The SIM card evolution: finally, a breakthrough?

[Is there a future for the SIM card in operator service delivery? Research Director Andreas Constantinou reviews the state of the SIM card industry, the commercial developments in the last 12 months and discusses why the role of the SIM may be indeed coming to a positive inflection point]

SIMcards.jpgThe SIM card is ubiquitous; it’s in every GSM phone. It’s used to identify the subscriber to the mobile network. In fact, the SIM card is the most pervasive service delivery platform with 95% or more penetration in GSM markets.

Yet a paradox exists in the adoption of the SIM card for operator services. On one hand tier-2 and tier-3 operators have put the SIM card into innovative uses: the SIM has been used to deliver mobile banking in Czech Republic, mobile ads in Russia, ringtone downloads in Brazil, payphone use in Nigeria and automatic device detection in Austria.

On the other hand tier-1 operators have used the SIM mostly for basic applications such as managing missed calls and roaming lists; At the same time handsets have developed far superior user interfaces to the SIM’s text-based UI and operators have invested in Java, Flash and on-device portals for advanced service delivery, as opposed to SIM based applications.

It’s perhaps yet another reminder that innovation does not easily bubble up in large organisations like tier-1 operators, while cash-strapped tier-2 and tier-3 operators have been more resourceful and innovated using existing infrastructure.

Still the issue of adoption of SIM cards for service delivery by tier-1 operators is indeed a fundamental one, given that tier-1 operators are the largest SIM customers. Furthermore with the commoditisation of SIM card functionality, SIM card manufacturers will need to continue delivering new value in order for the whole SIM ecosystem to survive – and a win-lose situation is not tenable.

So is there a bright future for the evolution of the SIM card?

The SIM industry backstage
To understand the status quo, one needs to visit the backstages of the SIM card industry – an all-too-familiar site, for those observing the industry in the last few years. Operators (particularly tier-1s) have been clearly motivated to see SIM cards take a greater stake at service delivery, yet have been reluctant to invest in long-term initiatives without a business case for a 6-month RoI. As such, tier-1 operators have reverted to applications (e.g. on-device portals, active idle screens), platforms (Java, Flash Lite) or ‘container’ programs to further their service delivery aims. On the other hand, handset OEMs have until recently seen the SIM card evolution as a potential compromise to their own agenda and have been slow at adopting industry standards for SIM-enabled service delivery. And while SIM toolkit standards have been adopted in the vast majority of handsets (an estimated penetration of 95% of more), the potential of the SIM as a service enabler has been severely limited compared to the constantly increasing handset feature arsenal.

Last but not least, SIM card manufacturers have since 2006 proposed significant technology advancements, in terms of ‘smarter’ SIM software, near-gigabyte capacity and creative new applications, from blogging and widgets to advertising and idle-screen promotions. Yet these advanced SIM cards have always demanded a significant per-unit price, while the average selling price of ordinary SIM cards has been dropping as much as 30% year-on-year during 2006.

Yet the prospects for the SIM card evolution in early 2008 are not as dire as they may seem. A confluence of developments, both technology and commercial ones are marking an inflexion point for the advancement of the SIM card.

Change of scenes
Three major developments that took place in the last twelve months will likely impact the uptake of advanced SIM cards in 2008:
1. The price war on SIM cards has largely subsided; during 2006 competition from China and between the major SIM card manufacturers caused prices to drop by more than 30% year-on-year. Fortunately, the prices have now stabilised with Gemalto reporting a decline in average selling price ASP) of only 2% year-on-year for 4Q07 (compare this to declines of handset ASP of 5% or more for tier-1 OEMs in 2007).
2. The cost of NAND memory used in SIM cards (as well as PCs and removable storage media) has dropped dramatically in the last two years. The cost delta between a 256KB NOR memory and a 256MB NAND memory has dropped by an order of magnitude within the space of two years. This has helped make mega-SIM cards more affordable to mobile operators who are planning to source high capacity SIM cards.
3. The OMA standards body has been busy finalising the Smart Card Web Server (SCWS) specification, a technology for using the SIM card as an always-on web server that stores operator content, application settings and encrypted files for multiple applications. The SCWS specification is expected to be finalised soon, following three successful interoperability ‘testfests’ which took place between September 2007 and January 2008. The SCWS is a pragmatic specification that leverages the mature and widely used HTTP protocol to enable a range of solutions such as on-SIM portals, NFC, just-in-time customisation and DRM. The SCWS protocol requires a more advanced smart card OS, but no hardware upgrade and hence no increase in hardware BOM. This is in contract to high-capacity SIM cards, which impact not only the silicon BOM, but also add a requirement for two extra PINs to both the SIM cards and the reader terminal.

We are not there yet..
Despite the recent developments, and the great potential to address the application distribution barrier, the role of the SIM card has not really advanced beyond that of an authentication mechanism, particularly for tier-1 operators who command scale and dominate OEM terminal requirements. A few tier-2 and tier-3 operators in Latin America and Europe have been using the SIM card in applications such as banking, automatic device detection, ringtone download and idle-screen promotions. Yet tier-1 operators still appear reticent and somewhat undecided as to whether to invest in advanced SIM cards with SCWS capability and/or high capacity.

The primary reason has been pricing. SIM card OEMs have been bundling advanced OS capabilities in higher-end NOR cards of the 256KB and 512KB range, which operators don’t yet perceive the need for. The major handset OEMs have delayed plans to incorporate SCWS (and the necessary underlying BIP server support) due to the lack of an established base of SIM cards that support this functionality. Sagem and LG have committed to supporting SCWS within selected commercial handsets later in 2008, but there are no commitments as to the scale and the sustainability of OEM SCWS adoption.

Overall, the industry has been caught up in a chicken and egg situation where no player has been willing to risk investment in advanced SIM cards.

How to kickstart the system
Pricing and addressable market are the fundamental criteria that have caused the Ferris wheel of the SIM card evolution to remain still. Yet, there are still ways to kickstart the wheel and push the industry inertia into motion.

For that to happen, SIM card manufacturers need to redraw their pricing plans and figure out how to migrate the software BOM surcharge into service enablement post-sales revenues. Once SCWS capability is featured on standard SIM cards as a norm, the handset OEMs will be incentivised to support the many SCWS use cases and therefore produce compliant handsets via a software update. And once the industry Ferris wheel starts spinning into motion, the benefits for both handset OEMs and network operators will be compelling enough for the wheel to keep spinning for many years.. at least until the next S-curve arrives.

– Andreas

[Andreas is a moderator at the forthcoming SIMposium conference in Berlin, 22-23 April, the annual SIM mega-event for the mobile industry.]

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Andreas Constantinou

As the CEO and Founder of /Data, Andreas oversees sales and strategy. He has been working at the crossroads of the mobile and software industries since 2000, helping take the very first smartphones to market. Since then he’s worked with the top brand names in the software industry including Microsoft, Apple, Google, Facebook, and Amazon. Over the past twelve years, Andreas has grown SlashData into the leading analyst firm in the developer economy, with a client base and reputation that out-rivals companies many times the size.

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