Harsh Reality Of Verizon’s Open Network

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.