Are Australian phone companies ready for the eSIM ?

Are you ready for the great eSIM shake-up?

We all know the tech landscape changes inthe blink of an eye. Just as we get used to one gadget, there’s always another evolution ready to revolutionise the planet.

The smartphone boom has epitomised that feeling over the past decade, with manufacturers making advances almost on a seemingly monthly basis. The latest craze to hit the headlines is the implementation of embedded SIM cards – eSIMs. Starting with the Apple Watch every leading name is working on their own eSIM with the likes of Samsung and even industry bodies like the GSMA revealing their own takes over the past few months.

The race to get the eSIMs out on the market has exploded and could very well change the way we use smart technology in the coming years. So what exactly is waiting for us just over the horizon?

The eSIM is set to disrupt an already fractious industry

The eSIM is likely to fundamentally change our relationship with our phone companies. Unfortunately (for them), it is likely to render phone companies what they never wanted to be – dumb pipes. A number of factors brought us and the phone companies to the launch of the eSIM. In this article, we examine what contributed to circumstances we’re in.

eSIM technology is completely in the hands of the handset makers who will be soon making the move to substitute subscriber identity modules (SIM) with eSIM chips which will stay embedded in the mobile device. It will have the capacity to work on all networks. The technology is already in use with some smart watches and wearable devices and should be in smart phones in 2017. This means the consumer will buy the latest smartphone from the manufacturer directly, probably using online shopping methods and will not need to be tied in immediately to a phone network provider.

The phone owner will be free to browse phone and data plans and choose whatever best suits their requirements without having to sign up to a long-term agreement just to get the privilege of using the most up-to-date phone The implication for network providers is that they will lose the chance to market a specific smart phone with a phone/data package and tying the user in by placing a high price on the whole deal while throwing in the smart phone. Smart Insights, a research portal, has estimated that by 2020, 346 to 864 million eSIM devices will have been released worldwide.

There are some current smartphone users who believe there will be more control over them but it appears it should still offer the options of choosing any provider and setting up the deal online, wherever it is around the world. Local SIMS will become a thing of the past.

Phone companies are in a race to the bottom

The irony of the launch of the eSIM is that ultimately, telcos could never avoid the world becoming a more competitive place. The eSIm exposes them to the the negative effects of the same technological progress that they benefited from 25 years ago. Remember, a quarter of a century ago, they, themselves, disrupted an older business model. At tat time, the major mobile phone companies in Australia and around the world gradually replaced or augmented most of the landline phone business which had been the backbone of telecommunications for as long as anyone could remember. They did very well out of it between about 1990 and now. In the process, they (the mobile phone companies) revolutionised how we live and work. Through the mobile phones they provided us, often under 2 year contracts, they’ve made us all more productive at work and more in touch with our social circles. Any tradie, for example, who does not have a mobile phone now, would be out of business soon. Any teen who didn’t check Facebook regularly would likely soon be ostracised from their social group.

Now, in late 2017 / 2018, the eSIM is going to mix the industry up again. The eSIM is the next step in technological progress and this time, the bigger mobile phone companies are going to be on the receiving end.

The eSIM is going to make ‘dumb pipes’

‘Dumb pipe’ is an interesting turn of phrase that’s over used in the industry. All pipes are dumb. Your heart’s left ventricle is a dumb pipe.

Phone operators have always wanted to avoid being ‘dumb pipes’. ‘Dumb pipe’ is an interesting turn of phrase that’s over used in the industry. Telcos’ concerns over being a dumb pipe come from wanting to avoid a race to the bottom, in which they consistently undercut each other on price for the provision of data services. This is why you are seeing some Australian phone companies invest in video and music content which they provide as part of their phone plans.

The reality is, all pipes are dumb. Your heart’s left ventricle is a dumb pipe. It is still be useful. The Sydney Harbour Tunnel is a dumb pipe. It’s still a profitable business. In our view, it’s not overly helpful to focus too much on the literal interpretation of the phrase ‘dumb pipe’. What Telcos really wanted to achieve ( with their strategy of avoiding becoming a ‘dumb pipe’ ) was to find a way to charge more than just the utility value of the connection they provide over the ‘last mile’ of airspace between their network and your phone.

Poorly defined problems (such as trying to avoid becoming a ‘dumb pipe’) , however, rarely lead to well thought through answers. Unfortunately for the telcos, the eSIM will make it much easier to port between telcos. At the same time, it will make it much easier to choose a better value alternative – for example, a smaller phone company. The resulting competition is likely to cause them to lower their price very close to it’s lowest possible level, to attract new customers. Inextricably, they are becoming what they wanted to avoid.

Using an eSIM in a commoditized market

Telstra did manage to differentiate their product by spending a lot on their network

Instead of developing a winning strategy, to avoid being a dumb pipe, phone companies have tried to avoid commoditization of their product. That’s not an easy job. We live in a very competitive world.

To be fair, Telstra did manage to differentiate their product by spending a lot on their network rollout. Telstra cover a substantially larger number of square Kilometers than the other Australian carriers. ( Telstra cover around 2.3m square Kilometers, others have half that or less. The population coverage difference between these networks is less than 1% but Telstra have marketed the advantage so well that they can legitimately claim to have differentiated in this area.

Phone companies have ( largely ) failed in their strategies to differentiate their network products and avoid commoditization. They also been out manoeuvred by a far more intelligent and innovative technology world. When the eSIM launches, and moving phone companies becomes that much easier. This could lead to swathes of consumers moving between phone companies who have not differentiated their products. The process will be so relatively pain free that some people could move many times a year just to get the best deal. Telstra with their network claims were, perhaps, the only company with substance to the message which will attract customers to them.

 

The eSIM model suits internet companies more than it does telcos

Use of the eSIM will be fully integrated in to the user experience of a smartphone.

In some ways, it’s hard to know what the telcos expected. They couldn’t have taken on the might of the whole planet’s innovation ? It was a fight they could never win. The services that have been produced which have started to eat in to their business are OTT including WhatsApp and Facebook are enabled already, by default, out of the box, optimized for mobile phone use.

Use of the eSIM will be fully integrated in to the user experience of a smartphone. There will be apps to help you manage it. The eSIM is likely to move customers interactions with their phone companies away from retail stores and on to mobile devices. Phone companies simply don’t think in terms of assisting users in this way.

 

Network Operators are Scared of the eSIM

Most people these days use SIM cards in their cell phones for multiple purposes, such as checking their emails, sending texts and making phone calls. The development of this type of technology enables people to stay on the move, whether for personal or business purposes. People can be seen tapping and clicking away on every street corner, in the shop, on the bus, in the supermarket and the library.

The mobile phone keeps going from strength to strength. Phones have without a doubt changed in style, appearance and functioning ability and can be used amongst other things to take photos, download songs, install maps and navigate the great oceans with a palm sized device.

The biggest problem that phone users have had to encounter since the introduction of the technology is the number of phone companies that are offering services. There are post-paid and pre-paid services. There are mobile plans integrated with TV coverage and broadband. There are some who provide unlimited texts, hundreds of minutes per month and a certain amount of data for a fixed monthly fee.

Other companies offer call and text included in a single payment, just between those who use the same company, while others offer deals which include calls and texts to users of any of the companies. Some offer deals just for off peak use while others offer peak period deals. Some of the deals that mobile phone customers prefer are when the most up-to-date phone is thrown in with a plan. There are usually strings attached to these including a compulsory 2 year loyalty with that particular phone company which is a big financial commitment.

 

More competitors coming ?

Going to get worse when the eSIM launches, not better. Google already is an MVNO, we we’ve seen with Project Fi. There are other internet companies with incentives to disrupt the telco market. They are, as we’ve seen, far more able to act in an internet world, which is what the eSIM will make the telco market.

The two competitors which first spring to mind already both have a role to play in the communications market.

  • Apple :
    Apple love to own customers and the entire customer experience. They have already moved in to the manufacture of phones. Is it so surprising to think that they might move in to network reselling ? There is nothing preventing Apple becoming an MVNO and owning the network component of the experience in Australia.
  • Facebook :
    Paid $Billions for WhatsApp and have since added a SIP voice service to their offering. Facebook has changed the way we communicate and creates a great deal of data usage. Why would they not want to sell network services that allowed their customers to stay on Facebook for longer ? The longer they’re on Facebook, the more relevant the ads Facebook can show.

Facebook and Apple are each credible brands to consumers which is half the problem when new companies launch as MVNOs. Both are already part of people’s day to day lives.

 

What could the phone companies do about the eSIM ?

Rising incentives to stay and loyalty systems are going to be expensive but necessary incremental costs in an eSIM world.

One of the things Australian phone companies can do as we move in to a world of eSIMs is to study plan features in other countries. There are some best practices and ideas from more innovative phone companies around the world which could be put to use over here.

  • Move to the smartphone :
    Telcos have actually been very good about rolling out mobile self service apps for their customers. Spurred by the success of banks lowering their costs with self service apps and services, the phone companies invested in thei own self service apps to help customers manage their accounts online. Developing this app so that all eSIM related activities are easy to do online is critical to the success of the phone companies next year.
  • Loyalty bonuses :
    Like Telstra’s ‘Thanks’ program or Vodafone’s ( cleverer ) Prepaid incentives : (stay with us and we will give you an extra 2GB of data each month,) loyalty bonuses are going to be big business in a world of eSIMs. Virgin Mobile give an increasing amount of data in their prepaid plans if you stick around. Rising incentives to stay and loyalty systems are going to be expensive but necessary incremental costs in an eSIM world.
  • Simplicity of plans :
    People find phone plans difficult to learn about, compare and buy. Simplifying the plan structure could be a real advantage for the phone companies. To a degree, by offering unlimited ( national voice and SMS across their entire plan range, Vodafone have started this process. Imagine the next step, though, in a world where people buy online, through their smartphone and are provisioned with an eSIM. A $20 all you can eat plan (unlimited national calls and SMS), then, for data, $1 per 100 MB. That’s the same price as $10 per GB which is what they charge you now. But you only pay for what you use. They could implement this across all of their plans.
  • Data management :
    Managing an eSIM will be an entirely online experience, in an eSIM works as we’ve seen from the basic trials of the service which have been in market for a while. Establishing this customer activity alongside the ability to manage multiple SIMs is a key opportunity for the phone companies. Samsung have an eSIM in their Galaxy Gear watch. We may all, soon, have multiple eSIMs on our person and in our possession. Many cars in the USA are already shipped with SIMs in them. Helping customers manage the network services used by these assets is the key thing to be aware of for the phone companies.
  • Embrace the customer :
    Google’s project Fi has shown us what is possible when it comes to real innovation in the phone market. Like Google, the telcos could assist users minimize their data usage and cost by handing over to free WiFi when ever a user is in range. Steps like this do reduce customer data use and revenues for the phone companies. But they build trust, reputation and encourage customers to move to companies which treat them better – something that’s much easier to do when you have an eSIM.
  • Manage customer data better:
    Telcos, like banks and internet companies have huge amounts of customer data available to them. Phone companies could invest in propensity movelling to develop proactive service models. They could recommend relevant products and bundles to their customer base which would help them save money. Big Data is a buzzword at the moment for good reason. The phone companies could
  • Content :
    We’ve seen new activity from smaller phone companies when it comes to content. OVO is a great example. . If the phone companies have found content which represents some unique value to their customers, and others can’t take that from them, they might just have found a sustainable advantage.
  • Deal with concerns over security in the eSIM : Whilst manufacturers and network providers are focusing in on the fundamentals, there is still the ongoing debate on just how secure it would be to use a device that runs primarily off a wireless connection. It has been a debate that has raged on for years but the concerns have been elevated once again with the emergence of the eSIM. This has been a point that the GSMA has looked to address in their latest version with the industry body revealing that their base model contains no less than 4 different algorithms designed to protect a user’s information.  Although 3DES, AES. ECC and RSA might not mean anything to an untrained eye, these four pieces of programming make up the basic security features on a normal SIM card and can all be found on eSIM models developed from the GSMA’s specifications. This means that the user will still face the same protection that they had from previous SIM card incarnations which at the very least will offer customers the same levels of security that have been previously used to.
  • Make the most of wearable technology : Although they still seem a bit of a novelty, wearable devices such as the smartwatch are set to be one of the greatest beneficiaries of the eSIM revolution. There has been a rise in the number of people using wearable devices in the past 12 months with the IDC noting a 173% rise in sales between 2014 and 2015 with sales reaching over 72 million units. It’s not surprising then that the first devices to benefit are the newest renditions of the Apple Watch and Samsung Gear where developers are trying to introduce the new SIM cards in the next models to hit the market. It doesn’t take long to see where the benefits may range for wearable devices fitted with eSIMs. Being much smaller than traditional SIM cards, the new eSIM chip will allow manufacturers to add more features into a smartwatch without sacrificing any processing power or speed. Not sure how this would work? Let’s have a look at the Samsung Gear 2. Knowing that this new technology would improve power and connectivity, Samsung unveiled the first smartwatch that could make calls and send messages as a stand-alone device rather than through a link to a smartphone, tablet or WiFi network. As eSIM to connect directly to a mobile network, it would mean that making calls and surfing the web freely on a smartwatch a basic necessity rather than a headline grabbing feature.’s are designed. It’s an advancement like this that would get manufacturers turning more and more attention to wearable devices and make them a must have gadget rather than smartphones or tablets.
  • Expect roaming revenues to decline : It’s not just manufacturers who have to adapt their methods as network providers are changing what they offer customers in their plans and contracts. Knowing that devices with an eSIM will benefit from greater connectivity, it means that providers will need to consider how they charge their customers both domestically and internationally. The potential is there for users to jump between carriers should a plan become too expensive. There is also a greater benefit for those looking to get roaming data packages overseas as there is now a possibility to switch between partner networks. Several global networks such as Deutsche Mobile, Telefonica and T-Mobile have already revealed that their regional affiliates would be compatible with eSIMs and allow them to connect automatically to a local network if it falls under the same banner as their domestic partner. Roaming charges could significantly drop with as the user wouldn’t bounce from different networks when they lose a certain signal when travelling overseas.

As we’ve seen, however, few of these tactics constitute a material, sustainable competitive advantage. In fact, there’s only one thing they can do which is guaranteed to get that. Spend more on marketing.

 

More than anything, marketing as a solution might still work

What phone companies can be, to a degree, is a desirable pipe by marketing in this way.

Telcos could market things like Apple do. Apple’s approach to marketing attempts make, for example, their phone seem different. The iPhone, you may recall, has a ‘retina screen.’ That’s marketing talk for a 326 Dpi (Dots Per Inch) screen.

If Apple expressed their product feature in the same terms as Samsung, it would allow you to compare quality with the Android equivalent. It would also raise the very relevant question of what’s the reason to continue optimizing that if it’s beyond the limit of human perception.

What phone companies can be, to a degree, is a desirable pipe by marketing in this way. People buy brands that reliably solve their problem. The tier 1 phone companies spending big on brand is a good way to secure their position when a lot of their existing customers are going to be faced with the thorny question of risking a move to a smaller company, the brand of which they are less familiar with.

Summing up the likely impact of the eSIM on big Australian phone companies

The eSIM could be the technology which sparks a much more competitive market for the big phone companies of Australia.

 

 

Sources : The difficulties that the eSIM presents to phone companies are well explored by a number of professional services firms. Here are two of the best articles on the subject :

KPMG : http://newsroom.kpmg.com.au/the-disruptive-impact-of-the-esim-your-relationship-with-your-telco-will-never-be-the-same/

McKinesy : http://www.mckinsey.com/industries/telecommunications/our-insights/e-sim-for-consumers-a-game-changer-in-mobile-telecommunications

For the Australian context, Whirlpool is often a good source – note, many opinions on here are speculative : http://forums.whirlpool.net.au/archive/2581920

 

Neil Aitken

Having worked in 3 countries for 4 telcos on both voice and data products, Neil is in a position to give you the inside track. Get beyond the marketing messages to the best plan for you.