In Phone Business, Big Is Big Again

In addition, the FCC recently loosened the rules that dictate how much regional companies like Verizon and BellSouth can charge the smaller companies for access to their networks. That is pushing the CLECs into partnerships with each other, and with companies like Cavalier that have their own networks.

The price regulations "gave the smaller companies an edge against the incumbents," said Brian Washburn, business network analyst with Sterling-based Current Analysis Inc. "Now that they're getting phased out, there aren't profit margins to be had. There are going to be millions of lines dropping from the CLEC rosters."

Washburn said the total number of lines will gradually decline for all telephone companies over the next few years as customers trade in land lines for voice-over-Internet-protocol phones, cellphones and cable-enabled phone service. In the past six years, 20 million phone lines have fallen out of use.

"But the CLECs are going to take the brunt of that blow," he said.

To make up for the impending loss, phone companies are merging and diversifying their offerings to reach more customers.

Three New England companies merged in July to form Massachusetts-based One Communications. Level 3 Communications Inc. in Colorado acquired four firms in the past year. Last month, New York-based Paetec Corp. and US LEC Corp. of Charlotte, merged to form a $1 billion company.

The consolidation of the smaller companies mirrors a recent spate of mega-mergers: last year, SBC Communications Inc. acquired AT&T Corp. and Verizon bought MCI Inc.

Cavalier was among the first of the mid-tier operators to offer a "triple-play" of voice, video and Internet service, Gonsalves said. The price of that package in the Washington area is similar to Verizon's. Cavalier officials say their customer service is superior to their larger competitor's, and will help them keep customers. Telecommunications analysts say they question whether that will be enough to keep the company afloat as the industry continues changing.

"Incumbent carriers have done a good job of showing they can provide more competitive prices through economies of scale," Washburn said.