WorldCom Stands To Gain From Rhythms Assets

WorldCom will get precious billing relationships with 83,000 customers and access to the midsize-business market if its $40 million offer for most of Rhythms NetConnections' assets is accepted.

WorldCom will get precious billing relationships with 83,000 customers and access to the midsize-business market if its $40 million offer for most of Rhythms NetConnections assets is accepted.

"It can be a great deal at $40 million," said Robert Saunders, senior analyst of Eastern Management Group, which covers telecommunications.

The bid was disclosed in a Federal Communications Commission order Monday, Sept. 24, that gave Rhythms permission to shut down. Rhythms, a DSL provider based in Englewood, Colo., filed for Chapter 11 bankruptcy protection on Aug. 2, listing assets of $698.6 million and debts of $847.2 million. The company has lines in 31 markets, and at its peak had 2,200 employees.

WorldCom should do better with Rhythms assets than AT&T has done with NorthPoint Communications DSL assets, analysts said. Unlike AT&T, WorldCom doesnt have a huge cable infrastructure, so it wont be pitting two of its own Internet access technologies against each other.

WorldCom and the other long-distance exchange companies are suffering from drops in long-distance rates, and from the fact that they have tenuous relationships with customers. Typically, customers pay one check per month to regional Bells such as BellSouth or Verizon Communications, the long-distance charges being mere add-ons to that check.

The long-distance companies are desperate for customer loyalty in a world where consumers shift long-distance carriers month to month to grab perks such as frequent-flyer miles. A physical link such as a DSL line or optic fiber should keep the customer from straying to another provider. If a business customer depends on a carrier for voice, data and access to the Internet, its more difficult to play the fickle belle of the ball.

WorldCom would use Rhythms assets to gain a connection to the business customer, using wholly owned facilities, "which is the only way to go," Saunders said. "You have to own the network if you expect to control your costs and maintain a relationship with the customer."

WorldCom already has more than 1 million access lines, most from its acquisition of Intermedia Communications, a competitive carrier that provides voice, data and frame relay services, and that has done better than the DSL-only players.

The long-distance giant has been experimenting with fixed wireless as well. "Its a fact of life that you need some connection to the customer to bring a real value proposition in the real world," Saunders said. "This may be a smart move to pick up the assets at fire sale prices."

Like other competitive carriers with ambitions to build a nationwide DSL network, Rhythms found that it couldnt attract enough customers to make a profit. It had raised $1.8 billion, but its capital costs for building its network were huge, and it had to compete against regional Bells that had long ago paid for their metro lines. At $30 or $40 per month per customer, the profit margins have proven too thin for any competitive carrier that offers only DSL service.