Transaction Costs, Market Frictions, and Digital Disintermediation in Mobile Connectivity

Transaction Cost Economics (Coase) and the Rise of eSIMs

The key concept in transaction-costs economics put forth by Ronald Coase is that the cost of using the market will also shape how a market functions—and therefore help to determine what institutions are able to survive and what types of intermediaries will exist—in addition to the other factors that impact how well markets function, including price and technology.

As a result of the rapid introduction of eSIMs (electronic SIMs that can be purchased and activated via the internet), eSIMs have disrupted traditional brick-and-mortar retail stores by removing the need for intermediaries to provide consumers with the information they need to make informed decisions about whether, where, and how to buy mobile services. Internet access through eSIMs has, therefore, driven disintermediation of numerous players throughout global telecom markets.

How eSIMs Collapse Transaction Costs

While eSIM technology changes the cost structure associated with international roaming, it also alters traveller behaviour by enabling consumers to obtain a SIM prior to leaving their home country or upon arrival at their destination, thereby avoiding the additional time and price costs associated with SIM purchase and activation.

The reduction in costs associated with eSIM technology lowers barriers to market participation and, in turn, creates opportunities for new forms of intermediation within the marketplace.

Digital Disintermediation and New Intermediaries

As markets adapt when the costs of transactions decrease. Coase’s analysis led to the conclusion that firms or intermediaries would emerge or disappear in response to changes in the costs of coordinating. eSIMs have facilitated the digital disintermediation of traditional local distribution channels. Therefore, the potential for SIM kiosks at the airport, small retail agents, and traditional roaming agreements has decreased in importance due to their economic purpose being to manage friction that is no longer present.

Additionally, new intermediaries are emerging as well. For example, platforms such as Holafly aggregate the wholesale access to data across countries and sell it directly to consumers. An example would be Holafly eSIM for Vietna; the consumer contracts with a global platform and not a local retailer, however the actual data traverses the same Vietnamese networks. The intermediary has changed, but the infrastructure remains constant.

Real-World Effects and Data Context

Pricing and adoption trends illustrate the economic effects of eSIM technology. In many destinations, historic international roaming rates have exceeded $10 per gigabyte. With the introduction of eSIMs, however, data pricing has moved closer to wholesale levels, as consumers are able to access competing providers without relying on traditional roaming agreements.

According to GSMA, the majority of smartphones sold worldwide are now eSIM-capable, and the number of manufacturers producing such devices has increased as physical SIM trays are removed from certain models.

In addition to intensifying retail competition with local carriers’ SIM cards in destinations such as Vietnam, eSIMs place downward pressure on the margins of tourist SIM products. The resulting decline in economic rents is a predictable outcome of reduced transaction costs and the emergence of lower-cost alternative distribution channels.

Economic Forces Driving the Shift

This transformation is taking place due to many different forces working together. First, digital platforms are able to scale rapidly at very low cost. The cost of providing service to one more customer is almost nothing. Secondly, customers want to know that their travel will happen smoothly and conveniently and so they will look for "no friction" alternatives. And finally, many regulations allow mobile virtual network operators (MVNOs) to sell their services to people all around the world.

The most important aspect of transaction cost reduction is that it will change the balance of power between consumers and intermediaries. Consumers will now have alternative ways to do business and intermediaries who relied upon friction will lose the competitive edge they had from creating that friction.

Conclusion

The most important aspect of transaction cost reduction is that it will change the balance of power between consumers and intermediaries. Consumers will now have alternative ways to do business and intermediaries who relied upon friction will lose the competitive edge they had from creating that friction.