As connections are turned off with little warning, the Internet service providers that offered DSL service from now-struggling wholesalers are desperately trying to keep their customers online.
A number of problems have been made public. Covad Communications on Tuesday announced it would delay its annual report, citing accounting issues. Rhythms NetConnections may be delisted from the Nasdaq and is considering selling its assets. Rhythms Chief Executive Catherine Hapka also resigned. NorthPoint's abrupt service shutdown left thousands of customers in the lurch.
Increasingly, the safety net for ISPs has been to turn to the so-called Baby Bell phone companies, such as SBC Communications and Verizon Communications. Many service providers worry that companies like Rhythms and Covad will follow NorthPoint over the financial cliff--and the ISPs don't want to be dragged down with them.
What that means for consumers is far fewer choices in the market for high-speed Internet access--a dynamic that could affect prices and service. Yet the prospect of a broadband future with the Baby Bells may be better than no future at all, many ISPs are saying.
"We're getting ready to do the NorthPoint thing all over again," said a representative from one large ISP, which saw customers' NorthPoint connections disappear and is now worried about its Rhythms service.
"I think there has been a lot of resentment (of the Bells) in the industry. But now they're being seen as a necessary evil."
Never an easy business
In some senses, the deck has been stacked against ambitious new DSL wholesalers like NorthPoint and Covad from the beginning.
Those companies launched several years ago with the intention of providing competition to the Baby Bells' own high-speed services, which at that time were coming out slowly and were riddled with customer complaints. The new companies installed their own equipment inside the local phone companies' central offices, often in places where the Bells themselves wouldn't catch up for months or years. These new companies, like Covad, then offered ISPs fast connections for their retail customers on a wholesale basis.
The problem was that those connections still went over the Bells' networks of copper wires, even if the newcomer provided the high-speed service. Even though the local phone companies faced regulation barring them from taking too much advantage of this fact, ISPs and wholesalers have repeatedly accused the giants of dragging their feet in selling service or lines to competitors.
The last few weeks have seen the wholesalers' dreams collapse. After filing for bankruptcy, NorthPoint sold many of its assets to AT&T late last month. But because Ma Bell didn't acquire NorthPoint's customers, and NorthPoint didn't have the funds to run its own network, most of those customers went dark last week.
On Tuesday, Rhythms said it had been notified that it is being delisted from the Nasdaq, adding that it is looking for a buyer.
Also Tuesday, Covad said it would delay the filing of its annual report to federal regulators, citing "complex accounting issues" related in part to its ISP customers' financial problems.
This streak of bad news doesn't mean the beleaguered companies are altogether finished. On Wednesday, Covad announced that it had signed a new agreement with Compaq Computer to provide high-speed access for the PC company's small-business program.
But the prospect of switching customers to yet another provider--a process inside the local telephone offices that can take weeks--is prompting many ISPs to think about hedging their bets as soon as possible.
Where to go?
From the perspective of many larger ISPs, there's only one safe bet left: Go with the Bells. They might be difficult to work with, the reasoning goes, but they at least provide some semblance of stability for their subscribers. Most of the largest, such as EarthLink and Telocity, already have direct relationships with the big local phone companies as well as with the struggling wholesalers.
A few--most notably MSN, which relied almost wholly on NorthPoint for its high-speed connections--were caught off guard, however. In its apology letter to customers after the NorthPoint dissolution, MSN said it wouldn't make that mistake again.
But for some small ISPs, the choice of service providers remains slim because large Bells do not want to deal in small numbers. Idiom, an ISP in the San Francisco area that now uses Covad, is one company worried about being caught in this size squeeze.
Idiom owner David Sharnoff says his ISP of 800 customers is too small to sign deals with SBC subsidiary Pacific Bell, which prefers to deal with larger players that can supply customer volume. "Nobody wants to deal with small ISPs," he said.
Even Covad is going this route and does not cater to small ISPs anymore. Idiom had to sign a deal with wholesaler Pac-West Telecomm just so it could receive Covad service. This turnaround in the face of market pressure disturbed Sharnoff, who said that in the last couple of years, Covad "went from being the nicest telephone company to deal with to being the worst."
Idiom may also wither without Covad because Sharnoff has not found a good alternative wholesaler that would allow access to Pacific Bell's service.
"I'm worried," Sharnoff said. "If Covad were to die the way NorthPoint died, I'm out of luck."
Many ISPs are still distrustful of the big local phone companies, however.
Chris Kern, a vice president at Lightning Internet Services, believes that the Bells are deliberately trying to winnow competition. "They're putting on a squeeze play and pricing smaller companies out of the market."
Nor are many consumers happy about relying on the Bells, which have a reputation for poor customers service and occasional headaches.
Message boards across the Web are littered with complaints about the companies. One typical poster, writing under the name "kat6531" on EverythingDSL.com, said Verizon took two months and three trips to the house to install service, which then worked for just one day. "I've been without DSL for 2 weeks with no explanation as to why and no help in sight," the customer wrote.
Bells stand firm
SBC, at least, says it is willing to serve ISPs of any size. It offers its own retail DSL service that competes with those companies, but their wholesale business helps the market as a whole, a spokesman said.
"We have been working with ISPs of all sizes for a while," spokesman Kevin Belgrade said. The company has more than 200 ISP partners, he added.
The sudden disappearance and instability of DSL providers is even prompting some analysts to call for a second legislative look at the 1996 Telecommunications Act, which was meant to force the Baby Bells into a competitive environment.
"The issue needs to be revisited from a public policy standpoint to make the access market more competitive," said Tim Smith, an analyst at Gartner.