Author: Richard Windsor

Radio Free Mobile is an independent research producer specialising in the digital and mobile ecosystem. During Richard’s 11 years at Nomura Securities, Richard focused on the equity coverage of the Global Technology sector in Equities. During that time, Richard began looking at Handset software and over a period of 5 years became an industry leader in the space. As a result he was regularly consulted by small companies, start-ups, VCs and the like for strategic input and views on where both the mobile phone industry and the handset software space were headed. Richard has always strived to maintain an independent and objective view and would not pull any punches when concerns arose about the viability of a company or an idea. Radio Free Mobile is the land of the one man band. This research is created, written, owned, operated and maintained by Dr Richard Windsor PhD CFA. Dr W. also makes the tea.

Google Android – Closed Source

I think Google may make Android proprietary in 2017.

Google has launched Android N but, without the ability to distribute updates, the software is virtually useless. To make matters worse, I think Google is effectively doing research and development where its competitors benefit more than it does.

Android M (6.0) is currently on just 18.7% of Google’s Android devices, despite having been available for almost a year. That corresponds to the penetration one would expect with virtually no updates being made. In contrast, iOS 9 is available on well over 90% of all devices and is about to be quickly replaced with iOS 10. This is a massive problem because it means any innovations Google makes to Android to compete against iOS, Windows or China will take four years to fully penetrate its user base. In my opinion, this renders the innovation worse than useless as it will be fully visible to the competition who can copy it and get it to market long before Google can.

A great example of this is Now on Tap which allows context based search from anywhere on the device. I have long believed this is a stroke of genius as Google currently only has 41% coverage of the Digital Life pie but this feature allows Google to collect data as if it owned 100%. The net result will be greater understanding of its users and better targeting of its advertisements — meaning higher prices, driving revenues and better margins.

Unfortunately, this service requires low level changes to be made in the Android Open Source Package (AOSP) so the device has to have version 6.0 (Marshmallow)or later in order for this service to work. Currently, only 19% of Google’s ecosystem users on Android have access to this feature despite it being available for a year. This, combined with the endemic fragmentation that hobbles the user experience relative to iOS, is a major reason why I think Google services in Android devices generate 50% of the revenue they do on iOS.

The only way I think Google can fix this problem is to take complete control of Android, culminating in the migration of the Android Run Time (ART) from the Android Open Source Package (AOSP) into Google’s own proprietary Google Mobile Services (GMS). This would render the open source piece of Android to being just a kernel with the real functionality of the device being controlled from within GMS which is fully under Google’s control. This would fix both the software distribution problem and the endemic fragmentation but could or would probably result in an outcry from the open source community as well as attract more scrutiny from regulators.

Google has long been an advocate for open source software and the backlash it would receive from developers when/if it moves in this direction would be severe. However, the recent loss in its war with Oracle has given Google the perfect excuse to close down its version of Android and blame Oracle when developers complain. In Marshmallow, Google has been forced to use Oracle standard libraries for the Android Run Time — Google has effectively lost control of the software roadmap for the runtime. This is something Google simply cannot afford and, when it presents its proprietary version, it can point the finger at Oracle as the reason for having to make the move. Furthermore, the AOSP will remain in open source but its relevance will have been reduced to being just a kernel rather than a fully-fledged OS.

There are already signs of this beginning to happen as Google is set to launch hardware which it has “put more thought into” and become “more opinionated about”. The Nexus line of devices is set to disappear to be replaced with devices designed by and branded with Google with the manufacturer (HTC) being completely absent.

For the creators of Android forks such as Alibaba, Xiaomi, Tencent, Cyanogen, and so on, this means they will also be forced down the same road, resulting in a series of proprietary operating systems all based on a common kernel. For developers, this will make their lives generally easier as developing apps for Google Android devices will become much easier but more work will be required to also develop for others. I suspect this will force makers of Google Android devices to take Google’s software as they have almost nowhere to go until the EU decides to step in and force Google to change its practices around how it licenses the right to put Google Play on devices.

This has been a gradual process as the scope of GMS has been increasing for the last three years but, at Google I/O 2017, I think this move will become much more visible. I think Google has very little choice because, at the end of the day, its fortunes will be driven by revenue growth from Android as iOS is grinding to a halt. I think a bit of developer anger is better than a $100bn loss in value.

Huawei vs Samsung: Rivers of Blood

Huawei flat-lines, passes advantage to Samsung 
The first indications for the smartphone market in Q2 16A are pointing to a loss of momentum for Huawei, Vivo, and Oppo. It will put a crimp in their plans to continue their rapid growth in 2016. Huawei is of particular note as it has very aggressive plans to become No. 1 in smartphones indicating it needs to employ a different strategy to continue gaining market share.

The net result is Huawei is no longer closing the gap on Samsung and its global ambitions are grinding to a halt. Huawei is now a comfortable No. 2 but I see it only making margins of 2-4% in the best instance. In order to earn better margins, it must become the No. 1 in terms of volume and outsell its closest rival by a factor of more than 2 to 1. It is this volume advantage that allows Samsung to earn 10-12% margins on Android devices which I think is sustainable for as long as it can maintain that volume advantage. This will be very difficult to achieve which is why I think Huawei is also working on differentiating its products through software and services.

I see three areas of development:

First: user experience. The aim is to lift the user experience on Huawei phones above other Android makers and thereby achieve differentiation. The user experience in developed markets is already reasonably well defined but RFM research finds that, in China, almost everyone struggles as 90% of users have low-quality stock Android. Only Xiaomi has developed a unique user experience but unfortunately, this has done nothing to help its poor profitability. Hence, I think Huawei will have to do something very special to achieve a price premium for its products which is unlikely to last long as good ideas will quickly be copied.

Second: proprietary operating system. I think Huawei is also building a complete alternative to Android where it would have full control of both hardware and software. This would give it the freedom to fully optimise the software to run with its silicon (HiSilicon) as well as to develop its own suite of services without having to put Google as the default. The problem is that outside of China and Africa, the Google ecosystem dominates Android to the point where it is almost impossible to sell an Android device without Google Play on it. Google uses this demand for Google Play to require handset makers put its services front and centre on their devices as well as precluding them from making devices based on other versions of Android. Hence, while this status quo exists, the Huawei version of Android is very unlikely to see the light of day outside of China.

Third: services. This is the Holy Grail because, if Huawei can develop a suite of Digital Life services millions of users love, it will be able to charge a significant premium for its devices. Unfortunately, this is by far the most difficult thing to do as one has to both build great services and then convince users to use them. Furthermore, in both China and overseas, there are bigger and stronger companies already dominating in the services space. I find it encouraging Huawei has understood and committed to differentiating in software as this represents its best chance of fulfilling its strategy without a substantial bloodletting for all Android handset makers. I think China represents Huawei’s best chance as it is in China where the most improvement in the user experience is needed and this is Huawei’s home market. I also see the possibility of a tie-in with Baidu, Tencent or even China Mobile as possibilities as these companies have very nascent, if any, verticalization strategies for their services. However, this won’t help in developed markets and Huawei must do everything it can to develop the appeal and attractiveness of its Honor brand.

These strategies will be difficult given the dominance of the Google ecosystem in these markets but I see cracks in Google’s position that might just give Huawei a chance. Huawei’s commitment to this strategy will be sorely tested as it is going to be a long and hard road and handsets could easily lose a lot of money before everything comes right. For the moment, the advantage has passed back to Samsung, who is also capitalising on the popularity of the Galaxy S7 to extend its lead in terms of profitability. This is why Samsung rests alongside Microsoft and Baidu as my top picks for 2016.