How Huawei's Android License Ban Could Affect Google's App Ecosystem - Seeking Alpha

How Huawei's Android License Ban Could Affect Google's App Ecosystem  Seeking AlphaGoogle's GMS suite of apps is widely used, although Huawei has recently lost its license from Google due to the U.S. government. The EU may investigate ...

How Huawei's Android License Ban Could Affect Google's App Ecosystem - Seeking Alpha

There are two operating systems ("OS") that run almost all smartphones. Apple's () iOS is one of them, but most smartphone manufacturers use the Android OS from Google, a subsidiary of Alphabet ()(). However, Google has recently decided to the Android license of one of these smartphone manufacturers. The manufacturer is China's Huawei.

Huawei can still use the open source version of Android, the Android Open Source Project ("AOSP"), but it will no longer be able to use the version of Android that includes Google Mobile Services ("GMS"). The second version is the most commonly used version of Android because it includes the GMS suite, which consists of popular apps such as Google Search, Google Chrome, Google Play Store, Google Maps, and Gmail. Unlike AOSP, GMS is proprietary software that requires a license from Google.

How Google's decision to revoke its license could impact Huawei

Although losing the ability to pre-install the GMS suite of apps could be a big blow to Huawei by making it hard to sell its smartphones, the actual impact is likely to more nuanced. Huawei can always fall back on its home market in China, which is the largest for smartphones and does not use GMS. In addition, there is room for Huawei to capture market share from other smartphone companies in China. The bigger challenge for Huawei will be selling its smartphones outside of China.

Company

Smartphones shipped 2017

Market

share

Smartphones shipped 2018

Market share

YoY

Huawei

90.9M

20.4%

105.0M

26.4%

+15.5%

Oppo

80.5M

18.1%

78.9M

19.8%

-2.0%

Vivo

68.6M

15.4%

76.0M

19.1%

+10.8%

Apple

55.1M

12.4%

52.0M

13.1%

-5.6%

Xiaomi

41.1M

9.3%

36.3M

9.1%

-11.7%

Others

108.1M

24.4%

49.5M

12.5%

-54.2%

Total

444.3M

100%

397.7M

100%

-10.5%

Source:

Specific Android apps can be very popular, depending on country and demographics. Not having Google apps pre-installed or the ability to use the Play Store to download popular apps could be an issue that may cause some people to shy away from buying Huawei smartphones. It would be wise for Huawei to find a way that makes most if not all Android apps available on the smartphones that it sells abroad.

Still, there are people such as tech enthusiasts who buy smartphones from online stores that do not come with the GMS suite. These smartphones are often made by small and obscure Chinese companies. So not having GMS does not necessarily mean that Huawei will not be able to sell its smartphones. If people outside of China are willing to try smartphones from small Chinese brands that do not include Google's GMS, then they could be willing to do the same for a bigger brand like Huawei.

Could the European Commission intervene in the Huawei case with another European Union vs. Google?

The European Union ("EU") has launched several antitrust investigations into Google in the last ten years, which have gone against Google and forced it to make changes. For instance, Google has recently that Europeans can select alternative browsers and search engines instead of Google's own products.

If one looks at the reasoning and the arguments given by the EU, then it's almost certain that the EU will want to have a say when Google puts restrictions on Huawei. Remember that Google has its Pixel line of smartphones, which means that Google and Huawei compete against each other for market share.

Google's latest actions could be interpreted by the EU as harming a competitor in order to gain market share and giving its own products an advantage over others. An accusation that the EU has often used against Google.

How Huawei could respond to Google's revoking of its Android license

But even in the absence of lawsuits, there are several other options that Huawei may pursue in response to losing its Android license. All of them would have consequences for Google. The first would be for Huawei to do what several smaller Chinese smartphone brands are already doing. That is to use the AOSP version of Android or an Android fork such as CyanogenMod or LineageOS that is available to all.

From previous experience by people who have tried it, it's known that you can install the Google apps on these smartphones through, for instance, sideloading APK files. Manually installing things may not be as convenient as dealing with pre-installed apps, but it's not that hard to do. However, people could find it cumbersome and may not want to do it. Furthermore, some apps could be troublesome because they require the use of Google Play Services or some Google library to work. But most apps should be fine.

Huawei could develop its own operating system to replace Android

Another option that Huawei might go for is to a new operating system to replace Android. Huawei is known to have hired software developers with mobile OS experience, including former employees of Nokia, as far back as 2012. This suggests that the new Huawei OS is not based on Android, but something entirely new.

It seems like the new OS is compatible with Android apps, although native apps written specifically for the new OS will be faster. This implies that the new OS uses some sort of software or translation layer that enables Android apps to work in a non-Android environment at the cost of a performance penalty. Possible techniques used could be an emulator or perhaps the use of a virtual machine.

Why Google Play revenue could fall as a consequence of the Huawei ban

But regardless of which option Huawei goes for, an Android fork or a new OS, Huawei will need an app ecosystem to go along with its OS. Key to an app ecosystem will be a suitable appstore, which could be either Huawei's own AppGallery appstore, a third-party appstore such as Aptoide or both. Note that Europe's Aptoide was part of the EU's antitrust investigation into Google's practices concerning its dominant position in the mobile market and the licensing of Google apps.

In order to entice people and get their support for whatever appstore it is using, Huawei could offer app developers financial incentives. For instance, appstores such as Google Play and Apple's App Store charge app developers up to 30% of the sale price of an app. Huawei could reduce or completely waive these fees, which means that an app developer gets all the proceeds without having to give Huawei a cut as is the case with Google or Apple.

Google could be forced into lowering their fees or face the possibility that some app developers make Huawei's appstores their preferred app distribution platform because they are cheaper. The revenue from digital content in the Play Store, including in-app purchases, falls under "Google other revenue". While not as much as advertising revenue, it's a segment that is growing fast as the table below shows.

Q1 2018

Share

Q1 2019

Share

Google properties revenue

$21998M

71%

$25682M

71%

Google network members properties

$4644M

15%

$5038M

13.9%

Google other revenue

$4354M

14%

$5449M

15.1%

Other bets

$150M

0.5%

$170M

0.5%

Total

$31146M

$36339M

Source:

Why the Huawei situation is unlike anything Google has seen before

Google's dominant position in the mobile industry has been challenged before. For example, Samsung () has its own Tizen OS. Similarly, Microsoft () developed Windows Mobile and Amazon () has its own Android fork and appstore. But none have had much success against Google.

So, based on prior history, one could make the argument that Huawei is not likely to be successful in weaning people away from using Google. However, there are differences between the Huawei situation and previous efforts. For instance, Huawei has the backing of an entire ecosystem in China with 1.4 billion people that exist outside of Google's control.

The Chinese market has its own apps such as WeChat, which one could argue is the number one app in terms of functionality and what it enables a person to do with their smartphone. Other Chinese apps such as TikTok have become very popular, which show that it's possible for Chinese apps to gain traction around the world.

It's not outside of the realm of possibilities that the Chinese ecosystem, previously contained to just China, will expand to include countries outside of China. The probability of this happening may be low in established markets in the developed world, but it's a different matter in developing countries. Especially those that are part of China's Belt and Road Initiative.

People there could be more open to new products and less likely to stick to established incumbents. There's no guarantee that people in developing countries will not adopt Chinese products and this includes the software side of things such as mobile apps. If apps like WeChat can offer the same functionality in developing countries that they offer inside of China, then there's no reason why people won't be open to trying out these apps. Many people in the developing world are still new to smartphones, which means that Google cannot always count on benefiting from being the incumbent.

China is a developing country after all and other developing countries may feel that its development model is a better fit for their needs. Trying to emulate China by adopting Chinese apps makes sense from that perspective. If this takes place, then Google stands to lose by limiting its opportunity to grow in developing countries.

The implications for Google due to recent developments with Huawei

It's almost inevitable that Huawei will attempt to launch a third mobile OS that competes with iOS and Android in particular. This could lead to a fracturing of the Android world, especially if Huawei gets the support from the Chinese government and other Chinese smartphone manufacturers.

Android is already quite with many different versions around. In comparison, it's easier to develop iOS apps when developers do not have to account for many different versions of the OS. If one of the biggest attractions of Android is its wide reach, then the prospect of Android reaching fewer people in the future is a negative for software developers.

A smaller addressable market means you're less likely to recoup the time and expense needed to develop apps. If the Android alternative from Huawei takes off, Google could see fewer people adopt its services around the world. Advertisers will not reach as many people as before through Google, which is a problem considering that advertising is by far the main source of revenue for Google. Google would become less attractive to advertisers and ad revenue will go down as a result.

But the biggest headwind of all is the possibility that companies and even countries will begin to ask themselves whether it's such a good idea to rely so heavily on Google and its services. For example, the EU could find itself in a trade war with the U.S. in the not so distant future. The EU cannot discount the possibility that it could be denied access to Google services in retaliation to force it to capitulate.

The EU has long had question marks about Google and the recent developments with Huawei will only serve to remind the EU why it has opened so many investigations into Google's practices. The EU may feel that it's prudent to have alternatives in place if or when Google decides to cut European companies from its services. It could do this by promoting home-grown alternatives such as the appstore from Aptoide or mapping software from HERE WeGo, formerly Nokia Maps.

Obviously, any attempt to move away from Google services anywhere in the world is bad for the company in the long run. The ultimate consequence of the Huawei situation could be that the Internet is divided globally into separate ecosystems, each with its own set of software and services. By virtue of its status as the preeminent Internet company, Google stands to lose greatly if the world moves in such a direction.

Source:

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.