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2Wire's gateway to follow SBC into living room

The wireless-gateway maker expands its all-important SBC deal--but the clock may be ticking.

Influential friends are hard to come by, but courting a giant like SBC Communications can make or break a start-up such as 2Wire.

The San Jose, Calif., company, which makes wireless home networking gear, on Monday expanded its relationship with SBC to provide multimedia set-top boxes for the telco giant's satellite TV service, powered by EchoStar's Dish Network. Until now, SBC has sold 2Wire equipment to broadband Internet subscribers looking for wireless access. The new agreement will give 2Wire a greater presence in the living room as well as in the home office.

The set-top box, dubbed the MediaPortal, receives input from SBC's broadband service and video signals from the Dish Network. With a 250GB hard drive, the MediaPortal can record and store TV shows, much like TiVo, and retrieve digital media files from PCs linked into the network.

The deal is consistent with 2Wire's goal of managing the many services being offered by the telecommunications giants--namely voice, video and broadband Internet service. "Our objective is to provide triple play services to telecom providers," spokesman Paul Brunato said.

However, the partnership does not span to the expected launch of SBC's Internet-based video service, which the company plans to launch in 2005. SBC is busily upgrading parts of its network with faster fiber optic lines into neighborhood nodes in preparation for its IP video service.

"The MediaPortal and home entertainment service is providing a television solution for those SBC customers who will not have fiber-to-node," Brunato said.

"The DSL-satellite long will it last? Three years? Five years? It's highly uncertain," said Michael Cai, an analyst at Parks Associates. "In the longer future, SBC is looking at all IP through fiber."

As part of the agreement, SBC and 2Wire will form a joint venture called SBC Media Solutions to sell the set-top box. The companies will try to figure out how to combine video and Internet-based applications into one service.

"The point is to connect those two platforms (TV and data) through some sort of integrated service," Cai said.

The 2Wire deal illustrates SBC's ambitions to become a greater presence in the living room. The Baby Bells--SBC, Verizon Communications, BellSouth and Qwest Communications International--each plan to launch a video service in the hope of competing more effectively as a TV provider against cable operators. SBC is banking on Internet-based video as its competitive advantage and is planning to spend billions of dollars to upgrade its network to achieve its goal.

High-fiber future
Monday's deal deepens 2wire's partnership with SBC, but by no means does it secure its long-term future. Founded in 1998 by Brian Hinman, the co-founder of Polycom and PictureTel, 2Wire has thrived under SBC, selling 2 million wireless gateways to DSL customers. Even though it lists British Telecom and Telefonos de Mexico as customers, the company's life and death in the Unites States hinges on SBC's plans.

SBC has repeatedly insisted that the key to its future is fiber-optic lines, offering a fatter pipe to serve Internet-based video, voice and data. The 2Wire deal is limited to SBC's partnership with Dish Network and may not reach into SBC's Project LightSpeed Internet video service.

While SBC has not chosen a manufacturer for the LightSpeed set-top box, powerful forces could influence the decision. Microsoft has already won a $400 million contract to power the video service with its interactive guide and digital recording software and could sway SBC's decision on its hardware vendor.

An SBC spokesman said 2Wire is in the running, as well as most other set-top box manufacturers.