Page 121 - Electronic Commerce

Chapter 2

Although NorthPoint was unable to make its relationship with each customer profit-
96 able, Malaga and his team were rapidly raising money in the hot capital markets of the
time. The company raised $162 million before its first stock offering in 1999, which
brought in an additional $387 million. At that time, the company had 13,000 customers,
which means that NorthPoint had raised more than $42,000 from outside investors for
each customer. Considering that each customer would generate revenue of about $1,000
per year, the economics of the business did not look good. By the end of 1999, North-
Point had spent $300 million of the cash it had raised to build its network infrastructure
and reported an operating loss of $184 million. At this point, NorthPoint was operating in
28 cities.
During the next year, the company continued to raise additional funds, gain more
customers, and lose money on each customer. In August 2000, the telephone company
Verizon agreed to purchase 55 percent of the company for $800 million paid in install-
ments. The total funding that NorthPoint had obtained by the end of 2000, including the
partial payments received from Verizon, added up to $1.2 billion. By the end of the year,
NorthPoint was in 109 cities and needed to spend $66 million in cash per month just to
stay in business. Verizon withdrew from the purchase agreement, the stock plunged, and
the layoffs began.
NorthPoint filed for bankruptcy in January 2001 and sold its networking hardware
to AT&T in March for $135 million. AT&T was not interested in continuing the DSL
business (it just wanted the hardware), so NorthPoint’s 87,000 small business customers
lost their Internet service overnight. In many of the cities that NorthPoint had served,
there were no competitors to pick up the service.
Because the capital markets of the late 1990s were so eager to invest in anything
that appeared to be connected with the Internet, NorthPoint was able to raise incredible
amounts of money. However, NorthPoint sold Internet access to customers for less than
it cost to provide the service. No amount of investor money could overcome that basic
business mistake.

Leased-Line Connections
Large firms with large amounts of Internet traffic can connect to an ISP using higher
bandwidth connections that they can lease from telecommunications carriers. These
connections use a variety of technologies and are usually classified by the equivalent
number of telephone lines they include. (The connection technologies they use were
originally developed to carry large numbers of telephone calls.)
A telephone line designed to carry one digital signal is called DS0 (digital signal zero,
the name of the signaling format used on those lines) and has a bandwidth of 56 Kbps.
A T1 line (also called a DS1) carries 24 DS0 lines and operates at 1.544 Mbps. T3 service
(also called DS3) offers 44.736 Mbps (the equivalent of 30 T1 lines or 760 DS0 lines).
All of these leased telephone line connections are much more expensive than POTS,
ISDN, or DSL connections.
Large businesses and government organizations that need to connect hundreds or
thousands of individual users to the Internet require very high bandwidth. These
organizations use T1 and T3 lines. NAPs and the computers that perform routing
functions on the Internet backbone also use technologies such as frame relay and

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