Putting the eSIM Smartphone Impact into Perspective

With 2019 marking the first full year of Apple XS, XS Max, and XR device shipments, market hype pertaining to eSIM continues, driven by a level of uncertainly and fear as it relates to the potential impact not only on the traditional SIM card market but also in terms of disrupting Mobile Network Operators (MNOs) subscription business models.

Speculation of any potential impact continues, with a wide variety of likely market outcomes being touted. However, Apple is just one of two vendors with commercially available eSIM handsets, with Google being the other. Although Apple remains a major player in the smartphone market by commanding a market share in excess of 13%, this still leaves the market majority yet to support or announce smartphone devices with eSIM. All eyes are now on other Original Equipment Manufacturers (OEMs), including Samsung, Huawei, LG, Xiaomi, and ZTE, who combined share an annual smartphone market share in excess of 40%.

Today the market remains at a crossroads. Apple is the first major vendor with a significant market presence to make some level of impact, but Apple cannot do it alone. Others will undoubtedly follow, but the big question is when?

In terms of global impact, it is important to note that China has been excluded from Apple eSIM support; currently, dual SIM functionality in China is being delivered via two traditional, removable SIM-card slots. For this reason, it would be safe to assume that any future eSIM smartphone release by another OEM in the near future would also exclude China.

Despite China’s likely short-term exclusion, the data look promising, with eSIM penetration rates into smartphones reaching over 24% by 2023. The level of support is based on the assumption that other OEMs, including Samsung and Huawei, will launch an eSIM-capable smartphone by 2023 in some capacity—likely within their respective high-end flagship smartphone devices.

At face value, the data suggest a significant disruptive threat not only to the traditional SIM-card market but also potentially to prepaid subscriptions by allowing customers to easily jump from one MNO to another. But an eSIM device that also encompasses a removable SIM-card slot will not necessarily translate into a significant penetration rate of MNOs supporting eSIM. The approach used by Apple and Google to date—supporting a combination of eSIM and removable SIM cards—places the power firmly in the MNOs hands, and so today they can decide either to support the eSIM or to continue to support the traditional removable SIM card.

Penetration rates for eSIM devices will not directly translate to a reduction in traditional SIM-card issuance or to majorly impacted subscription churn rates. Integrating an eSIM into a device is one thing, but it is redundant without the required MNO support. This is one of the key barriers holding back the eSIM market today.

From an MNO perspective, the investment and time required to develop the required business processes is extensive. It is an investment that needs careful consideration, as operators will not want to commit and invest too early. Operators will also not want to invest too late. Overall, the required investment and undertaking from an MNO perspective is a vast one and can be broken into three primary categories:

• Creation of an eSIM ecosystem: This involves the partnering of a provider such as Gemalto, IDEMIA, Giesecke+Devrient, or Valid to set up the required profile generation infrastructure. Like traditional SIM-card sourcing, operators will likely source, support, and invest in two or three competing systems.
• Information Technology (IT) business systems: This pertains to the review of all business processes and the development of ways to handle new subscribers, existing subscribers, and sales channels.
• Company training: This includes marketing, retail staff training, and customer support. This remains an area that is not largely spoken about but remains a requirement that has significant associated costs.

In the short term, MNOs will likely support both the eSIM and removable SIM-card slot, offering the consumer a choice or continuing to support the traditional SIM card for existing customers and moving new customers onto eSIM. As such, there will be a significant transitional time period where a combination of eSIM and traditional removable SIMs are supported. In ABI Research’s opinion, this traditional period will last years, and MNOs with international footprints will likely adopt a tiered approach to eSIM support to spread the associated cost and investment across a longer time frame.

From an OEM perspective, the likes of Apple may push eSIM support into the midterm and over a longer period; they may adopt a two-pronged device design strategy, developing an eSIM-only device for mature eSIM-ready regions and a dual SIM-card device for emerging regions. This will likely require more time to ensure that the necessary steps in terms of system updates, infrastructure, and required employee training are in place.

The ultimate goal will be to replace the traditional removable SIM cards with eSIM support, but the fact is that the true impact on both the traditional SIM-card market and MNO business models will not be realized or well understood until that time comes. Over the next three to five years, the impact from the eSIM will be limited, with ABI Research anticipating a smooth path toward eSIM support. As such, the eSIM is unlikely to create an overnight market shock, as OEMs continue to develop and release eSIM smartphones and MNOs ramp up support. This transitional period will provide the required time for MNOs to develop, react, and strategize for any possible outcome by using a limited number of eSIM smartphone devices in the field today to test the market waters and consumer appetites as well as measure any impacts on their respective revenue streams.