The disruptive impact of the eSIM: your relationship with your telco will never be the same

Levi Watters, Partner Advisory
Levi Watters, Partner Advisory

Apple and Samsung are signalling an intention to move to a digital e-SIM in their next generation of mobile handsets. While at face value this may seem a minor shift, it has the potential to significantly disrupt the telecommunications industry and change the way customers interact with their service provider.

With the emergence of digital mobile phones, the Subscriber Identity Module (SIM) has been a core component of how a mobile phone operates. The purpose of the SIM is to identify the customer through a unique code, the International Mobile Subscriber Identity (IMSI), which is used to authorise customer access to the mobile network. The SIM enabled the rise of the Mobile Virtual Network Operator (MVNO) market through a customer being able to swap service providers with the simple replacement of a SIM and without the need to change mobile device or phone number.

The eSIM will remove the reliance on a physical card and the need for a card slot. Embedded in the phone the eSIM will change identification and authentication to a software based process. While it will take time for the transition as customers upgrade to newer handsets, the eSIM will have a major disruptive impact on the telecommunications industry, markedly increasing the levels of competition.

The introduction of the eSIM will mean customers will be able to shift service providers via digital channels in real time without the complication of waiting for a new SIM. This reduction in customer effort to change service providers could lead to increased levels of competitive churn. Retention and acquisition of customers, while maintaining margin, will require differentiation beyond price with real-time analytics and marketing essential in gaining customers and avoiding price-hunting and customer churn.

The proliferation of offers and micro commerce led by the ability to change providers using your phone for payment could lead to the hyper competitive environment that exists in the developing world where customers carry multiple prepaid SIMs and take up offers based upon hourly or daily marketing campaigns and rates. The service provider that can deliver this agility at low cost will have a massive advantage.

Arbitrage in the wholesale network capacity market, or the ability for MVNOs to change network providers, is currently limited by the need to physically replace the SIMs of all customers. The eSIM will mean that the MVNO will be able to change network providers without customer interaction or customer knowledge. As a result, MVNOs will have much greater leverage in their negotiations with network operators which could lead to a network capacity trading market similar to the energy industry

An obvious impact is the disruption to the manufacture and distribution providers of SIM cards. In 2014, SIM manufacture was estimated globally at $5.4Bn. A phone without a physical SIM will reduce cost to service providers but will also remove a key touch point with the customer.

The eSIM also removes a number of barriers to entry for global players such as Facebook, Google and Apple. Google has recently announced its intention to launch an MVNO in the US. While keenly denied by Apple many industry analysts are predicting that the development of the eSIM is a precursor to Apple entering the telecommunications market. Any move from the device makers into the telecommunication market will further threaten service provider margins and threaten to leave the service providers as utility providers only.

The shift to the eSIM will take 18 to 24 months to reach critical mass and there are defensive plays that service providers can take to delay its impact. However what is clear is the eSIM will place further pressure on revenue through increasing competition while increasing the need for agility and improved customer service at a lower cost to serve.

Service providers cannot afford to ignore the impact of this disruptive change.

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