ANALYST Q&A: ASSESSING THE FUTURE OF eSIM

Pablo Iacopino

Director of Ecosystem Research GSMA Intelligence

Michele Mackenzie

Principal Analyst Analysys Mason

Ben Wood

Chief of Research, CCS Insight

William Stofega

Program Director, Mobile Device Technology and Trends, IDC

With forecasts suggesting huge growth is on the way, a group of top industry analysts scrutinise the prospects for eSIM and evaluate challenges which have thus far prevented mass adoption.

Q: Where will we see the effects of cloud adoption the most? What is the biggest opportunity it opens for operators?

Pablo Iacopino (PI) 2020 is a turning point for eSIM. The top three smartphone makers, representing more than half of the global market, are now fully on board. Apple (the eSIM pioneer) has also launched a mid-price eSIM iPhone – this matters, as it moves the boundaries of eSIM availability beyond the high-end consumer segment. Samsung and Huawei have doubled down by launching new smartphones with both 5G and eSIM. Interestingly, our research shows that these are the top two technologies that OEMs should prioritise, according to operators.

eSIM service availability is also on the rise. As of June 2020, a minimum of 158 mobile operators (including few MVNOs) offer eSIM service for smartphones, spanning more than 60 countries across all regions. This number doubled over the last 12 months – a clear sign that operators are increasingly embracing eSIM.

Looking ahead, supporting eSIM is a matter of when (not if) for OEMs and operators that have yet to launch. Our research reveals that two out of three operators plan to make eSIM service available by 2021. However, customer adoption at scale will take time, largely due to smartphone replacement rates (2-3 years in most countries). We forecast 2.5 billion eSIM smartphone connections globally by 2025 (35 per cent of total smartphone connections), with 2 billion and 3 billion as low and high adoption scenarios respectively. Europe and the US lead in the early days of eSIM adoption, but China will be the largest market by 2025.

Michele Mackenzie (MM)

eSIM has been very successful in the consumer smartphone market but less so in IoT. Operators’ early forays into eSIM solutions were largely self-serving and in response to demand from specific verticals, especially automotive. These eSIMs were built into the device hardware, thereby simplifying logistics for OEMs, but did not meet the GSMA specification to enable operator switching. The demand for eSIMs with full eUICC capabilities has grown since the release of the GSMA M2M eSIM specifications and MNOs and IoT MVNOs have partnered with the RSP platform providers to offer eUICC to enterprise customers.

Ben Wood (BW)

Initially we had thought that a shift to eSIM-only devices would happen relatively quickly – in a few years – but we don’t believe this is likely now.

Among manufacturers, Apple has led the way in eSIM, however we do not believe the technology has seen the traction that had been hoped for. The technology is also present in Google’s Pixel devices, although adoption remains relatively niche, but like the iPhone these models also have a standard SIM slot so there is no huge incentive for mass eSIM adoption. The Motorola Razr was one of the first flagship devices to be an “eSIM-only” product, but poor sales and supply constraints meant that it did not move the needle. There are other smartphones with eSIM support but no examples we have found where there has been meaningful adoption.

William Stofega (WS)

We have seen a select group of OEMs offer eSIM equipped smartphones, but eSIM technology has yet to percolate through their full phone portfolio.

The advantages of eSIM have been well documented in a variety of forums but bear repeating when assessing the current status and future status of the eSIM. For mobile phones, the elimination of a physical SIM card slot allows OEMs to reclaim physical space inside the device and repurpose it for other uses and eliminate BOM costs for physical SIM slot. The cost of supplying, packaging, storing, and provisioning physical SIM cards by the operator can be reduced by the use of an eSIM.

Also, operators can look beyond the current saturated market for mobile phone subscribers and focus on developing new markets for connected things such as laptops, home appliances, security services, and travel luggage tracking. For consumers, eSIM will have access to more service choices and can avoid having to carry physical SIM cards when traveling abroad. Consumers can also benefit from new bundling offers as well as take advantage of on-demand services. Finally, eSIM could enable mobile subscribers to find the best plan the fits their needs and budget. Given these advantages, we believe that eSIM and eventually softSIMs will replace physical SIM cards over the next 5-10 years.

Q: What are the largest market opportunities you expect to be opened by eSIM in both the consumer and IoT sectors?

PI In the consumer market, connecting more (and new) devices to mobile networks opens up new opportunities for the eSIM ecosystem. eSIM allows consumers to add companion devices and associated connectivity services to their main data plan, typically a smartphone one, more easily than with traditional SIMs. This improves take-up rates for those devices and services, enhances customer experience and drives greater usage of digital services. Smartwatches, for example, are seeing a renaissance driven by healthcare and fitness services, while the combination of 5G and eSIM could fuel interest in cellular connected laptops.

IoT has long been seen as a promising area for eSIM. There is potentially a market opportunity out there, as nearly 40 per cent of enterprises believe that eSIM is very important to achieve success in their future IoT deployments, based on our work with business decision makers across the globe. Connected cars with eSIM technology are already mainstream. Other IoT vertical sectors provide new opportunities, especially if the respective ecosystems move from single initiatives today to sector-wide deployments tomorrow. eSIM smart meters are seeing momentum in various countries.

It is still mainly the automotive sector that requests eUICC. This is the largest IoT sector, and given it’s global nature, eUICC is an important enabler to ensure that automotive OEMS can ensure coverage and control costs across many different geographies. We also aware that eUICC has been requested for some smart metering contracts. For private networks, eUICC will be an important enabler to allow enterprise customers to switch to a different provider when moving from the private to the public network.

eSIM is playing an important role in cellular-enabled wearables - most notably the Apple Watch. This probably accounts for the largest number of active eSIM consumer connections in many markets. Other wearables offering cellular connectivity are also using eSIM, including the Samsung Galaxy Watch LTE and we believe wearables are probably the best opportunity for eSIM in the consumer space right now.

Other devices which are turning to eSIM are trackers for kids, pets, assets and more, and also smartwatches for kids – which have been a huge phenomenon in China, but so far has mainly used a physical SIM. This could change in future and would spark serious growth.

M2M and IoT open up a whole new area of opportunity, as billions of devices can be connected and shipped across the world without the need for multiple SIM cards in different locations. This could really drive this nascent market opportunity. But turning this into a large opportunity in practice relies on good network coverage, tariffs, integration with IoT systems and adoption by machine makers - all of these are work in progress at present.

Vehicle connectivity represents a significant opportunity for IoT and eSIMs. Self-driving cars will require cellular connectivity, and the use of a physical SIM creates additional labour requirements that can complicate maintenance as well as present a tempting target for thieves. Other vehicles, including unmanned ships and drones, will require cellular connectivity to enable remote monitoring and manual control in the event of an emergency, and this represents a new opportunity for eSIMs.

As the number of cellular devices used in enterprise rises, the prospect of managing physical SIM cards for thousands of devices will overwhelm corporate IT departments. The eSIM will improve the management of corporate devices allowing IT managers to focus on security and network management instead of swapping physical SIM cards. Cars can last as long as 13 years and can cycle through three or more owners during their lifetime.

Q: How does eSIM change the game for operators, and what must they do differently as adoption of devices featuring the technology increases?

PI The transition to eSIM provides new opportunities and challenges for operators. The net result will take place over a number of years as consumer adoption scales and IoT use cases move beyond early deployments.

Even before Covid-19, there was a clear shift to online/digital in most sectors of the economy, including mobile. The fallout from the pandemic is highly likely to accelerate this change. eSIM is fit for purpose – it changes the customer acquisition journey and subscription delivery model to digital (partly or fully) allowing the digitisation of know your customer (KYC) and trusted digital identity (TDI). As the use of online and digital channels escalates among consumers, operators need to adjust their smartphone and subscription distribution plans to increasingly support a fully digital customer experience.

eSIM should also be seen in the context of 5G. 5G device renewals represent an opportunity to push the transition to eSIM, as more 5G phones will have eSIM capability. Similarly, the success of eSIM in the IoT market is to some extent linked to the future adoption of 5G in vertical sectors, which requires innovation and the ability to match 5G benefits and enterprise requirements.

Operators will have less control over the connectivity value chain and will face greater competition. They also risk losing direct relationships with end users. They will compete with various players from across the value chain (including suppliers and partners such as module providers). But failure to embrace eUICCs will make it even more difficult to compete.

They will need to offer eUICC especially when bidding for large contracts in the automotive, smart metering and other verticals to win these contracts. It may result in opportunities for operators to re-deploy resources to focus on delivering higher value services to their IoT customer bases. It may also incentivise them to simplify and automate their sales processes for IoT connectivity to reduce their connectivity cost base for use cases that are low-value, or where the operator does not have any ambition to provide end-to-end services.

A long-held concern for network operators around eSIM is that it potentially allows device makers to take greater control of the relationship with the end-customer. eSIM risks limiting the opportunities for telcos to engage with and upsell to subscribers as it reduces the reasons for them to visit a store. This is particularly relevant given the ongoing trend toward online purchases, that could accelerate due to the coronavirus pandemic.

As customers become more familiar with buying devices and subscriptions separately and with many increasingly doing so online, they may become more comfortable with provisioning devices themselves. In doing so, they could restrict the opportunity for operator brands to create an identity.

A further concern is that if manufacturers are able to offer customers a range of competitive tariffs that they can easily switch between, it could lead to an overall downward pressure on mobile prices.

In theory, we believe eSIM opens up the opportunity for manufacturers or Internet players to become MVNOs themselves, in a further threat to traditional operators. Whether this happens remains to be seen. Google has tried and found it challenging with Google Fi for example.

The long-term positive news for telcos is that eSIM negates the need to engage in costly SIM card distribution. It also opens up opportunities to attach secondary devices such as watches and fitness trackers.

Finally, eSIM could also open up opportunities in roaming by better enabling the provision of network operators for travelling customers. This could encourage greater usage among this segment.

For the most part, the prospect of capturing new services revenue from handset subscribers has become a difficult and expensive problem as the market has matured. In some markets, pricing has become the primary competitive tool used by mobile operators to attract new customers. Others have looked to acquisitions while others have looked to enter new businesses to make up for the saturation mobile market in the market.

In order to succeed in the future, operators will need to look beyond providing connectivity to handsets and embrace new opportunities to connect devices that are not connected. This includes medical devices, cars, drones, automated vehicles, and robots. The eSIM provides an opportunity for operators to begin the journey to new revenue opportunities that have yet to be realised. Bundles of services that can be purchased on a demand basis or as part of a subscription can be achieved faster and more efficiently by embracing the eSIM.

Q: What factors have hampered progress of the technology so far, and what are the challenges to widespread adoption moving forward?

PI Despite fast progress on eSIM global specifications, the eSIM market has yet to reach critical mass. To a large extent this comes as no surprise. A period of reconfiguration is needed as companies gain eSIM experience and adjust to new manufacturing, logistical and supply chain processes. On one side there is a technology (the traditional SIM) that has played a pivotal role in the rapid rise of mobile services over the last three decades. On the other side there is an ongoing transition to a new technology (eSIM) that brings new benefits for stakeholders and consumers, but also new challenges and changes, some of which are difficult to predict in the early days of eSIM.

Whether slowly or fast, eSIM will become mainstream in the smartphone market, especially if OEMs will push the transition to eSIM-only smartphones. Beyond smartphones, the uptake of companion devices at scale will depend on whether consumers see benefits in connecting those devices to mobile networks (as opposed to Wi-Fi) and the incremental cost of the cellular connectivity service (the typical value for money principle). A richer ecosystem of services that makes cellular connectivity for companion devices more valuable is needed.

Most companies in the wider IoT ecosystem believe that eSIM is crucial to driving IoT developments. However, future eSIM deployments at scale depend on such companies having a clear eSIM strategy alongside their main IoT proposition. From a technology perspective, the adoption of global standards and specifications (as opposed to proprietary solutions) may help tackle some of the challenges around integration and interoperability of different IoT solutions and platforms.

Deployment of eUICC and RSP platforms to support it has led to new costs for connectivity providers, including initial set-up costs, a recurring RSP platform fee and integration costs with existing business systems and the costs to facilitate switching on the RSP platform.

Also, nb-IoT is not fully supported by the GSMA specification yet so the specification does not support all cellular technologies. And there are issues with interoperability between different vendor eUICCs and RSPs although these are being resolved. Enterprises request eUICC but it seems more as an insurance policy. There is little evidence that many enterprises are switching operators (there is also a cost associated with switching operator profile).

A major headache is that eSIM has historically not been allowed in mainland China, so a global SKU of a device was not possible with eSIM only (Apple still does not support e-SIM for the Chinese variant of the iPhone for example). The other challenge is that it has proved significantly harder than expected for operators to implement eSIM in their networks – this has really delayed implementation.

Despite the advantages that eSIMs can bring to the market, the adoption of eSIM in the smartphone market has yet to take off, this is due to several reasons. These include: Fear from mobile operators that eSIM can be used by OEMs to disrupt the operator's relationship with their customers; fear from mobile operators that the adoption of eSIM could allow subscribers to focus on price leading to compressed margins and a race to the bottom; lengthy standards formulation process; and a lack of smartphones that are equipped with an eSIM module.

The slowing growth in the mobile handset coupled with a refresh rate that is moving toward 3.5 years before customers purchase a new phone means that changes in features and design will take longer to reach consumers. Still, operators and OEMs have done little to promote eSIM and have yet to define a compelling reason that can help stoke interest/demand.

The interests of the OEMs and operators will need to align to create a compelling story that will help create end-user demand. Currently, both OEMs and operators are struggling with promoting 5G, and this will likely continue for at least the next year. The transition to 5G should be viewed as an opportunity for technology change out in a variety of different areas. At the end of the day, the problem of eSIM adoption might be best solved by including eSIM modules in all 5G handsets.