Metro ethernet providers were all the rage in 2000 and 2001, laughing their way to the bank as other communications services companies dropped like flies. Here comes the reality check. Falling bandwidth prices, too much competition, and a slow economy have taken their toll on several metro services companies. The latest victim is Yipes Communications, a San Francisco company that filed for Chapter 11 bankruptcy protection last week.

The Chapter 11 reorganization of Yipes, one of highest-profile communications startups, calls into question the viability of other metro services providers. Metro ethernet providers sell data and Internet access to business customers using ethernet technology; those companies compete with telephone companies, which generally offer data access using T1 or DSL technology. The news of Yipes's reorganization comes on the heels of rival Sigma Networks' liquidation. And earlier this month, Metromedia Fiber Network indicated that it was contemplating bankruptcy.

"I think the Yipes bankruptcy is a natural development in the space," says Robert Saunders, an analyst with Eastern Management, a telecommunications consultancy. "Like the CLEC [competitive local exchange carrier] market, many companies in the mega-bandwidth (data-only) space were overly aggressive at a time when it would have paid to stay out of the limelight and stick to business basics."

Yipes's restructuring is a surprise for a company that was touting its huge revenue growth as recently as January; back then, the company issued a press release stating that its sales grew 64 percent in 2001 and that it ended the year with more than 550 customers. Those customers weren't chopped liver, either: they included giants like Accenture, Calpine, Carnegie Mellon Supercomputing Center, Dresdner RCM Global Investors, Drexel University, the U.S. Geological Survey, and the University of Pennsylvania.

But David Gross, senior analyst at Communications Industry Researcher, a research firm, was not surprised at Yipes's demise. "Their revenue growth is not impressive," he says. Those numbers are great when you're an established player, says Mr. Gross, but small startups starting from nothing should show a much steeper growth curve. "For me, as a startup they were way under target in hitting their sales goals," he says.

Founded in 1999, Yipes was one of the more spectacular companies to cash in on the metro ethernet craze. One of Red Herring's top 50 private companies in 2001, the company had raised about $291 million from the likes of Norwest Venture Partners, New Enterprise Associates, the Sprout Group, and JP Morgan Partners. That was quite a feat, given that the company was competing with several other startups and established phone companies.

In a radical move, Yipes decided to sell bandwidth at faster speeds and at lower prices than most telecommunications companies. The problem was that the company built out its infrastructure too fast. Yipes's network is in place in 20 cities, and analysts estimate that operating that network must have cost the company $10 million per month.

Mr. Gross points out that it cost Yipes about $70,000 to wire each building, and it had about 1.1 customers per building. The average customer had signed up for a 20 Mbps connection. That would translate into roughly $2.5 million in total monthly revenue. Last year Mr. Gross had forecast that metro services would be a $900 million per year market in three years, but he has now scaled back his expectations to around $300 million. Why? There was too much competition, which caused intense price discounting.

Another reason for Yipes's downfall, Mr. Gross says, was its financial management strategy. He estimates that Yipes must have spent nearly $100 million on gear from Extreme Networks; its counterparts, on the other hand, have paid for much of their hardware with debt instead of cash.

The news is not good for startups that are developing equipment for the metro space and their backers. Analysts believe that several other metro ethernet services providers might be teetering on the verge of financial ignominy. Among those left standing are Looking Glass Networks, Telseon, Cogent Communications, Giant Loop, and Intellispace. Cogent, which secured a huge loan from Cisco Systems, can still draw on about $175 million left from that loan. But Mr. Gross predicts the worst for other startups: "Telseon is on its last legs," he says.

These companies spent large sums on wiring high-profile buildings, never certain that enough customers would sign up to provide a good return on their investment. That doesn't mean all hope is lost: "I still think the market is a good one, and it's just a question of market rationalization and how a carrier executes," Mr. Saunders says. But for Yipes, that may be a lesson learned too late.