Rhythms NetConnections
By Henry Goldblatt

(FORTUNE Magazine) – HIGH-SPEED LOCAL PHONE SERVICE hq: Englewood, Colo. founded: 1997 sales: $528,000 employees: 550 stock: RTHM (Nasdaq) address: www.rhythms.com

Catherine Hapka knows something about cool companies--especially when they fall flat. In the final weeks before the business-to-business e-commerce venture Nets Inc. went bankrupt (see Cool Companies, 1996), she left US West and became president. "The experience gave me courage," says Hapka. "It was about the worst situation that could happen. Nothing now could even compare."

Today she's leading a venture whose prospects are way more auspicious. Rhythms NetConnections is building and selling digital subscriber line (DSL) service to corporate customers. Analysts praise DSL--a technology to transform ordinary phone lines into high-speed data conduits--as a killer solution to link international data networks directly with households or businesses. DSL can operate at speeds up to 7.1 megabits per second (about 125 times faster than a 56K modem over your phone line).

Rhythms is already in 14 cities, including San Francisco and New York, and will reach 33 by year-end. Installing DSL service in a city can take six months, and the tab runs pretty high--$10 million per city. Wooing and keeping customers will also be tough, now that almost all telcos offer this most lucrative connection to the customer.

Hapka faces hefty competition on all sides: from other DSL upstarts like Covad in Santa Clara, Calif., and NorthPoint in San Francisco; from Teligent of Vienna, Va., and WinStar of New York City, which are building wireless local networks; and from AT&T. The most serious foes may be the Baby Bells. All these companies are chasing a data-services market that should grow from $5.9 billion in 1997 to $11.7 billion in 2002, according to Jim Linnehan of Thomas Weisel Partners in San Francisco.

Despite the company's daunting costs, worthy rivals, and $465 million in debt, Wall Street digs Rhythms. When it went public in April, its stock rose 229% on the first day of trading, to $69 a share, then the eighth-largest first-day gain ever. (The stock now trades around $59.) All told, the company has raised $781 million from the receptive equity, debt, and venture capital markets.

Rhythms should thrive, say analysts, for two reasons. First, it boasts solid, wealthy backers. Microsoft and MCI WorldCom each hold around a 7.5% stake, while Denver neighbor Qwest owns 2%. Second, Hapka, 45, is a huge asset. She built !nterprise, US West's highly praised and wildly successful data-services division, becoming one of the most powerful women in this male-dominated industry. She recognizes the challenges, and when she gets too stressed, she plays the drums to relax. "We take risks every day. We're highly leveraged, but we're skilled," she says. "Still, this isn't for the faint of heart." No one accuses Hapka of being that.

--Henry Goldblatt