SAN JOSE, California (AP) — LM Ericsson’s plan to buy Redback Networks Inc. for $2.1 billion is a sign of how the popularity of Internet video is expected to drive demand for broadband network upgrades.Analysts said yesterday the acquisition also plugs a key hole in Ericsson’s product line as the company girds itself for an increasingly fierce battle with rivals Cisco Systems Inc., Alcatel-Lucent and Juniper Networks Inc.

Network equipment makers are locked in a tooth-and-nail fight to provide the gear that enables service providers to offer greater bandwidth on their networks and faster and cheaper downloads of data, voice and video products.

One key area of growth is expected to be IPTV, or Internet Protocol television, a form of digital television typically delivered over broadband. Such connections also support high-speed web surfing and telephone service.

San Jose-based Redback makes “edge” routers, a crucial piece of technology for enabling those high-level functions. Unlike “core” routers, which only connect to other routers, “edge” routers are located closer to the end user and connect homes and businesses to the Internet. They manage multiple data streams simultaneously and direct the information to the appropriate locations.

“Redback’s got a very good product, it’s pretty broadly deployed, and if you believe that the day of IPTV is coming, which a lot of people do, they’re sitting in a very strategic position,” said Zeus Kerravala, a network infrastructure analyst with Yankee Group.

Stockholm-based Ericsson is the world’s largest maker of mobile phone networking equipment, and analysts said the combination will help the company sell to an increasingly consolidated customer base of telecom companies.

On a conference call, Bjorn Olsson, executive vice president at Ericsson, said Redback’s technology will be essential in helping the company build out the next generation of Internet-oriented networks, especially wireless networks that “will require intelligent high-capacity routing technology that we know Redback is on the edge of.”

“We think that the technology and the knowledge that Redback has and our experience in carrier class and telecom networks really make this combination a very good base going forward,” he said.

Shares of Ericsson rose 1.5 percent to 27.95 kronor ($4.07, euro3.08) in trading Wednesday in Stockholm. Shares of Redback jumped $4.49, or more than 32 percent, to close at $25.66 on the Nasdaq Stock Market.

Analysts said the all-cash deal announced late Tuesday reflects a growing need among service providers to upgrade their networks not only to accommodate bandwidth-devouring traffic but also deliver it to cell phones and other mobile devices.

Redback Chief Executive Kevin DeNuccio said both companies stand to profit from the demand for video that’s driving service providers to boost the bandwidth on their networks.

“The market’s in its infancy today,” he said in an interview. “People are not adding subscribers but they’re making technology decisions around the globe. And this is how they’ll build their networks of the future.”

Redback, once a high-flying stock that traded near $200 (euro151.50) during the dot-com boom, was ravaged by the pullback in telecom spending after the bubble burst and filed for bankruptcy protection in 2003, when its stock was trading below $1 per share.

The company emerged from bankruptcy about a year later and has rebounded with a focus on high-demand router technology. But it has still remained largely unprofitable despite soaring sales, posting a net loss of $6.6 million (euro5 million) for the nine months ended Sept. 30.

Ericsson is paying about $25 per Redback share, an 18 percent premium over Redback’s closing price on Tuesday on the Nasdaq Stock Market. The deal is Ericsson’s biggest purchase since buying Britain-based Marconi for $2.1 billion in January.

Anders Berg, a Stockholm-based analyst at EQ Bank, said it was a good deal, fitting well into Ericsson’s product portfolio and “in line with the (Internet Protocol) initiatives it is trying to roll out.”

Berg said the price might seem somewhat on the high end, “but you often have to pay for quality and it’s definitely quality.”

The deal is expected to be completed in early 2007. Redback’s management team will stay in place, and the company will operate as a wholly owned subsidiary of Ericsson.

Redback has about 800 employees, and DeNuccio said no layoffs were planned.

“This is not about cost synergies, this is about growth,” he said.

Stockholm-based Ericsson has about 63,000 employees worldwide.