A move by Verizon Wireless to let customers use a broader range of cell phones and wireless features on its network was greeted by many observers as a stunning about-face. The No. 2 U.S. wireless service provider, which from the start has kept its network shut tight to what it considers unauthorized devices and services, suddenly was opening up.
When the new policy kicks in during the second half of 2008, subscribers are likely to have greater freedom to choose the devices and services they can use, and handset and application makers will probably get greater leeway in the breadth of phones and software they can build for the Verizon Wireless network. "This gives us the ability to tap into every innovative mind out there in the country," says Lowell McAdam, CEO of Verizon Wireless, a joint venture of Verizon Communications (VZ) and Vodafone Group (VOD).
But if the shift is an affirmation of consumer- and innovation-friendly openness, even more it's a reaction to the competitive pressures threatening Verizon Wireless and other mobile providers. The "Any Apps, Any Device" announcement helps Verizon Wireless steal thunder from other wireless upstarts—including Apple (AAPL) and Google (GOOG)—that are pushing for freer rein to offer their wares directly to mobile subscribers, leaving some analysts skeptical over just how open the Verizon Wireless network will be. "Several factors seem likely to keep the number of subscribers who actually opt for the open model down, which may limit its effectiveness as a force for change in the industry," say Ovum analysts in a Nov. 27 note.
The Fine Print
For starters, Verizon Wireless will need to test any new device model before letting it connect to its network. The degree of openness will hinge on how difficult Verizon Wireless makes it for products to get a green light. Columbia University law professor Tim Wu, a leading proponent of wireless open access, points out that the old Ma Bell-era phone companies often used testing requirements as a way to control their networks. "There's testing requirements and there's testing requirements," says Wu. "One is routine—and there's another thing of deciding what products they don't want on their network. It can become a black hole from which products never emerge."
Although Verizon stresses the business opportunities posed by open access, the company's move is also a shrewd defensive maneuver. Verizon had lobbied ferociously to prevent the federal government from applying open-access requirements to an upcoming auction of valuable radio spectrum. But now that Verizon Wireless has joined the open-access camp, it's free to invest billions in those radio waves—while blocking out potential rivals. "They have removed any economic incentive for an upstart wireless provider to build a new network," says David Barden, an analyst at Banc of America Securities (BAC). An added benefit: With fewer bidders, the move "could lower the price of the spectrum," says Barden. Google, of course, is unlikely to be deterred (BusinessWeek.com, 11/16/07). "It doesn't change our thinking on the auction one bit," says Google spokesman Adam Kovacevich.
Beyond the auction, Verizon's shift may score important points with regulators, politicians, and vocal members of the Internet community clamoring for increased wireless competition. Indeed, Verizon's announcement drew immediate applause from a diverse array of corners, ranging from Federal Communications Commission Chairman Kevin Martin to Microsoft (MSFT) to Dave Burstein, an often scathing critic of phone companies on his DSL Prime blog. And Todd Rosenbluth, an analyst with Standard & Poor's, notes that with a Presidential election coming up, Verizon's strategy puts the company "in a better light for whoever controls the agenda."
Don't Celebrate Yet, iPhone Fans
On one key front, Verizon clearly isn't throwing the barn doors open: Only phones that run on the wireless standard known as CDMA will be compatible with Verizon's network. That means devices already developed for some carriers, such as Sprint (S), can be submitted for approval for Verizon's network. But the vast majority of the world's mobile networks run on a rival wireless technology called GSM, so existing devices based on that standard—including Apple's iPhone—would need to be redeveloped.
What's more, Verizon Wireless disclosed no details about what customers might have to pay to use such devices. Some critics fear the company may try to force such customers into the industry's usual long, pricey contracts. McAdam stresses that Verizon will be flexible. "We will work with the community to bring out different pricing plans," he says. "If it's a game console, that will have a different model than a mobile video server. We need to let this evolve, and the market will drive pricing. But it will clearly be usage-based. If I check in once a month, I dont want to be saddled with a monthly charge."
But Verizon Wireless can't let prices be driven too low. Under the current system, the company captures a significant portion of its revenue from the sale of premium services, such as ringtones and video games, used on its network. In an open system, outside application developers and manufacturers would get a bigger share of those sales.
It's a risk Verizon Wireless had to take in light of new rivals in the long-closed wireless market. The most notable entrant: Apple. Millions of consumers have purchased the iPhone (BusinessWeek.com, 10/22/07) since its debut in June, drawn by its user-friendly design and computer-like Web-browsing capability. In October, Google announced an initiative called the Open Mobile Alliance, signing up more than 30 partners, including top handset makers and chipmakers. The plan is to create a new operating system for phones that will let hardware and software makers create specialized devices and applications. While Verizon hasn't joined the alliance (BusinessWeek.com, 10/31/07), its new Any Apps program does open the door for Google-based handsets on its network. "This allows Apple or Google or Nokia to build a device that will run on the most reliable network in the country," McAdam says.
Some Immediate Winners…
Some handset makers and software developers welcomed the turn of events. "We've been striving to bring choice to consumers ourselves, and we applaud all initiatives bringing more choice to consumers," says Nokia (NOK) spokesman Keith Nowak. And if open access brings snazzy new devices and applications to Verizon's network, rivals may have little choice but to follow suit. "Verizon's announcement puts a lot of pressure on the other carriers to think long and hard and fast," says Rebecca Arbogast, an analyst at the research firm Stifel Nicolaus.
Although AT&T (T) and T-Mobile (DT) subscribers would need new devices to switch to an open Verizon network, subscribers to Sprint, Alltel, and U.S. Cellular (USM) could have an easy time switching their existing CDMA handsets.
AT&T says it has no plans to ape Verizon Wireless' move. "For us, what really defines true openness in wireless is giving people unfettered access to the things they care about," says AT&T spokesman Mark Siegel. "Real openness is something we've already arrived at and set the standard for."
So now, Verizon Wireless will take a stab at its own brand of openness.