« Liberty Global Inc: Is TV Dead? | Main | Ring! Ring! Hot News, 3rd December »

Verizon Wireless’ volte-face: Virtue or Vice?

It’s been all across the tech news and blogosphere: Verizon Wireless has announced that they’re moving to a, well, less closed, network attachment model. For those whose job isn’t to surf the web, the summary is that pace certification testing by Verizon’s labs, and an unknown amount of bizdev negotiation, you can attach any device you like to the Verizon Wireless network. If you had to sum up Verizon’s strategy to date, it would be “Execute!”. They’ve simply done a great job of merging Airtouch, GTE and other properties; building out more coverage than the opposition; keeping an adequate level of handset and content innovation; and generally not screwing up.

The key details of the new offer — price, process and terms — remain hidden behind the PR fog. So what’s the unique Telco 2.0 slant on the news? When the market leader switches strategy, it’s not some short-term panic over Apple, Google, WiMax or spectrum auctions. It’s part of the deeper structural shifts in progress. So as we’re in the final assembly stage of our shiny new Broadband Business Models 2.0 report, here’s what’s on our minds about the future of connected devices:

Firstly, disaggregation of the value chain is a long-term inevitability. Regardless of Verizon’s taste in cell phones, there’s always going to be a need to assemble devices, software and content in configurations Verizon doesn’t think of, and sell through channels Verizon can’t access. For example, we’ve concluded content aggregation has strong increasing returns to scale, and as telcos aren’t very good at being media companies, they will exit the portal business — be it for text, video or music.

So in one sense, it’s “what took you so long?”.

Secondly, Verizon can now offer up its assets — billing, retail logistics, care, etc. — to partners. These assets can be sweated far harder. Verizon takes ideas for handset and content, develops them together, markets, retails, supports and bills for it. Along that chain there is always a weak link. By allowing other businesses to go around the weak link, the full value of the other parts of the business can be realised.

As it happens, they’ve got a good network, retail, customer care and billing. So handsets and content are probably the bottleneck in delivering value. The CDMA ecosystem is smaller than the GSM one, and many of the handsets available only appeal to the techno-mad Japanese and Koreans. Far from being a “dumb pipe”, we’d anticipate Verizon moving to a broad platform play offering a suite of services to partners. For example, did you know there are around 30000 sales tax jurisdictions in the US? Offering phone service is hideously complex due to a maze of federal, state and local regulation. Why fight through these thorns to the sleeping princess yourself when Verizon can rent you a ladder over the hedge?

If you were having a Coasian view of the world, you’d simply note that commodity IT, web services and the Internet have lowered the cost of integrating outsiders into the business. Hence the relative value of internal vs. market transactions has changed. “Open” and “closed” aren’t virtues and vices, but merely stages of evolution.

Next up, if you were running Verizon Wireless and looking to make your business more efficient, what can you do? You could set higher targets for your execs and exhort them to do better. However, management targets and incentives (as the UK public sector has discovered) are blunt instruments. You might get cost savings or revenues at the expense of investment and brand quality. So instead you draw inspiration from the structurally separated fixed-line business. Benchmark your retail operation against outsiders. Make them feel the heat of competition purely on the merits of their own sub-part of the business. The Verizon retail business is no longer a monopsonist buyer of Verizon’s network and wholesale assets.

Finally, the most critical factor in Verizon making a success of wholesale network access will be to construct pricing that incentivises the desired behavior. Offering flat-rate vanilla ISP plans to wholesale partners will be a fatal mistake. Consumers need simplicity. Wholesale clients do not. You should not be afraid to confront them with complex wholesale pricing that reflects both the value and the cost of running the network. That means reflecting peak and off-peak times, congested areas where there is less spectrum or fewer attachment rights, and differential pricing depending on where Verizon has an advantage over competitors in terms of speed or coverage. The partners then have to work out how to design and package their product around these parameters, and create the simple retail propositions.

To share this article easily, please click:

Comments

Verizon Wireless already has a strong wholesale program though MVNO (Amp'd and Lucky) and Agent (Car Toys, Best Buy, etc..) based models. Most of the press coverage and blogging tends to hint toward this as a retail play too - bring your non VzW phone to a VzW plan. No more subsidy to drag ARPU.

I've been saying for years that telcos can't run network businesses and retail businesses under the same umbrella. They require different business models to work effectively. Networks are a volume business - the more you can encourage outsiders onto them, the more efficient they are. And telecoms retail is no different from any other FMCG retail so let it loose from the shackles of the network side of the house and it can fly. Look at BT... Trouble is, the investment community still doesn't really see it that way. To my mind, telcos have just as much work to do in educating them as they do in sorting out which business models work for which of their expanding businesses.

This movement of Verizon will be ready by the end of 2008. Here in Telefónica Móviles Spain, we have launched an initiative where we are currently opening our network in an API format in open source. We have a roadmap where we will publish more APIs. If you are interesting in more details about the program, please contact me.

It's really important that telco companies start to inform the investors if they're going to make this work.

Post a comment

(To prevent spam, all comments need to be approved by the Telco 2.0 team before appearing. Thanks for waiting.)

Telco 2.0 Strategy Report Out Now: Telco Strategy in the Cloud

Subscribe to this blog

To get blog posts delivered to your inbox, enter your email address:


How we respect your privacy

Subscribe via RSS

Telco 2.0™ Email Newsletter

The free Telco 2.0™ newsletter is published every second week. To subscribe, enter your email address:

Telco 2.0™ is produced by: