NorthPoint's Failure Ripples to Other DSL Services

David Nathans's righteous anger is boiling forth, the wrath of a technologist wronged. His beef is with DSL providers that he says care more about their bottom line than they do about customers.

"DSL providers, the NorthPoints, the Covads, the Rhythms, they don't care about the customer. All they care about is the numbers on Wall Street," Nathans said, a week after NorthPoint terminated its service and began liquidating its assets.

Consequently, Nathans became an unwelcome propagator of the broadband blues to several of his own customers. He owns E-List.Net, a Boston-based Internet service provider that resells DSL high-speed Net access.

When NorthPoint unplugged its DSL feed to E-List.Net, Nathans's customers got knocked offline also.

"Some customers we were able to switch immediately, others are still out," he says. Reselling DSL services is tough enough, with low margins. And then the small reseller is at the mercy of larger services that also peddle their wares wholesale. After months of aggravating customers and enduring financial losses, the outage was anticlimactic. "We make more money from a $12.95 dial-up account than we do with a DSL account," Nathans says. "We're out of the DSL business."

Victims of DSL Meltdown

So far NorthPoint, with 100,000 customers, is the largest DSL provider to succumb to financial woes. But its troubles are far from unique. Over a dozen small DSL providers, including Zyan, Flashcom, and Bazillion, have filed for bankruptcy. Big players like Covad Communications and Rhythms NetConnections are also struggling.

As DSL wholesalers melt down, the impact ripples down the DSL food chain to retail customers. The end result, experts say, is a smaller choice of DSL providers as businesses turn for DSL service to larger companies perceived as stable.

Smaller DSL resellers like E-List.Net weren't the only ones affected. NorthPoint also stranded MSN's DSL customers. But MSN told its consumers it will "strike deals with companies that own their own infrastructure rather than wholesalers."

DSL Dollars Don't Balance

A wise man once said that any problem you can write a check to solve isn't a problem--it's an expense. In that frame of thought, technology problems did not sink the raft of embattled DSL wholesalers like Rhythms NetConnections, Covad, and NorthPoint. Rather, a primary technology problem for DSL wholesalers (who serve ISPs like E-List.net) is the technology expense. And network providers are suddenly finding investments sparse.

"A lot of DSL providers ran out of cash before they could start making money," says Adam Needles, analyst with DVG Research. DSL providers underestimated the fierce competition, which drove prices down and made profits rare.

"They went out and bought a lot of capital, floated a lot of bonds, bought a lot of switches and equipment, and then went out to sign up customers," says Peter Jacoby, an AT&T chief lobbyist.

Unable to gather customers quickly enough, the companies drowned in their own debt. NorthPoint--profitless and with more than $647 million in debt--sold its physical assets to AT&T for $135 million, pennies on the dollar for what the company likely paid.

Rhythms NetConnections, profitless and $832 million in debt, is looking for a buyer. Covad, $1.35 billion in debt, asked the Securities and Exchange Commission for more time to prepare its annual financial report because of "complex accounting issues," expecting those issues to reduce revenue and widen its loss.

Other broadband providers are laid low by similar debt problems. Trading was suspended for the stock of infrastructure and service provider PSINet, which may seek to reorganize under bankruptcy laws.

"There's clearly a shakeout going on," Jacoby says. "Telecommunications has always been a cyclical industry. We're not that different from Wal-Mart. If you have excess inventory, you're hurting until you get that inventory spoken for."

Challenges for Competitors

But analysts say DSL wholesalers also faced a real connectivity problem. Although they laid their own fiber optic cable and owned much of their own equipment, the newly formed upstarts still had to use some equipment owned by the local telephone companies. The regional Bell companies often own the so-called last-mile connection to customers. It's a challenge getting local phone companies to cooperate, especially since each is also a DSL competitor. The telcos' delays can slow DSL companies from providing service and, ultimately, from growing fast enough.

The financial troubles of DSL providers validates a long-standing gripe by AT&T and other telecommunications companies against the regional Bell companies, Jacoby says.

"The basic problem, if you're a DSL provider or a voice provider, is you're relying on baby Bell facilities to deliver your product," Jacoby says.

For a DSL provider to offer service, it must "collocate," or place its equipment near the networking gear of the local phone company at a central office service facility--a challenging venture.

"There are literally cyclone fences, with locks on them," said Steve Haggarty, vice president for local broadband services at Qwest.

AT&T's prize in buying NorthPoint is acquiring about 1000 collocation facilities, saving millions of dollars in equipment and setup costs. AT&T plans to enter the DSL market this year--with a head start.

Do-It-Yourself Helps

So while Covad, NorthPoint, and Rhythms combined for about 442,000 subscribers last year, their biggest challenge remain local telcos, which hold the key to the last mile. For example, SBC alone served 767,000 subscribers, Verizon had 540,000, Qwest had 255,000, and BellSouth had 215,000, according to consulting company Telechoice.

Jacoby calls the DSL service market monopolistic.

"SBC in Texas drove out competition and raised prices from $40 to $50," he says. "Clearly it shows that there's a monopoly on DSL service there, on the residential level."

An SBC representative denies that SBC lacks competition in Texas, and says SBC "is doing everything required to facilitate access to our network."

"Our competitive picture remains very strong," says Kevin Belgrade, an SBC spokesperson. Self-installation kits for customers used by Covad and now SBC have improved installation times and customer experiences.

But for ISPs like E-List.Net, the struggle to provide DSL has proved embittering, both to their customers and to themselves.

"We had to rely on other companies, and if you don't do it yourself, it doesn't get done," Nathans says.

Tom Spring of PCWorld.com contributed to this report.