December 2, 2010

Fifteen Year Locust

Locusts are only supposed to return every 17 years; for wireless carriers, however, it looks like they came back early. Fifteen years ago U.S. cellular carriers came within a hair’s breadth of the government mandating that resellers be allowed to install their own switch in the network. The effect would have been to deny carriers control of portions of their network and the relationship with customers. Now it appears as though Apple wants to achieve the same result, but with software.

In late October Apple indicated it was working with SIM vendor Gemalto on a “soft SIM” which would accomplish in software what is currently performed with a physical Subscriber Identity Module card. The effect of this would separate the carrier activation of a mobile device from the purchase of that device. Because the party that controls the soft SIM “owns” the relationship with the subscriber it would be possible to move that account back and forth across networks. Apple’s iTunes store could simply sell network access the same way they sell apps.

In the biblical Plague of the Locusts (Exodus 10:1-20) the insects devoured the Pharaoh’s crops. It is understandable why wireless carriers could see soft SIM as a similar fate. The key to the subscriber relationship is control of the SIM. When someone else controls the SIM they control the business.

For the moment it appears Apple has withdrawn its plans to add soft SIM to the next model iPhone. Reportedly, it still plans to include soft SIM on a future iPad.

The GSM Association, representing the carriers, has created a task force to develop an open standard for soft SIM (which they have renamed “embedded SIM”). Devices featuring the new SIM capabilities are expected in 2012 the association says.

But wait, what’s going on here? Are the carriers agreeing to the plague? Herein lays the carriers’ conundrum. The wireless future of an “Internet of Things” – tens of billions of wirelessly connected microprocessors – can’t rely on a hardware-based SIM. Wireless access to the chip connected to a water heater as a part of the smart grid, for instance, needs to be activated and controlled remotely. Physically changing out SIMs in tens of billions of tiny embedded communicating chips is out of the question. The Internet of Things requires soft SIM-like functionality.

Heretofore the Internet of Things looked like a service extension for wireless carriers’ existing business model. Now, as the industry prepares for embedded SIM, it’s becoming clear that the required functionality for such machine-to-machine applications is different from the traditional wireless model that staples a carrier contract to a device.

Some, no doubt, will try to take advantage of the new embedded SIM standard. The GSMA task force has announced their solution “will be built on the principles of openness and standardization” – take that Apple, with your closed operating system and walled apps garden! But markets flow to what technology enables; soft SIM will provide that opportunity.

Carriers have warned that soft SIM will play havoc with consumer-friendly practices such as subsidizing phones. No carrier could afford to subsidize a subscriber who could churn at will via a soft SIM. It’s not hard to envision a world where consumers can decline a handset subsidy in preference to lower rates. Particularly in a world of usage-sensitive pricing, such an eventuality seems almost certain.

The soft SIM is yet another of the technology-driven changes that will redefine the wireless industry as we know it. When the locusts are coming, it’s time to plan for a new crop.