Web Users Left Scrambling as a Big D.S.L. Network Goes Dark

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March 30, 2001

Web Users Left Scrambling as a Big D.S.L. Network Goes Dark

The first bankruptcy of a major provider of fast Internet access sent more than 100,000 computer users scrambling to find new service yesterday as the nationwide network of NorthPoint Communications was shut down.

The closing of NorthPoint's system which offered Web service to small Internet service providers in cities across the country, including hundreds of homes and businesses in New York came after AT&T reached a $135 million deal to acquire most of NorthPoint's assets, but not its customers.

AT&T cited the high costs of servicing NorthPoint customers and delinquent payments by some Internet service providers that were NorthPoint's main clients. After a last-minute effort by a group of service providers failed to come up with enough money to keep NorthPoint afloat, its network gradually went dark yesterday in parts of the country. NorthPoint, based in San Francisco, served several big-name Internet providers, including Telocity and the Microsoft Network.

It remains to be seen whether NorthPoint's bankruptcy is a singular development or the first in a series of failures by big providers of high-speed service, potentially leaving hundreds of thousands of customers without fast Internet access. In the short term, rivals like Covad Communications and Rhythms NetConnections could pick up customers stranded by NorthPoint's closing. But these companies face problems similar to those of NorthPoint, like late payments from customers, an austere financing climate and the high costs of maintaining their networks.

In the meantime, customers were left stranded and steaming. "I was dismayed that something like this could happen," said Bruce Morrow, associate director of a nonprofit organization that used NorthPoint's service though a Manhattan Internet service provider. After the organization, the Teachers and Writers Collaborative, spent about $900 to install digital subscriber line, or D.S.L., service last summer and about $5,500 for an annual contract, its 10 staff members were able to simultaneously connect to the Internet, allowing them to make changes to their Web site and to send and receive e-mail at far faster speeds than with dial-up connections.

Yesterday, the group's Internet service provider, Panix, informed its customers that it planned to switch over to two NorthPoint competitors, but that the process could take at least several days and perhaps up to four weeks. In the interim, it was making slower, dial-up connections available. "Something this convenient must come at a price," Mr. Morrow said. "I guess it was almost too good to be true."

[The California Public Utilities Commission will hold a hearing today on a request by Internet service providers for a temporary order blocking the shutdown of NorthPoint Communications, Reuters reported from San Francisco.]

The telecommunications industry is anxiously watching the first major failure of a D.S.L. company unfold, after the the closings of smaller concerns in recent months like Flashcom and Bazillion went relatively unnoticed. Some are wondering whether the much-heralded broadband revolution, which had been expected to usher in a prosperous era of fast-flowing information on advanced communications networks, was also too good to be true.

Much of the trepidation has to do with the collapse of technology stock prices in recent months and the drying up of financing that has sapped the strength of onetime titans at least in market value. Shares in NorthPoint traded as high as $30 last March. Its prospects were so bright that Verizon Communications, the giant regional Bell provider, offered to buy NorthPoint in a deal valued at $800 million. Verizon withdrew its offer late last year, concerned that NorthPoint's business was deteriorating. Without a suitor and without financing to maintain its network, NorthPoint filed for bankruptcy in January. In recent days, its stock has traded for little more than 22 cents, a 99 percent-plus drop.

NorthPoint's failure is a complicated morass that seems to mirror the complexity of the D.S.L. business itself. Perhaps no one knows this better than the company's work force of about 1,000, hundreds of whom are expected to lose their jobs in the next few weeks.

"We're a victim of the market's refusal to let us live," said Ray Solnik, the vice president for strategic development. "It's hard to revive a company that's gone into a trauma unit, so the best solution we found was to chop ourselves up and find buyers for the best parts."

AT&T decided, however, that NorthPoint's customer base was not one of its best parts, maintaining that it would be too expensive to continue serving NorthPoint customers, even for a few weeks. According to people close to both companies, it would have taken more than $25 million a month to keep NorthPoint's network running. Add that to late- paying Internet service providers that were NorthPoint's main source of income, and AT&T would have to spend more than $50 million before the asset acquisition deal is to close in about two months.

"From a P.R. standpoint it doesn't make sense why AT&T is telling more than 100,000 people, `To hell with you,' " said Arnold M. Huberman, head of an executive search firm in Manhattan, one of several hundred New York clients that had Web access through NorthPoint.

Unsurprisingly perhaps, AT&T disagreed. "NorthPoint was mainly a wholesaler that sold its service to Internet service providers, not end users," said Richard J. Martin, executive vice president for public relations. "So unfortunate customers like Mr. Huberman are the responsibility of the Internet service providers. NorthPoint literally went bankrupt doing business with Internet service providers who either didn't pay their bills or had contracts that didn't cover NorthPoint's cost of serving them."

It is unclear how NorthPoint's shutdown will affect wider growth prospects for the D.S.L. industry, which had more than 1.2 million subscribers at the end of last year, according to the technology research company Jupiter Media Metrix. The industry has been the object of customer complaints because D.S.L. service is difficult and sometimes impossible to install if a client is not within about three miles of the local phone company's switching office.

Often, complaints about D.S.L. installations and repairs result from a process that can involve several companies, some of them competitors. For instance, if a customer signs up for D.S.L. with an Internet service provider, that company must get the service from a wholesaler. Then the wholesaler has to coordinate the installation with the local phone company. Often, the customer is required to be present for technicians to make the original D.S.L. connection. So it is also with repairs.

Under the Telecommunications Act of 1996, which encouraged local phone companies to open their networks to competitors, the hope was that smaller, more nimble companies could provide customers with better, more varied services. But the local phone companies themselves offered D.S.L. in competition with the wholesalers and Internet service providers. Businesses like NorthPoint and Covad spent much of their time lobbying local phone companies and regulators to make it easier to gain access to networks.

"From a competitive view, the sheer complexity of the industry weighed heavily on newcomers," said Robert Lande, a University of Baltimore law professor and American Antitrust Institute director.

Of course, if others follow NorthPoint into bankruptcy, that could concentrate more power among the big local phone companies. Or it could lead some customers to opt for fast Internet access through cable systems, which already account for nearly 70 percent of broadband connections. The cable broadband industry is led by huge companies like AT&T and AOL Time Warner.

"This is part of the Internet's evolution, where the little guys drop like flies and the big guys get stronger," said Justin Beech, chief executive of DSL Reports, an online newsletter. "That translates into far fewer choices."http://www.nytimes.com/2001/03/30/technology/30DIGI.html

-- Carl Jenkins (somewherepress@aol.com), March 30, 2001

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