Verizon’s move could tear down ‘walled gardens’

WASHINGTON (MarketWatch) — Wireless-phone carriers have long operated their business like a closed clamshell, but a new strategy by Verizon Wireless is likely to pry open the industry like never before.

Verizon on Tuesday said that by the end of 2008 it plans to give customers more choice over the phones they use and the software that runs on them. In effect, its wireless business would become like the World Wide Web instead of the closed model of the existing phone industry. See full story.

‘Openness is coming. You either embrace it or you don’t.’

— Linda Barrabee, the Yankee Group

“You’ve got to move at Internet speed, not telecom speed,” said wireless consultant Jane Zweig, president of The Shosteck Group.

Spokespeople for AT&T Inc. and Sprint Nextel Corp. say they support open standards and more consumer choice, but they declined to say whether they would adopt the same approach as their rival. AT&T
is the nation’s largest mobile operator in terms of customers, followed by Verizon, Sprint
T-Mobile USA Inc. and privately held Alltel Corp.

Yet analysts say the trend is unmistakable. “Openness is coming,” said Linda Barrabee of market researcher Yankee Group. “You either embrace it or you don’t.”

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Those who don’t, she said, are likely to lose customers and fall behind in the wireless wars.

That’s why analysts expect Verizon’s rivals to adopt open standards eventually. They’re likely to find new opportunities to generate revenue as Internet access becomes increasingly important to mobile customers.

Some subscribers, for instance, might spend more on monthly service while others could hook up nontraditional devices such as gaming systems or products that don’t even exist yet. Each device added to the network means more profit.

Entering the garden

Ever since the industry’s inception, mobile companies have long controlled the phones and software available to customers in what’s known in the business as a “walled garden” approach. Subscribers can’t pick just any phone or download any software, as they can do with home computers.

In recent years, however, consumers increasingly have demanded more choices. Lawmakers and regulators have also put pressure on the industry to open up while technology giants such as Internet-search leader Google Inc. have been looking to smash into the “walled garden.”

Under Verizon’s new strategy, any device or software application, including those from Google, would be able to work with the company’s network so long as they met certain technical standards.

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“Over time the ‘walled garden’ will come down,” said Lowell McAdam, chief executive of Verizon Wireless. “We want to tap into those customers who want complete control over their devices.”

Executives said the standards wouldn’t be especially difficult to meet, but details won’t be made available to developers until early next year. Nor are they willing to say yet what sort of prices Verizon will charge, a critical component of the strategy’s success.

“How Verizon prices the service will be important in terms of user adoption,” said Tole Hart, research director at Gartner.

Analysts say a contributing factor to Verizon’s sudden strategic shift is the upcoming federal auction of valuable wireless airwaves in the 700MHz spectrum range. The Federal Communications Commission plans attach so-called open-access rules to a large portion of that spectrum, which would require buyers to open up the rest of their networks.

Until recently, Verizon had been fighting the FCC over the open-access rules, but its pending move to more open standards could bury that dispute. Verizon Wireless is jointly owned by Verizon Communications Inc.
and U.K.-based Vodafone Group PLC, which is used to open standards in its home market of Europe.

Spreading good cheer

While the mobile-phone companies clearly stand to benefit, so do others such as chipmakers and handset makers.

See also

Qualcomm Inc.
for instance, has produced chips that allow phones to run on CDMA-based networks used by Verizon and Sprint as well as GSM-based networks operated by AT&T and T-Mobile. These chips could be placed in every phone and give customers unprecedented freedom to switch providers.

Handset makers such Motorola Inc.
meanwhile, could also sell more phones if they’re capable of working on any network.

Software developers, big and small, would also get a cut of the action.

The biggest winner, however, may be the consumer. In the not-too-distant future, they’ll be able to download any software they want, and probably take their phones from one mobile operator to another if they switch service.

“You cannot control the customer,” Zweig said. “You cannot possibly know what they want.”

Added Barrabee of Yankee Group: “Consumers are going to have a lot of options.”

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