Google & Huawei – Fragmentation game.

Google’s defence of Huawei is about Samsung.

• Google has come to Huawei’s defence using the old fragmentation argument, but I think that its real aim is to prevent Samsung from becoming all-powerful once again and threatening its control of Android.
• According to the FT (see here), Google is lobbying the US government for a further extension of the ban or an exemption so that it can continue supplying Huawei with its digital ecosystem services for inclusion on Huawei devices.
• Google is making this argument on the basis of security backed up by its view that cutting Huawei off from Google’s software will encourage Huawei to create its own proprietary version of Android.
• This, Google argues, will be less secure than the original making Huawei phones more vulnerable to hacking when they are in the hands of non-Chinese customers.
• This argument makes no sense at all because Android is open source meaning that Huawei has not have lost access to it.
• What Huawei has lost is access to the proprietary services which it will now have to go off and get elsewhere or create on its own.
• I have already discussed at length the futility of this action (see here) which I think renders this line of argument moot.
• Furthermore, I don’t think that Google stands to lose any revenues from any Huawei market share loss because there are plenty of alternative devices available that carry the Google Ecosystem.
• Hence, users who demand Google services on their devices (almost everyone outside of China) will simply switch to another handset vendor.
• Hence there is unlikely to be any interruption of traffic to Google’s servers meaning that revenues will be unaffected.
• This raises the question of why Google would stick its head above the parapet for no apparent reason.
• I suspect that the real reason is Samsung.
• If Huawei loses all of its handset business outside of China, then Samsung is in pole position to pick up most of Huawei’s share.
• This would make Samsung once again (as it was in 2014) utterly dominant in Android which is something that will cause problems for Google.
• Back in 2013 and 2014, Samsung was engaged in creating its own digital ecosystem in a direct challenge to Google.
• The real problem was that because Samsung’s market share of the installed base was so high, a very high percentage of all Google’s Android revenues were being generated by Samsung handsets (see here).
• This was the cause of a lot of friction between the two companies which ended up with a 10-year agreement where Samsung agreed not to compete with Google Ecosystem services.
• The rise of Huawei has spread handset volume much more evenly among the main players and substantially diluted Samsung’s market power.
• Samsung now needs Google far more than Google needs Samsung.
• If Huawei were to fall and Samsung rise again, then the power balance would shift back in Samsung’s favour and could make life much more difficult for Google.
• This is particularly the case as it is now under regulatory scrutiny in the US and faces threats to the dominance of its app store from Epic Games (see here).
• Consequently, if Google can keep Huawei in the market for Google Ecosystem Android devices outside of China, the market will remain fragmented enough so that none of the handset vendors will have enough market power to challenge Google.
• This is the only logical reason why Google would enter the fray on Huawei’s behalf as it is pretty clear that its financial performance will be unaffected one way or the other.
• Huawei has about 90 days to have these issues fixed before its revenues start to suffer.
• Hence, the outlook for Huawei remains pretty bleak as I see it as a pawn in the much bigger jockeying for position that is going on between the USA and China.
• Huawei should be thankful that it has not followed its less fortunate peers and rushed to an IPO before it is ready.