The combination of Telco Systems and Metrobility Optical Systems, announced this week, not only gives much needed muscle to a small startup but allows Telco Systems to please both sides of the debate over where to deploy network intelligence, the two companies said.

Metrobility’s line of carrier Ethernet customer premises equipment, or CPEs (which it calls “demarcation devices,” since they mark the line between carrier and customer networks) bears some competitive overlap with Telco Systems’ CPEs. But the two companies’ products also complement each other, giving carriers a choice in where to deploy layer-two and layer-three technologies.

“There is a debate [in the carrier Ethernet equipment sector] about where you should put the intelligence,” said Zvi Marom, founder and chief executive officer of Telco Systems’ parent company, BATM. “Should you put it in the end device? The CPE device? Or should you put it in the center? The combination of Metrobility and Telco Systems would bring to the table the ability to give both.”

Metrobility’s newest product, the RS960 Ethernet Services Provisioning Platform (scheduled for availability before the end of this year), can operate either as a layer-two device or it can bring intelligent multiprotocol label switching (MPLS) and pseudowire technology to the customer premises. This complements Telco Systems’ existing gear, which performs multiservice aggregation further upstream in the metro network, Marom said.

Though Metrobility was able to sell its gear to more than 70 service providers, such as Cogent Communications and Buckeye TeleSystems, larger carriers wanted the reassurance that comes from larger vendors and comprehensive platforms, Metrobility said.

“We have been hearing from many [customers] like Time Warner Cable and others that they’re looking for more of an integrated solution within the metro,” said Manu Kaycee, Metrobility’s vice president of product strategy and management.

Metrobility’s gear will interoperate with Telco Systems gear as soon as the merger closes, which is expected to occur in July or August. And the products will be fully integrated into a unified solution by next year’s first quarter, Marom said.

Telco Systems is paying $6.85 million in cash for Metrobility, which earned nearly twice that in revenue in 2005 but reported a $1.2-million pre-tax loss that year. The purchase price does offer a return to investors, who contributed more than $5 million in funding to Metrobility since it spun off from its parent company in 2000.

About half of Metrobility’s revenue comes from North America, and more than half comes from service providers as opposed to enterprises. Marom downplayed the value to Telco Systems of Metrobility’s North American footprint, calling the market there “saturated,” but he sees more upside in Metrobility’s Latin American footprint in particular.

“We want to expand and expand fast,” Marom said.

As Metrobility’s existing workforce of less than 50 blends into its new home, administrative personnel will be cut “to the maximum,” Marom said, and its engineers (Metrobility has about 16) and other professionals will be cut “to the minimum.”

All of Metrobility’s retained employees will move from their current offices in New Hampshire to Telco Systems’ offices in Foxboro, Mass., less than a half hour away.