How Telstra and Vodafone got it so wrong with the eSIM

The eSIM is set to disrupt an already fractious industry

The eSIM is likely to fundamentally change our relationship with our phone companies. Unfortunately, the eSIM 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. Here, we examine what contributed to circumstances in which we find ourselves.

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. They’re subject to the negative effects of the same technological progress now as they benefited from 25 years ago. Remember, a quarter of a century ago, they, themselves, disrupted 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 communications 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 we all know) revolutionised how we live and work. Through the mobile phones they provided us, often under contract, 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 for the provision of data services. This is why you are seeing some Australian phone companies invest in 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.

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.

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.

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.

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

In the long rum, with the internet of phone companies are to do OK in an eSIM world. Data usage levels are increasing at near on 100% a year. As a result, so long as the phone companies discount at less than 50% per year, their revenues should be OK.

Competition from new players is a threat in every market. With free in city wifi and who knows what from the NBN around the corner, it’s never been a more dangerous time to be a tier 1 telco. The eSIM could be the technology which sparks a much more competitive market for the big phone companies of Australia.

 

Extra Resources – Articles of use to Prepaid Users

  • Prepaid plans now have streamed audio included in them :
    You may not be aware of one of the biggest improvements to prepaid plans since they were originally devised. 2016 saw the release of prepaid plans which have streamed audio included in them. If you already have a Spotify, iTunes Music, Google Music or IHeartRadio account, then you might like to find out more about streamed audio in phone plans.
  • Entertainment options are becoming common :
    You may also have started hearing about the increasing inclusion of entertainment options in prepaid and SIM Only phone plans. We also examine Optus’ mobile phone plan Entertainment options, Telstra’s mobile phone plan Entertainment options and compare the two.
  • Prepaid vs postpaid vs month to month :
    We’ve given a short explanation on this page but if you want more detail on the types of phone plans in Australia, this is it. In Prepaid vs postpaid vs month to month, we explain and the best value alternatives you have and when it makes sense to use each type.
  • Prepaid vs Postpaid –the simple trick to getting the best value :
    The tier 1 telcos ( Optus Telstra and Vodafone ) all have both prepaid and postpaid plans. Sometimes they have both types of plan at the same price point.
  • Does it make sense to buy a Phone myself and add a SIM ? :
    It’s often even cheaper to buy your own phone and add a SIM ( including a prepaid SIM ) to it. We explain how to go Buying a phone outright and adding a SIM.
  • Data Rollovers :
    Considering a plan with data rollover in it ? We explain why they’re not the real solution to the real problem with prepaid plans.

And, remember, before you buy, read the CIS (that’s the Critical Information Summary–a clearly written definition of what is and is not included in the plans from these phone companies) before you buy. You need to be confident in the plan you choose yourself. You’ll find the CIS on the Vodafone website.

 

Compare all of our prepaid plans

If you need another network, you might like to check our Best Prepaid Plans Page and compare all the plans ( including every one mentioned on this page. ) A list of best value plans using the Telstra, Optus and Vodafone networks.

COMPARE THE BEST PREPAID PLANS

 

 

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.