Rhythms NetConnections

» see rhythms.com as it lived, on the wayback machine

~ the obituary ~

I did not have broadband at home until around 2006. Rhythms had been switched off for five years by then, and the thing it sold, a permanent connection over the copper already in the wall, was still arriving in Turkish apartment buildings one street at a time.

Catherine Hapka left US West in 1997 to start it. The business was DSL for companies rather than for households: high-speed local access bolted onto managed networks, run out of Englewood, Colorado with sales offices in six cities. It was one of the three independent DSL carriers that mattered, the other two being Covad and NorthPoint. All three were doing the same thing, which was renting the incumbent telephone company's copper and selling data over it.

For about two years it was one of the best-funded ideas in American telecoms. Then the money stopped, and it turned out there had never been anything under the copper except the money.

~ the case file ~

~ the climb ~

In March 1999 Microsoft and the investment arm of MCI WorldCom each put thirty million dollars into the company, and Qwest added fifteen million the following month through a subsidiary. The IPO came on 6 April 1999: 9.3 million shares at twenty-one dollars, roughly two hundred and eleven million dollars net of the underwriters. By the end of that year the market said the whole thing was worth around two and a half billion.

By 23 April 2001 that market value had fallen ninety-eight and a half percent, and NASDAQ delisted the stock the following month. None of this was specific to Rhythms. Every independent DSL carrier was priced on the assumption that unbundled copper would stay cheap and that capital would stay free, and both assumptions expired inside the same eighteen months.

~ the enron hedge ~

This is the part that outlived the company. Enron put ten million dollars into Rhythms in March 1998, before the offering. By May 1999 the stake was worth about three hundred million on paper and Enron could not sell a share of it, because the lock-up from the IPO ran longer than anyone's patience for a paper gain that size.

Andrew Fastow's answer was LJM Cayman, approved by Enron's board on 28 June 1999 with Fastow himself as general partner and a million dollars of his own money in it. A vehicle inside that structure wrote Enron a put option on the Rhythms shares, so that if Rhythms fell, Enron would be made whole. What it would be made whole with was restricted Enron stock, which is to say Enron insured its own gain against itself and then booked the result as a hedge.

The Rhythms position is where that machinery was invented. Everything after it, the second partnership and the vehicles named for raptors, was the same trick run at larger scale until the share price underneath moved the wrong way and there was nothing behind any of it. A DSL carrier in Colorado that almost nobody remembers is the reason the structure existed at all.

~ what got buried with it ~

Chapter 11 came on 2 August 2001, with assets of $698.5 million against debts of $847.2 million. On 10 August the company laid off seven hundred of its remaining nine hundred and fifty employees and sent every customer a letter giving them thirty-one days. The network went quiet in the second week of September.

WorldCom bought the DSL assets for forty million dollars, thirty-two million of which was financing to keep the network breathing long enough to hand it over, and then WorldCom went bankrupt itself the following July. A securities settlement of $17.5 million was approved in April 2009, eight years after there was anything left to settle over. NorthPoint had already gone. Covad filed the same August as Rhythms and was the only one of the three to come out the other side.

What replaced them was the telephone companies. The independents had been built on a regulatory theory that the incumbents could be made to share their wire on terms that let competition work, and when the money ran out the theory went with it. American consumer broadband ended up being sold by the same companies that owned the copper in the first place.

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