The Next Smartphone Revolution: Price

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’t getting any bigger and the bezel is approaching zero. No more room for expansion here. We have reached the limit.

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

3. Thinner phone? No way. People want more battery life, not thinner phones. At some point, too thin becomes uncomfortable to hold. We have reached the limit.

4. Better battery life? Absolutely. There is plenty of headroom on this one. A source of perennial potential improvement. Infinite improvement ahead.

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

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

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

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

So what’s the bottom line from this list? Smartphone hardware evolution will focus on improving battery life, and to wait for Qualcomm to put more radios onto one chip, so that they can achieve the goal of eventually selling one phone around the globe.

Therefore, imagine this headline/advertisement: “New smartphone from Big 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 your smartphone!?

No?

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

So is that all there is? Is there no more lever to pull for the industry 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, and everything has LTE with a CPU that far exceeds the ability of the software to utilize all of it, then they will all have to turn to cost reduction 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 price is so much higher in relation to the basic hardware content. You can buy a Nexus 7 tablet and a Google  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  PC licensees are feeling the heat from a failing Windows ecosystem, and are seeking new revenue opportunities. 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 was difficult, with Apple, Samsung, HTC and a few of others such as Nokia , RIM  and Sony  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 smartphone price 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 a year 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 more a 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 is harder to see if the phone costs $349 (Nexus) and $649 (iPhone), as opposed to perhaps $199 a year from now (a future Nexus phone).

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

Google is likely to change this. I started writing in 2007, and have repeated this call in numerous articles since, that Google will launch its own integrated VoIP service. This has taken longer than I anticipated in 2007, 2008, 2009, 2010, 2011 and 2012. But it WILL happen. And I don’t think we are a full year away from this. I think it will happen in 2013 — cross your fingers.

With Google VoIP, calling may be 100% free, or you may get unlimited service at some very cheap price, perhaps $10 per month. Or you’ll get something like 1,000 minutes or 3,000 minutes for $10 — or whatever. All you need is a data plan, and you will be able to buy at least 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 and start using the free SMS (Google Voice).

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

Winners and Losers:

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

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

Microsoft: In theory, Microsoft is in the same boat as Google. The problem is that Windows Phone 8 simply isn’t off the ground yet, in terms 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 my Windows Phone 8 device doesn’t hold a candle to my Nexus, so the burden 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 better battery life, but otherwise the main difference will be that instead of costing $350 to $650 unsubsidized, they will mostly be $200-$500 unsubsidized — or less. And yes, monthly service plans will cost a lot less, because we will have free mobile VoIP and SMS from Google, Apple and Microsoft.

 

[Cross-posted at The Street]