On the Hot Seat: Verizon Wireless CEO Lowell McAdam

At last week's CTIA Wireless I.T. & Entertainment conference in San Francisco, FierceWireless editor-in-chief Sue Marek and FierceMobileContent editor Jason Ankeny sat down with Verizon Wireless CEO Lowell McAdam to talk about competition, WiMAX and the formidable iPhone.

FierceWireless: AT&T recently announced that it added 2 million net new subscribers in the third quarter. Are you concerned about them?

McAdam: They have always been a difficult competitor. The big-four are always banging away at each other. The regional carriers are very strong in their individual footprints. I think AT&T having the iPhone is similar to when they had the [Motorola] RAZR a few years ago. They were strong with that and we answered with our devices. Now we are going to answer with the Voyager. The thing I like about this industry is that from Day 1 it has been competitive and it's going to stay competitive. That's why I took the time to testify at the Senate committee last week. When you have great competition like this we are focused on beating the competitor and winning with customers and that's why you don't need the regulation.

FierceWireless: You mentioned the iPhone. Do you have any regret passing on that?

McAdam: None whatsoever.

FierceWireless: Why not?

McAdam: When we evaluate a product we look at the customer experience. We look at the technology of it and we look at the financial model around it. From a customer perspective we didn't like the restricted distribution. We didn't like the fact that we were being asked not to service customers. Let's just assume the model you see from AT&T is what they asked us to do, so I'm not divulging anything. We have a huge network of stores and we put a lot of investment into training our people. The model was to say to a customer 'thanks for coming in, now go down the street to Apple and they'll take care of you.' We didn't like the customer model. The technology was stuff that could have been dealt with.

The financial model, if you assume the financials that the European countries have said publicly what theirs was, we've made a $40 billion investment in our network in the last eight years. I don't think that revenue split was commensurate with the investment we made in the network. We are very happy with that decision.

As we roll out the Voyager, we are going to be happier. The Voyager takes things to the next level.

FierceWireless: Why did you decide to withdraw your FCC appeal for the 700 MHz open-access rule?

McAdam: We withdrew the appeal because it was clear we weren't going to get it expedited. Now CTIA will carry the torch for us.

FierceWireless: Are you glad that you cut a licensing deal with Broadcom so you wouldn't be impacted by the ITC ban on EV-DO and WCDMA chip sets?

McAdam: Yes. This could disrupt your whole supply chain. When you are trying to meet customer demands in the fourth quarter you don't get a second chance. We're very satisfied with this.

FierceWireless: When AT&T Wireless and Cingular first merged the result of the combined company was a carrier with a very large subscriber base. But there was a belief in the industry that Verizon would soon surpass the newly-merged Cingular (now AT&T) in subscribers. That hasn't happened.

McAdam: Yet. If you take a look at the numbers, where we focus is on the post-paid customer. We focus there because of the loyalty of that customer, the ARPU that they bring and the fact that that customer wants a reliable network and that is what we are all about. The difference between the total subscriber counts is just wholesale. From a retail perspective, we are bigger than they are. That's why we have higher revenue and better EBITDA margins. The model that we have adopted, we're clearly winning in that area. More sales to wholesale, that's fine. When a customer doesn't use your brand, they aren't loyal to you. They could easily go somewhere else.

We have seen the rise and fall of wholesalers and MVNOs. Even if it's ESPN or an Amp'd Mobile or the old-days of MCI, if you remember them, our view is that as the market becomes more competitive, as you further penetrate the market there prices will go down and there's less margin for a wholesale company to live on. That doesn't mean we won't go after that part of the business where it makes sense. Onstar, as you know, is part of Verizon's network. They will pay for the liability and they got it and there are customers there. That's a good model.

But being a straight prepay--most are prepaid today--or even a content version. Like ESPN is a good version. They had a product that was good, but why pretend you're a carrier? When they decided they had enough, they came to us.

FierceWireless: Given that you work with partners such as ESPN, which is a big content partner, do you see Verizon producing its own content? Last week Sprint announced an initiative to do this.

McAdam: I would say it's a big hurdle for us to want to do that. That's something that has been on the radar--I didn't know Sprint announced something like that.

FierceWireless: Sprint has a dedicated studio for it and they brought in some talent to host two- or three-minute shows. Most of the focus is on sports and lifestyle content.

McAdam: My answer to that is there are a lot of smart people out there that know how to do content. I would much rather do a deal with those smart people than try to be smart. We are good at building networks and building distribution. We are good at customer service and product development. That is one aspect of product that I would rather go do a deal with whatever the hottest content is rather than try to be on the leading edge. That's not a skill set for us.

FierceWireless: Speaking of Sprint, what do you think of WiMAX?

McAdam: I'm an engineer by training. My first jobs--back in the phone company Pacific Bell--were in new technology introduction. There is always the next-generation of technology that holds a lot of promise. The suppliers of that technology would love to get you to declare early on. My view is whether it's WiMAX, Rev. C or LTE, you make the visionaries deliver something. You evaluate what they deliver and then you decide what fits best in your network. WiMAX still in my view, there is a lot of talk about it, but let's see it work in the marketplace. Technology is technology. There's no emotion about it. Let's see how it performs.

There are also a lot of questions about LTE, but you have people running around saying that Verizon is going to go with LTE. We have said we will do a field trial and we will evaluate it. Then we got our wish list in front of the suppliers and that's where it is.

That's where we are. We'll see. I wouldn't be surprised if we use it somewhere. But I can tell you we aren't going to have three different technologies in a consumer commercial network. You have to be very good at delivering if your brand image is reliability, you have to be very good at delivering. No one delivers very well when you have that many different technologies running around in your network.

FierceWireless: You will do a trial of LTE. Will you also trial Rev. C and WiMAX?

McAdam: Yes, absolutely. Vodafone has said that they will be involved with a WiMAX working group and we're working with Vodafone on LTE. We'll see. When it's 2010, we'll have an interview on how we are making the final decision. But 2007 is a little too early.

FierceWireless: Let's talk about MediaFLO--can you give us any anecdotal information about who is watching it?

McAdam: In order for MediaFLO to take off we have to have more cities covered and more coverage in the cities that we do. What we see at this point is a younger set and I thought it would be more male because of the sports but it's not because of the diversity of the programming. All you can say at this point, is it's a younger bent--18 to 30 age group.

Usage is what they expected but the more coverage you get, the better. It was the same with voice services and with SMS. If we get more scale and more handsets, that will help. The new Voyager handset will have MediaFLO as well. That will help. If you have a mainstream handset that people love and it also has a feature on it, that will help it as well.

It's going about the way I expected it to go. I think in 2008 and 2009 we will hit the right mix of coverage, programming and handsets.

FierceWireless: I've spoken with a few different ad companies at the show. We hear a lot from them about how you guys feel about mobile advertising. The party line seems to be that you are interested in the revenue opportunity but you have a lot of legitimate concerns about invading customer privacy. Is that true? Is there change in the mindset of how to seize on this opportunity?

McAdam: The safe answer to your question is that whatever they told you is not true. We really are very focused on what customers tell us they want. We do something called a net promoter score survey with every customer after their interaction with us. We ask whether they would recommend us or not to a friend or relative. That helps us set up everything from spam filters. We block between 100 and 200 million text messages a month coming from outside our network. Most are from eastern European countries that are either pornography or some sort of fraud on our customers. We're careful about that. We are not trying to be Big Brother but 60 percent of our base is family share. No one wants our kids to get the kind of messages that we block out of those eastern European countries.

Advertising is certainly not as sinister as that. I don't want to insinuate that. But it's a similar invasion of customers' privacy. So we are going to move cautiously and listen carefully to what our customers tell us. There's this huge pot of gold from a revenue perspective and that's motivating a lot of people's behavior. I think that's why you see all the activity you see on the regulatory front because a lot of companies are trying to dip into that mobile advertising barrel.

I think the point of it for us is that we are who the customers look too to provide them the services they want. We are going to let them define what they want around advertising. Do they want location-based things sent to them? Do they want local promotion? If so, we'll do that. Having the customer in control of it as opposed to having the carrier ram things down their throat is an important distinction.

FierceWireless: One question that I'm hearing a lot at this conference, is what is the business model for entertainment? A lot of people think advertising is the answer.

McAdam: In my career, there is no silver bullet for anything. I don't buy that there is a holy grail of advertising that everyone will love. Someone has to pay for this stuff.