PALO ALTO, California (TheStreet) -- For all the talk of dramatic change in the smartphone landscape overthe last two or three years, they pale in comparison to the impact of what'snext: The shift from circuit-switched voice to VoIP, or Voice over Internet Protocol.This has been talked about for 10 years, but the stars are finallyaligning to hit with full force right now. Here is why:
The average U.S. smartphone monthly bill is approximately $100, plustax. Of this $100, approximately 2/3 goes to an unlimited voiceplan, and the other third to a broadband data fee for service ranging from 2 gig to unlimited.
Think about this for a moment. All the excitement of new and old appsalike, ranging from email to simple Web browsing to Facebook, Netflix,Dropbox, Twitter and numerous games -- is covered by one third of what youpay every month. In the other corner, the 100+ old app of simplephone calls eats 2/3 of your bill.
This may have been justified until recently, but Skype is nowavailable on the iPod Touch, iPhone, iPad and other platforms. OtherVoIP apps are, too, including Vonage, Fring, Truphone, 8x8 and others. Most recently,
announced on August 25 that all calls to U.S.numbers will be free -- at least until the end of this year.
Do you now see what is so wrong with this picture? Once you botherusing any of these apps -- Skype, Google Voice, Vonage, Fring,Truphone, 8x8 or any of surely many others already (or soon be) available or soon -- you are paying 2/3 of your monthly smartphone bill for
. Pure waste.
Did you wake up yet? I have just pointed out that a multi-trilliondollar industry may stand to lose 2/3 of its revenue once peopleinvest in a smartphone and click to install one or several of theseVoIP apps.
Of course, as with almost all changes in technology, this will notflow through the system as soon as a solution is available. It willtake years to play out. But once there's a crack in the Hoover Dam ... and you can't plug it ... do you really want to invest against thistrend?
Who will be the winners and losers in the market, as a result of theimminent VoIP smartphone revolution? The answer is divided into twoparts: Smartphone makers and network service providers.
First, smartphone makers. There are only two devices in the markettoday with the ability to take advantage of the VoIP smartphonerevolution, not forcing you to also pay for a traditionalcircuit-switched voice plan. The most interesting example is the
iPad. It is to my knowledge the only GSM-ecosystem device inthe market with significant smartphone capability, that you can buywith a data plan only, and not have to pay for any circuit-switchedvoice.
All you pay is $25 per month for 2 gigs worth of data, and thenyou use Skype. This makes the iPad the cheapest smartphone in themarket today, in terms of the monthly service fee. Yes, really.Compared to the iPhone, it saves you $70 per month, or $1,680 over twoyears. You hadn't thought of this, had you?
Of course, the iPad is a huge device and most people aren't going touse it "as a phone" because it doesn't fit in most pockets. ButApple has "a device for that" -- the iPod Touch. The current iPodTouch, of course, runs Skype, and you can use it with a separate datamodem such as the Novatel MiFi (available from Verizon Wireless,
and Virgin Mobile) or the Sierra Wireless Overdrive (availablefrom Sprint and its partners). These types of plans start at $25 permonth, mimicking
iPad data plan.
We all know Apple will be announcing a new iPod Touch on September 1.Today, the iPod Touch is the only device in its class, feeling justlike a smartphone, but lacking the cellular modems of every othersmartphone in the market. Apple could simply mimic the iPad and equipthe next-gen iPod Touch with the same kind of embedded HSPA (or EVDOor WiMax or LTE) data modem as it has already done with the iPad. Ifso, it would be a pure VoIP machine, in the right size for atraditional smartphone.
If Apple were to unveil such an improved iPod Touch device, it wouldbe the only company offering a smartphone with a monthly bill two-third lower than every other smartphone on the market. If Apple were theonly company doing this, it would punctuate the sales of every otherhandheld communications device in the market. At that point, Applecould sell well over 100 million of these units per quarter, on aglobal basis. Indeed, this is at the core of my bull case for Applestock.
That said, why would Apple be the only company offering such a device?
Of course it wouldn't. Every other smartphone maker can easily jumpinto this game. Every one. Skype and Google Voice, among others,could run on every OS, every device.
, LG -- one wonders what excuse any of thesecompanies has for not already having launched such a product.
Indeed,I will go so far as to say that the failure to launch this productrepresents nothing short of gigantic malpractice by all of thesemanagements. The first company bothering with this would catapultits market share like nothing we have seen in the smartphone world todate, including the iPhone and Android.
Interestingly and paradoxically, while Apple is the only companyhaving offered devices able to take advantage of this trend thus far-- iPod Touch and iPad -- it may be the only company restricted fromlaunching the killer product I described above (iPod Touch withdata-only modem). Why? Because its agreement with AT&T may preventit from creating a product that so closely competes with -- and whosesales would completely punctuate -- the iPhone.
That said, if thewell-publicized rumors of AT&T's deal with Apple ending by January2011 are true, this restriction will soon be history anyway.
Conclusion on the smartphone side: Anyone stepping up to the plateand bothering to make this VoIP-only machine will be a winner -- ifthey do it in time. Anyone who doesn't, or takes too much timefiguring this out, will go the way of the horse-and-buggy andmainframe. While Apple has the early lead here, this lead could bevaporized in a nano-second by Google and its partners -- or by anyoneelse.
What about the service providers? The lion's share of revenue andprofit from the traditional cellular service providers comes fromcircuit-switched voice. With this business collapsing into the cornerof Skype, Google Voice and others, it would appear to present animpossible equation for these companies. Yes, data revenue willcontinue to grow like a weed, but that may not be enough to replacethe profits from the legacy voice business. In this light, I don'tsee any reason to be long any of those companies -- AT&T,
Only one company stands out as a zero-loser in this new VoIP telecomworld:
. It's the only pure 4G play, with not a pennyof circuit-switched voice revenue to lose. Its network has the lowestlatency -- critical for VoIP to work well -- and offers the mostcapacity for VoIP. As all other cellular network providers see theirrevenue fall by two-third over time, Clearwire's revenue should mushroomdramatically.
Perhaps Clearwire will fail anyway -- the perils ofbeing heavily leveraged -- but if that doesn't happen, it may be theonly wireless company left standing with revenue growth. Either way,it makes it a most attractive acquisition target.
So there you have it, folks: The mobile VoIP revolution is up forgrabs for any smartphone maker willing to cater to this market, andApple has the fragile early lead with the iPod Touch and the iPad. Onthe service provider side, this will be a blood-bath for all of themexcept the VoIP-only network play: Clearwire.
At the time of publication, Wahlman was long AAPL, GOOG,RIMM, CLWR, NVTL, SWIR and short NOK.
--Written by Anton Wahlman in Palo Alto, California.
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Anton Wahlman was a sell-side equity research analyst covering the communications technology industries from 1996 to 2008: UBS 1996-2002, Needham & Company 2002-2006, and ThinkEquity 2006-2008.