For all the talk of dramatic change in the smartphone landscape over the last two or three years, they pale in comparison to the impact of what's next: 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 finally aligning to hit with full force right now. Here is why:
The average U.S. smartphone monthly bill is approximately $100, plus tax. Of this $100, approximately 2/3 goes to an unlimited voice plan, 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 apps alike, ranging from email to simple Web browsing to Facebook, Netflix, Dropbox, Twitter and numerous games -- is covered by one third of what you pay every month. In the other corner, the 100+ old app of simple phone calls eats 2/3 of your bill.
This may have been justified until recently, but Skype is now available on the iPod Touch, iPhone, iPad and other platforms. Other VoIP apps are, too, including Vonage, Fring, Truphone, 8x8 and others. Most recently, Google 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 bother using 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 nothing. Pure waste.
Did you wake up yet? I have just pointed out that a multi-trillion dollar industry may stand to lose 2/3 of its revenue once people invest in a smartphone and click to install one or several of these VoIP apps.
Of course, as with almost all changes in technology, this will not flow through the system as soon as a solution is available. It will take 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 this trend?
Who will be the winners and losers in the market, as a result of the imminent VoIP smartphone revolution? The answer is divided into two parts: Smartphone makers and network service providers.
First, smartphone makers. There are only two devices in the market today with the ability to take advantage of the VoIP smartphone revolution, not forcing you to also pay for a traditional circuit-switched voice plan. The most interesting example is the Apple iPad. It is to my knowledge the only GSM-ecosystem device in the market with significant smartphone capability, that you can buy with a data plan only, and not have to pay for any circuit-switched voice.
All you pay is $25 per month for 2 gigs worth of data, and then you use Skype. This makes the iPad the cheapest smartphone in the market today, in terms of the monthly service fee. Yes, really. Compared to the iPhone, it saves you $70 per month, or $1,680 over two years. You hadn't thought of this, had you?
Of course, the iPad is a huge device and most people aren't going to use it "as a phone" because it doesn't fit in most pockets. But Apple has "a device for that" -- the iPod Touch. The current iPod Touch, of course, runs Skype, and you can use it with a separate data modem such as the Novatel MiFi (available from Verizon Wireless, Sprint and Virgin Mobile) or the Sierra Wireless Overdrive (available from Sprint and its partners). These types of plans start at $25 per month, mimicking AT&T's 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 just like a smartphone, but lacking the cellular modems of every other smartphone in the market. Apple could simply mimic the iPad and equip the next-gen iPod Touch with the same kind of embedded HSPA (or EVDO or WiMax or LTE) data modem as it has already done with the iPad. If so, it would be a pure VoIP machine, in the right size for a traditional smartphone.
If Apple were to unveil such an improved iPod Touch device, it would be the only company offering a smartphone with a monthly bill two-third lower than every other smartphone on the market. If Apple were the only company doing this, it would punctuate the sales of every other handheld communications device in the market. At that point, Apple could sell well over 100 million of these units per quarter, on a global basis. Indeed, this is at the core of my bull case for Apple stock.
That said, why would Apple be the only company offering such a device?
Of course it wouldn't. Every other smartphone maker can easily jump into this game. Every one. Skype and Google Voice, among others, could run on every OS, every device. Nokia, SonyEricsson, HTC, Motorola, RIM, Samsung, LG -- one wonders what excuse any of these companies has for not already having launched such a product.
Indeed, I will go so far as to say that the failure to launch this product represents nothing short of gigantic malpractice by all of these managements. The first company bothering with this would catapult its market share like nothing we have seen in the smartphone world to date, including the iPhone and Android.
Interestingly and paradoxically, while Apple is the only company having offered devices able to take advantage of this trend thus far -- iPod Touch and iPad -- it may be the only company restricted from launching the killer product I described above (iPod Touch with data-only modem). Why? Because its agreement with AT&T may prevent it from creating a product that so closely competes with -- and whose sales would completely punctuate -- the iPhone.
That said, if the well-publicized rumors of AT&T's deal with Apple ending by January 2011 are true, this restriction will soon be history anyway.
Conclusion on the smartphone side: Anyone stepping up to the plate and bothering to make this VoIP-only machine will be a winner -- if they do it in time. Anyone who doesn't, or takes too much time figuring this out, will go the way of the horse-and-buggy and mainframe. While Apple has the early lead here, this lead could be vaporized in a nano-second by Google and its partners -- or by anyone else.
What about the service providers? The lion's share of revenue and profit from the traditional cellular service providers comes from circuit-switched voice. With this business collapsing into the corner of Skype, Google Voice and others, it would appear to present an impossible equation for these companies. Yes, data revenue will continue to grow like a weed, but that may not be enough to replace the profits from the legacy voice business. In this light, I don't see any reason to be long any of those companies -- AT&T, Verizon, Deutsche Telekom and others.
Only one company stands out as a zero-loser in this new VoIP telecom world: Clearwire. It's the only pure 4G play, with not a penny of circuit-switched voice revenue to lose. Its network has the lowest latency -- critical for VoIP to work well -- and offers the most capacity for VoIP. As all other cellular network providers see their revenue fall by two-third over time, Clearwire's revenue should mushroom dramatically.
Perhaps Clearwire will fail anyway -- the perils of being heavily leveraged -- but if that doesn't happen, it may be the only 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 for grabs for any smartphone maker willing to cater to this market, and Apple has the fragile early lead with the iPod Touch and the iPad. On the service provider side, this will be a blood-bath for all of them except the VoIP-only network play: Clearwire.
