How Verizon Wireless learned to stop worrying and love open access. Step one: Realizing it's a way to add low-cost customers
In yet another sudden shift, Verizon Wireless plans to support Google's (GOOG) new software platform for cell phones and other mobile devices. Verizon Wireless had been one of several large cellular carriers withholding support from the Android initiative Google launched in early November.
But given the stunning U-turn Verizon Wireless made Nov. 27, announcing plans to allow a broader range of devices and services on its network, Chief Executive Officer Lowell McAdam says it now makes sense to get behind Android. "We're planning on using Android," McAdam tells BusinessWeek. "Android is an enabler of what we do."
McAdam's Open-Access Campaign
Though skeptics see ulterior motives and question just how easy Verizon will make it for rival products to get on its network, the surprise embrace of an open-access model and of the Android software culminates a dramatic yearlong evolution in the company's thinking. The effort, championed by McAdam, involved meetings with the chairman of the Federal Communications Commission and late-night bull sessions with the top two executives at Verizon Communications (VZ), which owns Verizon Wireless in partnership with Vodafone (VOD).
All the while, McAdam kept focus by carrying a crumpled piece of paper in his pocket with seven bullet points defining what an open-access policy would mean to Verizon Wireless. "The paper is all wrinkled and it's got coffee stains," he says.
McAdam was more amenable to shifting gears thanks to time spent during the 1990s in Europe and Asia, where the wireless industry is more of a free-for-all. As vice-president for international operations at AirTouch Communications, now a part of Verizon Wireless, McAdam says he was impressed that European and Asian mobile carriers backed technologies that allow subscribers to switch to rivals with ease.
By contrast, Verizon Wireless has created the most profitable U.S. cellular business by tightly restricting the devices and applications allowed to run on its network. But over the past year, the company's leadership came to conclude that it was time for a radical shift. Such a move, they reckoned, might help Verizon Wireless keep growing while holding down costs.
Combating Market Saturation
When Verizon Wireless was founded in 2000, it ran 27 call centers to provide customer service. The company cut back to as few as 17 centers at one point, but the count is now back to 25, each with about a thousand employees. The company's 2,300 stores, staffed by 20,000 employees, are also costly. While workers in those stores used to spend nearly the entire day signing up new customers, now only a tenth of their time is consumed by new subscribers. Instead, the bulk of their energy goes to helping current subscribers with questions and problems. McAdam & Co. decided the business model was not sustainable. "If we get to 150 million customers, boy, that's a lot of overhead," says McAdam.
In an open-access model, though, Verizon Wireless won't offer the same level of customer service as it does for the roughly 50 phone models featured in its handset lineup. Though the company will insist on testing all phones developed to run on its network in the open-access program, Verizon plans only to ensure the wireless connection is working for customers who buy those devices. "They have to talk to their handset provider or their application provider if they have particular issues," McAdam says.
What's more, the open-access approach may enable Verizon to tap into niche markets that haven't been worth targeting. Verizon Wireless subsidizes the cost of all the handsets it sells directly to customers. Thanks to the costly process of developing phones with the likes of Samsung and LG, then testing each for hundreds of factors such as how hot the screen gets, only devices with mass appeal get the nod. "I can't go to 100" handsets in the lineup, says McAdam. "If a particular product can't generate 100,000 [purchases], it's not worth doing."
But with "outside" devices developed under Verizon's new policy, handset makers will bear most of the development costs. And because users won't be buying such devices from Verizon, the company won't be subsidizing those purchases. As a result, Verizon's network may come to support hundreds of devices, many customized for non-mass-market needs the company doesn't serve. "This allows them to add customers onto their network without having to spend as much to get them," says Todd Rosenbluth, an industry analyst for Standard & Poor's (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP)).
Verizon envisions a similar explosion of wireless applications. The company currently offers about 800 applications such as music, games, and videos. The menu might have been even larger by now if not for the rigorous testing that Verizon requires of each developer for every application. "Small companies have a hard time affording the development," says Greg Pelling, CEO of CounterPath, a Canadian provider of Internet calling software for Verizon Communciations and other phone companies. Google is hoping the large, open scale of its Android platform will remove that hurdle, slashing development costs. So does McAdam, who expects a flowering of tens of thousands of applications.
FCC Wireless Spectrum Auction
Verizon's conversion to open systems began last winter when McAdam, freshly promoted to run Verizon Wireless, began thinking about the implications of a federal auction of some especially valuable wireless spectrum in early 2008. At that time, Google and other tech companies began lobbying the FCC to require that auction winners allow any device or application on that spectrum. That got McAdam thinking it might be time to open up Verizon's airwaves. He batted the idea around with Chief Marketing Officer John Stratton and Chief Technology Officer Richard Lynch.
In the spring, Verizon Communications Chief Operating Officer Denny Strigl challenged McAdam to crunch his ideas down on paper. "Denny Strigl says if you can't put it on half of one side of paper, you haven't figured it out," says McAdam. "I kept playing around with it until I got it to one-third of one sheet of paper." Separately, Verizon CEO Ivan Seidenberg laid down his own challenge, urging McAdam to find ways to keep Verizon Wireless growing at a time when a quarter-billion of the nation's population already has cell phones, limiting the available crop of first-time customers.
By late summer, McAdam walked into Strigl's office on a Friday night and struck up a conversation about his crumpled paper. "Denny's eyes lit up," says McAdam. Then Seidenberg walked into the office, and after McAdam laid out his thoughts, the CEO said the open model might even help solve the growth challenge.
With a green light from above, McAdam held a meeting in October with his top managers and explained the new direction the company would be taking. Most of his staff got it, though some were apprehensive. "Others said, 'Whoa, this is a big change,'" recalls McAdam.
Jumping on the Bandwagon?
Then Google unveiled its Android platform (BusinessWeek.com, 11/6/07). While Sprint Nextel (S) and T-Mobile (DT) were among the 34 charter members of this Google-led "Open Handset Alliance," the two biggest U.S. carriers, AT&T (T) and Verizon Wireless, were notably absent. "To get into that press release really didn't do anything," says McAdam. "We needed to understand the details of that operating system."
When Verizon executives and engineers examined Android's software tool kit, however, they were impressed. "Clearly the Android system gives a lot of developers the opportunity to develop applications for a wide range of handsets," says McAdam. Not only did the company decide to support Android, but McAdam says the new platform was a key influence in adopting open access. "Android really facilitated this move,"says McAdam.
Some critics are suspicious of Verizon's cellular glasnost, alleging it's merely trying to curry favor with regulators or scare rivals from bidding in the FCC auction. Yet there's little doubt Verizon also recognized that market demand for open networks would be impossible to hold back indefinitely. "Five years from now the industry will be open like us," McAdam says. "I think we could be at an inflection point."
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