Verizon seen looking beyond Genuity

Verizon's business IP services have been closely tied to Genuity for more than two years, which means that as the ISP's future is called into question daily, so is the future of those Verizon services.

Verizon walked away from Genuity this summer after it exercised its right to cash in Class B stocks that would have let the incumbent local exchange carrier (ILEC) buy 80% of the ISP.

Genuity recently received its fourth extension from its creditors, which include Verizon and a consortium of banks. Genuity is in the process of restructuring its debt, which might lead to Chapter 11 bankruptcy proceedings, according to industry observers. While Genuity's future is murky, it's clear Verizon needs a new plan to meet its IP business service needs.

Genuity develops and maintains Verizon IP services, including IP VPN, security and voice-over-IP (VoIP) services.

"I suspect you will see [Verizon] use another carrier in the near term," says Steven Harris, an analyst at IDC. And that is what the ILEC is planning. A new IP "partner" might be announced as early as next week. "But [Verizon] will continue to use Genuity as long as they can," Harris says.

The ILEC says it will honor a five-year, $500 million commitment to purchase services and will continue to resell Genuity's IP networking services.

But Verizon business customers might be leery of putting their IP traffic over Genuity's network today when they cannot predict where the ISP will be by year-end.

"Enterprise customers do not have an interest in signing contracts with bankrupt companies, and Verizon will be hampered by its connection to Genuity for new contract sales," Harris said in a recent report.

While Verizon says it will continue to work with Genuity, the ILEC is expected to come up with a more solid, dependable IP plan. Verizon's IP possibilities include the acquisition of Genuity as a debt-free ISP if it files for bankruptcy, buying up dark-fiber to build its own IP network, and teaming with or buying another ISP.

However, the likelihood that Verizon would buy Genuity in bankruptcy, if that's Genuity's ultimate path, is doubtful, says David Rohde, an analyst at TechCaliber.

"Verizon dissed Genuity primarily because of the debt question. But there's an important secondary reason," Rohde says. Genuity does not have the customer base that Verizon wants, he adds.

"Exodus, [WorldCom] and AT&T have those customers," he says. "Exodus is taken. AT&T isn't for sale. WorldCom's UUNET division will be what they want. They just can't say so at the moment," Rohde says. If Verizon expressed interest in another financially challenged company, the ILEC's credit rating surely would be hampered, he says. Verizon cannot afford that risk.

IDC's Harris agrees that Verizon will not likely purchase an ISP soon. Instead Verizon will "muddle through this latest turmoil then buy a network down the road," he says.

While analysts say Verizon could receive Federal Communications Commission approval to purchase national dark fiber to build its own network, that route seems unlikely. The company is carrying a large debt, like most telecom companies.