RESEARCH STRATEGY REPORT OPERATOR STRATEGIES FOR THE esim ERA: OPPORTUNITIES IN DEVICE BUNDLING, SALES CHANNELS AND WHOLESALE KEREM ARSAL analysysmason.com
About this report An esim is an embedded (although potentially removable) SIM within a mobile device that allows users to activate or switch services remotely without being tied to an operator s network. This report assesses how the introduction of esims onto consumer devices (including smartphones) will affect operators strategies and their position within the telecoms value chain. It examines how the arrival of esims reflects current market trends, including the growth of SIM-only plans and the emergence of consumer financing by device vendors. The report identifies three strategic areas that operators interested in the esim opportunity should prioritise: multi-device bundles, sales channels and wholesale opportunities. We make clear recommendations about how operators can take advantage of esims on consumer devices. The report is based on these sources: Analysys Mason s research on esims and remote SIM provisioning 1 interviews with stakeholders in the mobile market operating in developed and emerging markets Analysys Mason s Connected Consumer Survey data on mobile services and devices usage Analysys Mason s Telecoms Market Matrix and regional data and forecasts. 1 For further details, see Analysys Mason s Remote service provisioning and esims: implications for the consumer market. KEY QUESTIONS ANSWERED IN THIS REPORT What changes are esims likely to bring to the telecoms value chain? How do these changes relate to consumer interest in SIM-only plans and the emergence of handset vendor financing schemes? What can operators do to respond to these shifts in the value chain? Which device strategies should operators adopt as esims become more prevalent on consumer devices, including smartphones? How should operators configure their sales and marketing channels to better adapt to esims and remote service provisioning (RSP)? What changes in wholesale and MVNO business can be expected, and what will the operator appetite be for taking advantage of them? WHO SHOULD READ THIS REPORT Operator CSOs and strategy managers who want to understand more about the potential shifts in the telecoms value chain and the associated implications for multiple areas of their business. Operators product and marketing managers who are interested in understanding how approaches to mobile data monetisation, service design and channel structures may evolve in light of these changes. Device and terminal managers at operators who would like to gain more insight into how they can adapt their strategies for the arrival of esims. Wholesale units with an interest in how the introduction of esims may generate opportunities for their business. 2
CONTENTS EXECUTIVE SUMMARY CREATING A MULTI-DEVICE STRATEGY REVISING THE CHANNEL STRUCTURE EXPLOITING THE WHOLESALE OPPORTUNITY ABOUT THE AUTHORS AND ANALYSYS MASON 3
Executive summary Operators can take advantage of the introduction of esims on consumer devices (including smartphones) if they adapt their device bundles, channel emphasis and wholesale approach. Operators role in the telecoms value chain has weakened in markets where consumers show growing interest in SIM-only plans and financing schemes from handset vendors are emerging. These developments challenge operators traditionally strong position as mobile device distributors. esims will enable remote service provisioning and will allow the entrance of many new players, which may further weaken operators relationships with their customers. However, it also presents opportunities: operators can adapt to the requirements of their evolving markets. 1 This report identifies three ways that operators can capitalise on the introduction of esims on consumer devices: building multi-device bundles based on shared data plans and a separation of service and device fees shifting the channel strategy to a more aggressive use of nonexclusive channels and digital sales and service delivery exploiting wholesale opportunities that emerge as a result of dramatically falling barriers to entry for mobile virtual network operators (MVNOs). 1 This is likely to be considered first by challenger or disruptive mobile operators with limited fixed assets. Figure 1: Three strategic areas of consideration for operators interested in esims DEVICE BUNDLES SALES CHANNELS WHOLESALE Current operator emphasis Traditional device plans with separate data plans for companion devices Emphasis on owned stores and franchises Cautious approach to MVNOs and wholesale partnerships More emphasis needed Shared data plans for multiple devices with device service fee separation Openness to non-exclusive channels, especially for companion devices Hosting many new entrants, especially by mobile-centric operators Source: Analysys Mason 4
The growth of SIM-only plans has weakened operators role in the value chain, but esims will present operators with unique opportunities The inclusion of esims on smartphones offers opportunities to operators that can adapt to the challenging telecoms landscape. Mobile operators have long relied on bundling smartphones with their services to grow their customer base and reduce churn. When smartphones were first introduced, each operator s exclusive access to certain brands and models substantially impacted its mobile market share. Operators have also been able to tie customers into long-term contracts and benefit from reduced churn rates by offering financing and locking smartphones to their networks. As smartphone adoption has matured and innovation stagnated, consumers have started to move towards SIM-only plans. These plans can be used in combination with consumers current smartphones or with new smartphones purchased from retailers. Consumer financing, which handset vendors such as Apple have started to offer, makes it easier for consumers to buy their mobile devices outside of operator channels. The potential take-up of esims will share some key drivers with SIM-only growth, such as the consumer demand for service flexibility and the shift towards buying smartphones from retailers. However, esims will also offer operators some new growth opportunities. This report outlines these opportunities and describes how operators can realistically capture them. Figure 2: Overview of present market conditions and the potential benefits of esims for some of the major players in the telecoms value chain Player Original equipment vendors (OEMs), device vendors Independent device sellers and third-party retailers Operators MVNOs Present market conditions Smartphone sales are stagnating and growth is needed through new consumer mobile devices SIM-only growth is partly related to their growing strength as smartphone channels Companion device attach rates are very poor and smartphone sales channels are gradually shifting towards retailers that offer SIM-only plans. Physical SIM distribution is a costly activity Benefits esims can enable vendors to design devices with better mobile use cases; operator channel dependence will be lower if connectivity is provided at any point of sale through esims. If these players can partner with multiple connectivity providers and give consumers choice, esims can help them make an impact. esims can be used to sell more cellular devices if adequate bundling tactics are used. Operators will not want to use non-exclusive retailers for their connectivity sales; market leaders will want to avoid comparability. esims eliminate the need for physical SIM distribution, and service activation can be electronic, which means that barriers to entry for these players are lower. 5
We have identified three priorities for operators interested in the opportunities presented by esims to consider We have identified three priorities for operators interested in developing the potential of esim-enabled consumer devices. Building a strong multi-device bundle strategy Operators have an immediate opportunity to sell connectivity to esim-enabled companion devices, although RSP specifications for any consumer device, including smartphones, are available as of June 2016. 1 Shared data plans with split device and service fees can attract consumers who do not wish to commit to separate plans for each companion device. They can also accommodate the replacement cycles of different segments. Revisiting the channel strategy Operators will need to be more open to selling connectivity for devices (at first, just companion devices) sold through nonexclusive channels. Moreover, they need to move their own stores beyond phone shops to stimulate multi-device take-up, while also developing digital sales and service delivery capabilities for RSP. Considering wholesale opportunities esims will significantly lower the barriers to entry for MVNOs, especially for those engaged in mobile device distribution. Mobile network operators will not share the same level of enthusiasm for hosting newcomers, but opportunities will emerge. 1 The technical esim specifications for all consumer mobile devices released by GSMA in June 2016 are largely the same as those released in February. Actual business models remain to be decided upon among industry stakeholders. Figure 3: Major trends related to a potential take-up of esims Priorities Areas of concern How the introduction of esims can address concerns Multi-device bundles Channel strategy Wholesale opportunities Low cellular attachment rates for companion devices Consumer reluctance to buy separate data plans for companion devices Retailers taking over device sales when cellular connectivity is not in demand Lack of standalone mobile use cases for some devices. SIM-only behaviour causes device sales to move to nonoperator channels The importance of online channels for device purchases is increasing. MVNOs require dense SIM distribution channels Mobile operators with limited fixed assets struggle to grow revenue in FMC-heavy markets More cellular-capable devices from both operator and retail channels will be available Shared data plans can address ad-hoc mobile usage of companion devices Devices with stronger potential for mobile use cases will be available. Enables more convenient device additions to data plans. Can use non-exclusive channels more aggressively to sell connectivity Digital channels enhance service sales and delivery Reduced barriers to MVNO entry because SIM distribution is not required. Challenger mobile operators that cannot compete with integrated multi-play offers may be presented with a revenue opportunity. 6
Recommendations 1 Operators must focus on extending cellular connectivity to companion devices by creating shared data plans and separating device and service fees. esims present operators with the opportunity to refocus their efforts on companion devices: the technology can help to improve standalone mobile use cases and activation processes. Shared data plans can help alleviate consumer reluctance to buy separate mobile data plans for such devices, while a separation of device and service fees may facilitate the implementation of flexible upgrade programs. 2 Operators should consider non-exclusive sales channels seriously, while also improving their digital sales and service delivery capabilities. The impact of esims is likely to be most noticeable when operators can provide connectivity to mobile devices sold through non-exclusive retailer channels. All operators may benefit from using such channels more aggressively for sales of companion devices, but for smartphones, challenger operators may have a greater incentive. In order to benefit from RSP, operators must also develop their digital sales and service delivery. 3 Operators need to assess growing wholesale opportunities with new entrant MVNOs; challenger operators or mobile-centric players in markets moving towards converged bundles may be more keen to host newcomers. Many vendors and Internet players with a foothold in mobile device distribution will consider launching MVNOs as the need for physical SIM distribution wanes. Challenger mobile operators and those with mobile-centric positioning in markets with converged bundles can respond quickly, but market leaders and incumbent operators with an interest in converged bundles may hesitate to enter such agreements because of fear of competition. 7
CONTENTS EXECUTIVE SUMMARY CREATING A MULTI-DEVICE STRATEGY REVISING THE CHANNEL STRUCTURE EXPLOITING THE WHOLESALE OPPORTUNITY ABOUT THE AUTHOR AND ANALYSYS MASON 26
About the author Kerem Arsal (Senior Analyst) is a key contributor to Analysys Mason s Mobile Services research programme, which helps operators to understand, and monetise to maximum efficiency, the interplay between voice, messaging and data services. His work involves in-depth coverage of issues such as customer retention, mobile data pricing, MVNO strategies, and the impact of regulation and roaming. Previously, Kerem was a research manager at Pyramid Research, where he was responsible for setting the thematic research agenda across multiple tracks and regions. He also headed numerous projects around operator strategies, as well as commercialisation of, and demand assessment for, new products in the consumer and enterprise segments. 27
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