Who's saving whom?

Covad's Safety Net program helps customers, itself The glory days of DSL seem to have come and gone long before the technology could take a stronghold on market share of consumers and businesses. The once-glorified and highly valued service providers in the DSL market are now scrambling to survive. And while harder times have fallen on DSL providers, they are pointing fingers at ISPs' failure to pay bills as the root of the problem.

Covad Communications recently revised its third quarter earnings as a result of ISPs' inability to pay and said it expects to post a fourth quarter loss of about $180 million to $190 million. Also, 2001 revenues are expected to be lower than planned. To make matters worse, the company will endure a $20 million restructuring charge related to its 13% workforce reduction.

"We had to restate quarter three earnings because [ISPs] put a financial strain on our revenues," said Chuck Haas, co-founder and senior vice president of sales and development for Covad, citing 14 faltering ISPs. Four of those ISPs - Fastpoint, Flashcom Communications, Relay Point and Zyan Communications - have filed for bankruptcy.

To help customers of those ISPs, Covad established a "Safety Net" program to transition customers over to either Covad.net or to an ISP Covad considers in good standing. So far, DSL.net, which also has seen its stock slide significantly, is the only announced company involved with the program. DSL.net is trying to establish similar relationships with other providers, according to a company spokesman.

"We put this [program] together around six weeks ago, based on requests from customers," Haas said. "Everyone wants to keep that broadband connection. The last thing they want is to lose that."

Days after Covad revealed plans to aid customers in transitioning to a new ISP, NorthPoint Communications created a similar plan. In NorthPoint's case, the company is working to transition customers of the now-bankrupt Flashcom, whose DSL lines NorthPoint recently purchased. Like Covad, NorthPoint blames a lot of its financial stress on the ISPs.

But while the data competitive local exchange carriers (CLECs) point fingers at their ISP partners, others say the carriers should look in the mirror. "Covad [is doing this] so they can assume the position of being a hero, when it is their own mess, not the fault of the ISPs," said Russ Intravartolo, CEO of ISP wholesaler Starnet.

The financial distress of the data CLECs is more deeply rooted in the very business plan of those providers rather than the ISPs, said Intravartolo. "There is no profitable way into DSL unless you own the physical layer," Intravartolo said.

With this in mind, Starnet got out of the DSL business to concentrate on its traditional dial-up business, Intravartolo said.

"We saw no reason to keep losing money when the traditional dial-up was doing so well. We spent three months trying to find another company to take the [DSL] business and could hardly give it away," he said.

Another service provider, Pathnet, also continues to get substantial revenue from dial-up service, said Patti Kelly, vice president of marketing for PathNet.

"Dial-up is definitely not dead," Kelly said, noting that the outlook and the opportunities available to ISPs are not dismal.

Gary Steele, vice president of product development for PathNet, echoes this sentiment. "What's going on in the industry may not be consolidation as much as it is the death of unsound business models."