Yahoo!

(YHOO)

has company coming tomorrow. So in a last-minute rush of fixing up, the company ordered new phone service.

A day before its annual daylong meeting with Wall Street analysts, Yahoo! announced a major marketing deal with regional phone giant

SBC Communications

(SBC)

. Starting in the middle of next year and focusing on SBC's DSL service for high-speed Internet connections, the companies will launch a co-branded access and content service -- something not far from what

AOL Time Warner's

(AOL)

America Online offers for a monthly fee -- in the 13 states where SBC Communications offers local service.

With Yahoo! and SBC agreeing to share revenue from advertising, premium services and monthly Internet access fees, the deal appears to be the most significant step so far in Yahoo!'s ongoing quest to diversify its revenue stream beyond advertising.

But the move also invites questions about the risk Yahoo! is taking by shunning cable modem users as the company prepares for the potentially lucrative opportunities that arise once most consumers connect to the Internet through high-speed, or broadband, connections.

Looming over the alliance are also the past missteps taken by companies that have tried, and failed, to find synergies by combining Internet access with Internet content.

Excite@Home

(ATHMQ)

, the now-bankrupt combination of the Excite portal and the @Home high-speed cable modem service, is perhaps the most famous casualty among those ventures, but not the only one.

Yahoo! investors were bullish on the deal. On Wednesday afternoon, the stock was up 5.8%, or 81 cents, to $14.78. SBC's shares were down 59 cents to $36.81.

Broadband Convergence?

As part of the transaction, Yahoo! and SBC will offer a co-branded service called SBC Yahoo!, concentrating on the 23 million homes in SBC's service territory to which the company can offer DSL service. In addition, the company will rebrand its recently acquired dial-up Internet service, Prodigy, as SBC Yahoo! as well.

As of Sept. 30, Prodigy had 3.6 million customers and SBC had 1.2 million broadband customers. SBC will share its connection revenue with Yahoo!, and Yahoo! will share advertising and premium service revenue with SBC.

Yahoo! said it would be concentrating on DSL customers as opposed to cable customers in SBC's territory. And though the company hasn't disclosed any broadband deals elsewhere, executives made it clear they were favoring DSL providers, rather than cable companies, though cable operators dominate the broadband market now and are expected to hold that lead over telcos' DSL service.

Jim Brock, Yahoo!'s senior vice president, major initiatives, said Yahoo! believes DSL gives it an opportunity to create "a differentiate experience," one in which high-speed access will integrate easily with voice, telephone service, unified messaging and other applications. In addition, he said, Yahoo! would be better able through DSL than through cable to reach small business customers.

Plug and Play

Yahoo!, which has been trying to establish commercial relationships with the millions of visitors who use its services for free, evidently won't bill SBC Yahoo! customers directly for premium services. Rather, it will go through SBC's billing relationship. Outsiders, including this reporter, have argued that Yahoo! could establish its own ties to users by acquiring an Internet service provider such as

EarthLink

(ELNK)

.

But Yahoo! CEO Terry Semel said the convenience of being able to "plug right in" to SBC's billing system and customer relationships was preferable to Yahoo!'s getting into the infrastructure business. In addition, he said, it would be easy for users to sign up for a Yahoo! online payment service as they signed up for Internet service.

One immediate skeptic of the deal was SG Cowen's Scott Reamer. In a Wednesday afternoon note, he enumerated several reasons for investors to curb their enthusiasm, starting with the fact that Yahoo! previously tried partnering with a phone company --

AT&T

(T) - Get Report

-- with little success. Broadband access via phones has perennially missed growth expectations, Reamer says, and AOL will be a tough competitor for broadband access. The analyst, whose firm hasn't done recent banking for Yahoo!, rates the stock neutral.