Verizon chief operating officer Lowell McAdam sat down with Fortune’s Stephanie Mehta at the Brainstorm Tech conference to discuss why it passed on the iPhone initially, the pending merger between AT&T and T-Mobile, and hacking.
MS. MEHTA: Lowell McAdam is the Chief Operating Officer and President of Verizon, and he’s been kind enough to join us for what we hope will be a really wide-ranging conversation about technology, entertainment media and a little bit about cell phone hacking. So welcome, Lowell.
MR. McADAM: Good morning. Congratulations on your demo. You got through it.
MS. MEHTA: I got through it, thank you. So Lowell, you were named president in October of last year, and by all accounts, everyone I talked to at Verizon says that, you know, you’re pretty much in charge. When is that going to become official?
MR. McADAM: I would have said some time between now and the end of the year. You know, to be honest, I use these days as a bit of a gift, because he can deal with the shareholders and the board, and I can scurry around the company causing mischief. So it’s — there’s no rush, from my perspective.
MS. MEHTA: And people tell me that it’s been pretty low drama, that the transition has been very smooth. Is that because, you know, it’s business as usual at Verizon, or is that about the personalities?
MR. McADAM: Well, no. I think it’s more probably about the personalities. Ivan said up front, when we first started out, he said it’s time for a fresh set of eyes around the business. So as I’ve, you know, two people do things differently any time you do a transition like this.
He’s been very, very helpful, frankly, in encouraging me to change the things that I feel need to be changed. So I wouldn’t say it’s business as usual, but there’s some continuity, I think, of strategy here.
MS. MEHTA: So what’s the biggest change that we’re going to see under Lowell McAdam’s Verizon?
MR. McADAM: Well, I think what we did in wireless we’re going to be doing more broadly across the whole company, and I think the biggest change is probably our openness. Some of you in the audience may know that we launched in Waltham, Massachusetts the Innovation Center we call it.
We talked about that in January. We have 6,000 different vendors working with us, because we’ve opened up APIs, we’ve opened up hardware testing. We’ve provided them all sorts of facilities to see how their devices would work on LTE, and right now —
MS. MEHTA: LTE is Long Term Evolution, 4G.
MR. McADAM: Yes, 4G. It’s not faux G; it’s 4G, and it’s a — I mean the interest has been tremendous. We have right now today 80 different vendors testing products in the lab, and we have launched commercially another 30 of those. So when you ask what’s the biggest change, I think we’re going to encourage openness and we’re going to have another center in San Francisco so we can cover both coasts, and have applications as well as hardware. I see that happening across the entire set of platforms within the company.
MS. MEHTA: So how open is open? I think there’s probably a lot of people in this audience who hear the word open coming out of a big telecommunications company, and are a bit skeptical.
MR. McADAM: Yes. Well, those of you that are skeptical, I mean I think we earned your skepticism over the last 100 years of the Bell system. But I think there is a real watershed event for us, when we worked out the arrangement with Google
, you know.
Nobody, including Eric Schmidt, the first time I visited with him, believed that we were really going to allow open devices on the network. Then we ought the 700 megahertz spectrum and now we’ve got machine to machine as one of our fastest growing areas, and we don’t develop that hardware. We assist in developing it. We’ve got a number of applications.
Yesterday, we just announced our mobile commerce, our joint venture where we brought all the big credit card companies in. That’s a very open system. We’ll have coupon providers in that wallet as well. So I mean open is as open as you want it to be frankly.
MS. MEHTA: You mentioned your meeting with Eric Schmidt. You spent a lot of time reaching and communicating with the IT community. Where do you think you, Verizon
and the sort of entrepreneurial tech world see eye to eye, and where are you guys still really far apart on your world views?
MR. McADAM: Well, I can’t say that we have had an opportunity that we’ve walked away from, because of being open or because of being at odds with an entrepreneurial group. I mean every model is going to be a little different.
But our view is that when you’ve got networks like Fios and you’ve got networks like LTE that have the sort of throughput and latency, there’s really nothing that couldn’t ride on one of those networks, and we just need to figure out what the economic model is.
I think, excuse me, what we’ve shown with the Google relationship and with others is that if you focus on the pie getting bigger, you don’t need to have the same percentage of the pie that you had when we had the walled garden. We’re seeing that impact our results. Our results are Friday, so I can’t really say too much about that.
But we’ve seen it impact our results in a very positive way by having this sort of open and more collaborative view.
MS. MEHTA: On this stage, almost exactly a year ago, Barry Diller got up here and made a very impassioned plea for net neutrality. You know, without getting into a sort of legislative versus non-legislative debate, what can you say to this audience, to assure them that Verizon will essentially provide equal access to all comers?
MR. McADAM: Well, all I can do is say watch what we’ve done, and what we’ve done is we’ve been completely open and we haven’t blocked things. The things that we need to monitor are overall traffic management on the network, because when you’ve got 100 million customers, you don’t want a few to just take the network down.
Now one of the things we did here just recently is we went to tiered pricing. So if somebody wants to use a lot of network capacity, our view is okay, within reason have at it, because you’re going to pay for it.
I think that was — other than that, I think the whole discussion about net neutrality was a red herring, and I understand certain people are very passionate about that. But you know, there wasn’t — show me where any wireless company, and even the whole issue over Comcast and Bit Torrent, I think, was a political game.
So I think it’s a red herring, and you know, we’ll show you that we’re going to move traffic. That’s what we’re in the business to do, is to move traffic and connect people and connect devices.
MS. MEHTA: So in the last set of comments, you made a reference to opportunities walked away from. In 2007, you called up Steve Jobs and said hey, maybe we should start a dialogue about doing something together. The first question, was it a mistake to pass on the iPhone initially?
MR. McADAM: You see, that’s another sort of favorite folklore. Look, I worked in the GSM world for several years when I was in Europe. Steve Jobs is not a stupid person, and he’s going to go —
MS. MEHTA: I’m glad you think so.
MR. McADAM: He is going to go where the volume is, right. I mean in business, it’s show me the money and the volume for him was in GSM. So there wasn’t any passing on it. It was, you know, he made a strategic decision. It was the right decision. Then he made a strategic decision to build a CDMA one, and you saw by their results yesterday that wasn’t a bad strategic decision.
So now we’ve got the iPad and we’ve got the iPhone and, you know, we’ve got a path, a road map together to get to LTE, which I think will really be cool when we can provide some of those throughout speeds and latencies on the iPhone and the iPad.
So it’s another one of those things that there was a lot of hype over, and there’s frankly not a lot of substance to it.
MS. MEHTA: So I know you’ve got earnings on Friday, so you can’t talk about the financial impact. But can you talk about the impact on your brand or the overall sort of halo effect that you’ve gotten from being an iPhone provider now?
MR. McADAM: Well, I think it fits with our overall strategy, which has always been to be a portfolio, have a portfolio of devices. So while we didn’t have the iPhone to begin with, we were very strong with RIM
and very strong on the Android.
Eric would tell you that, you know, when we declared for Android, we really moved that into the mainstream, and Android’s done very well. So having the iPhone now just strengthens our portfolio even more.
I’m also excited about the LTE portfolio. When I look ahead over the next six months, some of our best sellers today, Samsung just did a device called the charge, which is LTE-based, which is just terrific. HTC has some. If I look to the fourth quarter, our 4G LTE lineup will be as strong or stronger than the 3G.
So to me, it’s all about making sure you’ve got a strong portfolio, and we think we’re there.
MS. MEHTA: So handsets are not becoming commoditized. There’s, you know, because there’s a feeling that with operating systems like Android ad other operating systems, that you know, all the intelligence resides in the network, in the cloud, and you know, that benefits you. The handset could eventually become a dumb terminal.
MR. McADAM: Yes. I mean I think that’s somewhat debatable. I mean screens continue. The charge took the screen technology that Samsung took off their high definition TV sets. When you look at that the first time, you go wow. So I mean that’s a differentiator.
I think differentiators may change. Applications may change. I think the mobile commerce app is something that could be a differentiator, and that could ride on a bunch of different terminals. So to me, the ecosystem expands, and it’s not the old, you know, so and so’s got the exclusive particular device. Now it’s the entire ecosystem of the network, of the apps that go on it and of the device.
MS. MEHTA: So there’s a big merger pending in your industry.
MR. McADAM: Is there?
MS. MEHTA: Yes. A couple of people have told me about it. What are the odds that goes through, and what’s the impact on you guys?
MR. McADAM: Well, I don’t think we know the impact on us. If I was betting, I would say the merger will probably go through. It’s a merger that I think AT&T had to do, because we have a failed spectrum policy in this country.
There’s plenty of spectrum out there. It’s in the wrong people’s hands. So T needed to get spectrum. T-Mobile had spectrum. So it was to me, the only question was why did it take this long to do it? Then I think AT&T’s
motivated enough to do it, that they’ll agree with what the government needs them to agree to.
Our concern is what do those agreements, how do they impact Verizon? That’s what we’re kind of waiting to see.
MS. MEHTA: Right. So elaborate on the failed spectrum policy. Obviously, companies like Verizon Wireless need lots of spectrum. It’s important for the throughput of these increasingly robust applications and video.
MR. McADAM: Right.
MS. MEHTA: You know, is this a case where government needs to step in and intervene, and reallocate the spectrum?
MR. McADAM: Well, I think the government policy is what put us in this position, to be frank. I mean one of your best assets is AWS, which has a build date of 2021 on it, I think. You contrast that with the 700, which we bought and within 12 months of when we actually got the spectrum, it was in commercial use.
So I think you just have to be very careful that you’ve got an asset like this that’s important, and it doesn’t do any good sitting on somebody’s shelf somewhere. I also think we’ve sort of chopped up a lot of the spectrum into such small pieces, and the designated entity requirements around many of these things just encouraged people to buy it, hold it and then flip it in ten years.
That doesn’t help the nation deliver broadband to these rural communities.
MS. MEHTA: Right. But at the end of the day, should consumers be concerned about concentration of power in the hands of just a handful of wireless operators?
MR. McADAM: I mean this is a little bit — it is like the airline industry or any other. This is a hugely capital-intensive business. So having, you know, seven or eight operators that can’t afford to build out spectrum is not in the public best interest either.
So T-Mobile, great company. Had spectrum, could not afford to build it out. So what good did it do to have them in that competitive space? So I think there is — it’s a little bit of gravity. I’ve got to tell you, 50 million customers with Sprint, 130 or whatever it will be with AT&T. Anybody that doesn’t think this is a highly competitive market, you know, I’d love to talk to you.
When you bring in Google and Apple and others that, you know, Facebook will be in the mobile world. It’s a very competitive ecosystem. This goes way beyond what you see with individual carriers.
MS. MEHTA: I’m going to open the floor to questions in just a minute. Michael, I’ll get to you in a second. But you know, you mentioned the capital-intensive nature of this business. As you look forward to where Verizon is going to see growth, and where Verizon is going to invest, you have things like Isis that we mentioned earlier.
It’s a platform. It’s software-based, and then you guys have, you know, LTE, which is capital-intensive, you know, a big financial commitment to build out. Obviously, your core competency is still being a network operator. But are we going to see more Isis-like revenue sources?
MR. McADAM: Yes, I think so. I mean our objective is to concentrate our business on a few platforms. Fios is clearly our video platform. Obviously, that spills into LTE. LTE will be our mobile platform. Global Standard opens up the possibility of doing all sorts of things with Vodaphone (ph) and others around the globe.
We’ve got a huge IP backbone network with 100 gig services around the world. So if we focus on building those platforms, and then we’ll plan on picking a few applications that we want to be a part of, and Isis is one. We’re building a platform that will allow video to go across mobile and fixed.
So we’ll have a few of those cornerstones. But our message is that we would love to partner with others, to bring your applications onto those broad platforms, to be able to tap into things like health care and Smart Cities and energy management, and other machine to machine applications.
MS. MEHTA: Right. Let’s take a few questions. Michael Shragan of (inaudible).
AUDIENCE: Just to follow upon that answer in your earlier comment about Open. One of the most important decisions that Lou Gersner made at IBM was deciding what areas IBM would compete with its customers and compete with its partners.
How dynamic a conversation is that with you, because one of the signals you made with Android is there’s a certain way we’re not going to compete. So two, three years out, where are you guys really going to be competing in the ecosystem, rather than looking for partnership and symbiosis and kumbaya and all the good stuff?
MR. McADAM: Well, I think there’s a few places that are the sweet spot for us. Video is clearly one of those, because we’ve got the Fios platform and now LTE allows you to take it across the mobile side. That’s important.
I think multi-national enterprise applications clearly is one. We went out and bought Terremark, a terrific asset, a terrific management team. If you look at our assets combined with Terremark’s asset, that really gives us a springboard to move forward.
We have, if I look at what comes to us through the Innovation Center, clearly energy management is going to be something for us, and health care is going to be something for us. The partnering there, just looking at how we can help the energy companies lower their cost to produce and to transmit. I mean it’s shocking to me when I see it, what we can do because of the platforms we have.
So they’ll be a few sweet spots like that, you know, and there’s a varying degree too. I mean they’ll be some that we’re going to plant our stake in, and they’ll be others. We don’t really need to play more than a network connection play. But I think we can play across the broad spectrum.
MS. MEHTA: Question right here.
AUDIENCE: My name is (inaudible) from Beijing. I have a question about this IT consumerization. You know, nowadays, people bring their Smartphones to workplace, bring iPads. So they’ve got, they do their corporate work, all the business work-related.
So what do you see as a telecom operator, the challenges or the opportunities for this IT consumerization?
MR. McADAM: Well, I think security is probably the biggest one there, right, because what people expect on their Smartphone for their personal use versus what the company requires from their security is huge. That’s one of the reasons, that’s again a kind of a core competency for us.
That’s why we did Cybertrust, and that’s why we’re also happy about Terremark, because Terremark does some very, very high security things for customers, as well as the federal government. So I think that’s the big key. I mean there are a lot of tactical issues around, you know, accounting for usage of the device. Those are the easy things.
But I think privacy, and then mobilizing some of the applications off of the cloud. Those are probably the big things that we’re focused on.
MS. MEHTA: I know we’re going to have a conversation about this tomorrow, but Lowell, how many times in a day or a month does someone try to hack your network?
MR. McADAM: Oh geez. I mean it’s literally billions of attempts to get beyond our firewall. Most of them come from, you know, Russia, kind of those countries. But it’s literally billions of attempts a month.
MS. MEHTA: So say I were a tabloid journalist, and I wanted to tap into a politician’s cell phone, and I’m here in the U.S. and he was a Verizon customer. How easy would it be for me to do that?
MR. McADAM: Yes. You want a blueprint? Is that what you’re asking for?
MS. MEHTA: I’ll just call News World for that.
MR. McADAM: I’d say it’s unfortunate, in my view, that they’re using the term “hacking” here, because it’s not hacking in the way we all think about cybersecurity. It’s really more poor password management practices. If you’ve seen the media inquiries, a number of people tried to go out and get into the various carrier systems, and they couldn’t get into Verizon because we require a password on the voicemail system.
There have been some issues with customers saying that’s a little bit inconvenient. But we feel that that whole reliability moniker, that is the cornerstone of Verizon’s brand, was important to do that. So we require a password, and we don’t allow 0000, and we encourage customers.
So it would not be easy for a customer, for anyone to get into a Verizon cell phone.
MS. MEHTA: All right, but in the case of voicemail, it really was illegally listening to their voicemail messages, as opposed to hacking a network?
MR. McADAM: Right, exactly. It had nothing to do with the network. It had nothing to do with the cell phone itself. It had you know, spoofing the telephone number and then what are the protocols that the carrier sets up around password security when you call yourself?
Our standards were a little bit higher, because we felt it was needed to protect the customer, and it worked.
MS. MEHTA: We’re going to take a few more questions, but I’d be remiss if I didn’t ask you the perennial question about the relationship with Vodaphone. Any changes on the horizon on that?
MR. McADAM: Well, I think you asked right up front about the seamlessness of the transition with Ivan. That’s something we’ve been working on for a year and a half. The goal was, I think, for both Vittorio and Ivan and me, was to make it much more of an operating partnership instead of a financial partnership.
That’s why all the angst over the dividend, because we only had — it was one-dimensional. Now, we are working on major areas together. We’ve announced that we have our largest multi-national customers are handled by one team, and it’s a team that’s made up of a combination of Vodaphone employees and Verizon employees.
We’re expanding that as we speak. We’ve aligned our technology road maps. We have told and we’ve told our major suppliers, and we’re actually negotiating contracts now with the major suppliers that cover both companies. So there’s a number of things that we’re doing together to make this more of an operating partnership.
I think it’s going to provide us some competitive advantage in the marketplace as we turn our face — not only our face toward multi-national, but as we look at large consumer applications and device purchases going forward.
MS. MEHTA: And does LTE facilitate that, as you go —
MR. McADAM: Yes. Yes, it does. I mean, you know, the whole thing was the technologies were always different, and then trying to make the applications flow and that sort of thing was tough. Well that is now evaporating for us.
MS. MEHTA: Right. Well, I was going to take one more questions from the audience, but unfortunately Lowell we’re getting the axe. If everyone could please join me in thanking Lowell McAdam, Verizon?
MR. McADAM: Thank you all.