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Four Broadband ISPs File for Bankruptcy

Four broadband Internet service providers filed for federal bankruptcy protection, a move that will eventually strand thousands of customers and has prompted providers like Covad Communications Group to scramble Tuesday to adjust its business plan.

The four ISPs; Flashcom Communications, Zyan Communications, Relay Point and FastPoint represent more than 32,000 digital subscriber line customers using Covad's network that will soon have no DSL service.

It's unclear how the bankruptcies will affect other DSL providers. NorthPoint Communications and Rhythms NetConnections, two other major national providers, were unavailable for comment on the number of customers in its network affected by the news.

Wall Street reacted by shooting the messenger bearing the bad news. Covad, which announced its adjusted business plans Tuesday morning, immediately dropped 50 cents per share to $2.50, while NorthPoint and Rhythms, who have stayed silent, remained largely untouched.

Management at Covad Communications was forced to rewrite its business plan and adjust its financials to stay afloat after finding out about the impending court proceedings. The data competitive local exchange carrier has been feeling the financial strain for months, forced to carry the financial load of ISPs unable to pay their bills.

In order to improve profitability, Covad is giving preference to its small business DSL line installations and premium residential users who sign up for the high-end DSL speed options. The data CLEC will also emphasize self-installs for new users to cut down on the costs associated with a truck roll.

It's a step that leaves many residential customers who would sign up for basic DSL service at the back of a growing list of subscribers waiting for high-speed Internet services.

Chuck McMinn, Covad chairman, said it's a necessary step in order for Covad to stay in business.

"We are going to grow the business with lines that get us to breakeven and profitablility faster," McMinn said. "Not only will this have an immediate impact, but we expect to see long term improvement in our financial performance."

Steps like these, and its decision to ramp down central office equipment deployment nationwide, will help decrease the company's losses, McMinn said.

Covad officials expect these adjustments to decrease its earnings before interest, taxes, depreciation and amortization by more than $100 million, and decrease its monthly cash burn almost $15 million by the end of next year.

"In comparison with prior analyst expectations, we expect to spend approximately $200 million less in cash in 2001 as a result of our modified plan," McMinn said. "Our national network is one of the largest in the country. It's size and scope is very attractive to companies that want to do business with one nationwide supplier to both small business and residential services."

McMinn was referring to business customers like Sony Corp., who last month signed with Covad to provide Sony-branded DSL services to its customers. The deal, if it proves successful, could reap the troubled data CLEC a huge windfall. Sony's two premier products, Vaio and PlayStation2, rely on premium Internet connections.

There is no timetable to bring customers affected by the bankrupt ISPs to another provider. McMinn claimed it was too early to make a prediction and said his company would be in a better position to answer that question next month, during its fourth quarter 2000 financial results conference.

Covad Monday started its Safety Net Program to switch customers from ISPs like Flashcom to others in Covad's network, even Covad's own Covad.net ISP service.