NorthPoint disaster shows Bell partners' risks

Verizon's breakup with NorthPoint Communications serves as a stark reminder for struggling network companies: The giants make for poor life preservers in a stormy market.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
4 min read
Verizon Communications' breakup with NorthPoint Communications on Wednesday served as a stark reminder for struggling network companies: The giants make for poor life preservers in a stormy market.

Like other Internet companies before it, NorthPoint bet its future on a planned relationship with a local phone giant, in this case Verizon. The two companies were slated to merge much of their high-speed Net operations, creating a national footprint.

But as NorthPoint's business soured, Verizon got cold feet. It withdrew from the merger agreement Wednesday, prompting protests and threats of legal action from a suddenly vulnerable NorthPoint.

"The Bell companies are all still feeling their way and trying to make decisions," said Joe Laszlo, an analyst with Jupiter Media Metrix. "The big issue along these lines is, don't count on a deal to save you before it's finalized."

It's not the first time that a sudden swerve from a giant partner has threatened to capsize a smaller Net partner. Onetime Net star PointCast Network spent its last days developing an interface to high-speed services being developed by US West and BellSouth, only to see those partners pull out at the last moment.

Now Prodigy Communications and NorthPoint peer Covad Communications each have tied their ships to SBC Communications. SBC says it's still optimistic about those deals, but weaknesses in each Net company have analysts scrutinizing the relationships for signs of cracks.

The dissolution of Verizon's deal with NorthPoint comes after a series of bad news for the high-speed Net provider, culminating in a sharp downward revision of third-quarter earnings.

The company has suffered from an inability of its own clients to pay bills--about 31 percent of NorthPoint's installed base is delinquent in payments, Verizon said Thursday. That, combined with growing losses and plunging share prices, is enough to trigger a walkaway clause in the merger deal, telephone executives said.

The news came as particularly painful after NorthPoint highlighted the relationship as a bright spot amid its mounting difficulties.

"These recent events confirm the validity of our decision to find a strategic partner like Verizon," NorthPoint CEO Liz Fetter said in a statement after revising earnings.

In a brief conference call Thursday, Fetter said NorthPoint believed its partner did not have the right to end the agreement and that legal action against Verizon was possible. She also said the company still has enough funding to survive in the short term, with $150 million in cash and $165 million or so available in bank credit. She gave no details on either point and took no questions.

"I am confident that we have the management team in place to work through this current situation and to build a long and successful future for NorthPoint," Fetter said. "Verizon's action only took place yesterday, and we are evaluating our financial and strategic options quickly while continuing our focus on operations."

NorthPoint's stock plunged Thursday to hover around 50 cents for much of the day.

Analysts note that Verizon doesn't take the decision to drop the merger lightly. It needs a national presence in the high-speed Net market to fulfill requirements placed on it by federal regulators as a part of the merger between Bell Atlantic and GTE. The company says it will still go into 11 new markets with the help of partially owned partners Genuity and Metropolitan Fiber Network, however.

The telephone company also raised earning estimates for 2001 and 2002, saying it would no longer be subject to expenses related to the NorthPoint merger.

Others in danger?
All of this is causing analysts to look closely at Covad and Prodigy, each of which have tied their futures to deals with SBC Communications.

Covad in particular has experienced problems similar to NorthPoint, laying off 400 people early this week. It earlier announced that some of its customers were having trouble paying bills, and its chief executive resigned at the beginning of this month.

Prodigy showed its own signs of some weakness when it said at the end of the third quarter that costs associated with the SBC deal had drained its cash reserves and that it did not know where it would get new financing over the long term.

SBC says it is still committed to these deals, however. A spokesman said that comparing them to Verizon's situation was "apples to oranges," because both SBC deals have closed.

"It is early," SBC spokesman Kevin Belgrade said. "But we are satisfied that the investments will create an opportunity for the growth that SBC anticipates."

Analysts say that NorthPoint was in more danger than the other companies because its deal hadn't closed yet but that it's worth watching SBC for further signs of cold feet.

"There are several reasons why there's less to worry about there," Laszlo said. "It would probably take a very severe change in circumstances for SBC to move around. But now everyone will be wondering just what (in the financial statements) will be that line-crosser."