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Google Leads a Phone Price War in 2013

Anton Wahlman | Contributor
David Paul Morris | Bloomberg | Getty Images

One year from now, we will sit right here and ask: What was the most important thing that happened in the smartphone world in 2013?

Here is the good news: You are about to get the smartphone news of 2013, right now, at the end of 2012.

Smartphone advancements will be made on three fronts in 2013:

1. Smartphones will see little in terms of actual improvement, but they will be cheaper to assemble and fall in price a lot.

2. The new service to be launched on cellular networks is VoIP, and Google may end up leading this revolution in price: Zero or near-zero.

3. The price of cellular service will plummet as carrier voice and SMS revenue disappear from carrier columns, focusing competition on simple data plans.

Let us take these three factors in turn, in more detail:

Cheaper Smartphones

The only incremental "feature" for which smartphone users are screaming is better battery life. The current typical battery life is abysmal, and all smartphone makers will view this as a priority in 2013.

However, the displays are large enough, and thin enough, for our hands. The typical high-end resolution close to 720x1280 is more adequate for our eyes. In 2013, the change will be on the inside — not the outside.

The components inside the smartphone will become smaller and draw less power. They will be more integrated. Manufacturing methods will refine, and the result will be much cheaper prices.

Let's take Google's flagship phone, the Nexus. In 2013 we should expect more than the one annual Nexus product cycle. We should expect a Nexus 5 on May 15, and another refresh cycle in time for the November holidays.

The Nexus line may also fork into a lower-end device and a higher-end line. What would this look like?

The lower-end Nexus would be introduced to meet the $199 unsubsidized price point. It may have only 8 gig worth of on-board storage. The processor would be less expensive, the camera a bit simpler, and it wouldn't have LTE.

The higher-end Nexus would continue to be near the pinnacle of what Android can offer. It would have 16-gig, 32-gig, and even 64-gig storage in order to match the iPhone. The camera would be fancier, the processor.

With a Nexus starting at $199, the price between totally constricted contract phones -- requiring laughably expensive monthly plans — would be blurred with a SIM-unlocked, contract-free Nexus enabling a user to cut the monthly expense by two-thirds.

It's easy to dismiss competition against the outstanding iPhone 5 but, at some level, price does matter. If an iPhone 5 will cost three times as much to own and operate over two years, it has to impact market share.

Finally, Mobile VoIP

VoIP started over landlines with Vonage in 2002, and we hardly even think about it anymore. Flat fee landline calling has now been available from $0 to $30 per month for years. That war is over, and VoIP won.

The wireless VoIP war has not really started yet. Yes, there are VoIP alternatives in the marketplace, ranging from FaceTime to Google Hangouts to Skype, Tango, and many more. They tend to be for "in-network calling" with some enabling calling outside for a fee.

The problem with "in-network" VoIP systems such as Tango and Google Hangouts is that only tech geeks tend to use them. Regular people want something that is universal. We have three such electronic networks today: email, telephone numbers (calling), and SMS on the same telephone numbers.

On the PC, Google already offers free unlimited calling to regular phone numbers. It could do the same on cellular networks too, but pre-LTE cellular data has been shaky, yielding erratic quality. This is now changing, and by the second half of 2013, the buildout of LTE networks will be essentially complete by most of the major carriers.

This becomes Google's inflection point. When LTE is essentially universal, it can simply offer cellular devices such as smartphones the same kind of free calling as it now has been offering on PCs for years. This will happen by the end of 2013.

In principle, Microsoft could offer the same with Skype, too. The question here is if Microsoft is going to be willing to compete on price. Skype calling to regular phone numbers isn't free on the PC.

What about Apple? It's got nothing significant on this front right now, outside iMessage and FaceTime. If Apple cannot compete here, it could be crushed by the end of 2013.

This leads us to 2013 prediction number three.

Dramatically Falling Monthly Service Fees

I have just established that if you are a Google (Android, Nexus) customer, your voice and SMS expense could go to zero in 2013. So obviously you're not going to send a check to Verizon Communications, AT&T, T-Mobile, and Sprint Nextel for services you will not be buying from them.

Now, all you need from the carriers is data. This means that the carriers lose all SMS and voice revenue as such. On an AT&T or Verizon $90 monthly bill, those are $60 out of the $90. What's left is $30, the data revenue.

Did you pay attention here? AT&T and Verizon will lose 67 percent of their wireless revenue. Capische? Do I have your attention now?

It may actually be even worse than that. T-Mobile already today offers data plus voice and SMS for $30, although only 100 minutes. But by the end of 2013, you can just chuck the SMS and voice pieces from the $30, and you're now at $20 to $25, tops.

Republic Wireless, which is reselling Sprint service, already offers unlimited-everything for $19 per month. FreedomPop, also a Sprint reseller, offers a little bit of cellular data for FREE — you only pay a $99 one-time payment for the equipment.

I will skip straight to the bottom line here: Google will pressure Sprint and T-Mobile resellers to offer a fat bucket of data — 5 gig or even 10 gig — for $19 per month. You get your SMS and calling from Google for free. That's it — $199 for a Nexus 5 smartphone, plus $19 per month for everything: "Do you hear me now?"

In this radical race to the bottom, the revenue and profitability at AT&T and Verizon in particular will plummet. Apple? Without something to counter Google's cloud services, it could only ride "for free" on the $19/month data — but voice and SMS would be extra. So an iPhone would probably be at least three times more expensive than and Android Nexus over two years.

That would likely cap Apple's market share, and more likely cause some people to abandon the iPhone in favor of Google Android Nexus.

So there you have it, folks: 2013 will be the year the smartphone pricing fell through the bottom. Google is in the driver's seat in this race, with Sprint and T-Mobile helping along, eagerly seeking to savage AT&T's and Verizon's market shares.

Stock impact? I'm starting to get worried, on almost all fronts.

By Contributor Anton Wahlman

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Disclosure: At the time of publication, the author was long GOOG and AAPL.