$199 Unsubsidized Verizon LTE Tablet Changes the Game

NEW YORK ( TheStreet) -- Thanks to near-universal coverage of 700-megahertz LTE networks, primarily from Verizon ( VZ) but soon also from AT&T ( T), dramatic price drops will hit the tablet/smartphone market in 2013 and 2014.

The purpose of this article is to show why this is different than "the usual" Moore's Law technology progression in these markets, and why it will yield a 33% or greater price drop in 2013.

The crucial background is this: Over the last 20 years, most new U.S. cellular data networks were typically launched on a higher frequency than before. From 800 MHz to 900 MHz, 1700 MHz, 1900 MHz, 2100 MHz and 2600 MHz -- more often than not, the new faster network launched on a higher frequency than the previous one.

A higher frequency means higher capacity to transmit bits over the air nearby, but it also reduces the range. Instead of going through 10 walls, a signal would go through only five. Instead of reaching one mile, the signal only reached half a mile.

Once you move beyond very dense deployments very close to the cell sites, the superior range of the lower frequency trumps the superior capacity of the higher frequency. Why? Because getting any coverage is better than getting none.

The implication from this is if you launched a new network, you needed backwards compatibility to the older data networks. For example, if you launched HSPA ("3G") on 1700 MHz, you also needed to support EDGE ("2.5 G") on 900 MHz. Otherwise, a user would drop coverage traveling between two cell sites.

Pretty much the only company that had the ability to support all of the older networks, while still staying on the cutting edge on the new technologies, is Qualcomm ( QCOM). This is why Qualcomm dominates the so-called "cellular baseband" industry. Whether you're Apple ( AAPL), Google ( GOOG), Microsoft ( MSFT) or BlackBerry ( BBRY), you pretty much must base your products on Qualcomm. If you don't, your products simply won't maintain a signal as you travel between cell sites.

This is what will start to change very soon.

In 2007, the Bush Administration auctioned off spectrum located close to 700 MHz, yielding more than $10 billion for the U.S. Treasury. Verizon and AT&T are now the dominant operators in this spectrum. Verizon is almost 100% done with its build-out, and AT&T is said to get there in the second half of this year.

Once you have deployed LTE at 700 MHz on the same cell towers as the old technologies at 800, 900, 1700, 1900, 2100 etc. MHz, there is no strong need to maintain backwards compatibility for those higher frequencies, for coverage reasons. Why? Because there are no longer any "gaps" between towers reachable only by the older, lower frequencies.

This has huge implications for Qualcomm, and for the cost of building devices such as smartphones and tablets.

What can you do now, with 700 MHz LTE, that you couldn't do before? You can launch products with so-called "single-mode LTE," which is an LTE chip without any backwards compatibility with the older 3G technologies such as EV-DO and HSPA. It may even operate at a single frequency, e.g., 700 MHz, in some cases.

This means you don't have to buy that LTE chip from today's de facto monopolist, Qualcomm. I don't know exactly how much money you could save, but my conversations with industry experts suggest that a far simpler LTE chip from a hungry second-tier vendor could reduce the price of a tablet or smartphone by more than $50 in some instances. Obviously the actual cost (revenue to Qualcomm) of just the LTE chip is less than $50.

Consider this: Apple charges $130 extra for LTE in its iPad tablets.

The biggest 700 MHz LTE beneficiary of this is Verizon because its backwards compatibility is tied more closely to Qualcomm than is AT&T. For evidence, see Verizon's CDMA, 1xRTT and EVDO legacy networks, all tied 100% to Qualcomm. Every single Verizon LTE device in the market today is Qualcomm, not coincidentally.

For this reason, it seems evident that the next move by Verizon is to launch an LTE tablet based on such a single-mode LTE 700 MHz chip this year. Would such a device be based on Android, iOS, Windows or BlackBerry?

My guess is Android. Why? Because speed of development in Android is leaps and bounds ahead of the other operating systems. Time-to-market simply trumps the other operating systems nine times out of 10. New technologies are typically introduced in Android first, then spread to iOS, Microsoft and BlackBerry as they catch up.

Today you can buy an unsubsidized, quality seven-inch Android tablet with a cellular data modem for $299, in the form of the Asus Nexus 7. This is the price leader for a true tablet, i.e., not a closed-OS book-reader. It's got HSPA, not LTE, but that may not matter much especially as T-Mobile's HSPA network is either 21 or 42 meg, depending on the market.

The WiFi-only version of the Nexus 7 was launched on June 27, 2012, and much progress has been made in terms of cost reduction, even outside this future single-mode LTE development. Considering Apple's $130 LTE premium on the iPad, the new single-mode LTE premium may be only $30. That's $100 net, taking the price down from $299 to $199. Further reductions may be possible this year as well.

For reference, you can also buy a Samsung seven-inch LTE tablet at Verizon today for $299, but it is running the now-obsolete Android 4.0 operating system and there is no clear upgrade path announced. Apple charges a relatively whopping $459 for its LTE version of the 7.9 inch iPad Mini.

Conclusion No. 1: De facto 100% LTE coverage at 700 MHz means Verizon could save a ton of money ditching Qualcomm in favor of single-mode LTE. This will happen in tablets first, because voice-over-IP is not yet mature in the cellular world -- although that is coming soon, too, spreading this development to the smartphones.

Conclusion No. 2: In the near term, this could help Google at the expense of Apple -- assuming that this first tablet is Android instead of iOS. In principle, though, there is no reason Apple couldn't respond with the same coin. It would be painful for Apple to try to sell its LTE Tablet for $459 when an equivalent Android version would be sold for $199 or even less.

Conclusion No. 3: Qualcomm could be in big trouble. This is contradictory from the perspective that everyone in the industry knows that Qualcomm makes the best products, and has been in this pole position for years. This single-mode LTE trend could mean that Qualcomm's pricing could fall through the floor because Qualcomm would to have to sell a much cheaper product.

Conclusion No. 4: This kind of LTE-only tablet for Verizon could be the first to have a non-Qualcomm LTE chip, the first one to do so. I don't know this, but it seems logical if Verizon wants to break Qualcomm's back.

The bottom line: This development would be incrementally negative for Qualcomm, positive for Verizon, short-term slightly positive for Google, short-term slightly negative for Apple, Microsoft and BlackBerry. Longer term, single-mode LTE also means VoIP (Voice over IP), which in turns means Google taking over the voice/SMS business at the expense of the carriers such as Verizon and AT&T.

In other words, a relatively short-term victory for Verizon could turn into a longer-term nightmare. The only clear winner -- short-term and long-term -- remains Google.

Specific prediction: Verizon -- and perhaps other carriers in due course -- will launch single-mode LTE tablets priced at $199 or lower, unsubsidized, contract-free, in 2013.

At the time of publication, the author was long GOOG, AAPL and QCOM, and had a short position in MSFT.

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