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Verizon Drops the Open Bomb: Maybe The Old School Is Starting To Get It

Posted by Bob Warfield on November 27, 2007

My hat is off to whomever at Verizon decided to open up their network for “any app any device.”  To date, the industry has had a strangehold on which handsets each carrier offers and which apps are on the handsets.  Tampering with the standard offered by your carrier has been difficult and extremely risky.  The Apple iPhone triggered a storm of controversy when they started “bricking” phones that users tampered with to unlock.  Verizon has done a complete about face relative to the rest of the industry in announcing their new open approach.  Opinions vary on what it means, but it certainly is dramatic.  There is a short list of standards the devices must adhere to, some a little odd (CDMA versus GSM), and phones must be certified in a new lab facility Verizon is building. 

Ben Worthen at the WSJ says it means Verizon’s mobile devices are on their way to becoming as useful as PCs are today.  I don’t know about them being as useful, but an open device with a vibrant ecosystem of apps to choose from can’t help but make mobile devices a whale of a lot more useful.  Various friends in the wireless industry have lamented since they started that the biggest challenge is distribution.  You can build the software, but you can’t get it onto the device without elaborate negotiations with Luddite Carriers.  These are huge Enterprise-class deals with similarly huge and lengthy sales cycles.  One friend had a huge deal fall through with a major carrier simply because they did a reorg just before the deal was about to close.  I’ve seen that happen selling Enterprise software and it is one of the most frustrating things imaginable because you get to start the sales cycle all over again.  Quite simply these carriers were the bottleneck to innovation, and given how monolithic carriers in the US are, we had lagged the rest of the world considerable in mobile infrastructure and innovation.

There is considerable speculation over whether this was all triggered by Google’s Android announcements.  It hardly matters whether it was or it wasn’t, but it’s the sort of thing the blogosphere likes to gossip about.  After watching the round and round between Google, it’s OpenSocial partners, and Facebook, I have to say that Verizon looks brilliant from a PR perspective compared to Facebook.  ZDNet’s Larry Dignan suspects Verizon will have a fair portfolio of 3rd parties apps up in 2008 well before Google even gets their initiative off the ground.  That’s certainly what Verizon has to be aiming for, and given the pent up demand for distribution among wireless startups, there is likely no shortage of such apps ready to go today.

The point is that an open ecosystem can drive growth and opportunity far beyond what a walled garden can in today’s edge economics.  The world has been exploited by too many walled gardens and so it’s leery of granting to much power to perceived gardens, particularly when credible open alternatives are available.  This trend has moved in fits and starts.  The recent web world would like to think they invented the idea, but the truth is that it’s been going on a long time where those later to the party are dropping the Open Bomb to trump earlier arrivals.  It sure worked great for Sun against Apollo, for example in the 80’s and 90’s.  Unix crunched Apollo’s Domain, but has itself been overshadowed by Linux in recent years.

The question now is, when will the next carrier sign up?  There must be considerable gnashing and moaning about the risks.  Most people don’t understand the warped economics of most of these telcos.  In many cases, they offer services to get attention, but they hope against hope that the service won’t be popular because it chews up too many costs to support it.  Some of my in-the-know friends indicate video on phones is more or less in this category for many vendors.  There is some thought that these offerings were intentionally crippled to keep the cost down.  At the same time, text messaging is something of a cash cow, while other areas have been commoditized.  None of this is common across countries, or necessarily even across carriers, and it’s all a moving target.  Opening up to run any device any app is a gutsy play.  What if the devices and apps that turn out to be popular tank profitability?  In fact, there are a lot of unknowns and risks.  It seems likely Verizon is going to pass a lot of costs it used to eat back to customers, for example.  This is all part of the unbundling, but if the economics don’t work out well, it will severely limit the value of the open capability.  Hopefully we can count on competitive dynamics to make such pricing issues short lived.  Om Malik predicts it will open the market up to cheap Chinese handsets, for example.  Details of the exact business model are hazy.  There may be surcharges for apps or bandwidth may be limited or too expensive.

And what other ripples does this create in the pond?  What does it do for Apple, whose iPhone is pretty darned closed, thank you very much?  What of the Google Open Handset (aka Android) initiative?  Will Verizon join up?  Some say it was already rumored before this latest.  Beyond all that, what if everyone’s playbacks are finally updated with the conclusion that it’s good to drop the Open Bomb early in this much more connected world of New Millenium?  Wouldn’t that be a gas.  Much more disruption in many industries followed by new bursts of innovation and lots of entrepreneurial opportunity.  Now that’s what I’m talking about!

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Erik Schonfeld discusses Verizon’s “Two Tiered” strategy, which he characterizes as one tier for Verizon’s valued installed base (you can’t sell them your apps) and the new customers who pay for an “open” phone.  I’m not surprised.  This is all part and parcel of the business model issues that surround these devices, as I discuss above.  Verizon can’t very well offer everyone the capability who has an existing contract because they might select an app that causes Verizon to start losing money under that contract.  I still think Verizon has made a positive move and more should follow.

So many see Verizon’s move as being a result of some other company’s strategic genius.  Scott Karp says it’s all a result of a brilliant Apple conspiracy plan.  Every big company I’ve ever seen is the world’s worst conspirator, but maybe.  Just because I’m paranoid does not mean the whole world isn’t out to get me.

Woodrow gets it right by saying:

Whether you question VZ’s motives or not is largely irrelevant. This IS a revolutionary move. And, while I think Verizon is reacting to market conditions; they are doing so far more aggressively and proactively than most have come to expect of BIG TELCO.

Precisely my point.

Daniel Berninger over on GigaOm muses about the impacts on Verizon’s business model of “any app, any device.”  For example, he says that SMS messaging is hugely profitable, but doesn’t that go away in an open world?  Yes it does, and Verizon or others will have to rethink their pricing.  This is precisely why they can’t offer it to existing contracts as I explain above.

7 Responses to “Verizon Drops the Open Bomb: Maybe The Old School Is Starting To Get It”

  1. The handset dynamic is driven by Volume. nokia for instance won’t do CDMA phones anymore cos…no volume. China, Brazil and the US are basically the only places with cdma. Unfortunatly CDMA isn’t so much a standard as a group of them….hence interopability isssues.

    The precedent for openness is the key here. And realising that adding value on top of the network (instead of it being the network).

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  5. kameran said

    None of this would be possible without Google and more fundamentally the open framework movement. Verizon tried the frontal approach, and it did not work. The FCC is moving forward. This is a tactical defensive strategy to leave two options: bid for the new open network spectrum and join Android alliance. You can read my post about the danger of walled gardens in a networked world.

    Kameran Ahari

  6. smoothspan said

    Kameran, welcome!

    I think it’s a real stretch to say that Verizon’s move would not even be possible without Google. It may or may not have been prompted by Google’s actions, but Verizon certainly could have chosen to go this route regardless of what Google did. As I mention above, Google nor even the Open Source movement did not invent open strategies.



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