DSL's crazy ride continues

Just when it seemed the plight of the data competitive local exchange carriers could not get much worse, it did. Rather than proclaiming new service areas on the map, DSL providers now seem to be taking turns contributing to the outbreak of bad news.

Last week, NorthPoint Communications filed for Chapter 11 bankruptcy protection from its creditors. Rhythms NetConnections echoed recent moves made by Covad Communications and NorthPoint to reduce employee overhead by cutting 23% of its work force.

NorthPoint's bankruptcy filing comes after its uncontrollable downward spiral that left the company's stock under $1 for an extended period. To make matters worse for the company publicly, Nasdaq suspended trading of the stock.

But NorthPoint apparently is not ready to close its doors yet. As allowed by Chapter 11, the company secured financing to help keep it afloat so it can attempt a recovery.

“We have secured a commitment for up to $38 million of debtor-in-possession financing, which in addition to our cash on hand, we will use to continue day-to-day operations throughout the restructuring process,” said Elizabeth Fetter, president and CEO of NorthPoint.

The financing will enable NorthPoint to “meet immediate operating requirements and take us through completing a structured sale of NorthPoint,” Fetter said.

While NorthPoint thought its merger with Verizon Communications would be that much-needed sale, Verizon's pullout from the deal seven weeks ago left NorthPoint in even greater financial trouble. Fetter tagged Verizon's merger termination as the primary reason for the Chapter 11 filing, adding that the company needed “protection from our creditors while we continue to look for a strategic partner.”

That, in turn, sparked NorthPoint to sue Verizon for the lost monies of more than $1 billion, which Verizon agreed to pay for its stake in the company. While NorthPoint is searching for a new “partner,” it also is taking several measures to reduce costs and generate cash. NorthPoint has reduced its work force by 19% and will move its employees and corporate headquarters from San Francisco to its Emeryville, Calif., facility. The company sold its interest in VersaPoint to Versatel and its stake in NorthPoint Canada to Call-Net Enterprises.

While NorthPoint has run for safety under Chapter 11 and by shedding assets, Rhythms is merely scaling back.

“We are concentrating on our 40 largest markets,” said Catherine Hapka, chairman, CEO and co-founder of Rhythms. The company will “de-concentrate” on the other 18 markets Rhythms has, but it is not planning to sell those assets or to close them, Hapka said.

“We are not shutting them down; they are still open. It is just a market defocus,” she said.

An evolving business model has prompted the changes at Rhythms and is the way to strengthen its business for the long term, Hapka said.

“Market conditions have changed,” Hapka said. “It has gone from lines at any cost to profitability and funding.”

One analyst agreed.

“If any of them come out of this, it certainly won't be with the model they went in with,” said Kathie Hackler, vice president and chief analyst for Gartner. “Rhythms and Covad will have to look for strong partners to survive,” Hackler said.

To try to adapt, Rhythms is attempting to focus on larger enterprises while balancing the mixture of business and consumer customers.

“We want to have a business and consumer mixture of 50/50,” said Jay Braukman, CFO of Rhythms.

Rhythms has secured an additional $50 million in financing from Cisco Systems, of which about $35 million will be available by year-end.

“I am reasonably confident there will be some additional [funding] going forward [from Cisco],” Hapka said.

One analyst believes Rhythms can survive the hard times as well.

“Covad and Rhythms are in a little better shape because of the deals they have with WorldCom and AT&T,” said Lisa Pierce, senior U.S. telecom analyst for Giga Information Group. “Rhythms' problem is that they are so much smaller, although their business plan is much more well thought out,” Pierce said.

But business plans aside, the challenge for the providers left standing will be to straighten out problems with DSL technology and flow through, according to Pierce.