Alcatel Buys Into 2Wire

Alcatel (NYSE: ALA; Paris: CGEP:PA) is to spend $120 million on a 25 percent stake in home gateway vendor 2Wire Inc., which counts many of North America's major carriers among its carrier customers. (See Alcatel Invests in 2Wire.)

Alcatel's chief marketing officer for North America, Tim Krause, says that, with the emergence of triple play (voice, video, data) services, Alcatel regards the home gateway as a natural extension of a carrier's network, and "with network equipment being part of our core business, we felt we needed to have a position in this space."

The two firms will work together to "standardize an offering for carriers that is pre-tested and pre-provisioned," says 2Wire spokesman Paul Brunato.

The move marks the growing importance of the home gateway in carrier and vendor strategies, as stressed at the recent Broadband World Forum Europe event. (See BB Forum: Gateway Goals for Carriers and Telcos, Vendors Battle Over Gateway.)

Heavy Reading senior analyst Rick Thompson says the move makes sense for Alcatel. "The home network is evolving with the rollout of triple play services, and Alcatel doesn't really have a play there yet, so it's a logical step as part of an end-to-end solution. The next-generation home network will be an area of focus, industry-wide, in 2006," states the analyst.

Alcatel and 2Wire are already familiar with each other through their close relationships with AT&T Inc. (NYSE: T), formerly SBC Communications. (See SBC Launches Joint Venture With 2Wire and Mais Alors! Alcatel Bags $1.7B SBC Deal .)

There had even been talk that Alcatel had considered acquiring 2Wire outright earlier this year, but neither company would comment on that rumor.

Instead, the giant French poodle becomes a minority owner in the San Jose-based firm along with two of 2Wire's customers, AT&T and Teléfonos de México (Telmex), which have, between them, bought a 26 percent share of the firm. Further details have not been released.

The two operators are among a host of major operators -- including BellSouth Corp. (NYSE: BLS), Israel's Bezeq, BT Group plc (NYSE: BT; London: BTA), SaskTel, Singapore Telecommunications Ltd. (SingTel) (OTC: SGTJY), Sprint Nextel Corp. (NYSE: S), and Verizon Communications Inc. (NYSE: VZ) -- that sell 2Wire's home networking systems on to their residential customers.

That business model (it doesn't sell direct, only through carriers) has generated a lot of sales for the gateway vendor, which in 2004 recorded revenues of $176 million. Spokesman Brunato says sales have been "growing rapidly," but couldn't give an expected sales figure for this year.

Just last week 2wire announced it had shipped its four millionth unit, just four months after hitting the 3 million mark. (See 2Wire Hits Landmark.)

While the carrier relationships are great, Krause says the chief driver for Alcatel's investment is 2Wire's technology and how it fits in with what Alcatel already has. "We're investing, rather than just partnering, so we can have a meaningful role in developing 2Wire's product strategy," and work closely with the vendor on further developing its component management system, called CMS, which, says Krause, is "without doubt the best in its class."

2Wire's CMS performs multiple functions: It's an element management system; a device group manager, which allows a carrier to manage home gateways in groups, instead of just individually; a report manager, which centralizes customer usage data, helping a service provider identify trends and patterns; and a services and policy manager, that allows service providers to identify and activate services, and manage security and quality of service (QoS) policies.

Krause says Alcatel will work with 2Wire to develop these features further, integrate CMS into Alcatel's OSS portfolio, and work towards improving "operational efficiency between the DSLAM and home gateways."

So might Alcatel look to acquire capabilities even further into the home network, for instance in the set-top box market? Although Krause notes that 2Wire has some set-top box capabilities, he says a pure-play set-top firm would take Alcatel into the consumer electronics space, and "that's somewhere we don't plan to be. We already have relationships with multiple set-top box players," he adds.

Earlier, Light Reading reported that, according to sources, Alcatel was involved in discussions with Scientific-Atlanta Inc. (NYSE: SFA) earlier this year about a potential takeover, but dropped out of the proceedings a long time before Cisco Systems Inc. (Nasdaq: CSCO) pulled the trigger. (See Scientific-Atlanta: Cisco's Sweet Deal?.)

— Ray Le Maistre, International News Editor, Light Reading