2013: Google Leads a Phone Price War

NEW YORK (TheStreet) -- One year from now, we will sit right here and ask: What was the mostimportant thing that happened in the smartphone world in 2013?

Here is the good news: You are about to get the smartphone news of2013, 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, butthey 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 ( GOOG) may end up leading this revolution in price: Zero ornear-zero.

3. The price of cellular service will plummet as carrier voice andSMS revenue disappear from carrier columns, focusing competition onsimple data plans.

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

Cheaper Smartphones

The only incremental "feature" for which smartphone users arescreaming is better battery life. The current typical battery life isabysmal, and all smartphone makers will view this as a priority in2013.

However, the displays are large enough, and thin enough, for ourhands. The typical high-end resolution close to 720x1280 is moreadequate 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 lesspower. They will be more integrated. Manufacturing methods willrefine, and the result will be much cheaper prices.

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

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

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

The higher-end Nexus would continue to be near thepinnacle of what Android can offer. It would have 16-, 32- and even 64-gig storage in order to match the iPhone. The camera would befancier, the processor the fastest in the market and it may have LTE. Unsubsidized prices would start at $299 and up.

With a Nexus starting at $199, the price between totally constrictedcontract phones -- requiring laughably expensive monthly plans --would be blurred with a SIM-unlocked, contract-free Nexus enabling auser 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 hardlyeven think about it anymore. Flat fee landline calling has now beenavailable from $0 to $30 per month for years. That war is over, andVoIP won.

The wireless VoIP war has not really started yet. Yes, there are VoIPalternatives in the marketplace, ranging from FaceTime to GoogleHangouts 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 GoogleHangouts is that only tech geeks tend to use them. Regular peoplewant something that is universal. We have three such electronicnetworks today: email, telephone numbers (calling) and SMS on the sametelephone numbers.

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

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

In principle, Microsoft ( MSFT) could offer the same with Skype too. Thequestion here is if Microsoft is going to be willing to compete onprice. Skype calling to regular phone numbers isn't free on the PC.

What about Apple ( AAPL)? 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. Soobviously you're not going to send a check to Verizon ( VZ), AT&T ( T), T-Mobileand Sprint ( S) for services you will not be buying from them.

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

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

It may actually be even worse than that. T-Mobile already todayoffers 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 piecesfrom the $30, and you're now at $20 to $25, tops.

Republic Wireless, who is reselling Sprint service, already offersunlimited-everything for $19 per month. FreedomPop, also a Sprintreseller, offers a little bit of cellular data for FREE -- you onlypay a $99 one-time payment for the equipment.

I will skip straight to the bottom line here: Google will pressureSprint and T-Mobile resellers to offer a fat bucket of data -- 5 gigor even 10 gig -- for $19 per month. You get your SMS and callingfrom 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 atAT&T and Verizon in particular will plummet. Apple? Withoutsomething to counter Google's cloud services, it could only ride "forfree" on the $19/month data -- but voice and SMS would be extra. Soan iPhone would probably be at least three times more expensive thanand Android Nexus over two years.

That would likely cap Apple'smarket share, and more likely cause some people to abandon the iPhonein favor of Google Android Nexus.

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

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

At the time of submitting this article, the author was long GOOG and AAPL.

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

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