Rumors Dog Rhythms Silence

Rumors persist of an asset buyout or merger of failing national broadband
provider Rhythms NetConnections, Inc.

Tongues started wagging last week, when the national digital subscriber
line (DSL) announced June 14 its decision to pull out of 150 central
offices and disconnect affected customers Aug. 13.

Officials at the Englewood, CO-based company don’t have much to say that
isn’t already in its filing with the Securities and Exchange Commission.

The data competitive local exchange carrier (DLEC), delisted by Nasdaq last
month, has remained curiously silent on its intentions. The company’s only
other release was to announce its impending delisting by Nasdaq May 30 and
placement on the Over-The-Counter Bulletin Board (or penny stocks),
considered the final resting grounds before a company goes out of business.

Vincent Wong, general manager at broadband provider, said
his company was never contacted by Rhythms for discussion on moving
customers off of its network.

He speculates that a deal is likely in the works between Rhythms executives
and another broadband provider since its operations are burning a lot of
cash every month and that the time to leverage its assets is now.

“What I suspect is that they’re probably working some kind of back office
deal with a particular provider to try to capture some revenue in that
transfer,” Wong said.

In the 8-K report, officials said only that it would make every effort to
“transition service to alternative providers.” The cities selected were
based, they said, on the number of current DSL providers, forecasted orders
and operating costs. Rhythms currently have 83,000 subscribers; it’s
uncertain how many are affected.

Coreen Mahoney, Rhythms spokesperson, said she didn’t have numbers on the
Internet service providers (ISPs) and customers affected by the roll back,
saying only they were working to assist them in its transfer off of Rhythms

The nine cities marked for closure are: Charlotte, NC; Cincinnati; Dayton,
OH; Greensboro, NC; Hartford, CT; Pittsburgh; Tampa, FL; Kansas City,
KS/MO; and St. Louis.

But the DSL provider will have a tough time proving it has made every
effort to ensure a smooth and orderly transition since it didn’t issue a
public statement and many providers remain unaware of the company’s
decision to pull out of the affected markets.

Some suspect the company is looking to merge or get acquired by another
player, though that remains an unlikely proposition.

Mahoney declined to comment on merger speculations.

Covad Communications, a direct competitor for DSL customers, is just as
financially strapped as Rhythms and wouldn’t be able to float the
acquisition bill. Besides, Covad’s modus operandi is to purchase only the
customers that move from a failing network to Covad’s Safety Net. Again,
it’s uncertain whether Covad could afford the price Rhythms would ask for
the subscribers.

Martha Sessums, a Covad spokesperson, said her company is aware of Rhythms
roll back, but only because they read the SEC filing last week, not from
any contact from Rhythms.

Covad, which is offering a rebate and free installation for affected
Rhythms business customers, remains committed to its Safety Net program,
Sessums said, but that would be the extent of its involvement with Rhythms
or its customers.

“(A merger or acquisition) just wouldn’t work for us,” Sessums said,
“because our networks overlap each other so we wouldn’t get anything extra
or gain any real advantage.”

A buyout by one of the incumbent LECs (ILECs) is just as
unlikely. Companies like SBC Communications and Qwest are only interested
in the bottom line. Taking over the operations of a sinking ship would not
please its shareholders, who are more concerned about their dividend checks.

That was proven earlier this year, when Verizon Communications backed out
of a deal with now-defunct NorthPoint Communications, a former Rhythms
competitor. Rhythms, in similar straits as NorthPoint was at the time,
would have a tough time convincing the Bells to take over.

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