Internet Info 1994 March/Internet Info CD-ROM (Walnut Creek) (March 1994).iso/inet/nren/hearing.12mar92/schrader.testimony

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 <NIC.MERIT.EDU>                                             12 March 1992
      /internet/legislative.actions/hearing.12mar92/schrader.testimony


 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, [e-mail]



 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.