DSL Providers Scramble for Survival

Independent DSL providers continue to look for ways to curtail spending and maximize resources in light of Wall Streets newfound zeal for profitability in the telecommunications industry.

For Covad Communications Co., shedding deadbeat ISPs (Internet service providers) is a top priority. Of the 14 “troubled” ISPs that forced Covad, of Santa Clara, Calif., to reduce its earnings report earlier this fall, four have filed for bankruptcy protection. The four, Flashcom Inc., Zyan Communications Inc., Relay Point Inc. and Fastpoint Communications, represent more than half of the 65,000 lines served by the troubled providers.

“It has personally been very frustrating for me to have such a large portion of our ISP base deteriorate so quickly,” Charles McMinn, Covad chairman, said in a briefing with analysts last week. “Our reliance on the troubled ISP accounts is diminishing.”

To retain end users who subscribed to the failing ISPs, Covad set up a Safety Net program, which gives users the option of maintaining Covad service while switching to a new ISP. Although the bankruptcies are expected to complicate Covads migration plan for end users, McMinn said he believes Covad will be able to salvage many of the lines.

The struggle to regain favor among investors is turning Covads attention to higher-end customers. The company will restrict residential orders to higher-margin line shared installations and will implement an aggressive plan for self-installations. By years end, Covad expects to have 270,000 lines in service and 440,000 to 460,000 lines in service by the end of next year.

Although the stigma of lengthy installation delays remains with DSL services, many small and medium-size businesses view the technology as their best option. “I could not wait for the day that I could turn off my ISDN service—I was so soured with my data service from [the incumbent local exchange carrier],” said David Strom, president of David Strom Inc., a consultancy in Port Washington, N.Y. “Now Im scared, as a Covad customer and as an investor.”

NorthPoint Communications Group Inc. cut its work force by 19 percent this month, after the collapse of a planned merger with Verizon Communications at the end of last month. As promised, the upstart DSL (digital subscriber line) provider filed a lawsuit against the Regional Bell Operating Company Dec. 8, alleging, among other things, that Verizons cancellation of the merger was a “pretext” for an effort to increase its near-term stock price. San Francisco-based NorthPoint is asking that Verizon be required to fulfill its obligations under the merger agreement or pay $1 billion in damages.