When the news of Verizon's [VZ] buy-in to NorthPoint [NPNT] hit yesterday, everything made sense. We bet the deal has been percolating for some time -- in fact, that Verizon had just been waiting for the dust to settle from the Bell Atlantic-GTE merger to settle before announcing it.

Think about it. The DLECs' life-blood has been access to the networks of incumbents. On the critical issues of collocation and provisioning, NorthPoint had been relatively quiet, letting Dhruv Khanna, the firebrand general counsel of Covad Communications [COVD], take most of the heat.

NorthPoint President and CEO Liz Fetter yesterday downplayed collocation and provisioning entirely, as well might a woman who has an ILEC in her pocket. Such squabbles were a "first-generation challenge" to the DSL industry, she said.

The deal will give NorthPoint a quick start on line-sharing, which "is going to be the real big breakthrough in the DSL category," Fetter said.

But wait a minute. The FCC has ordered line-sharing by all ILECs. If incumbents intend to comply with the order, how would an inside deal speed the process?

The reality is that both NorthPoint and Verizon get what they need out of the deal. Verizon gets an almost-national network that leans heavily toward business. That's the market the ILECs lost much of with their two-year foot-dragging on DSL, as they attempted to hold onto T-1 revenues. Verizon also breaks DLEC unanimity in the current fight over access issues.

NorthPoint gets preferred access to the Verizon network. Fetter described the access fight as "a bit historical." It is since yesterday, for NorthPoint, at least.

The FCC's approval of the Bell Atlantic-GTE merger specifically requires Verizon to spend $500 million on competitive local services outside its region within 36 months or, alternately, to win 250,000 out-of-region customers in the same period.

The day the merger was approved, Ivan Seidenberg, Bell Atlantic's chairman and CEO, made clear that Verizon would satisfy that requirement by hunting DSL and wireless customers in the regions of other ILECs. "There is no requirement for us to, in effect, become a voice out-of-region competitor," he said.

Our bet is that talks were even then underway between Bell Atlantic and NorthPoint.

The response to the deal from CLEC organizations was muted. John Windhausen Jr., president of the Association for Local Telecom Services, said the deal validates the CLEC business model. "ALTS has said all along that competitors are best at providing customer-focused broadband services better, faster and cheaper," he said.

You can expect the deal to cause some consternation among other DLECs, however, as it upsets the balance of power in that market. The response is likely to take one of two forms: a selling spree, as DLECs rush to sell stakes to incumbents, or a ferocious fight at the FCC.

Windhausen held out the second option. "We will examine the details of this transaction closely to ensure that it complies with the Communications Act and federal and state rules," he said.

COPYRIGHT 2000 Phillips Publishing International, Inc.

COPYRIGHT 2000 Gale Group

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