Huawei – Really Convincing Story, Not.

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RCS unlikely to lift Huawei from its commodity margins.

• One has to give credit to Huawei for realising that it has a problem but so far, its attempts to drive its differentiation beyond hardware are not bearing any fruit.
• Its latest attempt in this direction is to join together with Google in supporting Google’s RCS based Android Messaging platform in its mobile devices and I presume in its infrastructure.
• RCS or Rich Communication Services is the telecom industry’s attempt to maintain a grip on messaging once it became clear that messaging was going to move to data rather than the 2G control channel.
• Although the technology has been around for 10 years, it has never been able to compete with the ease and ubiquity of the OTT apps and so it has never gained any significant traction.
• The result has been is that messaging is now dominated by WhatsApp, WeChat, iMessage and so on with RCS gaining virtually no traction at all.
• Even when Google threw its weight behind it and managed to get a several mobile operators on board, the ship had already sailed as everyone had pretty much already switched.
• The one exception is Scandinavia where SMS is still widely used and this represents an opportunity for Scandinavian operators to migrate their users as they are yet to try something else.
• However, in the rest of the world I am pretty sure that RCS will remain an oddity that will eventually be forgotten.
• The problem with messaging is that it has a very strong network effect where to communicate, both terminals need to support the system being used.
• This is why SMS was so successful as everyone who had a digital mobile phone had it already included as a single interoperable standard.
• Huawei’s intention to include RCS in its devices is born from the hope that if RCS messaging takes off, it will work best on Huawei’s devices because it has designed it in from the factory.
• There is nothing wrong with this strategy per se its just that it looks like the messaging networks have pretty much already formed meaning that getting people to switch to RCS will be almost impossible.
• Unfortunately, this means that this feature, like its AI assistant, AI chip and its now commoditised imaging offering will be unable to generate any differentiation for Huawei in its devices.
• This leaves it exactly the same boat as all of the other Android handset makers who differentiate purely on the basis of hardware.
• With the Google ecosystem dominating these devices this means virtually no software differentiation at all resulting in the widely observed race to the bottom in terms of pricing and wafer thin margins.
• The one exception is Samsung which makes good margins on Android devices, but I have long believed that this is because it outsells its nearest competitor by a factor of more than 2 to 1.
• Huawei is showing very little sign of passing or even catching Samsung meaning that commodity margins are going to remain a way of life.
• Huawei will need to do a little better than that if it ever wants to IPO.