Once considered to be one of the more sluggish regional telephone companies in terms of digital-subscriber-line deployment, Verizon Communications-created June 30 by the merger of Bell Atlantic Corp. and GTE Corp.-is looking to jump-start its DSL business with the $800 million stock purchase of NorthPoint Communications Inc.
Verizon will create a separate company, which will retain the NorthPoint name, to hold both its and NorthPoint's DSL assets. Verizon will own 55 percent of the new company and NorthPoint will hold the rest.
NorthPoint CEO Liz Fetter will continue in that same position at the new entity. Verizon vice chairman Lawrence Babbio will be chairman of the new company.
Verizon has a total of about 220,000 DSL customers throughout its service territories. In contrast, NorthPoint has around 62,000 subscribers, mostly commercial customers.
Verizon has been slow to roll out DSL service, lagging considerably behind industry leaders SBC Communications Inc., Covad Communications Group Inc., Qwest Communications International Inc. and Rhythms NetConnections Inc.
SBC-which leads the pack with 330,000 DSL customers-announced a $6 billion DSL strategy last year, "Project Pronto," aimed at building a broadband footprint covering 77 million customers by 2002.
The NorthPoint deal vaults Verizon into the No. 2 DSL spot. More importantly, NorthPoint's fast-moving, entrepreneurial reputation could give Verizon's DSL initiative a much-needed shot in the arm in the race to win market share from high-speed cable-modem services.
"This turns the heat up if you're a cable operator," CIBC Oppenheimer Corp. Internet/digital-new-media analyst John Corcoran said.
The deal could also set off a consolidation frenzy in the competitive-local-exchange-carrier sector, with companies like Covad and Rhythms becoming the likely targets of incumbent telephone companies.
"We believe that this aggressive national move by Verizon effectively raises the bar for the other industry giants," Bear Stearns & Co. analyst James Henry wrote in a research report.
Although NorthPoint has had some problems in the past with its back-office operations and in obtaining funding, Corcoran added, those difficulties are largely wiped away with the Verizon deal.
"NorthPoint knows what it's doing," Corcoran said. "It has had the same growing pains as the cable industry, but it has a nice mix between business and residential and it's a decent size."
He added that the new NorthPoint expects to increase its DSL customers to 600,000 by the end of the year, up from Verizon's earlier estimates of 400,000 by year-end.
Granted, Verizon's latest estimate was the second time the telco downgraded its DSL expectations. Earlier this year, the company planned on 1 million DSL customers by the end of 2000.
Verizon faces stiff competition from cable operators in the Northeast, its main service territory. The seven MSOs that operate in that territory-AT & T Broadband, Adelphia Communications Corp., Comcast Corp., Cox Communications Inc., Charter Communications Inc., Time Warner Cable and Cablevision Systems Corp.-have a total of 1.5 million cable-modem customers across the country. However, their combined data-penetration rates are only about 5 percent.
Verizon was also in the middle of a potentially crippling strike, with more than 87,000 employees walking off the job last week. If that strike draws out much longer, it could affect Verizon's ability to service its customers.
That leaves plenty of room for an aggressive competitor like NorthPoint, Corcoran said.
Cable operators for the most part appeared unconcerned by the Verizon/NorthPoint merger.
"It's pretty clear that our 'Optimum Online' product is definitely superior to DSL," a Cablevision spokeswoman said. "We definitely continue to quickly introduce the service to more of our customers. Customer growth is a strong indication of our ability to deliver the service."
Comcast and Time Warner declined comment.
One operator who asked not to be named said DSL has been a nonthreat so far, and there was no reason to think it will become a bigger threat now. The operator added that the latest Verizon purchase sounds more like a desperate move to bolster its high-speed-data presence rather than an indication of a more aggressive focus.
"[Verizon hasn't] exactly outperformed in terms of this business," the operator said. "NorthPoint isn't exactly [MCI] WorldCom [Inc.]-they depend on the Bell companies for their business."