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Monday, October 20, 2014

Apple's SIM card - less of a gamechanger than many people think

Let's get one thing clear straight away: it's not a Soft-SIM that's in the new cellular version of the iPad Air. Apple isn't becoming an MVNO, either. And it's not about to put Apple in the position of supreme gatekeeper for the world's telcos, much less charge them for the privilege.

Although the precise details remain available only in outline and inference, it appears that the "Apple SIM" is just that - a physical SIM, in familiar card form. It just comes pre-installed at the factory, but (it seems) can be removed and replaced as normal, for example with a SIM from an operator that isn't currently providing its profiles to Apple for its menu system.

This isn't actually a new concept, either. It's a variant of the GSMA's programmable SIM / eUICC standard, intended to promote cellular use in M2M devices, by helping manufacturers and users avoid some of the "friction" involved today. Operators want more new devices on their networks. Manufacturers of non-telephony devices want to avoid the hassle of setting up local distribution channels to provide SIMs. And users don't want to have to hunt for SIM cards, especially for short-term service plans.

The idea is that a device ships with a SIM card that either has
  • A "master" profile from one operator, which can then switch in/out the profiles to a partner or affiliate MNO in another country, or... 
  • (As appears here) a basic "bootstrap" profile from the device vendor that can then be used to trigger operator-specific downloads & activations from a menu. 
NTT DoCoMo has already launched its programmable-SIM services, and in discussions recently at CTIA I found out about several more that are working on their own propositions. The names of the operator groups concerned won't come as much surprise, given those that have been publicly supporting the GSMA initiative. Where this differs from some of the proposals is that the device vendor (Apple) is issuing the cards, and presumably has to bear the costs and administrative work of getting them produced.

Although the main emphasis of the programable/eUICC model is on fully-embedded SIMs, for example in vehicles or ruggedised industrial machinery, the Apple SIM model makes perfect sense for tablets as well, in a situation where some operators have signed up, but others still demand a conventional SIM.

It is not yet clear whether the Apple SIM ships with the AT&T/Sprint/T-Mobile/EE profiles pre-installed, or whether these have to be downloaded once the user chooses from the menu. It's also not exactly clear what happens if the user switches - does the old profile get deleted and another downloaded? Or does the user just swap to another that's already pre-embedded? If the device does hold multiple profiles upfront (rather than one at a time), how many can it accommodate? There's a lot still to be answered. 

However, the idea of multiple profiles (and IMSIs) in SIM cards is not new - operators like Truphone have been doing something broadly similar for years, but with MVNO deals rather than the operators' own brands upfront. The innards of SIM cards, IMSI, security credentials, MNC/MCC codes and related topics is pretty arcane - there are numerous ways to create multi-operator SIMs, and that's before we even get to fully-soft SIMs in the phone's own OS and processor chips. (I first wrote about multi-IMSI cards in 2009).

It's also worth noting that Amazon's Kindle Fire HDX's ship with pre-installed SIMs, although provided by Vodafone in Europe and (I think) AT&T in the US. The Kindles and VF SIMs, shipped from central distribution centres, can then be configured to support whichever country the subscriber lives in, with the appropriate local network credentials for the relevant Vodafone OpCo.

The obvious question is whether a similar approach could be applied to the iPhone. My view is that it's very unlikely, especially in the next 2-3 years. There are several major reasons:

  • Tablets have a cellular "attach rate" of  less than 20%. Operators want to increase this. Phones have an attach rate of 100% already.
  • Tablets don't need a phone number. Data devices can (& do) switch between networks easily, so short-term contracts and "ephemeral" connections work fine. Phones do need a stable phone number, which would need to be ported if you switch providers - and which obviously cannot be ported internationally. (We may be able to go number-free eventually, but not yet)
  • There is an agreed standard & set of business processes for programmable SIMs for M2M-type applications (eUICC), which tablets fall into. There isn't an equivalent standard for phones - and judging from GSMA and operators' clear lack of enthusiam, there won't be one any time soon. Given this model requires operator consent, that is a major stumbling block. Apple might try to end-run this with a couple of renegade operators, but I have my doubts.
  • Tablets, along with many other M2M devices, don't fit well with the retail model for mobile phones and phone-oriented SIM cards. Customers buy tablets in computer shops, not phone shops. Or they order them online. While some might overlap (especially phablets), that's the exception. Getting SIM cards into the computer retail/online channel is hard (as is getting SIMs into car retailers, camera retailers, electric appliance channels and so forth). Staff in those stores or websites are not trained to sell cellular plans. So having "blank" SIM cards pre-ship from warehouses by the manufacturer reduces friction massively. Conversely, the mobile phone channel is pretty good at selling both phones and cards.
  • Tablet usage is very different to phone usage. People have much "burstier" patterns of needing mobile access - when travelling, when in places with poor or expensive WiFi, with children, with work and numerous other variables. Many are not conducive to traditional, monthly subscriptions, so mechanisms that allow short-term use is beneficial.
Aside from this, many observers have also suggested that Apple wants to be an MVNO, or try to get carriers to pay to be one of the menu choices, or take cuts of the various iPad-specific data plans. I have huge doubts about this. I don't think Apple wants to be an MNO or MVNO. The margins are lower, the customer support headaches are higher (billing systems & queries, anyone?), there's a ton of regulatory hassle, and - ultimately - mobile services represent a market that has already peaked. Plus, many operators subsidise iPhones hugely, which eases their path into the market. Potentially, Apple could offer its own finance/subsidy plans - but that then just turns it into a bank, with all the credit risk that involves.

And of course, this is not to mention the low likelihood that operators are willing to do this anyway, and that MVNOs are not legal or easy to set up in many countries, besides. And, finally, Apple isn't going to want to put itself on the hook for operators' network deficiencies, outages and so on. It might try out one country - or even set itself up with a Dutch-style newly-liberalised MNC code (ask me offline for details of why this is interesting) and try to do roaming deals instead of MVNOs - but that's some way off as well as not necessarily being an attractive commercial proposition.

What Apple does want, as always, is higher-priced, higher-margin hardware. It makes a big chunk of its profits from selling upgrades - more memory, external covers/batteries and so on. A lot of Apple's profit comes from - essentially - selling memory chips at retail prices far above what it pays for them wholesale. The cellular variants of the iPad are £100 or US$130 higher - and you can bet that the cellular modem probably costs Apple $50 or less in incremental price. Added to that, it is possible that Apple gets some sort of "bounty" payment from carriers when users activate a SIM - which is sort-of equivalent to a subsidy.   

So if Apple can sell 10m more cellular-enabled iPads, it can probably make a tidy extra billion or so for very little effort. To make an extra billion of profit out of taking a slim margin on lots of MNO data plans would be much harder work.

Is all this a precursor to a long-run approach to full Soft-SIMs? Maybe. But my guess is that Apple will try to get in front of the next curve rather than try and subvert the status quo. It recently joined the NGMN in the hope of helping define 5G. I wouldn't be surprised if it suggests SIM-optional or Soft-SIM models in that forum. A successful programmable SIM in the iPad would give a nice weight of evidence about the possible benefits.

Overall, I think the Apple SIM is definitely interesting. But it's not the game-changer that many people think. It's not obviously a thin-end-of-the-wedge, or slippery-slope, or any other similar metaphor. It's specifically a win-win-win approach to get more tablets to use 4G networks. It learns from the failed attempts at getting 3G-embedded laptops into the market (which I predicted in 2008) by getting the processes more aligned with consumer needs. It doesn't relate to phones, at least for a long time.

I've also realised one other absolute, killer argument that seriously limits the role of any future programmable or SoftSIM model. It's one I haven't seen discussed in any articles about the Apple SIM so far. I'm not going to be revealing it on this blog either - but it's big enough that many of the "doomsday scenarios" for operators become almost impossible to realise. Instead, I'm going to be thinking about the implications a bit more deeply, and writing it up for my mobile broadband research subscribers only, in the forthcoming update to my "non-neutral" mobile broadband report due out in November. The information and purchase page is here. (If you urgently need the "big reveal", I can let you know the outline by email in advance, if you buy the report).

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