Rhythms could put up 'For sale' sign

Just one week after NorthPoint Communications Group Inc. shut down its national DSL network, rival Rhythms NetConnections Inc. last week revealed it is bringing in an investment banker to review its strategic options. Rhythms also announced it would likely have its stock delisted by Nasdaq and that CEO Catherine Hapka was resigning.

Rhythms' woes certainly won't be welcome news for the company's customers, coming after more than 100,000 NorthPoint users were stranded without DSL service. It's also bad news for many of those NorthPoint customers whose ISPs are moving them over to Rhythms' service.

Although Rhythms says it will look at several options, including strategic partnerships and raising more equity, Adam Guglielmo, an analyst with TeleChoice Inc., says the announcement "amounts to putting a 'For sale' sign on the front lawn."

The three national DSL wholesalers - NorthPoint, Rhythms and Covad Communications Co.- have been unable to raise significant amounts of capital since early last year. That fact, added to the low margins on selling DSL connectivity and the high cost of building and maintaining a national network, means the providers are desperate for money.

NorthPoint ran out of money soon after Verizon withdrew from a partnership agreement with the company last fall. Rhythms and Covad say they have enough cash to continue operating into 2002. All three had announced layoffs and scaled back network buildout plans in an attempt to conserve cash.

For now at least, Rhythms plans to continue operating as usual. The company is not divulging any more details about its plans, as it is in a quiet period leading up to its first-quarter financial results.

Covad Chairman Chuck McMinn says the problems DSL wholesalers and ISPs have faced recently aren't due to any technology issues, but to the change in the financial markets. DSL demand is still soaring, he says, noting that Covad added approximately 44,000 DSL subscribers from January through March.

"When the financial markets decided to focus more on profitability than growth, some companies got caught with not enough money when the music stopped," he says.

McMinn is confident Covad has enough cash to operate into 2002 and turn a profit with a small hand from private capital sources.

"We had a lot of money in the bank, and that's given us enough time to change our business in response to the market," he says.

One step Covad took to cut costs actually included slowing its addition of new subscribers so it could focus more on selling higher-margin business-class DSL services to existing customers.

Guglielmo says Covad's long-term prospects are probably better than Rhythms'. Covad's advantages include a retail arm, a customer base of more than 300,000, which is more than three times the number of Rhythms subscribers, and a partnership with SBC Communications.

"People are giving them a chance right now," he says. "They've certainly got fewer flies on them than the others."

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