Are Australian phone companies ready for the eSIM ?

60 second intro to the disruption the eSIM will cause

  • eSIMs or ’embedded’ SIMs will be built in to the phones and wearables we buy starting with the 2017 Apple Watch.
  • Phone plans will be chosen from the handset, not in a telco retail store.
  • Telecommunications is already a competitive industry. Phone companies are in a constant ‘race to the bottom.’ They have bet their strategy on providing content to make customers more sticky.
  • The eSIM will effectively digitise the industry drawing in new entrants, allowing users to super optimise plans to their usage and stimulating innovation in price plans. For example, refunding unused data charges.
  • Companies which succeed in digital industries are agile, centred around enjoyable digital customer experiences and create ecosystems of ‘wrap around products’ like Apple did with their App store on the iPhone.
  • Telcos on the other hand are hard to deal with, slow to react and rarely truly innovative.
  • So, in a totally digital telco environment created by the eSIM, it seems Apple, Google et al. will be eating phone companies’ lunch.

Are you ready for the great eSIM shake-up?

The smartphone boom has epitomised that feeling over the past decade, with manufacturers making advances almost on a seemingly monthly basis. The latest and perhaps most substantial change, set to hit the headlines in September 2017 is the implementation of embedded SIM cards – eSIMs in to those smartphones. Starting with the Apple Watch, an increasing proportion of the phones we buy from key manufacturers will contain an eSIM.

The list of stakeholders demonstrating immediate interest includes Samsung, Apple and even industry bodies like the GSMA (the organisation responsible for global phone related standard) revealing their own take on the eSIM in recent months..

The eSIM could very well change the way we use smart technology in the coming years. So what exactly is waiting for us 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 seems likely to turn them into exactly what they never wanted to be – dumb pipes. A number of factors have combine to bring consumers and the phone companies to this place.

  • The eSIM will change who provides you your SIM :
    eSIM technology will shift ownership and control of the bit of your phone which connects you to a cellular network. Where you used to get a SIM from your phone company, the SIM will now come in electronic form. It will be embedded in your phone when you buy it. This is a substantial change. It significantly impacts your need to relate directly to your telco. In the past, you might have gone in to a phone shop or a phone company website to order a phone, you will no longer need to do that. The implications of this are wide ranging and we cover them below.
  • Your new embedded SIM card can connect to more than one network at a time :
    eSIM standards are still evolving. However, even at this ‘early’ stage of development, current eSIMs can support two operator profiles. Ultimately, the eSIM will have the capacity to attach to any network and should be in smart phones in 2018.
  • It will increase choice and availability of phone plans :
    Phone users will be free to browse phone and data plans and choose whatever best suits their requirements, direct from their handsets. The eSIM is turning telecommunications digital. What was previously an analogue, hardware process with a lot of inefficiency – picking a plan and walking to a shop to get a SIM, is now becoming a software, entirely online experience. That exposes phone companies to the same disruption which has so dramatically changed other industries.

The implications for network providers is are substantial. Smart Insights, a research portal, has estimated that by 2020, 346 to 864 million eSIM devices will have been released worldwide. In no time at all, eSIMs will be in the majority of phones. And this entirely digital experience will be the way we buy SIMs.

 

eSIMs - what you need to know

 

How will the eSIM ‘fragment’ the industry ?

We used to go to the phone company shop and buy a phone under contract, keep it for 2 years and then repeat.

How will the eSIM change that ?

  • Digital explodes the value chain :
    Digital disruption often involves big changes to the value chain. The digitisation the eSIM brings has already attracted new entrants from adjacent industries. Microsoft have already started partnering to will be selling data bundles for laptops installed with the Windows OS. Despite having denied it, increasingly credible reports suggest Apple will become an MVNO – see below. When you wanted to book a hotel room, you used to compare online and book direct with the hotel chain. Now, many people go to the Air BNB app.
  • The eSIM allows for users to buy more than one plan at a time :
    For example, with the eSIM, it will be possible to pick up a Vodafone plan for use when you’re in a city and a Telstra plan for when you’re outside the city. In time, as the GSMA increases the number of profiles which are available, we will see further innovation in the phone plans which are available through eSIMs. In the past, when you wanted to go on holiday, you went to a travel agent. Now, you book each component (flight, hotel, rental car) through Expedia to get the best deals and more closely match each element to your need.
  • The eSIM will allow ‘wrap around’ products :
    Apple’s success with the iPhone came not just from the new hardware but from how well the Apple store created useful apps which solved real life problems. The eSIM will enable a host of useful wrap around apps on a handset. Imagine having the ability to pause your phone agreement from your handset. Imagine being able to send your wife 5GB of data this month. Imagine talking to a bot which has scanned your call records for international conversations you’ve had and suggests a better plan.  The digital nature of the eSIM means these things are likely to happen.

There are already a host of phone leasing options. Most people buy their phone and add their own SIM plan to it so they can move when they want to. The fragmentation of telco has been coming for a while. But the way the eSIM works is going to turn telecommunications in to a totally digital business. Which is tough because the starting point for phone companies is not that great as it is.

Phone companies are in a race to the bottom

The irony of the launch of the eSIM is that ultimately, telcos could never avoid either this disruption or, more broadly, 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 that 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. 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’ 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 move between them and one of their rivals. 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.

Telco is not the first industry to have experienced this, as we’ve said. Other companies have weathered the storm and there are valuable lessons to learn from them.

Telcos will have to operate in a more digital environment

When the eSIM launches, and the market fragments, the major phone companies seem set to lose a lot. Moving phone companies will become that much easier. This could lead to swathes of consumers leaving the big telcos and moving to smaller alternatives. The process will be so 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 in this sort of environment.

Telcos are notoriously slow beasts, encumbered by legacy technology and often highly political, sometimes ineffective project delivery teams. They have struggled to make the most of Digital because of this. So what will they need to do to stay on top of their customers when the eSIM gets here ?

  • Make the customer experience as enjoyable as possible :
    Companies which tend to do well in digital environments are those who make the customer experience as easy as possible. Many people (around 30% in a recent survey we conducted) said they didn’t like or trust their phone company. Consider the difference between Uber and Taxi drivers, for example. Which has a better customer experience. Companies which win in a digital world tend to collate a number of the fragmented services that customers need in to a single place.
  • They collate results for users :
    Take YouTube, for example. They don’t make very much of their own video content but they use the information they have on their customers to collate valuable content for the people who visit their site.
  • Constant improvement and innovation :
    Finally, companies which succeed in digital environments tend not to be constrained by what the old model looks like. Consider Amazon. They didn’t copy what had been happening in retail before they launched, they built an online store and then added reviews, cross sell and up sell, one click shopping and so on. They never stop innovating.

Companies which can do these things well will win when the eSIM digitised telco.

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.

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, optimised 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.

Take these 3 examples and consider what they’re doing ‘around’ the market for phones right now :

  • Apple already lead the phone companies by the nose. Now it looks like they will be becoming an MVNO : 
    Apple love to own customers and the entire customer experience. They have already moved in to the manufacture of phones. They have such power over the 700 operators they work with that they treat them terribly. They have denied wanting to sell their own data plans but 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 :
    Facebook paid $Billions for WhatsApp and have since added a SIP (Session Initiation Protocol) voice service to their Messenger product. 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.
  • Google :
    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.

If you ask me who is looking best placed to deal with the fragmentation of the industry when the eSIM turns it digital, I’d say it’s agile businesses which think about how to do digital well, not people who are scared of being a dumb pipe.

 

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. You might have noticed how similar Vodafone’s new price plans were, to an equivalent scheme in the USA. There are some best practices and ideas from more innovative phone companies around the world which could be put to use over here.

  • Centralise the digital experience around 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 their 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. Building additional components which, for example, warn people if they’re about to enter a network blackspot, help proactively move them to a new plan and so on, and do that through the app, is exactly the kind of value wrap that good digital companies do.
  • 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. Rising incentives to stay and loyalty systems are likely 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.
  • 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. 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 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.
  • Reassure people over their concerns with eSIM security :
    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. The industry body has revealed that their base model contains no less than 4 different algorithms designed to protect a user’s information when it is stored on the eSIM.  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. They can also be found on eSIM models developed from the GSMA’s specifications.
  • 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.
  • 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.

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. It’s turning telco digital. They’ll save money on the retail stores they need to support but they are also, in my view, extremely exposed to the fragmentation of their industry and to internet companies which know how to succeed in that environment. Worse still, many phone companies seem stuck on the idea that content is going to save them.

In my view, providing genuinely digital, products built around customers which treat people fairly is a better direction to turn. Help customers build and manage the products they want. Offer the digital first proactive solutions. But then, with the eSIM, Apple, Google, Microsoft and others will all be able to set themselves up as an MVNO and do all of that. When it comes to betting who will win this ‘future of the eSIM’ fight, my money is on those sort of internet companies, not the major telcos.

This isn’t the first time we’ve seen industries changed in this way. As digital pervades, big, slow companies who have enormous holes in their customer experience, which their customers hate (in telco, there are many – including – roaming fees, data overage charges, not putting users on the best plan, poor usage management tools) act surprised when new entrants use their knowledge of how the internet works to undermine them. As we’ve seen with Uber, where power was held by oligopolistic taxi firms in major cities, digital has put the power in consumer’s hands and fixed the customer experiences which were present in the old system. The eSIM will offer the same circumstances to telcos. The only question is, when will they notice?

 

Sources :
The difficulties that the eSIM presents to phone companies are well explored by a number of professional services firms. Here are three 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

This is an exceptionally good article about eSIMs in Smartwatches with (at least one) important point. They could make us more sociable :
http://www.news.com.au/technology/gadgets/wearables/why-its-time-to-buy-a-smartwatch-the-wearable-technology-finally-has-its-own-4g-internet-connection/news-story/047d68943fd0c2a5813f019fd882feab

 

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.