The cell-phone provider's decision to open its network is surprising, but it may have been inevitable
Imagine Fidel Castro embracing capitalism. Or Starbucks (SBUX) swearing off caffeine. That's the kind of ideological U-turn that Verizon Wireless pulled on Nov. 27 when the company said it would let consumers use a broader range of cell phones and features on its wireless network.
Verizon had built the most profitable U.S. wireless business by tightly controlling the devices and programs, such as games and maps, that could operate on its network. How tightly? The examples are legendary, but just this summer Verizon disabled the GPS navigation capability built into a BlackBerry device; in November it introduced its own similar service. Now it's possible to imagine a future BlackBerry running on the Verizon network with rich, location-based services from Google (GOOG) and many other players.
The move to a more open model reflects a shift that has been playing out in wireless over the past two years. Tech giants such as Google, Apple (AAPL), Nokia (NOK), and scores of other companies that develop wireless applications have been battering the so-called walled gardens of the wireless network operators, demanding the right to offer their own services. Verizon chose to join rather than keep fighting. "If this is where the tide is going, Verizon is going to grab a surfboard," says Banc of America Securities (BAC) analyst David Barden.
Verizon executives portray the move as a hard-headed business decision. Over the past few months, Verizon Wireless CEO and President Lowell C. McAdam has championed the radical new policy within the company. Privately, Verizon officials have expressed concern over the huge cost of servicing the company's 64 million subscribers. For customers who bring their own devices to an open network, Verizon won't handle questions about glitchy handsets or programs. Yet it stands to gain from cell and data fees paid by those new customers. How much isn't clear yet, but McAdam says Verizon will be flexible: "The market will drive pricing. But it will clearly be usage-based. If I check in once a month, I don't want to be saddled with a monthly charge."
Another thing that's striking: Until recently few phone company officials would concede that a closed system hobbled innovation. Now, McAdam sees openness as a way to spark new products and services: "We can only make a limited number of bets. This gives us the ability to tap into every innovative mind out there in the country."
It's also a shrewd defensive maneuver. Verizon had lobbied unsuccessfully to prevent the federal government from requiring buyers in the upcoming January spectrum auction to support any device or feature. Now that Verizon Wireless has joined the open-access camp, it's free to try to grab some of those radio waves to expand its business. Still, that's unlikely to deter Google from its own multibillion-dollar bid to create a network. "It doesn't change our thinking on the auction one bit," says Google spokesman Adam Kovacevich.
Verizon's new policy won't result in huge changes for consumers immediately. Verizon will need to test any new device before letting it on its network. And the degree of openness will hinge on how difficult Verizon makes it for products to get a green light. Columbia Law School professor Timothy Wu, a leading proponent of wireless open access, points out that the old Baby Bell phone companies often used testing as a way to control their networks. "It can become a black hole from which products never emerge," says Wu.
AT&T (T), meanwhile, says it has no plans to ape Verizon's move. But with the wireless wall coming down, it may not be singing the same tune a year from now.