in academia with the
New York State Engineering and Research Network, or Nysernet,
Schrader's dream was to use Nysernet to link businesses. He
wouldn't take no for an answer. If Nysernet's governing board
refused, he threatened to hook up businesses on his own. They
did — and so did he.
Schrader and his wife, Kathleen E. Duffy, sold the family
car, a 1976 Ford. They took a second mortgage on the house —
well over what the house was worth. They pushed credit cards
to the limit. They wondered if they were nuts.
Together with Schoffstall, now managing partner of
Reston-based Schoffstall Ventures, they cobbled together about
$300,000 to start a company called Performance Systems
International — PSI. It would offer commercial access, maybe
even consumer dial-up. It would link the world — or bankrupt
them.
"I had always anticipated that this Internet thing should
be part of the communications fabric of the world, not just in
New York state," Schrader recalled in a 1999 interview.
Not that most people had ever heard the word "Internet"
yet. This was in 1989, long before dot.coms. There were
moments, as Schrader has related the story to associates, when
he and his wife stared at each other, wondering if they were
crazy. They had three boys. What would they live on? But never
mind. Doubts more often energize than slow Schrader. In tough
times, he liked to say to associates, "We'll have to take out
the old nine-millimeter."
His going-away present to Mandelbaum was a pistol, polished
and carved by a Syracuse craftsman. It's made of wood and
fires rubber bands. Not a real gun — but symbolic enough to
Mandelbaum that he treasures it for what it says about
Schrader.
"Doesn't matter what the odds are. Bill's not one to mope,"
explains Mandelbaum. "He does get emotionally involved in
running things, though. Instead of dispassionately handling
money, he has more of a technologist's attitude. You know why?
Because he's out to change the world. And that alters the
risks you're willing to take."
During the Civil War, Col. Mosby's single-minded knack for
plotting and then successfully infiltrating enemy lines,
grabbing thousands of horses and hundreds of thousands of
dollars in soldiers' pay, even rousting enemy officers from
their beds, "annoyed" Gen. Sheridan so much the general
grumbled about Mosby in his memoirs. During the early telecom
wars, Schrader, too, single-mindedly managed to innovate,
build, grow — and agitate in ways that are not easily
forgotten.
PSINet became the first to link computers on 1.5 million
bits-per-second T1 lines, and the company won the race to
provide dial-up Internet service for consumers. The company's
$1 billion valuation when it went public in 1995 transformed
Schrader, his family and even entry-level employees into
instant multimillionaires.
The company began diversifying, buying software companies
and racking up hefty losses. Analysts didn't care for
Schrader's brash style, which many said contributed to
PSINet's faltering valuation. The company regrouped and by
1997 drafted a longer-term strategy that was sufficiently
persuasive to raise $600 million in high-yield bonds. Share
prices rose.
"To some people, the Internet can seem too good to be
true," Schrader wrote in a January 1997 article in an industry
publication. The title: "Why the Internet Crash Will Never
Happen."
Schrader and his company continued to prosper. Riding the
Internet wave of the late 1990s, PSINet gained 100,000
corporate clients, with switching, satellite and hosting
centers serving 900 cities in 28 nations. The company dubbed
itself the Internet "supercarrier," swelling eventually to
10,000 employees. It was one of the first sparks in Northern
Virginia's technology boom.
By 1999 the company's value rose to more than $3 billion.
Two companies were interested in buying, one seriously, but
Schrader stubbornly refused, saying he would only sell if
someone placed "an ungodly amount of money" on the table.
"Why would we sell?" he asked an interviewer in June 1999.
Schrader popped up in the public eye regularly, at hearings
on Capitol Hill on issues such as encryption and domain names,
and on CNBC, MSNBC and CNN. In 1998, Ernst & Young named
him "Master Entrepreneur of the Year." Computer Reseller
Magazine pegged him as one of the telecom industry's "Twenty
to Watch." He was called an Internet "cowboy" and digitalsouth
magazine asserted that "if the Internet had a Declaration of
Independence, William Schrader's signature would be on it."
Even among other regional techno-titans, Schrader seemed to
come out ahead. Schrader had become, one Washington area wag
opined, "the mind that MicroStrategy's Michael Saylor fancies
himself to be."
That only encouraged Schrader's boldness. Techtopia's crown
prince boldly took on the giants of telecommunications not
only in the marketplace, but in the media. "The telephone
industry has no innovation in it," Schrader declared,
characteristically, during a June 1999 interview. "This is not
a telephone company environment. They will not thrive here.
They will die here. So when you ask a bunch of dinosaurs, 'Who
do you think is in charge?' You'll get them saying, 'The
dinosaurs are in charge.' For all of us little mammals, we
say, 'Right.' Just let them be. We're the mammals because we
can adapt. We saw the meteor coming, we hid in a cave, all the
dinosaurs croaked, we came out and say, 'Hey, looks pretty
good.' The Internet is the meteor."
The dinosaurs, it turns out, are not only still kicking and
breathing, but now also licking their chops. The pesky mammal
looks like a pretty divine dish; ironically, those lumbering
telecom giants may have a shot at devouring some of PSINet's
assets. And not for even half an ungodly sum.
Schrader missed his own chances, too. Back when he was
surfing the top of the Internet crest, he was ungodly wealthy.
In 1998, his own shares were worth $77 million, and while his
compensation and bonus in 1999 totaled about $750,000, had he
sold at the stock's peak last year he could have made more
than a half-billion dollars.
He spent some of his money, or at least money gained
through huge loans using his shares as collateral, purchasing
$2.5 million and $1.2 million properties in Captiva, Fla.,
overlooking the Gulf of Mexico. He went sailing, though
rarely. His wife owns a $713,000 home not far from Smith
Mountain Lake near Roanoke. But associates say he never seemed
too interested in money or the outside activities money
enabled. On a bio once, he referred to one of his favorite
movies — "Apocalypse Now" — but listed among his interests
"work." A man on a mission, he apparently never thought of
selling his shares.
At work, he could be both inspiring and intimidating. Some
executives sweated profusely under his gaze and unrelenting
scrutiny; others loved him.
"He really encourages you to stretch yourself," says
Postal, who Schrader hired as PSINet's chief financial officer
in 1996. "He comes on strong, and you've got to be ready to
debate him."
Sometimes, Postal would retreat from the heat of his
conversation with Schrader to compose a response via e-mail.
"He's such a good debater, I had to make sure that he might
not win the debate but miss the point," explains Postal, now
chief financial officer at Cidera. "Then he'd usually come by
and commend me for it. He's got a rough exterior, but don't
let that fool you — he's got a terrific interior."
Alan Daytner, Schrader's construction manager who was
developing data-hosting centers in Asia and Europe, recalls
his first strategic planning meeting with the top executives
two years ago. Schrader was wearing his usual sports jacket,
jeans and collared shirt, as if heading for Friday night
dinner with friends.
"There I was, a new employee, and he was two seats away.
Suddenly in the middle of the meeting he leans over, grabs my
tie, says, 'What's this? You don't have to wear that.' He
connected with me right away. It's been a joke with us ever
since."
By 1999, things looked so robust the company agreed to pay
$106 million over two decades on a brash marketing ploy —
placing its brand on the stadium of the Baltimore Ravens. It
worked: People who had no idea what the company did at least
knew its name.
Schrader also had become something of a venture capitalist,
spending his own borrowed money on promising startups. At an
industry breakfast, Peter Mechlin approached Schrader to shake
his hand and make a cold pitch about his idea that people
might advertise yard sales on a Fairfax Internet site. The two
had never met. Schrader was sold immediately. He soon
delivered some PSINet Ventures capital for yardsales.com, and
kicked in some of his own money.
Meanwhile, Schrader had been overseeing a stunning
corporate shopping spree, as PSINet snapped up no fewer than
70 companies between 1998 and the first part of 2000. The
rapid acquisition doubled PSINet's staff, drove up the share
price and, many analysts believe, laid the foundation for
failure with a poor integration strategy. Paradoxically, one
of the world's largest networks for Internet traffic wasn't
able to network with its own acquisitions.
"Everybody was trying to build as fast as we could,"
recalls Daytner, whose job in development placed him on the
front lines. Sometimes, equipment had to be ordered before
designing had even begun. Operations and sales were having
trouble keeping up. "Double-shifts, round-the-clock, weekends.
A real compressed schedule. It was one big race. Because the
first guy in the market to host centers gets the customers."
Talk about fast burn. The company foundered under the debt
load. Today, it's $3.6 billion in the red, with another $50
million in payments due by June. During the last six months of
2000 alone, Schrader's corporate dreamchild burned through $1
billion. Investors and Wall Street had tugged him toward
ever-higher revenue targets and market-share, and the company
repeatedly missed its own goals. Meanwhile a glut of similar
networks and services drove down prices. As went many
dot-coms, so went the dot-coms' "supercarrier."
"He can be brash. He can be outspoken. And Wall Street
doesn't like that," observes F. Drake Johnstone, who tracks
the company for Richmond-based Davenport and Co. However,
"what the problem really boils down to is the decisions to
grow too fast. He did it because he thought he could and the
capital markets would support him. He got a little carried
away. Everyone in the sector did. I'd say William Schrader is
really emblematic of the excess that was going on, and that
we're all now paying for."
The scene of Col. Mosby's first success is a half-hour by
car from Schrader's 1750 mansion. One day, Mosby and his
guerrilla band managed to sneak well behind the Union lines
and at Fairfax Courthouse they plucked a general from his
sleep. The capture was impossibly bold — precisely why Mosby
figured he'd succeed. If you wanted to go for a general, why
not just go for the general?
Schrader, too, doesn't believe in going slow. "He's got a
laser-sharp focus, and he's very intense. There's not a lot of
beating around the bush or sidestepping of issues or
sugarcoating. What he wants he just goes for," observes Steve
Wallman, chief executive officer of FOLIOfn.
When Wallman, a former commissioner of the Securities and
Exchange Commission, pitched his concept for foliofn.com to
the PSINet CEO, Schrader was characteristically impulsive. "I
couldn't stand it; I had to invest!" Washington Business
Journal quoted him as saying. Schrader is on Wallman's board,
and Wallman considers him a friend.
"It's a tragic story, really," Wallman says of Schrader's
fall from giga-grace. "Because Bill took some risky moves to
get some high returns. He did some things that in retrospect
obviously were issues. But had the market not turned the way
it has, the demand for PSINet's services would have
accelerated and people would have seen more need for
infrastructure. If things had gone differently, he would have
been perceived as a genius."
Last November, Schrader also faced the horror of having his
stock holdings liquidated by the Bank of America in an
embarrassing margin call. Prices had sunk too low, and the
shares were seized and sold. Ironically, he's fared better
than his family; he had use of a $25 million line of credit.
But his family's 2.4 million shares, valued at $144 million
last March? They're worth only about $450,000 now.
If Schrader never believed in going slow while ramping up,
he certainly didn't believe in it while sizing down. Beset
with losses, PSINet launched the corporate equivalent of a
distress sale, rushing to forestall disaster by writing off or
selling off properties.
Within months of acquiring Metamor Worldwide of Houston
last year, for more than $1 billion, PSINet wrote it off as a
$500 million loss and hired investment bankers to find a
buyer. Last month, PSINet sold Transaction Network Services,
which it had acquired in 1999 for $720 million, back to the
original owners for only $300 million.
Ulric Weil, senior technology analyst at Friedman,
Billings, Ramsey & Co., made a bet with Schrader years
ago. If Schrader ever become profitable, he owed Weil dinner.
Back in 1998, Weil figured it was time to pay up. And now?
"Who knows? Who cares?" Weil groans. "That feels like such a
long time ago. Owing me dinner? That's the least of it."
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PSINet
CEO William Schrader has more in common with Col. John
Singleton Mosby than his house, site of a big victory by
Mosby's Raiders during the Civil War. The two men share
reputations for being aggressive, flamboyant,
independent, innovative and stubborn.
| Col. Mosby might have
been finished for good at Schrader's house — not just
defeated, but dead. One dawn in 1863, as Mosby and his
troublesome band of 69 men slumbered, 150 Union cavalry
sneaked up on the sleeping Confederates, surprising them in
the house and the hay barn. At last, the Union commanders
thought: They had the pesky devil. Mosby's rangers rallied.
They drew revolvers and sabers. Blood spilled. The morning
wore on. When it was all over, the underdog guerrilla band had
taken more than half of the Union soldiers prisoner, wounded
many, and lost only a handful of their own.
Friends say Schrader, too, doesn't give up — and hasn't
now. But those who know Schrader expect that, like Mosby,
he'll rally. Explains ex-CFO Postal: "He's not the type to get
depressed or throw in the towel. He's a very driven person. I
can assure you he's busy planning his next steps. And if you
look at his life, he's been up and down, up and down. I'm sure
he's not even looking at the economic aspects of this, what it
does to his net worth. He's never been in this for the money.
This isn't about PSINet. The Internet is like a religion to
him."
Schrader's father and grandfather were carpenters, and he
used to joke with Postal that he'd been born with a wooden
spoon in his mouth. Schrader understood the value of hard
work, having to depend on yourself. The upbringing, Postal
says, also explains Schrader's almost ideological obsession
with his work. He views electronic connections as a way to
break down traditional barriers between people of all classes
and nations; it's not just a commercial revolution, it's a
democratic one.
"Allowing people to communicate across boundaries — that's
important to him," says Postal. "Bill believes the Internet is
the next step in leveling the playing field for people to be
productive and happy."
Signs of Schrader's human side emerged in an e-mail
dispatched to employees last month. He urged workers to focus
on jobs rather than the stock market, and to be kind. "We are
all tired of the stress," he wrote. "A warm handshake or a hug
will go a long way to remind us that we are all on the same
side of the battle."
"He's been beaten pretty badly by this larger storm that's
raging out there," muses Wallman. "It's really tragic. Some
heads of companies aren't very smart or passionate. But here's
a person who as a CEO exhibited all the opposite attributes —
he's very smart, very dedicated, very, very passionate. He
knows his business. And yet, even with all that going for a
person, sometimes things just don't work out."
Keith Epstein is a Washington-based investigative
journalist and freelance writer. A former investigative
reporter in the Washington bureau of The (Cleveland) Plain
Dealer, he now writes for The Washington Post and the
Discovery Channel's Web site, discovery.com.
Washington Techway staff writer Brendan Barrett contributed
to this story.
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