Sign commercial deals with ILECs to use UNE-P lines (without a wholesale discount);

Use wholesale lines from another provider like Covad Communications Inc. (OTC: COVD);

Offer VOIP services over broadband; or

Become a facilities-based provider handling their own switching, port, and transport functionality over UNE-L copper loops. This could allow them to eventually offer a full range of services including voice, data, and video.”This is another hurdle for the CLEC community,” says Dana Frix, a partner at law firm Chadbourne & Parke LLC. “The notion that the FCC would require carriers to duplicate facilities is odd and inefficient.”

Frix says that the ILECs knew what they were getting when they agreed to unbundle and get into the long distance market with the signing of the Telecommunications Act of 1996. “They agreed to a deal and after they got into it they claimed that it costs them money,” he says. “Those who have put a lot of time into ensuring competition in the market have been double crossed by this ruling.”

Not everyone agrees this UNE-P development is the death knell for CLECS, who have increased their share of access lines in the past year (see CLECs Think Small). Some see it as an opportunity for them to expand by offering bundled services that consumers want. ”This amounts to a huge sea change in policy,” says Doug Cooper, Ciena Corp.’s (Nasdaq: CIEN) VP of regulatory and market development. “CLECs will have to move from a model where they were providing voice services only over someone else’s equipment to them adding their own switches and being able to offer additional services like data and video.”

The change is a big opportunity for CLECS like Covad, who do have their own switching facilities. “With UNE-L, ILECS provide a copper loop without switching or dial tone that has to be terminated at a co-location facility,” says Jeff Ahlquist, Covad’s VP of product management. “For CLECs without a facility, this ruling is a tough pill to swallow.”

The ruling also sets the stage for explosive growth for companies like MetaSwitch and CopperCom who provide cost-effective voice platforms that can handle traditional voice traffic and VOIP all in one system.

Whether viewed as an opportunity or burden, the change ensures a rough road ahead for CLECs as they transition their business models. The capital investment in equipment purchases to build their own facilities could cause consolidation in the industry and will even push come CLECs out of the market. “Some will use this as an exit strategy,” says Ciena’s Cooper. “But those who have a facility or can ramp up quickly are the ones who are going to advance and prosper.”

But Frix disagrees: “The diminution of market participants is not a good thing and not in the public interest. Consumer demand for services from carriers who are not RBOCs is high, and this ruling eliminates that competition.”

By arguing to the FCC that the CLECs shouldn't have a free ride on their networks, the ILECs essentially are forcing smaller companies into a facilities-based competitive environment. And since many CLECs act as little more than marketing companies reselling LEC services, this transition is no simple task. "It's difficult to build a facility with voice switching capabilities," says Covad’s Ahlquist. “This definitely has a lot of people scrambling.”— Chris Somerville, Senior Editor, Next-Generation Services