This has been barely noticed during the last Apple keynote, but the next wave of iPhone 6s will feature an optional monthly plan to pay for the device. Apple has massive amounts of cash out of the US, which it is not in a hurry to repatriate, so it clearly has the deep pockets for such a strategy globally. All this will come with something already seen on the last iPad: the Apple SIM. Now that Apple is taking over the distribution of mobile subscriptions, Mobile Network Operators (MNO) may rightfully feel threatened to be dwarfed into a last mile provider, while Apple rips the profits of distributing mobile plans. But this is not a done deal: there are ways that MNO may fight back. So, how can MNOs deal with the Apple SIM ? Here are a few ways to explore.

What is the Apple SIM ?

Before moving forward on this topic, let’s be more specific about what we are talking about. The Apple SIM is nothing new conceptually, at it operates like a technology called eUICC — all on a standard SIM package. eUICC is fully standardized by the GSM Association, and sold by leading vendors such as Gemalto.

In short, the eUICC technology allows for reconfigurable SIM cards with the help of cloud technologies. You may know that your SIM card embeds the private crypto-key of your mobile provider — one that allow to uniquely identify you on the network. On a traditional SIM, this private key is hardware-coded on a chip, which is a highly secure way to distribute it in millions of SIM while still keeping it unreadable (the way the key is used in mobile auth protocols is beyond this article).

In the case of the eUICC, an entity called “service manager” securely and remotely pilots the private key in use inside the chip. This allows two nice features:

• the MNO can be reconfigured in your device remotely, without any physical interaction;
• once this tech is widely accepted by MNO, you actually don’t need a SIM card anymore: an eUICC module could be soldered anywhere on your phone’s motherboard — which saves space and makes design more simple.

In the Apple SIM, as you may have guessed, Apple is the service manager of the SIM, and the MNOs are back to their main role in the chain: mobile service providers.

Why eUICC is a big deal for MNOs ?

Mind you, Mobile Network Operators already use the eUICC technology: in M2M applications, where you need global coverage for thousands of devices scattered all over the country, including in rural areas, it could be nice to get coverage from just the telco that’s there. Some connected electricity counters, for example, may be reconfigured to connect to the network with the best signal wherever it stands, without having to manage a stock of SIM cards and manually insert them on the field. It was also chosen by the EU in its connected car recommendation. Actually, all the main MNOs have signed up for the eUICC standard by the GSMA.

What MNOs are worried about is the use of eUICC in the B2C space, because it is disrupting the distribution of the mobile plans. There are two issues at stake here:

1. Telcos have traditionally developed an extensive retail distribution network through a large number of self-branded stores, which are either self-owned or franchises — and they are turning useless;
2. A service manager with significant market power might extract more value than what MNOs currently pay for acquiring customers. Apple might fall in that category, as it “owns” the premium segment (80% market share for devices above $300). Apple also showed in the past that it is not scared to impose stringent conditions on telcos that just want to distribute its phones (although it hurt its competitors more than the telcos actually).

The end of MNO retail stores

Sure, the eUICC makes the retail store irrelevant, as distribution happens online (through a portal managed by the service manager). But as it stands, the store is already largely irrelevant in mobile distribution, for at least four reasons:

• Online stores are already on the rise, if only for price comparison. You may still buy your SIM in the store because you don’t want to wait for delivery, but you choose your offer online anyway. In many developed countries, the customer does not buy a phone plan, it buys a mobile device with a consumer credit. Find the best offer online, and the store no longer “sells” you anything, it is just part of the logistic chain.
• MNO stores were once relevant when offers where complicated and people did not know how to insert a SIM in their phones. But it turns out that complexity have decreased and customers have become more tech-savvy. This makes the store pretty much useless on two of its main missions.
• In many mature markets, prices declined sharply, which leaves less money to pay for a brick&mortar distribution channel. A retailer used to make up to €250 for acquiring a new customer with a 2-year commitment. This is no longer possible when unlimited (unsubsidized) plans run at €20/month, as is the case in some countries. Add a subsidy worth €20/mo, and pay the distributor the equivalent of €10/mo for a 2-year commitment, and it sells for €50/mo instead of €20/mo. When you are 2.5x times more expensive than the standard offer, you are targeting a niche, at best. Most likely, irrelevance is at the doorstep.
• In many countries, the market share of plans without commitment have increased drastically. For example, in France, 2/3 plans are not under commitment any more — up 100% in the last few years. Although one clear driver
  has been competition and the launch of a 4th MNO, it is also the result of a longer lifetime of the smartphone. The following chart by mixpanel.com shows that iPhone 4/4s/5, launched 3 to 5 years ago, still account for roughly 40% of users in the US. With a churn rate of 30-35% in pospaid, this confirms that people now change plans more often than devices.

In brief, it is fair to say that the lower utility factor of MNO stores is not a result of the eUICC, but rather the logical result of endogenous factors. The danger of eUICC is that the irrelevancy of retail stores is brutally translated in facts: nobody needs to get a SIM in the store anymore. Plus, should customers want to remain in brick&mortar channels, why would they tie themselves to one single MNO brand ? It used to be for the subsidy, but if this can be had from the device manufacturer, why bother ?

Focus on the customer, not the channel

The main recommendation to MNO is not to fight the eUICC tidewave, but rather to embrace an “adopt and adapt” strategy:

• MNO need to rethink their retail strategy. Customers no longer need these stores as such, therefore they should either find another “raison d’être”, or prepare to close them altogether. New missions could be to service defect phones, sell used/reconditioned devices, solve specific customer problems as a differentiator, etc. All this requires different skills than what’s currently in place.  But without proper repositioning, MNO should start shortening lease agreements, sell stores to franchisees, and stop operating retail stores altogether.
• MNO need to work on the best way to acquire customers on the eUICC’s service manager portals. There is clearly an opportunity to work with Apple on this, as this would legitimate its technology. MNO need to define the most attractive offers (subsidy or price ? / Unlimited vs segmentation, etc.) and marketing strategies for this channel.
• MNO need to focus fully on customer satisfaction, and upsell ! Although Apple can influence the choice of a carrier, it does not control which plan is used at any given time by a user. If the MNO sells a low-cost plan at first, it could increase its margin by converting the user to a higher-end tier. The example of FreedomPop in the US is striking, as it is able to convert a large number of freemium customers to a paid offer by optimizing its communication to the enrolled users. MNO should allow self-configuration through an easy application on the device to combine unlimited usage and budget control.

All in all, the best way to shine in the eUICC world is to be desired by the customer. This, Apple cannot fight, or at its own expense. MNO can shield themselves against abuse of power from Apple by learning to use this new distribution channel fully, instead of entering a dogmatic war against it — which at the end is a war against the user’s experience.

As Apple will start to subsidize its own devices, MNO should anticipate the associated extra cash flow — as they will subsidize less devices. Up to them to invest in customer experience, or to take the short-sighted path of exceptional dividends…