SchlumbergerSema today unveiled its annual smart card market trends review, which notes that the economic slowdown of the last year significantly affected the industry's deliveries.
As usual, this forecast focuses on volumes and yearly periods, and does not include financial, pricing, margin, monthly or quarterly anticipations about the growth trends in this highly cyclical industry, which is traditionally slower in the first part of the year.
For 2001, year-on-year growth rates for the entire smart card industry fell from typical +20% levels to what for this market segment is effectively a flat line at just +3%. The most visible effect is expected to be greater emphasis on a wider range of applications that go well beyond previous years' strong focus on mobile communications.
Hidden inside the overall picture are some significant trends and successes. They include maturity for multi-application cards, with anticipated dominance for the JavaCard” platform; the continuing rise of the Asia-Pacific region; and unstoppable momentum for banking applications, which have long cycle times that seem to be immune to macro-economic fluctuations. Looking forward two years, SchlumbergerSema expects smart card-enabled PKI (public key infrastructure) technology to play a growing role in the deployment of many 2.5 and 3G networks, the roll-out of national ID card programs, and the implementation of smart card-based network access for enterprise IT systems.
"Success is now heavily reliant on the ability of the industry's major players to offer end-to-end solutions embracing systems design, integration and deployment, a trend which underscores the vision behind last year's Schlumberger Limited acquisition of Sema," said Jorgen Rasmussen, president, Cards, SchlumbergerSema. "Smart cards provide a key enabling technology across many different industries, catalysing profitability and operational efficiencies. Moving forward, business success for smart card players is going to rely largely on their ability to provide a full spectrum of solutions -- from simple, single applications to the most complex card life-cycle management programs."
TELECOMMUNICATIONS: SIMS ARE DOWN, BUT FAR FROM OUT
After an amazing run of double-and triple-digit growth years, the SIM (subscriber identity module) smart card market experienced an unanticipated drop in 2001. The main reasons were low levels of handset renewals due to the perceived failure of WAP, the non-arrival of 2.5G technologies, near saturation of handsets in some countries, and the fact that many operators had overstocked on Sims to meet growth predictions that did not occur. In combination with the general lack of confidence following events on September 11, the result was a decrease of the market of around 10%. This learning experience led operators and industry suppliers to revise their forecasts; and the regular replacement forecasting models of the PC industry are no longer in vogue.
For the wireless smart card sector, the growth outlook is now a modest 12% for 2002, moving upward to 20% in 2003. The key factor driving this growth curve is the arrival of higher bandwidth mobile network infrastructure, which is expected to mature and result in volume handset orders during 2003.
There are some particularly bright spots that indicate that SIM cards are possibly growing faster than some handset manufacturers might predict. Two factors stand out.
The first is the strong growth of SMS (short message service) traffic. In an overall disappointing year, this was probably the biggest success story for mobile operators, with SMS traffic accounting for up to 10% of revenue. As the value-added services (VAS) that facilitate this business are heavily based on SIM Toolkit (STK) applications, SMS provides a healthy impetus for SIM card growth, which can only be boosted with the current migration to 64K Sims, which SchlumbergerSema started shipping in 2001. This trend heralds cards that support large numbers of VASs. The rollout of SIMalliance-compatible browsers based on STK is now starting to impact shipments, further improving prospects.
The second factor is the adoption of GSM or GSM-like technology by TDMA operators, and even non-GSM operators, such as CDMA operator China Unicom, which is starting to use RUIM (Removable User Identity Module) cards. This shift is now evident in North America, Latin America, Asia Pacific and Africa. Among operators adopting GSM technology, AT&T in North America provides a very high profile example. Such moves are contributing to the widespread usage of cards via the introduction of the SIM and STK -- a proven means of deploying revenue-generating VASs. And as most mobile operators in the world are now linked to one of the few large controlling groups, STK-based VAS know-how is readily available, cutting time-to-market for these major initiatives.
With the lack of impact from Windows for Smart Cards” in the mobile communications segment, Java' has been further reinforced as the de facto standard worldwide. JavaCard compatibility has become an unstoppable force for high-end SIM cards following the release of the 2.1 specifications, which provides interoperability for deploying VASs and upgrading them in the field. In 2001, JavaCards accounted for 60% of high-end multi-application card shipments to the wireless industry. This trend is expected to consolidate and rapidly lead to complete domination in 2003.
SchlumbergerSema pioneered JavaCard technology in 1996, and has traditionally dominated this segment of the smart card market. For the foreseeable future, SchlumbergerSema expects its total JavaCard shipments to increase dramatically in the high-end SIM segment.
Considered geographically, consumption of SIM cards for mobile communications applications in the Asia Pacific region matched the European market in 2001, and is expected to outstrip other markets in the foreseeable future. This is due to the large markets expanding and opening up in Asia -- particularly China, Indonesia and India. Significantly, the Asia Pacific region is starting to become a technology leader, too.
"Smart cards are now a worldwide phenomenon in mobile communications," commented Xavier Chanay, vice president, Mobile Communications products, SchlumbergerSema. "The rapidly increasing capacity of cards, plus their major role in supporting revenue-generating, value-added services make them the ideal device for supporting the key business objectives of leading-edge mobile communications companies."
Turning to other smart card applications in the telecommunications sector, the first trend of note is early signs of decline in the biggest single chip card market: phone cards. Based on simple memory-only chips, this sector accounts for well over half of the industry's total card shipments -- over a billion units in 2001. However, it only reflects a small portion of the industry's revenue, as phone cards have become a commodity product. The phone card market, which has in recent years grown by around 10% per annum, is now being affected by the increasing penetration of mobile phones. Other factors impacting it include the growing ability to pay for calls via multi-application cards, such as an e-purse or debit application on a financial card. The phone card market now looks set for gradual single-digit declines for the foreseeable future.
BANKING - A SOLID BUSINESS CASE FOR GROWTH
The financial market represents the next largest application sector for smart cards, and it is proving to be relatively immune to economic fluctuations, largely because of the long cycle times associated with projects. This market grew by 21% in the last year, a strong performance driven by the country-wide projects that are replacing existing magnetic stripe bank cards with smart cards -- such as the UK's conversion to smart cards in 2001.
The EMV (Europay MasterCard Visa) specification continues to dominate the industry, with Brazil, Korea and Japan emerging as the newest smart card financial markets, and the UK entering a maturity phase. The case for smart cards in the banking industry was originally built on controlling fraud. Today, applications are increasingly focused on winning and retaining customers by offering innovative multi-application cards with multiple services, such as credit, debit, e-purse and cash dispensing facilities; new functions such as loyalty, secure remote access to accounts; and even non-banking applications like healthcare.
Technologically, a number of platforms - notably JavaCard and Multos -- are still competing for leadership in open standards, but none is expected to become dominant in the near future. One prediction from SchlumbergerSema is that the banking sector is likely to be the first volume adopter of the company's USB-compatible e-gate” smart cards, which enable high security, smart card-based services to be easily used over networks for authentication and payment.
"The provision of end-to-end solutions for multi-application cards is now key for financial institutions re-engineering their customer relationships and deploying multi-channel access to reduce time-to-market for these new services and cut total cost-of-ownership", said Philippe Cambriel, vice president, e-Transactions Cards, SchlumbergerSema.
PUBLIC SECTOR ID CARDS OFFER GROWING PROSPECTS
Although the government-driven card application sector involves large volumes, and is the next largest consumer of microprocessor-based smart cards after mobile communications and banking, it is still in its formative years. This makes it extremely sensitive to individual projects, and near-term growth forecast partially relies on an extension of existing projects, such as the massive French health card project, which moved from its rollout to maintenance phase. From 2004 onward, however, overall market prospects start to become immense.
Several countries are currently tendering for national ID cards, with some projects expected to reach their rollout stage during the next two years. Numerous other countries are currently starting to consider options in this area, partly as a result of heightened security concerns stemming from the events on September 11. This is particularly true in North America, where both government and businesses are exploring new ways to protect the security of their IT networks and buildings without compromising the privacy of individuals. In the US, the Department of Defence is rolling out Java multi-application cards for physical identification and building/network access.
Technologically and organizationally, this sector is one of the most challenging for the smart card industry. From a technological standpoint, the cards must support a sophisticated PKI to achieve the highest level of protection against counterfeiting. This necessitates powerful on-card cryptographic processing capabilities. The physical structure of the card is also crucial -- it must exceed normal durability standards, as well as support graphical and printing techniques that provide equal or higher security than bank notes.
A second factor is the public sector's growing demand for end-to-end support. As SchlumbergerSema predicted in past years, this drive for complete solutions is a fundamental factor behind recent consolidation and change in the smart card industry - with the Schlumberger acquisition of Sema emerging as the highest profile example of this trend. Industry survivors in this sector must offer end-to-end solutions that include mini-smart card personalization factories, distributed network systems and interfaces with back-office national computer systems.
TRANSPORT APPLICATIONS ARE MOVING SMOOTHLY
The transportation sector has progressed to an interesting phase. The established productivity and business benefits of contact less card technologies for ticketing and tolling are now spreading out from high-profile mass transit applications in major cities to numerous smaller-scale projects in mid-sized cities and towns.
Four major RF (radio frequency) contact less technologies are competing for business. Smart cards still have to overcome the cost barrier associated with chips being more expensive than magnetic stripes, especially as it relates to low-value tickets. A key factor in determining which technologies and suppliers attain dominance is that smart cards enable transit operators -- which are usually government-sponsored in some form - to increase profit by offering additional on-card applications to their customers.
Although the complementary applications that will drive this emerging market are still to be determined, they will almost certainly demand cards which combine contact less and contact interfaces - such as the ones used in Southampton, UK; Curitiba, Brazil; and the RATP program in Paris, France -- together with the associated multi-application operating systems, terminals and systems integration support.
SMART CARDS FOR PAY-TV APPLICATIONS ENSURE SECURITY IN THE DIGITAL AGE
The pay TV market for smart cards is already substantial. Although it is likely to grow only sporadically in the short term, it is potentially a star in the smart card industry's future as cable and satellite set-top box card systems come up for renewal every two to three years.
Because they are simple to use, low cost and easily replaceable, smart cards are now fundamental to security management for the pay TV industry. The transition to all-digital delivery for terrestrial/national TV channels, the emergent business models for digital rights management for high-value content providers in areas such as sports and films, and operators' desire to leverage customer bases by marketing set-top boxes for Internet access indicate enormous growth prospects for the smart card industry in 2005 and beyond.
IT SECURITY EMERGES AS NEWEST MAJOR APPLICATION
For the first time in the annual SchlumbergerSema smart card review, IT security applications are covered as a separate application segment. Although still involving small numbers, smart card-enabled IT security is experiencing explosive growth. Smart cards are providing a user friendly and convenient tool for implementing enterprise-wide security for physical access to premises, as well as logical access to computers and private/public networks. Over the last year in particular, numerous industry-leading enterprises have started to equip their IT systems with smart card-based PKI applications, inspiring many more companies to adapt this easy-to-use, secure option.
Market growth in this segment is enabled by the support for smart cards built into the Windows” operating system, which reflects the demand for systems integration support from smart card vendors for applications such as client sign-on and back-office integration with PKI resources. Global around-the-clock support is another factor, especially for the current initial wave of users, which are typically multinational corporations.
SchlumbergerSema expects the IT security sector to more than double each year for the foreseeable future, and the technology is expected to start penetrating mid-sized and smaller organizations over the next couple of years. For corporate users, the new USB-compatible SchlumbergerSema e-gate technology - which eliminates the need for a reader -- is a key factor in simplifying adoption.
WINNERS WILL DELIVER END-TO-END CUSTOMIZED SOLUTIONS
The fast-growing markets and application sectors for smart cards generally involve microprocessor-based technology and multi-application capabilities. SchlumbergerSema predicts that by 2003, 50% of smart card shipments are expected to support multiple applications. Moreover, the open JavaCard standard for multi-application cards -- building on its unchallenged leadership in mobile communications -- is expected to attain industry-wide domination in the same timeframe.
The establishment of smart cards as the portable client device of choice for automating consumer services and managing customer relationships is a further indisputable trend, which has already led to the emergence of a new breed of systems house.
"With very large rewards for card-adopting organizations, the challenge is now one of design, integration and service," stated Rasmussen. "The successful card players of the next few years will be companies that can provide optimal customized solutions, from the card itself through full system integration to operational services."
