NorthPoint DSL demise: A lesson in size

NorthPoint was already facing ruin after Verizon Communications backed away from a previous acquisition agreement, and AT&T acquired NorthPoint's assets in a bankruptcy court sale.

But by Friday of this week, reality hit. NorthPoint laid off 700 employees, or 71 percent of its work force, and began turning off service for thousands of DSL customers.

The California ISP Association this week also urged the California Public Utilities Commission to halt NorthPoint from shutting off its DSL network. The state PUC, which regulates communications companies in California, ruled Friday that NorthPoint must not terminate its DSL service without first providing its customers with at least 30 days notice.

In addition, AT&T, which agreed to buy NorthPoint's assets, must get approval from the government agency, which legally has the authority to block the asset sale.

Some analysts say NorthPoint's imminent death punctuates the tough times faced by dozens of broadband Internet service providers and competitive local phone companies in recent months.

"This is the last big hiccup out of this shakeout that we've seen over the past few months. I don't think we'll see anything this dramatic or traumatic after this, unless Covad or Rhythms fail to pull through," said Adam Guglielmo, a DSL analyst at TeleChoice, a communications consulting firm. "The unfortunate thing about the whole NorthPoint situation has been that it gives the whole industry a black eye."

NorthPoint was a highly touted start-up when it went public in 1999.

Like many of the broadband providers, stock in NorthPoint soared--for a while. Investors reasoned that NorthPoint and competitors such as Covad Communications and Rhythms NetConnections among others were in a strong position to provide high-speed Net connections to ISP customers that would resell those lines to millions of eager businesses and consumers.

Broadband services, after all, are immensely popular and carry a higher price tag, potentially earning larger profits for carriers.

But NorthPoint was reliant upon the Baby Bell local phone companies, larger competitors that were reluctant but legally required to lease copper phone wires to the company. The model proved cumbersome, as the Bells were loath to act as quickly as NorthPoint and the others would have liked. In addition, NorthPoint and many of its ISP customers were pinched by a shortage of investment capital after the stock markets flinched last April.

ISPs such as MSN, Excite@Home's @Work business-focused unit, and Telocity, among others, relied on NorthPoint to provide them with broadband connections. High-speed Net access is quickly becoming a critical piece in any service provider's portfolio of products.

Taking all the blame
But the NorthPoint service interruptions have left many ISPs scrambling for alternatives and leaving them looking bad in the eyes of some of their customers. "Some have handled it more responsibly than others," Guglielmo said.

DSL.net, MegaPath Networks, @Work, and others are trying to line up new partners. Telocity on Friday offered unlimited dial-up Net access for its customers until their DSL service is restored.

"Telocity has worked very hard over the past week to communicate what we're doing to provide our customers with options. By and large we're receiving positive feedback and that they understand it's out of our hands," said Telocity spokesman Bill Chandler. "It's healthy that an ailing CLEC was replaced by AT&T. In the long run it will be good for consumers. DSL's here to stay. This is a slight bump in the road."

However, state regulators may try to keep service from being terminated in the first place.

"Forty-thousand customers of DSL services in California are likely to suffer irreparable harm if NorthPoint discontinues service without providing time for customers to make alternative arrangements for their DSL connections," reads Friday's California PUC ruling, signed by Commissioner Carl Wood.

"Absent commission action, thousands of California customers may lose their Internet connectivity within the next few days. The AT&T purchase made no provision to keep the NorthPoint network operating, nor did NorthPoint require an interim period during which it could give notice of its termination of service."

Now the company's ISP partners are left picking up the pieces.

Thousands of small businesses and consumers want to know why their DSL is down. Many will blame their service providers, companies such as Telocity and Microsoft's MSN, which send them a monthly bill and handle customer service calls. Those companies are likely to sign pacts with Covad, Rhythms, or other companies such as New Edge Networks or the Baby Bell giants. But the process could take 30 days to 60 days by most estimates.

"There's a real danger that these (ISPs) will lose some customers," TeleChoice's Guglielmo said. "You might want to wait it out. But there will be people who will look elsewhere."

Meanwhile, analysts speculate that cable modem providers, an alternative to DSL, may have a field day with NorthPoint's problems.

"I wouldn't be surprised to see the cable guys jump on this in their advertising," Guglielmo said.

News.com's Sam Ames contributed to this report.