The end is near

The key to survival now is adapting to the changes in market focus. But it may be too late for the DSL providersinvestors are weary, sales are weak and customers are concerned.

It was a long, hard and courageous battle filled with good intentions and good ideas. But unfortunately, the battle may be reaching its darkest days for the now extremely troubled data CLECs. Their glory days appear to be gone.

The companies that once soared to classic dot-com levels and reaped the benefits of their lofty valuations have now suffered a fall even greater than their ascent. Stocks that were once strong and steady have dropped to dangerous levelsand NorthPoint has been suspended from trading.

All the major DSL providers that made a run for market share essentially owned by the incumbents have suffered huge setbacks. It is hard to determine which detrimental event spawned another: Was it the problems with line sharing or perhaps the change in valuations and expectations? Most of the providers have placed blame on ISPs that were unable to pay their bills and on the sudden changes in investor expectations. But in reality a combination of factors, not one or two events, has most likely caused the debacle.

The business model has changed. As Catherine Hapka, chairman and CEO of Rhythms said, It has gone from lines at any cost to profitability and funding.

Changing a business model from growth at any cost to profitability between quarters is an arduous and near impossible task. And for NorthPoint, which filed for Chapter 11 bankruptcy protection last week (see story on page 22), something clearly went wrong. NorthPoint's CEO Elizabeth Fetter blames Verizon, which pulled out of their merger and left NorthPoint with a gaping financial hole. Now NorthPoint, which once denied any interest in selling its business, is gladly taking $38 million in debtor-in-possession financing to help complete a structured sale of the company.

While NorthPoint is the first of the big three to suffer the pains of bankruptcy and be taken off the Nasdaq, it is not alone. Like NorthPoint, Covad and Rhythms also have succumbed to staff reductions. Ironically, companies such as Rhythms that once spoke loudly of their new niche markets are being forced to de-focus and concentrate on the most successful markets.

The key to survival now is adapting to the changes in market focus. But it may be too late for the DSL providersinvestors are weary, sales are weak and customers are concerned. The demise of these providers may simply reflect business plans that worked in the short term but not the long term.

The data CLECs erroneously believed the glory days would last and their stocks would continue to skyrocketalthough candidly, most would admit that they expected to sell their assets for a hefty sum in the future. Having the foresight to sell at the right time is a rare gift, but all the data CLECs apparently missed the window. The opportune time was when they plodded forward with DSL and most of the incumbents weren't too concerned with the rollouts. On the flip side, the incumbent providers may not have been interested in buying any of the data CLECs, even when they were at their best. Rumors indicate that Verizon pulled out of the deal because of territory overlap and technology conflicts. That could be true for any proposed acquisition.

The data CLECs have fought tirelessly to promote and spread DSL across the country and beyond, which other providers now can benefit from. And now that the blood is in the water, it will likely be the time for larger, stable providers to buy. Apparently, the lurking buyers played their cards right. Instead of buying the data CLECs when their stock prices were high, the larger providers now can bail them out and take the assets at a fraction of the cost.

So will any of the data CLECs survive the financial downturn? No one really knows. But DSL has come a long way on their account, and we should all be glad they fought as valiantly as they did.

Contact Liane LaBarba at labarba@airmail.net