Level 3 Communications reported ongoing improvement in wholesale transport pricing trends in a sector long plagued by cutthroat pricing.

The company reported a net loss of $204 million (or $0.29 per share) for the third quarter, an 8% sequential increase. Revenue was down 12% sequentially to $799 million.

Revenue from transport and infrastructure services rose 8% sequentially to $132 million during the quarter, aided by growth in pre-existing government contracts, the company said.

“Pricing trends look positive, but we’re not declaring victory,” said Kevin O’Hara, Level 3’s president and chief operating officer.

Part of the reason price compression may be easing is a rising tide of traffic in fiber networks, reducing unused capacity, company executives said.

“There are cases where we believe there are capacity constraints in various companies’ networks,” O’Hara said. “We believe that because we see companies behaving differently from a competitive standpoint on a route-by-route or segment-by-segment basis. We believe you wouldn’t see that if they had surplus capacity across the board.”

“For two or three years, overinvestment meant substantial inventory,” Level 3 chief executive officer James Crowe said. “A number of competitors believed that selling inventory at essentially any price contributed some about of incremental cash flow to their results. Underinvestment inevitably leads to shortage. At that point, you have to invest fully, write checks for capex and opex and systems; you can’t simply price out of inventory at very low prices. We think that’s occurring.”

In the mean time, Level 3 has also worked hard to sell customers on value rather than price, O’Hara said. “We developed the ability to say, ‘No,’ and know when to walk away.”

Crowe expressed hope that the company’s growth areas--voice, transport, and IP and data services--would offset declines in areas such as DSL (revenue from which slipped 29% sequentially to $17 million in the third quarter) and managed modem service (whose revenue contribution slid 6% sequentially to $97 million).

“The current growth rate includes very little contribution from subscriber VoIP services, a market we’re investing very heavily in,” Crowe said. “If our expectations and those of our cable, ISP and enhanced service provider partners about the future of VoIP are correct, we can create a VoIP revenue stream significantly larger than the one we had for managed modem, which became a half-billion-dollar business in a fairly short period of time.”

During its conference call today, Level 3 also commented briefly on the conflict between itself and disputed peering partner Cogent Communications that resulted in widespread service outages for Internet users.

“Any contract, to be sustainable over time, must be equitable to both parties,” O’Hara said. “At the time each agreement was entered into, it made sense. However, in an industry that is as dynamic and fast-growing as the Internet, the value of an agreement to either party is likely to change over time as a result of the evolution of their respective businesses.”

“During the quarter, we modified the nature of a number of relationships with the goal of making sure the agreement remained equitable to both sides,” O’Hara continued. “We remain committed to this goal. In one instance, a number of Level 3 and Cogent customers were hurt as we pursued this strategy. I apologize to both sets of customers. In addition to achieving a contractual goal with interconnecting carriers, we recognize we have an obligation to customers of the Internet. And in this instance, we contributed to letting them down.”