|How a New Apple Watch May Threaten the Telecoms|
The world awaits the 10th-anniversary iPhone. But the real news may be buried within a redesigned Apple Watch.
The telecommunications market may soon be up-ended once again by the Apple Effect. A decade ago, Apple transformed the terms of the wireless phone business with its first iPhone, and this week it may do so again.
No, this is not about the 10th-anniversary iPhone that’s expected to be unveiled at a Sept. 12 media event at Apple’s headquarters. Rather, the pivotal development may involve a second, less-ballyhooed product, the Apple Watch, which many believe is also getting an upgrade.
The rumor mill has for months said Apple’s next smartwatch will gain the ability to dial up the internet wirelessly even when it’s not connected to an iPhone. If true, the new Apple Watch will probably make use of an emerging technology called an embedded SIM. This could further separate the purchase of a new electronic gadget from the grip of the phone companies.
A beneficiary of this development could be Dutch-listed Gemalto (ticker: GTO.Netherlands), a supplier to the phone companies. ( Gemalto also has American depositary receipts that trade over the counter under the ticker GTOMY.)
Inside every smartphone is a subscriber identity module, or SIM, a little plastic card with a chip that employees at the phone store shove inside the device when you buy a new unit. The SIM tells a wireless network that you’re a valid customer so you can connect. The carrier traditionally buys SIMs, then programs them with customer numbers.
The embedded SIM, or eSIM, which has been in development for a number of years by a wireless industry consortium known as the GSM Association, works differently. The chip is built into the device when it’s made. Nothing needs to be inserted. Moreover, an eSIM can be set up remotely, over the internet, without a visit to a store.
Industry experts believe that the Apple Watch will use an eSIM to make possible that independent data connection. You might order a watch, open the box, then pick a wireless provider right from the device, or from an app on your iPhone.
The eSIM has been slow to take off, although it has been placed within some automobiles with internet connections, and in industrial equipment. Samsung Electronics (005930.South Korea) has touted its own smartwatch, the Gear S3 Frontier, as the very first eSIM device.
But Samsung trails far behind Apple in the smartwatch race, so the market for eSIM is waiting, once again, for the Apple Effect. “It [a new Apple Watch] will give a huge boost to the struggling eSIM market,” says Neil Mawston of market research firm Strategy Analytics.
The eSIM is now in less than 1% of all mobile and automotive devices globally, Mawston’s data show. “Everyone is sitting on their hands and waiting for Apple to ignite the fireworks,” he says.
There are two immediate beneficiaries, presuming that Apple delivers the goods: Gemalto, as mentioned above, and a private firm based in Munich called Giesecke & Devrient. Both manufacture SIM cards. As a result, making eSIMs is their next logical opportunity, something they’ve been talking about for some time.
Gemalto has the top SIM market share by some counts, says analyst Mawston, though that can vary depending on how one slices the numbers for units of SIMs shipped.
Mawston is inclined to think that Giesecke & Devrient may get the business from Apple to build the eSIM for the smartwatch, given that the company was “a little earlier to the eSIM game” than Gemalto. But, it’s tough to second-guess Apple, he concedes, and Gemalto could end up having some or all of the business. We won’t know for sure until the smartwatch gets into the hands of gadget types and they tear it open and examine its chips.
Gemalto stock has been down 28% this year. Phone companies have been buying fewer conventional SIMs, because they’re preparing for a world in which eSIMs show up in devices, hurting Gemalto’s sales. If Gemalto gets business from Apple, it could see a big rebound.
Where things get really interesting is when the eSIM moves from Apple Watch to iPhone. Apple already allows people using its iPad tablet to select which wireless carrier they want on a month-by-month basis, using a programmable version of the normal SIM card. Apple Watch will follow in that tradition, and iPhone may be next. “The launch of an Apple Watch with eSIM would not be good news for mobile operators,” says Mawston, who anticipates Apple adding eSIM to iPhones in a couple of years’ time. “It would be a sign that Apple wants to take more control and ownership of the mobile subscriber in the future.”
Phone companies will initially have a new opportunity to sell additional wireless data to new Apple Watches this holiday season. But the prospect of eSIM coming to smartphones has got to be distressing to an industry already facing ferocious competition for subscribers in markets such as the U.S.
AT&T (T), Verizon Communications (VZ), T-Mobile US (TMUS), and Sprint (S) now face the prospect that in a couple of years’ time new phone buyers will not set foot in a retail store, never see the latest promotions, never get sold on this or that service by retail reps, and instead choose a carrier from a device menu, on a pay-as-you-go basis.
The subsidies that have enticed consumers are still a big advantage for carriers. But those subsidies have been fading over the years, as device financing is built into monthly charges rather than as a benefit of contracts. Apple even provides its own financing for qualified iPhone buyers.
The next Apple Watch may be a small step forward for wearable technology, but a giant, scary leap into the unknown for the telecoms.