Telco Strategy2016

• Identifying an under-reported but material change to the industry• Considering the potential global and Australian ramifications• Options to manage

Neil Aitken : njaau@yahoo.co.uk : +61 414 202001

Executive Summary : Apple leasing phones direct to customers + the impending ‘eSIM’ suggest a huge change for telco worldwide & a rise of MVNOs. Big phone companies will not be selling phones & will face significantly higher competition.

• 59%1 of buyers already buy their own phone & add a SIM later.• Between 16%2 and 41.5%3 of Australians ( depending on the

segment analysed ), have already moved to a smaller phone company/‘network reseller’ for the SIM Only services they require.

• These companies, also known as MVNOs usually sell SIM Only deals including prepaid. They don’t sell phones under contract.

• Apple set the tone for the mobile phone industry.• Apple are about to make a significant change which will

accentuate the SIM Only / network reseller trend.• Apple have started leasing their iPhones4 direct to consumers in

the USA. Samsung are doing the same thing.• ‘Soon’ ( 2016 is forecast by the FT ) Apple will include an ‘eSIM’ in

their phones. This replacement for the physical SIM will make it much easier to compare plans and move network providers.

• This is likely to mean a great deal more choice, flexibility and potentially data in the phone plans Australians have access to.

• It’s also likely to lead to the uptake of network resellers / MVNOs.• The ramifications for tier 1 telcos are likely to be material.• It’s also going to require that consumers learn 2 new things.

1. What a network reseller / MVNO is. 2. How to stay abreast of price changes.

+means

No more of this

1. http://www.afr.com/business/telecommunications/flexibility-key-to-amaysims-appeal-says-ogrin-20150715-gicsp42. http://www.itwire.com/your-it-news/mobility/64934-new-market-share-data-shows-rise-of-mvnos 3. http://www.itwire.com/it-industry-news/telecoms-and-nbn/70215-telstra-share-loss-in-consumer-postpaid-sector-as-optus-enjoys-postpaid-growth

4. http://time.com/4028327/apple-iphone-upgrade-program/

The majority ( 59%2 of Australians ) already buy their own phone and add a SIM later. It’s often cheaper than going to the phone company. In the iPhone example below, tying together this SIM + purchasing the phone outright saved 18%

Factors driving SIM Only sales :

• They give you bigger bills than you expect : The industry has charged ‘staggering’ out of bundle data usage ( leading to what the industry describes as ‘Bill Shock’ )– something one third1 of us have experienced in the last 6 months, the reasons for the dissatisfaction are clear.

• They charge too much and they have patchy networks3 : In Australia, sentiments about mobile phone companies often run deep. People dislike Telstra for charging too much and Vodafone for coverage.

The Majority Already Buy Their Own Phone and add a SIM later

SIM Only agreement Phone under contract

Above : This individual got better coverage, more inclusions and saved 18% by tying together their own SIM Only Deal. Disclaimer : The author worked at

WhatPhone – the company which produced this infographic.1. http://www.computerworld.com.au/article/580021/telco-bill-shock-still-dead-survey-finds/?utm_campaign=computerworld-today-pm-edition-2015-07-

20&utm_medium=newsletter&eid=-6787&utm_source=computerworld-today-pm-edition 2. http://www.afr.com/business/telecommunications/flexibility-key-to-amaysims-appeal-says-ogrin-20150715-gicsp43. http://www.theaustralian.com.au/business/companies/better-coverage-could-come-at-a-cost-of-customers-for-telstra/story-fn91v9q3-1227443326977

Smaller Phone Companies ( known as ‘MVNOs’ in the industry ) are growing rapidly as a proportion of the market‘Better data inclusions’ and ‘peer recommendation’ is what’s attracting people who own their own phone to MVNOs

Australian MVNO market share rose from 20% to 24% between June 2013 and June 2014 – that’s a 20% increase :

• The global MVNO market is already growing at 10%2 per year.• Key reasons for switching included better data inclusions and

recommendations from friends and family.1

• “A key trend in the data in both prepaid and postpaid is the strengthening of MVNOs, who have seen their total share grow from 13.2% in June 2013 to 15.6% in June 2014,”2

• “Amaysim is now very well established but still growing in prepaid and, with the highest satisfaction rating and a share of 7.3%, is bigger than Virgin Mobile.” 2

• “Another high growth MVNO is Aldi Mobile which in the space of 18 months has secured a share of prepaid customers of nearly 4%,” 2

MVNOs have a disproportionately high market share in no contract plans :

• Customers of MVNOs are generally smartphone users who own their phones.1

• They are attracted to straightforward plans which offer good value and large data allowances without the longer term commitment of postpaid plans. 1

19%

21%40%

20%

MVNO Market Share June 2013VHAOptusTelstraMVNO

15%

21%

40%

24%

MVNO Market Share Sept.2014VHAOptusTelstraMVNO

10%18%

32%

41%

Market Share No Contract PlansVHAOptusTelstraMVNO

All reporting on this page comes from quarterly Kantar statistics. Specifically : 1. 1 http://www.itwire.com/it-industry-news/telecoms-and-nbn/70215-telstra-share-loss-in-consumer-postpaid-sector-as-optus-enjoys-postpaid-growth and2. http://www.itwire.com/your-it-news/mobility/64934-new-market-share-data-shows-rise-of-mvnos

Between June 2013 and Sept 2014, MVNO market share

rose 20%

MVNOs are 41% of the no

contract market but only 24% of

whole market.

A number of national and international factors are driving SIM Only uptake and revolutionizing the industryLower prices, increased availability, flexibility & desire to have the latest phone are causing shoppers to buy own phone + SIM

• Tmobile : Internationally, the move to SIM Only + buy device outright even stronger than we’re seeing here1. Tmobile began in 2013. Since then, Verizon, America’s ( joint2 ) largest telco has also done away with 2 year contracts1.

• Company push will turn the Australian market SIM Only : SIM Only already dominates5 the telco market. With phone companies and major handset manufacturers pushing to separate the handset and the network service, things will change quickly.

• Cheap phones have become available : There are a growing array of ( cheap ) places to buy new or second hand phones. Kogan sells the iPhone cheaper than Apple.4

• People will learn to save money by splitting their phone and SIM Only contract6 : In many circumstances, customers can save up to 30% on their bill over 2 years buying the phone outright and adding a SIM. They save more if they already own their phone or get it 2nd hand.

• Expectations of instant gratification3 : In a world of instant gratification, people simply don’t like being obliged to stay with a single phone company for a 2 year period. They want a new phone when they want a new phone.

• Customer pull will drive further uptake : One of the distinguishing features of SIM Only plans is that they almost exclusively sold with no contract. Users can change phone companies whenever they want to, move deals and change allowances without penalty, on whim.

• Phone companies want to sell airtime : Phone companies are in the business of selling you network services : calls and data. To them, the phones were an enticement to get you to sign up with them.

• Optus, Telstra and Vodafone will separate charging for SIMs from charging from phones : Subsidizing handsets created baggage for phone company accountants. They may be pleased to see the hardware go.

1. http://time.com/4028327/apple-iphone-upgrade-program/ 2. http://www.statista.com/statistics/199359/market-share-of-wireless-carriers-in-the-us-by-subscriptions/ 3. http://www.boston.com/lifestyle/specials/2013/02/01/the-growing-culture-impatience-where-instant-gratification-makes-crave-more-instant-gratification/eu5SPWCVTmFp9Nm6dUndhP/story.html 4 . http://www.crn.com.au/News/315769,how-kogan-can-sell-the-iphone-5-cheaper-than-apple.aspx 5. http://www.afr.com/business/telecommunications/flexibility-key-to-amaysims-appeal-says-ogrin-20150715-gicsp4 6. http://www.wsj.com/articles/kill-the-wireless-contract-buy-your-own-phone-1424807865

Who’s doing what that’s affecting SIM Only ? What does that mean for Australia ?

Apple’s ( and others’, including Samsung’s ) leasing programs will likely accelerate the move to SIM OnlyApple have ‘changed everything1’ in the market for phones since the launch of the iPhone

• One of the most significant elements of Apple’s 2015 iPhone 6S release, was under-reported in Australia : In addition to the new features and colour they brought to market, Apple launched their new product with an innovative funding option.

• From this year, in the USA, Apple will be leasing iPhones to customers direct : That is, not through a phone company. Leasing payments will be made via a monthly payment plan4.

• The facility is known as the Apple Upgrade Program : Those who enter the scheme are offered the chance to upgrade their phone every year for a monthly costs which starts at $324 (USD ).

• Samsung followed suit soon after : A few days after Apple’s leasing announcement, Samsung launched it’s own leasing program5 or it’s own phones.

• Between them, Apple and Samsung, the world’s two largest producers of handset3 : Together, they make up between a third and a half of all phones sold globally, depending the period being studied3. They lead market behaviour by dint of their size.

• Phones leased from Apple will come with a ‘value add’ of Apple Care for the period of the lease.

• Some telecoms analysts suggest that, over time, these schemes may reduce the hold that telcos have on their customers6.

Below : The Apple Upgrade Program2 is an existing feature in the US

Below : Samsung soon followed suit

1. https://gigaom.com/2011/06/29/the-iphone-effect-how-apples-phone-changed-everything/ 2. http://www.apple.com/shop/iphone/iphone-upgrade-program 3. http://www.idc.com/prodserv/smartphone-market-share.jsp4. http://time.com/4028327/apple-iphone-upgrade-program/5. http://www.forbes.com/forbes/welcome/6. http://www.betaboston.com/news/2015/09/11/apple-lease-program-challenges-carriers/

Apple’s eSIM ( electronic SIM ) will make it easier to move telcos, further accelerating the trendThe eSIM removes the need for physical SIMs. Users will pick ( and provision ) a telco from their phone.

• At the same time as the nature of the commercial agreement between individuals and their phone companies is being fundamentally changed, the technical relationship between them is also being updated.

• Led by Apple and Samsung, the GSMA ( the Global technical group responsible for standards agreed between manufacturers for wireless telecommunications devices ) have agreed on the eSIM1.

• The new eSIM standard will embed a ‘virtual’ SIM in new phones.• eSIMs will likely launch in the UK and USA first. The following

telcos appear3 to have signed up. AT&T Deutche Telekom, Etisalat, Hutchinson Whampoa, Orange, Telefonica and Vodafone. ( Note, Vodafone also operates in Australia – a joint op. known as VHA. )

• The eSIMs is likely to be ready ‘soon’2

• “It <The eSIM> will come in the form of an embedded SIM card, one that cannot and need not be removed from a device - something that consumer electronics manufacturers are also keen to adopt for connected items around the house as part of the Internet Of Things”3.

• Together, leasing phones and adding eSIMs will create a number of opportunities / threats in Australia next year. ( Next slide. )

Above : The Financial Times covers the impending arrival of the ‘eSIM’, removing the need for physical SIMs.

1. http://whatphone.com.au/guide/esims-and-what-it-means-for-the-australian-market/ ( The Author worked at WhatPhone 2. http://www.ft.com/home/us 3. http://www.pocket-lint.com/news/134640-what-is-an-e-sim-and-how-will-it-change-smartphones-for-the-better

Likely ramifications : While speculative (as all views of the future are), these seem likely ramifications. Digital & mobile will be accelerated as acquisition channels. MVNOs will become more powerful. Telcos’ actions affect consumers’ and vice versa.

• A dramatic shift away from retail sales to digital : It is far more likely that people will make a decision as to the operator and plan they want to join from their phone, using the information which they have available online.

• Minimise acquisition costs : Super churn and competition will require telcos establish a cost effective way to obtain customers in such a competitive market.

• Wholesale pricing changes : Possible price increases from major telcos in wholesale pricing to stem churning cust. nos. Potential regulator response to ensure competition at SP level maintained.

• Heightened brand related spending : Brand can be thought of as an intangible quality asset used to derail a rational decision making process. Optus has notably added a lot of ‘brand’ related ( unique ) product features e.g. Premiership Football.

• Focus on what’s important to customers : Straightforward, data inclusions and a focus on Social Media are elements we know to be important to customers. ( See slide 4 )

• Increased frequency of movement between phone companies : With no contracts to constrain them, individuals are likely to shop around more often and move providers more regularly – as deals appear.

• Use telco plan comparison engines : There is plenty of information online and a number of comparison engines which highlight how easy it is to move. Comparison engines may become a more significant cost of acquisition.

• A greater level of competition in data inclusions : Data inclusions are often the first thing customers check now, when comparing plans. This is especially true in Oz since Optus and Vodafone moved to Unlimited voice & SMS.

• Choice overload1 & dissatisfaction from customers : People are already overwhelmed with the choices available to them in life, let alone the myriad from phone companies. The requirement to research and move is likely to further reduce their satisfaction with telcos.

• Use MVNOs ( Network Resellers ) : More MVNO sales : The market is moving to SIM Only. MVNOs are disproportionately represented in the SIM Only market ( it’s all they sell. ) This is likely to benefit MVNOs. Will Apple become an MVNO as Google have started to with project ‘Fi’ ?

Possible Effects on the Telecommunications Industry Possible Effects on consumers buying phone services

1. http://www.nytimes.com/2010/02/27/your-money/27shortcuts.html?_r=0