Apple Declares War on Top Telcos Over eSIM Tech

The U.S. Department of Justice is probing the country's top four wireless carriers -- Verizon (NYSE: VZ), AT&T (NYSE: T), T-Mobile (NASDAQ: TMUS), and Sprint (NYSE: S) -- over allegations that the telcos colluded to thwart the adoption of eSIM technology. A complaint from Apple (NASDAQ: AAPL) reportedly sparked the probe.

eSIM (embedded SIM) chips are soldered directly to circuit boards, and allow users to switch carriers without swapping out their SIM cards. eSIMs were originally designed for industrial machines, but Apple started installing them in consumer devices with the second-generation iPad Pro and Apple Watch Series 3 last year.

Apple wasn't the first to adopt eSIM technology -- Samsung's Gear S2 G3 and Alphabet's Pixel 2 also use eSIMs. Yet Apple has been the most vocal supporter of replacing SIMs with eSIMs.

eSIMs are much smaller than current-gen Nano-SIMs, making them ideal for more compact consumer devices. The SIM bay can also be removed for slimmer waterproof designs. eSIMs can also be used to share a single phone number between multiple devices.

Why would telcos want to kill eSIMs?

The Justice Department is investigating claims that AT&T, Verizon, T-Mobile, and Sprint colluded with an industry group called GSMA to establish new standards which would lock devices to their networks even if they were equipped with eSIMs.

That makes sense; telcos don't want their customers breaking contracts and swapping carriers. Carriers already charge termination fees, but rival carriers can subsidize those fees for customers who switch. That could cause the current price war between telcos -- which was exacerbated by T-Mobile's aggressive promotions -- to quickly escalate.

eSIMs would also make it tougher for carriers to charge overseas roaming fees. Carriers in other countries could offer low prepaid daily rates to travelers, who would only need to change a software setting to use the new network.

AT&T is already on thin ice

Out of the four carriers, AT&T has the most to lose in this new probe. The Justice Department is already trying to block its planned $85 billion takeover of Time Warner (NYSE: TWX) on antitrust grounds.

AT&T and Time Warner are disputing the DOJ's claims, but the new eSIM probe could be cited as an example of the telco leveraging its market share to lock in customers. AT&T is already the second largest wireless carrier, top wireline services provider, and biggest pay TV provider in the country. If the Time Warner deal closes, it will also become one of the biggest media companies in the world.

AT&T has been adding wireless subscribers in recent quarters, but its wireless revenues have been declining due to pricing pressure. Therefore, the adoption of eSIMs could make it harder for AT&T to retain its customers.

Why Apple is leading the charge

Apple constantly drops components from its devices to make them lighter, slimmer, and sleeker. Many of those changes have been controversial -- it removed optical drives and removable batteries from its MacBooks, introduced the smaller Lightning connector in 2012, included just a single USB-C port in the MacBook in 2015, and eliminated the headphone jack in the iPhone 7 in 2016.

Each of those decisions upset consumers. But over time, those moves were praised as forward-thinking steps that enabled Apple to produce thinner and lighter devices. Replacing the SIM tray with eSIMs is just a continuation of that strategy.

Therefore, Apple's charge against the telcos isn't aimed at helping consumers switch carriers. It's all about building slimmer and more appealing iPhones, which accounted for 70% of its sales last quarter.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple and AT&T. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Verizon Communications. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Time Warner and T-Mobile US. The Motley Fool has a disclosure policy.