Why Verizon Killing Its 3G Network Probably Won't Save You Money

We will soon be witness to the death of 3G. At least, we will from Verizon. 

Speaking at the Deutsche Bank Media, Internet and Telecom conference, Verizon chief financial officer Fran Shammo said that Verizon could start phasing out its 3G CDMA chips by the beginning of 2014. The goal, ultimately, will be to lower subsidies that carriers pay to smartphone manufacturers to carry new devices.

As it stands in the United States, the big carriers pay full price for smartphones like the iPhone or Samsung Galaxy S 3 then retail them at a reduced cost tied to two-year contracts. This subsidy costs the carriers a lot of money up front and is a drain on their quarter-to-quarter revenue. The carriers end up ahead if a user stays for the life of the contract (or pays an early termination fee), but anything a company like Verizon can do to lower its subsidy prices is good for its bottom line.

“Then if you look out into late 2014 then you start to think of things like, okay, so now I can start to take the CDMA chip out of the phone and just have a pure LTE handset. That also starts to reduce subsidies. So over the next two to three years I think we will start to see subsidies come down,” said Shammo, according to a transcript of the interview from Thomson Reuters (PDF).

What is stopping Verizon from phasing out its 3G CDMA network and moving to LTE permanently now? The answer lays with an overlooked aspect of smartphones that users tend to forget exists: voice.

The Coming Of Voice Over LTE

As it stands now, smartphones running LTE cannot make calls over the 4G network. LTE is a big, fat data pipe and it is indeed very fast. Yes, you can use some IP-based services to make calls (Skype, for instance), but the traditional phone call is not available on the newest wireless standard.

The challenge is that LTE is an IP-based system (akin to Wi-Fi) and does not handle traditional voice. When you make a call with your 4G LTE Verizon phone, you are actually still using the 3G network. Most people do not know or care how that works, but it forces companies like Verizon to keep expensive chipsets in their smartphones to handle voice calls. 

Verizon’s CDMA network is also why devices like the iPhone 5 cannot simultaneously make calls and browse the Web. The standard just does not allow it. 

This will change when Voice Over LTE (VoLTE) is available, likely near the end of 2013 or the beginning of 2014. 

“So I am a believer that over the next two to three years subsidies will start to decrease just because of the ecosystem. Then, for us, I think – for Verizon Wireless one other important ingredient for us is obviously we are investing in all this LTE technology. We will ultimately get to Voice Over LTE, probably end of this year, beginning of next year,” said Shammo.

What Does It Mean For You?

More than any other industry, the mobile operators play a very fluid game of ARPU – average revenue per user. As we have seen in the past, the supposed “deals” we have seen from the carriers are really just rearranging how the language and structure of contracts are made. For instance, with Verizon’s “Share Everything” plan, you are going to pay basically the same as you were under the previous plan for data plus a couple extra dollars per device you add. It remains to be seen if Verizon will actually pass on savings from lower subsidies to consumers buying devices. 

So, Verizon cutting out CDMA in the next year for the sake of lower subsidies is not likely to lower your own data bill. If there is anything that consumers can count on it will be that companies like Verizon will always be looking for ways to squeeze the ARPU out of them.