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Harsh Reality Of Verizon's Open Network

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Consider the recently unveiledany app, any device” initiative by Verizon Wireless in the context of the company’s latest quarterly results.

The wireless unit of Verizon (VZ) reported year-over-year subscriber growth of 12 percent, but a mere 5 percent rise in voice revenues. Data revenue saved the day, surging 63 percent and lifting the company to 15 percent revenue growth overall. Data revenue per user increased 43 percent, while voice revenue per user declined 5 percent — pushing data to 20 percent of revenues from 14 percent.

The same report revealed a 10 percent decline in residential access lines. The voice business of Verizon Wireless, in other words, seems to have entered the same cycle of contraction suffered by Verizon’s wireline business in recent years. Joining the open access bandwagon promises to keep data revenues growing strongly, but CEO Lowell McAdam faces some mighty difficult choices as the 80:20 ratio of voice to data revenues reverses. The legacy pricing model incorporates price discrimination that will prove awkward to preserve.

Consider the lucrative SMS business of shipping 160 character messages for 10 cents each, or roughly $1,000 per megabyte. What happens when all devices cleanly incorporate instant messaging? “Any app, any device” means VoIP-capable devices that transparently support voice and web browsing via data plans. Why would someone pay Verizon an extra $40 per month for voice services? Any data plan that makes video affordable makes voice essentially free.

Does Verizon really have enough conviction to price without discrimination by application type? McAdam said pricing for the bring-your-own-device crowd will be “competitive” and “usage-based.” Even assuming other carriers follow Verizon’s lead to create competition, does “usage” refer to bit volume or application type?

“Any app, any device” sounds like it eliminates the long list of acceptable use prohibitions associated with existing data plans — quite a change of heart for the company. Verizon only recently settled a lawsuit brought by New York Attorney General Cuomo for terminating the accounts of customers with so-called “unlimited” Internet plans for unwittingly violating the plans through activities such as downloading movies.

It may already be too late for Verizon to back away from the edge. Anything short of a fully open network, neutral to bit type, seems likely to turn the PR love fest into user backlash. In any case, no one expects Verizon to embrace the “faster, cheaper” mantra necessary to fully earn induction into the infocom future.

We can suspend our disbelief until the pricing details arrive in January, but the unintended consequences of the announcement likely represent the best hope for progress. Verizon’s vision of the future may not have changed much. It just gets easier to read the writing on the wall when your back is up against it.

7 Responses to “Harsh Reality Of Verizon's Open Network”

  1. This is why Verizon doesn’t offer any app any device without a new contract. They have to rejigger the business model around those new contracts. This had to be done anyway. They’re way overcharging for SMS and undercharging for other things. Too many games were played and then institutionalized. Now they have to clear that slate and start over.

    More on my blog:

  2. John Thacker

    So, hasn’t the complaint recently been that US providers are “behind” Japan and Europe because of the lower use of data services? (Something that I think is at least partially explained by how mass transit users should prefer texting and data, while voice is more comfortable for drivers.)

    Scott, I’m not sure I understand the newspaper analogy. The shrinking newspaper market is largely about competition from other sources, not because of “opening the newspaper network.”

    A current player has an incentive to open the network if that incumbent feels that churn would overall help that incumbent. Verizon apparently feels that it has the strongest network and would benefit from switchers more than others. Phone number portability is an example of a more open network that didn’t shrink the market, since people could feel safer about getting cell phones (and dropping landlines) when they could keep their wireless number for longer and switch more easily.

  3. My guess: a truly open network would shrink the market (reduce total revenue), and therefore won’t be done by one of the current players. (Examples from other markets: encyclopedias (and probably office software), newspapers.) If one of the incumbents either makes a big move into a new revenue stream, or figures out how to drastically shrink their costs (which is much more painful), then I’ll believe “any app, any device” at a reasonable price. Until then, I’m a skeptic.

    My bet: Google wins the 700 MHz auction and shrinks the market.