Forecasting the Australian growth of the eSIM
The classic hardware ‘SIM’ – the Subscriber Identification Module we’ve all come to be familiar with, is now almost a relic. SIMs are nearly 25 years old. In many ways, it’s surprising that the SIM hasn’t been superseded a long time before now. Few things last a generation in the field of consumer electronics. The SIM has succeeded by providing a secure means of accessing mobile networks, of connecting us to the phone companies we need. We’ve come to accept it and grown used to what is, frankly, a cumbersome process. We can change TV channels without a physical SIM in our remotes. We can even change energy companies. Why do we need a computer chip in a piece of plastic to change wireless networks ? Perhaps we don’t….
What’s an eSIM?
Basically it’s a chip fitted into the phone on to the motherboard before you purchase it and it’s programmable. eSIMs allow users to pick a network without changing a physical SIM in whichever device they’re using. People won’t even need to talk to their phone company to join the network. It will all be done from the handset. This means you can choose whatever telco you like or any Mobile Virtual Network Operator, for that matter, if that suits you better.
eSIMs (Embedded SIMs) are the most significant change happening in the world of phone companies at the moment. The new Apple Watch – the third edition – will contain one. It should get to market in September / October 2017. The new iPhone 8 may also have an embedded SIM. When you think about it, it makes sense that we’ve arrived here. Phones already have chips embedded to enable the device to be used for its various communication purposes. It was only a matter of adding more to a chip that would enable SIMless phones. The eSIM breaks down any traditional relationship that has been formed in the past with a carrier as it’s them who have traditionally provided the SIM. However, with an eSIM you don’t need to worry about the service provider until you have purchased the phone. Last year, the GSMA, the consortium that has a say in Mobile World whose job has been to set the policy for the wireless industry, has now come to an agreement about the mobile phone profile.
Changing SIMs is an enormous change for the industry to adopt. It’s an even bigger change for people like you and me to get used to. And therein lies both the problem and opportunity.When it comes to the eSIM we are talking about upgrading the core of an entire industry. There are a huge number of stakeholders in the world of telecommunications. Estimating the speed with which the new idea is accepted by everyone involved requires consideration of a number of view points. As McKinsey points out :
McKinsey say : “Revenue is at stake, and operators’ approaches to new propositions, shared data-tariff portfolios, potential new revenue streams, and handset-subsidy strategies across multiple markets will play a big role in how they fare in the new e-Sim ecosystem. Whether an operator decides to take a role as a smart follower or an early mover, an overall strategy and associated initiatives need to be shaped thoughtfully now.”
Pros and cons of the eSIM from a consumer perspective
The rate of uptake will be spurred by how readily the eSIM is adopted and constrained by the negatives associated with it. Here are the pros and cons of the eSIM which will underpin it’s adoption.
Pros of the eSIM for users
- No need to visit a phone company : The eSIM is likely to change many of the fundamentals of your relationship with your phone company. You’re far less likely to visit a retail store if you can change plans without a hardware SIM, as will be the case in an eSIM world. It seems like that many phone companies will be (albeit gradually) shutting up their storefronts and conducting all their business online. Some users will find this annoying because the face to face communication is lost. For most, it will make it much easier to manage their phone and eSIM plan.
- No need to wait for SIM delivery : In the old days, there were atoms to move around if you wanted to connect to your phone network. Now it’s just 1s and 0s. Phone companies can provision your embedded SIM over the air. That means there’s no need to wait 1-3 business days for the delivery of a new SIM that you ordered online. That beats the old days of the SIM card, during which you have to go online to purchase one and wait for it toget to you through your letterbox.
- Easier to change a mobile service operator : One of the biggest winners users will notch up is also likely to be great for all the MVNOs. Their plans will be listed as available in the eSIM alongside the major Australian telco brands. If you are not happy with one, you can easily change to another online without the need to buy a SIM or be physically sighted by a phone company. Smaller phone companies will be shown alongside bigger phone companies and people will have cause to ask the question – why shouldn’t I sign up with one of these smaller telcos ? After all, they often offer better SIM deals.
- Facilitates the roll out of Internet Of Things ideas : There are some mobile Machine2Machine (M2M) and Internet of Things (IoT) devices which have embedded SIMs which are soldered inside the device. These are normally re pre-programmed prior to purchase with a specified mobile operator’s unique information. The owner is not able to change networks with this sort of device.
- Less electronic waste in the environment : Hundreds of millions of SIMs are made and distributed every year. They have to end up somewhere. The eSIM replaces the need for this previously wasted hardware.
- Support concerns : Customers and perhaps phone companies may be unsure who is responsible if the SIM in the phone fails. As with all new technology rollouts, especially those in which multiple vendors tie together a solution for a consumer, delineation of responsibility for problems is critical. As we have seen in Australia, with the NBN, getting this wrong can cause real problems for end users and call in to question how worthwhile the ‘upgrade’ was.
- Difficulty switching devices as a SIM won’t be present to remove : Consumers will have to learn to wipe their settings before selling devices second hand. They’ll have to get used to potentially having two SIMs in their eSIM enabled phone or smart watch.
- New processes for the phone companies too : The phone companies have been working on processes and procedures to support the launch. Specifically, they’ve had to focus on : Working out the cost of eSIMs and cellular radio in lower-end devices; The eSIM business scenario for both the device seller and the network operator; Issues related to the users potential experience; Regulatory questions; Operational difficulties in for example IoT device retail channels; The fitting of the eSIM with other up and coming telecommunication’s mega trends, such as 5G. There has been a lot to consider and there are bound to be teething problems early on.
- How can security be better controlled? Fingerprint recognition has always been a way of being sure someone is who they say they are. However, Andreas Morawietz has other answers which involve a set procedure when signing up to a particular network provider. This involves a person positioning themselves in front of a screen with a Web cam on who is being viewed by a live operator who can see the person and their passport photo. Morawietz says that there will be 2 types of security, the eSIM, and the secure part of it, which will be the chip in the iPhone and any other devices that store your fingerprints.
Phone manufacturers will be affected the most
OEMs ( Original Equipment Manufacturers – what the industry calls people that make phones) will have to overcome the hurdle of providing smart phones which take SIMS but can also be be SIMless. SIMless is on its way, whether they like it or not, and it is expected that between 346 and 864 million eSIM handsets will be manufactured annually up to 2020. By the end of this decade alone the SIM card industry will experience drops in shipment by 16 percent.
SO, McKinsey say the eSIM market will double every year but initial growth will be slow
Until now, details of eSIM technology have been slowly emerging. What we haven’t seen is discussion on the forecast growth of this new type of SIM. Technology never takes over immediately, There is always some inertia in the market. That’s especially true when it comes to phones, phone companies and the way they work. Most phone companies have a sizeable proportion of their processes built around the production, programming and dissemination of hardware SIMs – the current standard. That means that, when it comes to the eSIM, the key obstacle to widespread immediate adoption is the number of phones in market which use the standard hardware SIM. The big phone companies we all know have been pushing back for years on the demands made of them, in relation to the eSIM, by the GSMA, the global governing body in charge of SIM standards. (Among other things.)
McKinsey, also argue in a recent paper that eSIMs, already used extensively in Machine to Machine applications ( think Coke machines which report when they are out of cans ) are a non trivial base of eSIMs which will double every year. They compare eSIM growth to growth in existing SIMs of only 5% per year.
What’s wrong with mcKinsey’s eSIM forecast (in our view)
It is potentially this lack of agreed standard which has caused McKinsey to forecast such small increases and slow uptake. We think they’ve missed a couple of key factors which will speed the adoptionof the eSIM in Australia.
- First, the progress that SIM Manufacturers – especially Gemalto have made in producing eSIM provisioning technology.
- Second, the influence of Apple; First as a phone company which have a habit of disrupting industries and second, as the most popular device in Australia.
Starting with Gemalto and their eSIM provisioning technology
Gemalto has been the most vocal of the 3 global companies who currently deal with the distribution of hardware SIMs. They appear to be betting a large part of their business on the uptake of the eSIM standard. Gemalto’s focus has been the development of enterprise scale provisioning systems.
Provisioning is the process under which the phone company writes their details on to the SIM card you’re using, in such a way that it can connect to their cellular network. A provisioned SIM – be that an eSIM or a regular hardware SIM – has the settings necessary to attach your phone to the Telstra’s network, for example.
Importantly, the size of the provisioning infrastructure they’ve built can be used to provision thousands of eSIM enabled phones an hour – the sort of connection volume one might expect to see from the launch of a new hero handset or device. Which brings us to Apple.
To which circumstances, you can add Apple
As you can see from Kantar ( another research institution ), Apple recently made up nearly 40% of the Australian market.
Below : Kantar’s Interactive iPhone Market Share Model
We are disproportionate Apple fans down under. They sold 13 million iPhone 6s in the first few days of trading, around the world. Many say that they last only about 2 years before they need replacing. This is not to say that Apple are the only company working on eSIM solutions. ( There are actually several different types of next generation SIM as we explained in eSIM vs Embedded SIM vs Reporgrammable SIM ). Samsung are doing the same thing. And they make up a lot of the Android market. And they last a couple of years too.
What McKinsey have missed is that Apple define the market for mobile phones. They have stragically positioned themselves incredibly well to own this market. The current version of the AppleSIM may not meet the textbook definition of an eSIM but in function, it performs the same way. If you buy one of the enabled Apple devices in market, you will be able to pick an operator which has signed up to be part of the Apple program or take out the Apple SIM and insert another.
Bringing Gemalto together with Apple for a faster global rollout
There was considerable interest in the G & D stand throughout the Mobile World Congress. This company is not only the brains behind the eSIM, but it also makes the chip module and is in control of the management of the software that is capable of downloading the specific profile of an individual network provider to the eSIM. G & D also looks after the security of the eSIM, which has been a particular concern in recent years as people connect themselves more and more.
In our view, the rollout of the eSIM is going to be much, much faster than forecast by McKinsey. This could just be a difference in the definitions involved. The technology used to disrupt the phone market is secondary, in our view, to the disruption itself. Apple’s AppleSIM and Samsung’s equivalent engender the same pattern for the industry whether or not the are ‘officially’ eSIMs.
The new sales models which are likely to appear are mind boggling to people who have bought their phone services the same way for decades. The ability to select a month’s network service like you would an on demand movie is probably more accurate than our current drive to the retail stores of the telcos. Apple will launch their first eSIM in the late 2017, as part of the new Apple Watch. If they follow this path, it will give them a chance to iron out any process problems, either within Apple or their phone company partners on the Apple Watch – rather than trying to deal with them in an iPhone release which is already the highest volume, fastest selling phone each year.
Self Service for your SIM and plan, too will be revitalised by the eSIM. Buying the wrong sized SIM, moving contact information between devices, having provisioning problems, failing to connect to the right data APN and problems with enormous data roaming bills will all be a thing of the past. It’s likely that users will be able to subscribe to two plans at the same time and cherry pick the right service for their context, minimising cost and improving the experience.
It seems the eSIM will unlock the mobile carrier market for every type of consumers. At the moment an unlocked phone owner can choose a provider but a SIM card is still necessary before any service can be used.
The eSIM (or it’s experience equivalent) is going to change the world. In our view, McKinsey have underestimated how quickly the evolution will occur. Apple will create the migration simply by including a hybrid SIM / eSIM solution in their iPhone 7. Samsung is likely to do the same thing. Gemalto can deal with the huge volumes required to support such a launch. And when people realise the benefits in convenience, cost and experience, they are likely to be wont to move even faster.
Gemalto are one of the world’s leaders when it comes to eSIM provisioning : http://www.gemalto.com/iot/consumer-electronics/embedded-sim-uicc
We’ve linked to this McKinsey paper before but it’s worth resharing here : http://www.mckinsey.com/industries/telecommunications/our-insights/e-sim-for-consumers-a-game-changer-in-mobile-telecommunications
Industry rumours about an eSIM enabled Apple Watch : http://appleinsider.com/articles/17/03/28/no-an-lte-equipped-apple-watch-will-not-come-with-a-physical-sim-card