Industry Thought Leadership

The eSim Revolution is Coming to the Middle East

May, 2017
Jad Hajj

Strategy& (formerly Booz & Company), part of the PwC network

The telecom sector will soon experience another disruption, one that will reach the Middle East in coming years. After mobile and then the Internet, the next change will be the demise of the physical SIM card, the chip that sits inside mobile phones and that connects consumers to telecom operators. Etisalat is planning to introduce eSIMs in 2017. Saudi Telecom Company has recently announced that it will introduce the eSIM in collaboration with Oberthur Technologies’ subscription platform and the Huawei smartwatch. The demise of the SIM card will mean that telecom companies will lose control of connectivity, with important implications for consumers, device manufacturers, mobile network operators, and mobile virtual network operators. At the same time, the market for connectivity is growing quickly because there are more and more smart devices that need connectivity—such as connected cars, connected fridges, or home security systems.

The SIM card allows a mobile operator to identify and authenticate a consumer, which in turn gives the consumer access to the mobile network to for calls and data. In the past, this meant that mobile operators could control connectivity. In the future, devices, such as smartphones or tablets, will not need a physical SIM. Instead, these devices will use an eSIM, a mixture of software and apps.

The main beneficiaries will be consumers because they will have more control over connectivity. They will be able to connect to operators’ networks in the same way that they now choose WiFI networks. Consumers will decide which plan they want when they buy their device or turn it on for the first time—the plan could come from a telecom company or from the device manufacturer.

The device manufacturers could also gain because they can sell directly to consumers more often, disintermediating telecom operators. In the past device manufacturers had bulk agreements with telecom operators. In the future, device manufacturers will also be connectivity providers. Many devices, whether cars, tablets, home security systems, or even fridges, are connected to the Internet through mobile networks. These eSIM-enabled devices can offer connectivity, giving consumers more choices.

The eSIM could be an opportunity for telecom companies, whether they are mobile network operators (MNOs) or mobile virtual network operators (MVNOs, which buy network capacity from MNOs and then sell it to consumers).

If the eSIM is introduced gradually, then MNOs would manage connectivity for consumers’ multiple devices, remain the main sellers of these devices, and would offer new additional services. MNOs have until now retained their customers by having them sign long-term contracts and by subsidising the cost of devices, whether handsets or smartphones. They can respond to the eSIM by providing bundled contracts for multiple connected devices (e.g. cars, domestic appliances, wearables, tablets), which would create a closer connection to consumers than at present. To do so will require operators to embrace the new technology. They will have to revise contract structures and change how they subsidise devices.

In terms of the corporate market, in which companies need large numbers of lines and connectivity, MNOs can offer better provision of devices and more self-service to keep costs down. Far from losing consumers, MNOs could increase their retention rates.

MVNOs and smaller MNOs will also need to make changes. They will face competition from new connectivity providers such as smart device manufacturers. The makers of these smart devices—such as fridges, ovens, dishwashers, or home security systems—need connectivity to give their customers the ability to order suppliers or to call for maintenance. The best response for small MNOs and MVNOs is to form partnerships with smart device manufacturers to help them provide connectivity rather than wait for these device makers to become their competitors.

Much will depend on the attitude of regulators. The eSIM could be the catalyst for regulators to accelerate measures that are currently under consideration. In particular, regulators could use the eSIM to force large incumbents to shape up. The attitude of consumers will also have an impact as they will push for a free for all. Consumers will choose their device first and carrier second—with the list of potential carriers including MNOs, MVNOs, and device manufacturers.

The eSIM means consumer choice. There are certainly opportunities for device manufacturers, but the consumer relationship with telecom operators is far from over. If MNOs and MVNOs respond wisely by building on their core capabilities, they can establish a new connection with their customers that will be more enduring than the SIM card.