Next Smartphone Revolution Will Be Price

NEW YORK (TheStreet) -- What will be the next "wow" factor in smartphones? Where will the next battles be fought? Let's go through the list:

1. Bigger display? Not really. At around 5 inches, hands aren'tgetting any bigger and the bezel is approaching zero. No more roomfor expansion here. We have reached the limit.

2. Better display resolution? Not really. The first 1080p displayis here ( HTC Droid DNA on Verizon ( VZ)), but 720p was already good enoughfor high-end phones. Going beyond 1080p? No way, not useful for thehuman eye. We have reached the limit.

3. Thinner phone? No way. People want more battery life, notthinner phones. At some point, too thin becomes uncomfortable tohold. We have reached the limit.

4. Better battery life? Absolutely. There is plenty of headroom onthis one. A source of perennial potential improvement. Infiniteimprovement ahead.

5. Faster networks? Sort of, but they are already here. The LTE standard will improve, but Qualcomm ( QCOM) has the requisite chips and they will upgradeevery year. We have reached a plateau for the next five years.

6. Integration/simplification? Yes, always. A major goal forSKU-reduction and cost reduction is to enable more radios on one chip. This is where Qualcomm leads the way today. Continuous improvementahead, but largely invisible to the end user.

7. CPU/GPU processing power? Yes, sort of. There will always beimprovement here, but for most people right now, the hardware is farahead of the software being used.

8. Camera? Yes, for sure. But how many people care? How manypeople think the current high-end smartphone cameras are good enough?

So what's the bottom line from this list? Smartphone hardwareevolution will focus on improving battery life, and to wait forQualcomm to put more radios onto one chip, so that they can achievethe goal of eventually selling one phone around the globe.

Therefore, imagine this headline/advertisement: "New smartphone fromBig Carrier XYZ! It's got 14% better battery life and the manufacturer is able to have you buy the same SKU that he sells in Nigeria and Japan."

Doesn't that make you thrilled to spend $349 or $649 to upgrade yoursmartphone!?

No?

Me neither. If that's all there is, the upgrade cycles will stretchout for an extra year or so, unlike the recent experience of theupgrade cycles compressing as smartphone makers were racing to get tothe current high-end plateau of superior specifications.

So is that all there is? Is there no more lever to pull for theindustry in terms of advancement?

Of course not.

There is always price. And when the hardware race has almost "frozen"at a certain display size, at a certain display resolution, andeverything has LTE with a CPU that far exceeds the ability of thesoftware to utilize all of it, then they will all have to turn to costreduction far more aggressively.

Think about it: What's wrong with this picture?:
7 inch tablet: $200 or less.
10 inch tablet: $400 or less.
Laptop: As low as $200.
High-end smartphone: $350 to $650 (unsubsidized)

One of these four does not look like the others. The smartphone priceis so much higher in relation to the basic hardware content. You canbuy a Nexus 7 tablet and a Google ( GOOG) laptop for $400 combined, or 35%less than a single iPhone 5! It makes absolutely no sense.

Then add the fact that all the Microsoft ( MSFT) PC licensees are feeling theheat from a failing Windows ecosystem, and are seeking new revenueopportunities. Microsoft is making its own PC now -- the Surface --and perhaps soon its own smartphone.

If you are Acer, Asus and Lenovo, just to mention a few obvious ones, why not focus more on Android smartphones as you did on Windows PCs?

Yes, it was hard until now because keeping up with the spec war wasdifficult, with Apple ( AAPL), Samsung, HTC and a few of others such as Nokia ( NOK), RIM ( RIMM) and Sony ( SNE) duking it out for the high end in a fast-moving spec race. But if the race is now reaching something of a plateau? Then the game changes.

The hardware race to radically cut the relative high-end smartphoneprice will be mated by a reduction in service cost. Why and how?There are two reasons:

1. At some point, the hardware becomes so relatively cheap --unsubsidized high-end Android smartphones probably approaching $199 ayear from now -- when subsidies won't seem as attractive anymore.

Once the American consumer realizes that a subsidy up front plus an inflated monthly fee is a net ripoff, there will be a move in the marketplace to buy smartphones SIM-unlocked and get service from a SIM card that you may have picked up at Wal-Mart. Thirty dollars per month can give you unlimited service, saving you as much as $60 a month, or $1,440 over two years. The consumer nets $1,000 or more in savings, $500 per year.

Those $500/year savings are already available to the consumer, so why will it matter morea year from now than today, you may ask? The answer is that the U.S. consumer is so short-sighted that the net present value benefit isharder to see if the phone costs $349 (Nexus) and $649 (iPhone), as opposed to perhaps $199 a year from now (a future Nexusphone).

2. Even lower prices for the monthly plans. If you want not onlyunlimited data, but you're also stuck on circuit-switched telephonyand SMS, as 99% of Americans are, it's not enough to get just a $30data plan for your smartphone. Most people pay closer to $90 becausethe bill adds to the $30 data also $20 for SMS and $40 for unlimitedcircuit-switched calling.

Google is likely to change this. I started writing in 2007, and haverepeated this call in numerous articles since, that Google will launchits own integrated VoIP service. This has taken longer than Ianticipated in 2007, 2008, 2009, 2010, 2011 and 2012. But it WILLhappen. And I don't think we are a full year away from this. I thinkit will happen in 2013 -- cross your fingers.

With Google VoIP, calling may be 100% free, or you may get unlimitedservice at some very cheap price, perhaps $10 per month. Or you'llget something like 1,000 minutes or 3,000 minutes for $10 -- orwhatever. All you need is a data plan, and you will be able to buy atleast 4 gigs for $30 per month. SMS? It's already free with Google,and when they make voice free as well, people will finally wake up andstart using the free SMS (Google Voice).

I predict Google will unveil this vision -- complete with $199high-end smartphones and almost-free VoIP -- on May 15, 2013.

Winners and Losers:

The big winner here will be Google. Unlike Apple, its hardwarepartners are cycling new devices onto the news stage much faster thanone per year. So cost will be cut a lot faster. Then add thelikelihood that Google will launch VoIP faster than Apple, and youhave a one-two punch.

That said, Apple could still be a big winner. First, Apple will stilltake power away from the carriers, and secondly Apple may surprise uswith new hardware cycles and its own VoIP service. If it does, Applecould equal Google as the big winner in this evolution.

Microsoft: In theory, Microsoft is in the same boat as Google. Theproblem is that Windows Phone 8 simply isn't off the ground yet, interms of market acceptance. Microsoft needs to close the app gap(quantity and quality) with iOS and Android. If it does this quickly,Microsoft together with Skype will also be a big winner, but so far myWindows Phone 8 device doesn't hold a candle to my Nexus, so theburden of proof is on Microsoft here.

Conclusion: One or two years from now, high-end smartphones will look mostly just like today's high-end smartphones. They'll have betterbattery life, but otherwise the main difference will be that insteadof costing $350 to $650 unsubsidized, they will mostly be $200-$500unsubsidized -- or less. And yes, monthly service plans will cost alot less, because we will have free mobile VoIP and SMS from Google,Apple and Microsoft.

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

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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