AT&T, Alcatel’s Stealth Take Over of 2Wire?

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Alcatel, AT&T and Telmex have done what amounts to a quasi-takeover of 2Wire, a San Jose-based DSL modem maker with plans to deliver a triple set-top box. In a news release this morning, Alcatel and 2Wire announced that the french company was taking a 25% stake in 2Wire. Buried in the same press release is information that company formerly known as SBC (aka AT&T) and Carlos Slim was taking a minority stake in the company.

The SBC’s share have to be substantial given the close relationship between the two companies. A year ago they had formed a joint venture with 2Wire and called is SBC Media Solutions. At the heart of the deal was this interesting sweet little set-top box, which combines satellite TV, and DSL modem type functions along with ability to offer more media/services as part of the set-top box. SBC and Carlos Slim’s Telmex are said to a enjoy close relationship. Till July 2004, Slim sat on the board of SBC, but left because he bought a substantial stake in MCI.

2Wire’s spokesperson Paul Brunato confirmed that the two companies – SBC/T and Telemex – share was 26%. Brunato said that it is not a take over. If you add it all up, we might have two of 2Wire’s biggest customers and an equipment maker Alcatel taking control of 2Wire’s destiny. So what is the valuation of the deal? I have heard 2wire has been given a valuation of around $500 million. Reuters reports that Alcatel’s investment was around $120 million, which syncs up with my information.

First, this is interesting news because only a few weeks back Cisco bought Scientific Atlanta for $6.9 billion. I had heard that Cisco had made an offer for 2Wire, but the deal did not go through because of certain customer’s displeasure with the router maker. 2Wire had IPO ambitions but that didn’t go anyway, and this might have been the best option available.

I suspect, this IPO filing would be a way for company to set a price for itself, and then a larger probably sell itself to a larger player like Cisco.

The deal also signals the return of Alcatel to the DSL customer premise equipment business. If you remember, the company has sold off its CPE/modem business to Thomson, just ahead of what amounted to the biggest boom in DSL and a technology driven renaissance. It was that kind of far sight which let the Chinese become dominant players in the DSL modem business. Hopefully, this time they have learnt their lesson. Parks Associates predicts that annual shipments of residential gateways will grow from 3.7 million units in 2005 to nearly 16 million units by the end of 2009. So far 2Wire has sold 4 million home gateways.

The investment in 2Wire means that SBC, (which had already awarded it the non Project LightSpeed business) might mean that Microsoft-based set-top box might not be a slam dunk. It could also have negative implications for Motive which is close to Alcatel. 2Wire has its own very-able provisioning system, that competes with Motive. It also means that many of 2Wire’s current US based customers such as Sprint might be looking for alternatives, mostly becuse of SBC/Telmex investments. Will the recently won Verizon-deal home-gateway business whither away? This could be good news for rival DSL modem/home gateway makers like Westell Technologies, in the 2Wire accounts. A lot of questions to ask when I catch up with Brian Hinman, CEO of 2Wire.

From a VC standpoint, this deal might represent some sort of a closure for the likes of Venrock, Oak, TCV and Doll Capital, who all together pumped in close to $190 million into the company in several rounds of financing.

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Steve

This raises other interesting questions: could the Alcatel/2Wire partnership really be a quiet hedge against Microsoft TV-enabled MOT and SFA STBs? If an Alcatel/2Wire IPTV STB is in the offing, whose IPTV middleware client would run in it? Microsoft’s or Alcatel’s supposedly-retired Open Media Platform? Why would they do this, though, if Alcatel could just as well support SA and MOT in porting the Alcatel middleware client to their boxes?

In any case, 2Wire’s is a strong product, with PVR and home media server capabilities, including the ability to access it from a mobile device. Alcatel’s having an Alcatel-branded TV CPE device is a good answer to Siemens, given that Siemens is also touting a converged entertainment platform (SURPASS, with Myrio middleware) and has its own STB line.

Thierry

Om,

I cannot agree with your comment regarding Alcatel selling their DSL CPE business to Thomson. I am not sure what Alcatel’s motivations were at this time – although servicing/reducing their debt in the face of a sagging telecom equipment market certainly required raising some cash.

However I feel that this deal made perfect strategic sense for Alcatel. Indeed this happened right at the time where DSL became standardized, value migrated to the DSL modem chips, and DSL CPE became commoditized. This would have happened regardless of what Alcatel did. The business was turning into a consumer electronics activity – certainly Thomson was much better equipped to run it. And the Chinese suppliers were gearing up and starting to put pressure on prices.

I might add that the price Alcatel got for that business was quite nice in my opinion.

Regards,

Thierry

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