Wireless carriers have a love-hate relationship with smartphone subsidies. T-Mobile is making a risky move later this year when it ditches them altogether. The No. 4 domestic carrier is facing stiff competition in the postpaid market, in part because it has always lacked Apple's iPhone in any official capacity.
As T-Mobile pursues its unsubsidized plan, the rest of the industry will be watching with bated breath to see how customers respond to the prospect of paying full retail price for smartphones, even if they can obtain financing to do so. Spanish carriers have already showed T-Mobile of what kind of pain may be in store, since their own attempts proved to be a disaster. Two months ago, Verizon (NYSE:VZ) CEO Lowell McAdam expressed interest in ditching subsidies, but acknowledged that consumers aren't ready to give them up.
At the Deutsche Bank 2013 Media, Internet, & Telecom Conference, Verizon CFO Fran Shammo said that he believes smartphone subsidies will decline in the coming years as competition heats up. While the platform landscape continues to currently be dominated by iOS and Google Android, Shammo sees rivalry from Microsoft Windows Phone and BlackBerry 10 putting downward pressure on subsidies. Shammo added, "I'm a believer that over the next two to three years subsidies will start to decrease just because of the ecosystems."
According to Kantar Worldpanel ComTech's most recent estimates, over 95% of smartphone sales in the U.S. are either iOS or Android. Verizon has a vested interest in seeing that combined figure decline, with the hopes that subsidies will fall along with it.
Additionally, Shammo sees voice-over-LTE as another catalyst for subsidy deterioration, as devices will technically be able to remove the CDMA chips inside and reduce component costs. Big Red is planning on rolling out VoLTE later this year. That doesn't mean that Verizon's 3G CDMA network is going anywhere, though, as the carrier previously said it was aiming for 2021 as a possible retirement date for its 2G and 3G networks. But as newer devices shift toward VoLTE, that could affect its ongoing subsidy costs.
However, one challenge that I see Verizon facing with this prediction is that the rest of the world simply isn't anywhere near that stage in the game. Outside of the U.S., LTE networks are either nonexistent or in their infancy. Verizon is well ahead of the pack with its LTE network in the U.S., which now covers 480 markets, but the fact remains that smartphone vendors highly prefer to build devices with broad global compatibility whenever possible.
In order for a subsidy reduction to materialize due to VoLTE, Verizon will need to convince (or require) OEMs to build devices specifically tailored for its network and lacking older CDMA chips, while manufacturers will still need to build devices with CDMA chips for other networks around the world. As mobile gatekeepers, wireless carriers get a lot of leverage and it's still feasible that Verizon could demand this of any vendor wanting access to its top-dog subscriber base. Just don't expect OEMs to be happy about it, as they universally despise device exclusivity.
That would also be a big bet on a relatively new technology, especially when consumers still sometimes need to fall back on the 3G network at times when 4G coverage may be spotty. If a consumer picks up a fancy new flagship smartphone only to find that it loses voice capabilities in 4G deadzones, even when there's a perfectly good 3G network available, the company could be on the receiving end of some serious backlash from subscribers.
For example, here's Verizon's current coverage map.
Imagine only being able to make VoLTE calls in the 4G LTE markets, while venturing in to 3G coverage area would neuter the phone capabilities of that smartphone.
It's very clear that VoLTE is the future, but as with any nascent technology, rollout and adoption will take time. It seems rather aggressive to expect VoLTE to be ready for total dependence (implied by the predicted elimination of CDMA chipsets) in just a few years.
Betting on the underdog
In some ways, Verizon probably wants T-Mobile to see some modicum of success with ditching subsidies, so that it may potentially follow suit one day. Until then, Verizon will hope other forces can help it battle the rising tide of smartphone subsidies.
Fool contributor Evan Niu, CFA, owns shares of Apple and Verizon Communications. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.