THE EFFECTS AND IMPLICATIONS OF A DOUBLE INTERMEDIATION NETWORK FOLLOWING A SUDDEN PLATFORM CLOSURE

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How the U.S. Blacklisting of Huawei Products May Result in a New Type of Network Structure

By

Niels Scholte Student number: 3206971

MSc Business Administration (Strategic Innovation Management)

July 22, 2020

Supervisor: Marvin Hanisch Co-assessor: John Dong

Word count: 15.649 (Main body: 11.864)

Abstract

IT developments have allowed digital platforms to rapidly scale at low costs, which resulted in dominant digital platforms. These dominant platforms entail a potential dark side to actors that depend on such platforms for their business activities. This paper depicts the case of the Chinese high-tech firm Huawei and the recent developments around its ban from the Android platform. The results show the

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Introduction

On May 15th, 2019, the U.S. government signed the Securing the Information and Communications Technology and Services Supply Chain order. This order heavily restricted foreign network operators’ involvement in the U.S. mobile carrier networks (Reichert & Keane, 2019). Following this order and several accusations of espionage, the Chinese tech giant Huawei was put on a blacklist by the U.S. government, meaning that all U.S. firms were no longer allowed to do business with Huawei.

As a result of the blacklisting, Google - the platform owner of the Android operating system for smart devices - suspended business with Huawei on May 19th, 2019, and Huawei was no longer allowed to preinstall the Google Mobile Services framework on future handsets (Moon, 2019). On May 13th, 2020, the U.S. government decided to extend the U.S. trade ban for Huawei products for another year, meaning that Huawei will remain on the blacklist until at least May 2021 (Kelly, 2020).

The case of Huawei, its ban from the U.S. market, and subsequently, its ban from the Android operating system and the associated applications available for the ecosystem, illustrate a potential dark side of powerful platforms. The expulsion of Huawei shows how the growing dependence of firms on strong and dominant digital platforms can have negative ramifications for firms that rely on these platforms and their complementarities to do business, especially in the face of rising worldwide tensions.

Traditionally, researchers have emphasized the importance of network externalities - the notion that the value of a platform increases the more users join the platform - as the main driver of platform growth (Economides, 1996; Farrell & Saloner, 1986; Katz & Shapiro, 1985; Rochet & Tirole, 2003). Based on these network externalities, much attention has been given to so-called “get-big-fast” strategies, focusing on how platform owners could kickstart and grow a platform by focusing on both demand-side and supply-side mechanisms.

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Researchers to date have not yet investigated the negative consequences that platform dependence can have from the perspective of a network actor that has been suspended from the platform. They have not yet looked at the effect of a sudden platform closure that creates a lock-out effect, restricting access to a platform and its complementary offerings required to successfully compete in an industry characterized by strong network externalities in which these complementarities are a deciding factor. Moreover, researchers have not yet examined the powerful position of a platform owner, who can act as a powerful gatekeeper and who can exercise its control by granting or denying its partners access to the

complementary offerings that its partners need to survive.

This paper aims to fill this gap by focusing on the powerful role of a platform owner, who acts as a gatekeeper of its platform, and by focusing on how a platform owner’s decision to limit access to its complementary offerings can threaten the survival of firms that depend on the platform and its

complementary offerings. The central research question of this paper is: “How does a sudden platform closure by a platform owner impact a firm and its value net?”

Grounded in the literature on digital platform competition, network externalities, and intermediation networks, this study uses an inductive, qualitative case study approach, studying the case of Huawei and its ban from the Android platform to examine the implications and consequences following a disrupt platform closure from a firm’s value net perspective.

A value network is defined as “any set of roles and interactions in which people engage in both tangible and intangible exchanges to achieve economic or social good.” (Allee, 2008, p. 6). In the context of this paper, a firm’s value net consists of the relationship that a focal firm has with its stakeholders, such as its relationship with suppliers and customers. In addition to the effect of the platform closure on the firm and its value net, the firm’s competitive response following its expulsion from a dominant platform will be analyzed and discussed.

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In contrast to the belief that digital platforms and smartphone operating systems serve homogeneous needs, this paper challenges this assumption by examining whether the smartphone operating systems industry follows the traditional winner-takes-all paradigm in which only a few dominant players tip the market in their favor or whether the industry consists of customer groups with heterogeneous needs, which would allow multiple platforms to coexist when they are sufficiently differentiated from each other (Cennamo & Santalo, 2013). This paper uses the concepts of within-country and cross-country network externalities (Stallkamp & Schotter, 2019) to explain how geographical differences influence customer needs and allow for a niche positioning in the smartphone operating systems industry.

More specifically, and based on the possibility of platform differentiation, this paper investigates the role of two get-big-fast strategies in the platform design and competition process (Cennamo & Santalo, 2013). On the one hand, this paper argues that pursuing an app market competition (AMC) strategy may be worthwhile when customer demand is homogeneous and is not contingent on the geographical location of customers, such as in the case of strong cross-country network externalities. On the other hand, an app exclusivity strategy that aims to attract valuable yet distinctive complementary goods providers to the focal platform may be the optimal strategy for a differentiated platform that aims to exploit strong within-country network externalities. Thus, a platform that serves the homogeneous needs of a global customer base may need to design another platform competition strategy than a platform that aims to serve a differentiated, local customer base. The interrelationship between customer needs, the strength of location-bound network externalities, and the two get-big-fast strategies is visually depicted in Appendix A and will be discussed in greater detail in this paper.

Furthermore, this paper aims to advance the platform internationalization literature, which is still an underdeveloped field that requires more research and deeper theoretical understandings (Stallkamp & Schotter, 2019). This is supported by De Reuver, Sorenson & Basole (2018), who stated that a more fine-grained understanding of digital platform competition is needed by conducting qualitative case study research. Moreover, these authors stated that the antecedents of the creation of new digital platforms need more attention and that future research is needed to uncover the design process of digital platforms.

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Whereas Google’s Android OS currently dominates the smartphone operating systems industry

(Appendix B), this paper proposes that a new type of network - a double intermediation network - where two dominant platforms coexist and compete for (partly) the same complementary resources by focusing on either heterogeneous customer needs and strong within-country network externalities, or on

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Theoretical Framework

Platform competition

Recent advancements in digital information and communication technologies have changed the way of doing business for a wide range of industries (Boudreau, 2012), and a multitude of firms now operate through platforms (Autio, 2017; Evans & Schmalensee, 2016; Van Alstyne, Parker & Choudary, 2016). In this paper, a platform will be defined as “[The] interface between different groups of users [that] facilitates value-creating exchanges” (Cennamo & Santalo, 2013, p. 1331).

The focus of this paper will be on two-sided platforms, which are characterized by bringing two groups together through an intermediary platform (Galeotti & Gonzalez, 2008). The owner of a two-sided platform derives its value from serving as an intermediary interface, mediating the transactions between sellers and buyers or between complementors and users (Eisenmann, Parker & Van Alstyne, 2006; Evans, 2003; Hagiu, 2014).

Platforms thus serve as the foundation through which, for example, firms can transact with customers by offering products or services (Gawer & Cusumano, 2002; Gawer & Henderson, 2007). These products and services are termed complements and can increase the value of platforms through so-called network externalities (Gawer, 2009; McIntyre & Srinivasan, 2017; Zhu & Iansiti, 2012), whereby the value of the platform - and each user’s utility - increases the more users (and other actors) join the network (Cennamo & Santalo, 2013; Edelman, 2015; Zhu & Iansiti, 2012).

The process, in which the value of a platform increases through a self-reinforcing cycle whereby

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Platform growth strategies

The WTA paradigm suggests that platforms should pursue the strategy of aggressively expanding both sides of a platform - the installed user base and the number of providers of complementary offerings. Strategies to quickly build up a platform are termed “get-big-fast” (Lee, Lee & Lee, 2006) and are desirable to (1) rapidly build up a large installed user base, (2) lock in the new users, and (3) undermine rivals’ ability to pursue the same strategy (Cennamo & Santalo, 2013). Two of the most popular growth strategies described in the WTA literature include (1) stimulating app market competition (AMC) between complementary goods providers to create a large number and variety of applications for the platform, and (2) sweetheart deals by signing exclusivity agreements with complementary goods providers.

App market competition

The first popular get-big-fast strategy discussed in the WTA literature is the app market competition strategy. The app market competition strategy is believed to be a valuable strategy to grow a platform by attracting users by offering a high variety of applications on the supply side (Hill, 1997). Although research has found that application providers would like to face less competition on the supply side (Boudreau, 2012), the competition between the application providers makes the platform more attractive for users to join, and in return, a more popular platform increases the potential for application providers to sell their applications to a larger number of customers.

Sweetheart deals and app exclusivity

The second popular get-big-fast strategy discussed in the WTA literature is the licensing strategy, which can be used to lure in complementary goods providers through sweetheart deals and exclusivity

agreements (Eisenmann, Parker & Alstyne, 2006). Following this strategy, the platform can get certain, highly valued application providers on board, while excluding other firms from being able to offer these applications on their platform. Such a strategy limits the supply of complementary goods to competing platforms, while it boosts the value of one’s platform by offering more (exclusive) applications

(Armstrong & Wright, 2007; Hagiu, 2009). Moreover, the platform that has secured the exclusive rights to distribute certain applications may, in turn, be able to attract a larger number of users, who have no other choice than to join the platform to access the desired and exclusively held applications (Cennamo & Santalo, 2013).

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both end-users and complementary offerings providers, attention should be paid to the strategic trade-off in pursuing both strategies at the same time to avoid a hostile environment for application developers.

Challenging the WTA paradigm

In line with prior research, this paper aims to explain that a get-big-fast strategy, whose aim is to rapidly expand a platform’s presence across the globe to ultimately tip the market in its favor, may not

necessarily be the optimal strategy for a platform owner to pursue. This paper argues that attention should be paid to the interrelationship between customer needs, the strength of location-bound network

externalities, and the platform growth strategy, indicating that the efficacy of the optimal platform strategy is contingent on this interrelationship.

Customer needs

Researchers have argued that, under certain conditions, multiple platforms can coexist (Eisenmann, 2007; Eocman et al., 2006; Sun & Tse, 2007). Armstrong & Wright (2007) and Eisenmann (2007) already argued that solely focusing on a get-big-fast strategy may have limited benefits when platform differentiation is possible. Research has shown this platform differentiation is possible when (1)

differentiation is possible to begin with (Eocman et al., 2006; Shankar & Bayus, 2003 and Suarez, 2005), (2) the costs of adopting multiple platforms (often referred to as multi-homing costs) are low so that consumers are more likely to adopt multiple platforms (Eisenmann, 2007), or (3) when network externalities are not strong enough to lead to a WTA situation (Eisenmann, 2007; Eocman et al., 2006; Shankar & Bayus, 2003). However, notwithstanding the possibility of platform differentiation in certain contexts, recent research has argued that operating systems were destined to be international by default (Siddiqui & Li, 2017).

Strength of different network externalities

Focusing on the possibility of platform differentiation and on the assumption that not every platform-based industry is dominated by only a single platform, Stallkamp & Schotter (2019) argued that

researchers implicitly mistreated platforms as homogeneous entities, whose value do not change based on the geographical location in which the platforms operate (Lee, Song & Yang, 2016). Stallkamp &

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Since Stallkamp & Schotter (2019) found that platform differentiation was possible in certain contexts, they aimed to advance the field by taking a more fine-grained approach. They found that platforms are valued differently by a range of actors, depending on the country in which the platform is located. As a result, the researchers distinguished network externalities into two categories: within-country and cross-country network externalities. This distinction emphasizes that the value of a network is contingent on the geographical perspective taken, meaning that the value of a platform - and the associated strength of network externalities - can differ across actors located in different parts of the world. Whereas within-country network externalities aim to explain that local customer needs differ between countries or larger regions, cross-country network externalities argue that network externalities are not contingent on the geographical location of customers.

Stallkamp & Schotter (2019) found that the optimal platform strategy to pursue is contingent on the type of network and the associated network externalities - that is, whether the platform exhibits strong within-country or cross-within-country externalities and whether the value of the platform thus depends on location-bound factors. Focusing on these differences between network externalities, it can sometimes be advantageous for a platform provider to be an early entrant in a specific country when strong within-country network externalities can be exploited, while for platforms that have stronger cross-within-country externalities, being an entrant in a single country is less important than rolling out the platform on a global scale to rapidly expand both the demand and supply sides across a wider range of users and complementors.

Synthesis of customer needs, strength of network externalities, and platform growth strategies I have argued that previous research has (1) investigated the role and strategic trade-off between two dominant platform growth strategies that aim lure in both demand and supply-side actors to quickly grow a platform and become the go-to platform in its respective market, (2) looked at the possibility of platform differentiation when customer demand is heterogeneous, and (3) investigated the role of within-country and cross-country network externalities. This paper aims to contribute to the literature on platform competition by exploring the interconnectedness between customer needs, the strength of specific network externalities, and the role of platform growth strategies.

Homogeneity in customer demand, strong cross-country network externalities, and AMC

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needs and can instead pursue an international platform strategy from the beginning to lure in a vast array of users and complementors. As I will aim to show, the most optimal platform growth strategy in such circumstances is fostering app market competition to rapidly build up a large number of complementors to the platform, which will also attract a large number of users on the other side of the platform.

Heterogeneity in customer demand, strong within-country network externalities, and app exclusivity On the other side, however, when customers do have differentiated needs, such as is the case when customer demand is heterogeneous, within-country network externalities may become more relevant and worthwhile to exploit than cross-country network externalities when the differentiated needs of the customers are contingent on the geographical location of the customers. In such circumstances, this paper argues that pursuing an app exclusivity strategy that aims to lure in application developers who serve the differentiated needs of the customer base, may be the optimal platform growth strategy.

Based on the potential for platform differentiation in the smartphone operating systems industry, this paper thus aims to contribute new insights and potential platform growth strategies to successfully differentiate a platform based on the customer demand and the difference in the strength of location-bound network externalities. For a visual overview of the theoretical framework used in this paper to investigate the interrelationship between customer needs, the strength of network externalities, and the implications on platform growth strategies, please refer to Appendix A.

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Research Method

Research design

This paper uses the approach of an inductive, qualitative case study due to a lack of research and knowledge in the field of platform internationalization and digital platform competition (Reuver, Sorensen & Basole, 2018; Stallkamp & Schotter, 2019). A case study is “an empirical inquiry that investigates a contemporary phenomenon within its real-life context, [...] in which multiple sources of evidence are used.” (Yin, 2003, p. 13). Eisenhardt (1989) identified the use of a case study approach as a viable “research strategy” to model and create theoretical constructs based on empirical evidence.

A qualitative case study is appropriate to use when it aids a better understanding of the nature, strengths, and interactions of the variables researched (Black, 1994). The phenomenon researched should be supported by a variety of data sources to ensure that the topic is studied using multiple lenses, which allows for a deeper understanding and a more elaborate revealing of the underlying mechanisms (Baxter & Jack, 2008).

Research setting

This study focuses on the smartphone operating systems industry. After the introduction of the Apple iPhone in 2007, the smartphone industry changed drastically. Whereas smartphones were predominantly selected based on hardware characteristics before the introduction of the first smartphone, the value of a smartphone has since shifted towards the software side, and especially towards the availability of

complementary applications (Black, 2017, Salmon, 2009). In the smartphone operating systems industry, Apple’s iOS and Google’s Android have grown to become the dominant platforms with the largest number of applications available in their respective application stores (Hill, 2019).

Whereas Apple follows a closed approach, whereby it only allows its iPhones to run the iPhone Operating System (iOS), Google also allows other phone manufacturers to use its Android operating system

(Cervantes, 2020). Major tech firms such as Samsung have since shifted from offering cell phones using their proprietary software to using Android as the default operating system. Yet, while this has allowed other tech firms to easily gain access to a large and popular platform that is valued highly by a large group of customers thanks to the availability of many, high-quality applications, there is also a dark side to this.

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towards its partners, by forcing them to preload an elaborate set of Google applications on their

smartphones. Moreover, this growing dependence on the Android platform means that major tech firms face major risks when they do no longer have access to the operating system and the accompanying application store following a restriction put in place by Google.

Case selection and description

This study focuses on the dominant role of contemporary smartphone operating systems and investigates the phenomenon of a sudden platform closure and the subsequent lock-out effect for an affected actor that heavily depends on a dominant platform and the available applications, as well as the strategic

considerations following such a platform expulsion from the perspective of the Chinese firm Huawei. Founded in 1987, Huawei has grown to become one of the largest ICT providers in the world, operating in over 170 countries and serving over 3 billion people across the globe (Huawei, n.d.).

Data collection

For the data collection process, I make use of articles that cover (1) a U.S. perspective of the reasons for the U.S. to ban Huawei from its market and to disallow U.S. firms to trade with Huawei, (2) a U.S. and Chinese perspective on the consequences of such a platform closure in different geographical contexts, and (3) the strategic considerations of Huawei following the ban from the Android ecosystem.

Therefore, this paper draws upon sources from tech-based websites from both the Western part of the world, as well as Chinese documents and articles retrieved from the Chinese search engine Baidu, which are translated using Google Translate. Key search terms include “Huawei (华为)”, “Huawei Ban (华为禁止)”, “Huawei United States (华为美国)”, “Huawei Google (华为 Google)”, “Huawei Android (华为 Android)”, “HarmonyOS” and “Huawei HarmonyOS (华为 HarmonyOS)”.

In addition to these news articles from the U.S. and Chinese-based technology articles, interviews given by the rotating Huawei CEOs, both to the U.S. press as well as to the Chinese press are used for

additional information and for more strategic insights as to how Huawei deals with the platform closure and how it aims to shape its future operating system. Finally, Huawei-owned websites, news outlets, and social media posts embedded in articles are used to shed light on Huawei’s strategic considerations from an inside-out perspective.

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started browsing to this website and I subsequently entered the key search terms listed above. I scanned articles that either discussed Huawei’s platform expulsion from the Android platform or Huawei’s competitive response following the ban. When articles referred to other websites, I used

Mediabiasfactcheck (mediabiasfactcheck, n.d.) as a tool to judge the objectivity of reporting of the respective websites.

However, not all websites listed below could be found on Mediabiasfactcheck, so I aimed to triangulate the data of sources by using multiple data sources that covered the same topic but described it from a different perspective. For example, most Chinese sources could not be traced by Mediabiasfactcheck, and in general, it is very hard to find information about Chinese sources and whether they are trustworthy and of high quality. Therefore, I aimed to counter the Chinese articles that did not show up on

Mediabiasfactcheck with U.S. based articles that covered the same topic but that were listed on Detailed or that were deemed as trustworthy by Mediabiasfactcheck (mediabiasfactcheck, n.d.).

Moreover, some Chinese sources such as the South China Morning Post scored rather low on the “Factual Reporting” criterium of Mediabiasfactcheck, with a tendency to have a pro-China reporting style. Being aware of the possibility of pro-China articles in my data set, I aimed to lessen the bias that these articles would have on my data set by balancing the set of articles that covered the Huawei case from a Chinese perspective with an evenly large set of articles that covered the case from a Western perspective. Through aiming to find linkages between both sets of articles, I tried to counter the bias that some articles would inherently have and to enhance the quality through the concept of triangulation, which can lead to the convergence of data findings (Breitmayer, 1991).

In total, this paper is based on 6 interviews with the Huawei rotating chairmen, 31 articles from the Western part of the world, and 29 Chinese-based articles (Appendix D), ranging from being published in early 2018 to May 2020 (Appendix E). Although some more websites and articles cover the Huawei ban, many of the articles that have been excluded only provide general information about the blacklisting and do not go into detail on the consequences of the ban from the Android ecosystem using a platform-based perspective. Moreover, many articles found on the topic refer back to the original articles already included and do therefore not significantly differ from the already selected papers on this topic.

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Appendix E shows a visual representation of the sources used in this paper over a longer period. Initial interest in the topic spiked when the Trump administration decided to put Huawei on the U.S. Entity List in May 2019, thereby restricting Huawei’s access to the U.S. market and its ability to conduct business with U.S. companies. The second wave of interest followed in the first months of 2020, when Huawei presented its financial results of the fourth quarter of 2019, which showcased the first real pain points of the U.S. ban. Moreover, at the start of 2020, the company first presented its operating system as a viable alternative to Android, as will be discussed in the following section. The public interest continued to be strong at the start of the second quarter, when Huawei launched one of its first new flagship products after its expulsion from the Android ecosystem globally and when the Trump administration decided to extend the ban for an extra year.

The approach to combine sources from different parts of the world is used to examine the effects of the Huawei ban from different parts of the world using both the within-country and cross-country network externalities concepts. By drawing upon sources from different parts of the world, I aim to uncover what the effects of the Huawei ban will be from a within-country network externalities perspective, namely China. Moreover, the U.S. based sources will be used for the cross-country network externalities, aiming to uncover the effects of the ban for more globally connected customers in the Western markets.

Data analysis

In contrast to positivist research, there are little common rules regarding conducting and communicating interpretive research (Bourgeois & Eisenhardt, 1988). Yet, to provide some guidelines regarding the data analysis process, this study follows the data analysis process as described by Eisenhardt (1989).

Following this approach, the different sources used as input for this study are read through the lens of the research question mentioned in the introduction: “How does a sudden platform closure by a platform owner impact a firm and its value net?”

I started the data analysis process by first reading through all the data sources and highlighting important concepts, following the data analysis method as described by (Gephart, 1993). This means that theoretical sampling (Glaser & Strauss, 1967) was used by scanning the text documents and highlighting the text areas that were focused on the theoretical concepts used in this paper, such as digital platform competition and within-country and cross-country network externalities (See Data Appendix B). This way, the

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Results

In this chapter, I will address the most important findings that arose from the data. Firstly, I will briefly describe the general causes and effects of the U.S. ban on Huawei, focusing on the three main dimensions of the ban. Secondly, I will zoom in on the restrictions that Google had to put in play following the U.S. ban and the platform consequences this has caused for Huawei. Finally, and most importantly, I will focus on Huawei’s strategic considerations following the restricted access to the Android ecosystem from both a short-term as well as a long-term perspective. For a graphical overview of the most important events leading up to and following the ban of Huawei from the U.S. market and Android ecosystem, please refer to the timeline provided in Appendix G.

A Three-Dimensional Ban Trade war

In 2018, the U.S. and China started a fierce trade war, imposing higher tariffs on goods imported from China and the U.S. respectively (BBC, 2020). As a means to force China to comply with the wishes of the U.S., Huawei was being targeted since it has quickly grown out to become one of the dominant forces in the smartphone industry, directly competing with U.S. firms and even overtaking Apple as the second-largest player in this industry (Reiff, 2019).

National security threat

Ren Zhengei, one of the founders of Huawei, was a member of the Chinese Communist Party, which led the U.S. to believe that Huawei is either being controlled by the Chinese government or that it has close linkages to the government, meaning that the firm has to comply with Chinese data laws by sharing sensitive information with the government (Cheng, 2020; Cutress, 2019). Therefore, the U.S. fears that Huawei-branded equipment sold in the U.S. is used as an espionage tool to send sensitive information to the Chinese government, indicating that Huawei’s market presence in the U.S. poses a potential threat to the national security of the U.S.

Huawei-branded 5G equipment

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Huawei’s technological prowess

Although not explicitly stated by the U.S. government, it is also argued that the U.S. fears Huawei’s technological process, which may allow China to become the new technological leader, surpassing the United States as the most technologically sophisticated country in the world (McCabe, Hong & Benner, 2020; Pham & Lu Stout, 2019; Stewart, 2019). Since the U.S. suspects that Huawei and the Chinese government are closely linked, the U.S. is worried about the technological prowess that Huawei can achieve by being backed by the Chinese government and by its ability to rapidly expand its business worldwide through its smartphone sales and 5G deployment. As these sources suggest, the U.S. government decided to add Huawei to the entity list to put a halt to China’s technological expansion around the world, and to prevent China from overtaking the U.S. as the technological leader of the world.

U.S. blacklisting

The U.S. government decided to put Huawei on the U.S. entity list in May 2019. As a result, Huawei’s access to the U.S. market is blocked, and U.S. firms are no longer allowed to partner and conduct businesses with Huawei.

Yuqing (2020) termed the U.S. ban a “comprehensive three-dimensional attack”, in which the U.S. (1) blocks Huawei from deploying its sophisticated 5G network in the U.S., (2) blocks Huawei’s access to hardware suppliers for components used in Huawei products, and finally, (3) restricts software suppliers to license their software to the Chinese firm (see Appendix H).

Since the focus of this paper is on the ban from a platform perspective, the following paragraphs will take a more detailed look at Huawei’s restricted access to the Android platform and the consequences of such a ban, taking both a domestic as well as global perspective.

Implications of U.S. blacklisting

As described in the previous paragraph, part of the blacklisting of Huawei by the U.S. government meant that software suppliers were no longer allowed to do business with Huawei. As a result of the blacklisting, Huawei was no longer allowed to sign new Mobile Application Distribution Agreements (MADAs) with software license suppliers (Rahman, 2020). For an overview of the implications of the blacklisting, please refer to Appendix I.

GMS license

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Although Google’s Android is free to use by anyone and Huawei can still use Android for its current and future handsets, the GMS license adds value to the operating system by giving partners access to the Google Play Store as well as to the underlying Google services that are needed to download and utilize many applications available on the Android platform (Cutress, 2019).

Without the GMS license, the Android operating system loses its appeal to a lot of customers that rely on Google applications such as Google Drive, Google Maps, and YouTube (Baidu, 2020a; Cutress, 2019). Not only can future Huawei phones no longer ship with the Google Play Store, but numerous applications need to have access to GMS in order to work (Vonau, 2020a). Applications such as Twitter and Netflix, and navigation apps such as Citymapper and Google Maps, use Google-specific application programming interfaces (APIs), which are part of the GMS framework.

Financial impact

Following the ban in May 2019, the financial report of Huawei over 2019 shows some interesting findings. In general, Huawei’s overall annual revenue in 2019 increased by 18% to 850 billion yuan (121 billion USD) compared to 2018 (Goh, 2019), of which the local Chinese market accounted for 97.8% of the total revenue growth (Yuan, 2020). Regarding its consumer business channel, Huawei’s 2019

smartphone sales increased with 17% compared to 2018 (Disis, 2019), whereby Huawei surpassed Apple as the second-largest smartphone vendor in 2019 (Laidlaw, 2020). This increase in overall smartphone sales was caused by a large increase of 37% of smartphone sales in China (Sawers, 2020).

While the overall sales figures of Huawei phones grew in 2019, this is partly because Huawei phones introduced before the ban were still sold to the global market, while new phones introduced after the GMS ban were no longer attractive to global users due to a lower availability of complementary applications.

Moreover, in the case of the Android operating system, the strength of network externalities caused by the availability of complementary applications available in the Google Play Store differs between the Chinese and U.S. market, since - even prior to the GMS ban - the Google Play Store and Google Services were already banned in China (24hChina, n.d.). Therefore, Chinese users do not depend on the same

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Short-term Strategy: AOSP and HMS AOSP without GMS

As a response to the GMS ban, Huawei developed a parallel platform strategy (Appendix J), where it continued to use the Android Open Source Project (AOSP) as its operating system to serve its global customer base. While the use of the open-source variant of Android is used to combat the loss of the GMS license in the short-term through offering an increasing set of applications using its Huawei Mobile Services framework, first-party applications, and its application store, the company is also working on its (domestic) ecosystem to become less dependent on Google’s Android platform in the long run (Hall, 2020). First of all, I will describe the short-term competitive response, after which I will discuss the long-term strategic considerations.

Huawei HMS

To combat the loss of the GMS license, Huawei decided to focus its efforts on creating its mobile services framework called Huawei Mobile Services (HMS) as a substitute for GMS (Cutress, 2019; Ming, 2020). HMS includes Huawei’s first-party applications such as Huawei Search and MeeTime as replacements for Google Search and Google Hangouts respectively, and Huawei also launched its app store called the AppGallery as a replacement for the Google Play Store (GSMArena, 2020; Porter, 2020).

While the AppGallery and HMS framework come preinstalled on all newly released Huawei mobile phones such as the Huawei Mate 30 Series and Huawei P40 Series, existing Huawei handsets also get the AppGallery and HMS framework installed via an update (XDA, 2019). Moreover, even other Android users can download and run the Huawei AppGallery application as well as the HMS framework. As a result, the AppGallery already accumulated a large installed user base through being installed on existing and new Huawei handsets, of which Huawei claims that 300 million users actively use the app store every month (Baidu, 2020b; Tencent-QQ, 2020), and an even greater number of users have the AppGallery application preinstalled.

As a means to stimulate app market competition for its AppGallery and HMS platform, Huawei has deployed several supply-side mechanisms that aim to lure in application developers to support its HMS platform, which will be discussed below.

Revenue-sharing agreements

Next to offering a large installed user base to app developers, Huawei also pursues supply-side

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by offering appealing revenue-sharing options. Whereas Google and Apple each take 30% of an app’s profit when the application is sold through either the Google Play Store or Apple App Store, Huawei takes a more conservative approach.

For example, game developers will only have to share 15% of the earnings with Huawei, while all other applications will not be taxed at all during the first year of release, after which Huawei will still only claim 15% of the revenues. Huawei calls this approach the Revenue Sharing Percentage for the Preferential Policy (Onawole, 2020).

Additionally, developers who signed up for the Preferential Policy program before June 30th, 2020, will be able to enjoy the benefits of lower revenue cuts for the next two years. As (Vonau, 2020b) argued, the Revenue Sharing Percentage for the Preferential Policy strategy may especially be attractive for (indie) developers that rely on paid applications or in-app purchases, thereby boosting the availability of complementary offerings available in the AppGallery.

App conversion toolkit

As briefly mentioned before, many third-party applications rely on the GMS framework to function properly, so many of these applications simply refuse to work on new Huawei mobile phones that do not have the GMS framework installed (Bohn, 2020; Joire, 2019).

To enable applications that heavily rely on the GMS framework to work on Huawei phones, Huawei decided to provide a development environment and toolkit to developers to aid the conversion process from GMS to HMS (Cutress, 2020). One example of such a tool is the Huawei Toolkit, which enables developers to port over their existing applications to the AppGallery by making use of the HMS

framework instead of the GMS framework (Huawei Developer, n.d.). This tool should ease the process of making a developer’s application available in both the Google Play Store as well as Huawei’s

AppGallery, thereby increasing the number of complementary apps available on Huawei’s platform and making the platform more attractive for both users and app developers to join.

Pooling resources

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Service Alliance (GDSA) is set to take on the dominance of the Google Play Store (Artashyan, 2020; Kirton, 2020).

Synthesizing short-term strategy and theoretical underpinnings

Concludingly, Huawei aims to reduce the negative implications of the ban by creating its mobile services framework and application store on top of the Android platform (See the top part of Appendix J). Huawei aims to ship the open-source variant of Android, together with its HMS framework and AppGallery to its global customer base. To make the platform more attractive for both end-users and app developers, the company decided to heavily incentivize application developers to support the platform by fostering app market competition. The supply-side mechanisms Huawei deployed to kickstart the positive feedback loop through indirect network externalities include (1) favorable revenue-sharing agreements with new developers, and (2) the availability of Huawei’s developer toolkit and a development environment to ease the conversion process of GMS applications to support Huawei phones.

The theoretical underpinnings and mechanisms of this platform strategy can be described in the following way. Huawei aims to serve the needs of its global customer base with its HMS, which means that Huawei focuses on the general consumer needs in the smartphone market. Moreover, since its strategic orientation is focused on a global set of users, Huawei aims to exploit cross-country network externalities by making its platform accessible for users around the globe. As a result, my theoretical framework (A) shows that the compatible platform growth strategy following these contingencies is app market competition to rapidly expand the supply side of the platform, which, in turn, attract more end-users with homogeneous needs to the platform through the existence of indirect network externalities (Appendix K). In

circumstances in which a platform’s goal is to rapidly expand both its supply and demand side by

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Long-term Strategy: U.S. Independence

As I have discussed at the start of the previous section, Huawei currently faces a three-dimensional ban in which it (1) cannot deploy its 5G infrastructure in the U.S., (2) cannot partner with U.S. hardware

suppliers, and (3) cannot partner with software suppliers to license software.

In the context of this paper, the focus is on the implications that not being able to partner with Google poses on Huawei’s ability to compete in the smartphone industry, yet for the long-term strategic

considerations, I will begin by taking a broader look at the implications of the U.S. ban on Huawei and its value net from both a hardware and software perspective.

Hardware independence

Firstly, the U.S. ban means that Huawei’s ties to U.S. hardware suppliers were cut. To reduce the impact of this ban in the year following the blacklisting, Huawei set up alternative, non-U.S. supply chains for its semiconductor demand (New.QQ), as has been researched by the Boston Consulting Group (Varas & Varadarajan, 2020). This BCG report claims that domestic firms and foreign, non-US suppliers, can satisfy a large portion of the hardware needs for Huawei and that the trade war between the U.S. and China may eventually damage the United States’ global competitive advantage and leading position in the semiconductor industry (Varas & Varadarajan, 2020).

So, from a macro perspective, the hardware supply ban caused Huawei to shift parts of its components supply back to China and to set up alternative supply chains in the Asian region. Yet, while it may eventually be possible for China, together with other Asian countries to be fully independent of U.S. technologies, this may affect Huawei’s ability to compete with U.S. technologies in the short term as current Asian technologies such as mobile semiconductor design is still lacking compared to U.S. technologies. Moreover, the current hardware ban may also harm the U.S. by damaging its technological leadership in the long run.

Yet, despite the shortcomings of current Asian technologies compared to more sophisticated U.S.

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Software independence - The HarmonyOS ecosystem

While the U.S. sanctions continue to block Huawei’s access to the GMS framework - at least until May of 2021, Huawei is preparing a large backup plan by investing in its ecosystem called HarmonyOS. The HarmonyOS platform is targeted to be an alternative to the Android ecosystem (Hall, 2020), and it is aimed to become a unified platform with a shared underlying technological basis, so that the operating system can run on nearly every smart device, from Internet of Things (IoT) devices such as

microcontrollers, all the way up to televisions (Cutress, 2019).

Researchers argue that HarmonyOS could eventually become China’s national operating system since Huawei is the largest manufacturer of both mobile devices and internet of things appliances in the Chinese market and because Google does not have a strong market presence in China due to the ban of the Google Play Store (Cherrayil, 2019).

Together with the open nature of the platform and the support from the Chinese government to build a national operating system to become less dependent on U.S. technologies, Huawei may be able to establish its HarmonyOS operating system as a third pillar in the mobile platform market by capitalizing on its market presence in a broad scope of smart devices in the domestic market (Cherrayil, 2019):

Besides the operating system itself, the four major Chinese smartphone manufacturers (Huawei, Xiaomi, Oppo, and Vivo) have already joined forces through the establishment of the Global Developers Service Alliance (GDSA) to create a unified app store platform for Android as an alternative to the Google Play Store (Hall, 2020), as has been mentioned before. It is argued that this partnership can extend beyond a unified app store and that major Chinese firms may want to join the HarmonyOS ecosystem to expand the number of product categories that use the HarmonyOS operating system. This would not only make the platform more attractive for app developers, but it will also provide the Chinese manufacturers some leverage over Google if the platform is able to carve out a niche in the Chinese market (Cherrayil, 2019). In turn, other Chinese firms may also be willing to join the platform in a bid to become less dependent on Google’s ecosystem.

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Moreover, after having established some form of market presence in the domestic Chinese market, Huawei could also extend its platform to other markets in which Google’s platform presence is not ubiquitous in an attempt to rapidly build up its customer base (Xiaobo, 2019).

For a timeline of the most impactful events leading up to the blacklisting of Huawei by the U.S.

government and Huawei’s strategic considerations following the ban, please refer to Appendix G. For an overview of the most important events and quotes following Huawei’s competitive response to the ban and its parallel platform strategy, please refer to Appendix L.

Synthesizing long-term strategy and theoretical underpinnings

The long-term competitive response of Huawei and the second part of its parallel platform strategy (Appendix J), can be explained using the interrelationship between customer demand, the strength of location-bound network externalities, and the role of two dominant platform strategies (Appendix A).

For its HarmonyOS operating system, Huawei aims to first explore the domestic Chinese market. Due to the lack of the Google Play Store in China (24hChina, n.d.), most Chinese customers do not depend on Google applications or the Google Play Store. Therefore, Huawei can aim to exploit the customer needs of the domestic market, which are heterogeneous from the needs of overseas users that do value the Google applications and access to the Google Play Store. As a result, Huawei’s HarmonyOS can grow to become a differentiated platform in the smartphone operating systems industry by targeting the

heterogeneous needs of its domestic customer base. Based on the fact that heterogeneous customer needs, created through the existence of strong within-country network externalities, the optimal platform growth strategy for the HarmonyOS platform will be to ensure the exclusive availability of high-quality, local applications (Appendix M).

The reasoning behind an app exclusivity strategy in such circumstances is that the exclusive availability of applications that are valued by a distinct group of users makes the platform the go-to platform for these users since other platforms do not provide these exclusively-held applications. As a result, local users that depend on these distinctive applications have no other means to access these applications than to join the platform that exclusively possesses the applications. This further increases the distinctive positioning of the platform by attracting users that value the availability of local applications.

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market and to craft a differentiated platform in a bid to attract more domestic customers, Huawei may be able to sign an exclusivity agreement with Chinese application providers such as Baidu. While overseas customers have access to the Google search engine and do not value the availability of the Chinese search engine Baidu, Chinese users – who do not have access to Google-related applications – do value the availability of the Baidu search engine. As a result, the lack of the Baidu search engine does not harm the more generic positioning of the Android platform, while it does enhance the value of the domestically oriented HarmonyOS platform. By focusing on the needs of the domestic customers, Huawei may, in turn, be able to also attract other hardware and software partners that want access to a potential pool of Chinese customers they can reach through utilizing the HarmonyOS platform.

Of course, in the early development stages of HarmonyOS, the chances of attracting large partners that would want to exclusively supply their applications to the platform will be limited, as these partners would have to forego the possibility to provide their applications to other platforms. Therefore, Huawei may be able to first of all lure in partners that provide exclusive perks in addition to their applications to the HarmonyOS platform. As an example, the Chinese firm Tencent Games produces the popular game Player Unknown’s Battlegrounds (PUBG) and the Chinese variant of this game (Game of Peace) is amongst the most popular gaming applications in China (Reuters, 2019). Though it will be hard for Huawei to persuade Tencent Games to exclusively provide its game to Huawei’s platform, Huawei may be able to partner with Tencent Games and provide its customers with exclusive perks such as additional in-game credits or exclusive cosmetic upgrades in the same way that Samsung has partnered with Epic Games, the owner of Fortnite, to attract more users to buy its smart devices by offering exclusive perks (Samsung, n.d.).

Thus, in the case of a differentiated platform, the platform owner should not focus its attention on rapidly growing both the installed user base and availability of complementary offerings by heavily incentivizing app developers in a bid to offer a large number and high variety of applications. Instead of simply

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Discussion and conclusion

This paper has examined the effects of a sudden platform closure from the perspective of an actor that depends on an externally-owned platform for its business activities. Moreover, the paper discussed the strategic considerations of a firm that has been expelled from a dominant platform for both the short and long term, grounded in the concepts of within-country and cross-country network externalities that give rise to heterogeneous customer preferences based on a customer’s geographical location. The central research question of the paper is: “How does a sudden platform closure by a platform owner impact a firm and its value net?”.

The results show that a sudden platform closure can affect the expelled firm on both a hardware and software level. In the case of Huawei, the trade war between the U.S. and China not only affects Huawei’s ability to acquire hardware components from U.S. based firms, but it also shows how having limited access to a dominant operating system and its complementary applications can harm a firm’s business continuity. The results show how alternative supply chains aim to tackle the hardware ban, while the parallel platform strategy aims to counter the negative consequences following a ban from a dominant ecosystem (Appendix G). More specifically, this paper adds to the platform literature in the following ways (Appendix N):

WTA Paradigm in the smartphone operating systems industry

Firstly, researchers till date either (1) disregarded the existence of national borders for the effect of network externalities, and their influence on customer demands (Lee, Song & Yang, 2016), (2) expected digital platforms to be international by default (Siddiqui & Li, 2017) or (3) anticipated a universally dominant role of cross-country network externalities for smartphone operating systems (Stallkamp & Schotter, 2019).

This paper contributes to the platform literature by describing and applying the interrelationship between (1) customer demand (homogeneous versus heterogeneous), (2) the strength of geographically-grounded network externalities (cross-country versus within-country network externalities), and (3) the role of two dominant platform growth strategies (app market competition versus app exclusivity). The

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only be focused around building the largest platform, but that instead, controlling a platform’s trajectory should be the main consideration for managers.

The paper has shown how Huawei’s short-term strategy, based on limiting the negative consequences following its ban from the Android platform, focuses on a generic platform strategy built to serve a homogeneous group of worldwide customers. The company aims to serve its global customer base by stimulating app market competition through providing developer toolkits, favorable revenue-sharing agreements and a large group of (passive) customers to complementary goods providers as a means to kickstart the positive feedback loop between app developers and the installed user base (Appendix K).

To ensure long-term business survival, Huawei has invested in its operating system, which aims to serve the differentiated needs of the domestic, Chinese customer base. Through exploiting the strong within-country network externalities that are worthwhile to pursue due to the lack of Google’s presence in this market, Huawei’s operating system can grow out to become China’s national operating system. By partnering up with local partners and by securing the exclusive supply of highly-valued local applications on its platform, Huawei’s HarmonyOS can become the go-to platform for Chinese users (Appendix M).

The paper thus adds to the platform literature that multiple platforms can coexist in the smartphone operating systems industry, due to heterogeneous customer needs that arise from geographically-grounded differences in network externalities. More specifically, the presence of strong within-country network externalities allows firms to enter markets that have not yet been conquered by Google's Android and Apple's iOS by carving out a niche platform that serves distinctive user needs. Therefore, the paper adds to the literature the importance of the interrelationship between customer demand, the strength of

location-bound network externalities, and two dominant platform growth strategies. The paper has shown the dichotomic distinction between two sets of compatible strategies in platform design and competition by applying the theoretical framework (Appendix A) to Huawei’s parallel platform strategy (Appendix I).

Additionally, the paper aimed to explain the role of intermediation networks in the smartphone operating systems industry. Thereby, the paper highlighted that the platform structure of the smartphone operating systems industry may shift from its current single intermediation network structure, in which Apple and Google satisfy global customer needs by offering a “generic” platform, to a double intermediation network, in which two differentiated intermediary platforms may compete for partly the same

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ecosystem by bringing together a distinct set of locally-oriented complementary apps providers to a Chinese customer base.

Platform dependence

Secondly, the paper explains that the potential dark sides of platform dominance and platform dependence for actors other than the platform owner have received limited attention. The paper explains how most extant research has focused on the importance of network externalities and positive feedback effects between the installed user base and complementary goods providers to quickly build up a platform from the perspective of the platform owner (Economides, 1996; Farrell & Saloner, 1986; Katz & Shapiro, 1985; Rochet & Tirole, 2003).

Moreover, in the contemporary world in which digital platforms can rapidly grow due to IT

developments, large IT-based platforms dominate the industry (Eisenmann, Parker & Alstyne, 2006). As a result, these platforms can lure in a vast array of actors, ranging from hardware vendors to application providers that aid the attraction of the platform for a growing group of customers.

The dominant position of the platform owner forces all actors to comply with the actions of the platform owner. Therefore, the platform owner possesses a powerful position within the network and functions as a gatekeeper of the platform by being able to unilaterally decide which parties it allows to enter and stay on its platform and which parties it can expel from its platform.

As a result, this paper adds to the literature that dominant platforms have a dark side for platform actors, and that actors who depend on an externally-owned platform should consider investing in a backup plan to ensure business continuity in case they get expelled from the platform. The more uncertain the external environment is, the more important it is for firms to invest in such backup plans due to the increased probability of platform closure in such circumstances and the dangers that such platform closure poses to a firm’s ability to compete and survive. The paper shows how investing in a parallel platform strategy may alleviate both short-term and long-term concerns about the firm’s business survival.

Passive installed user base

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a platform’s attractiveness by subsidizing one side of users (Eisenmann, Parker & Van Alstyne, 2006) or by attacking another platform’s supply side (Cennamo & Santalo, 2013).

The results show a novel mechanism not yet found in the existing literature. The paper shows that leveraging a passive installed user base can be a viable demand-side mechanism to kickstart the positive feedback loop and to attract developers to support a new platform. This paper has revealed that firms selling their products on dominant platforms may be able to capitalize on the existence of an already established installed user base to kickstart the initial stages of their platform.

The Huawei case explains that this can be done if firms are able to provide (parts of) their platform offerings to not only their self-owned platform but also to the existing and dominant platform. This way, the new platform may be able to lure in providers of complementary goods who are attracted to the new platform because of the large installed base they are can provide their applications to on an already existing platform.

Managerial implications

Due to the increasing dependence of a growing number of firms on platform owners and rising worldwide trade tensions, this paper helps managers to understand how the dominant position of platform owners may affect their business and how such a dominant position could have negative ramifications for their business continuity. The paper shows how platform owners can have the power to unilaterally decide which actors are allowed on their platform and which actors can be expelled from the platform.

Moreover, to combat the powerful position of platform owners, this paper provides possible solutions to managers by showing how a parallel platform strategy may dampen the negative consequences following a sudden platform closure in both the short and long-term. The paper aids the managerial understanding of platform competition by focusing on the interconnectedness of customer demand, the strength of network externalities, and the implications for platform growth strategies. The paper aids managerial understanding of platform design and competition by providing an explanation of the contingencies in platform design (Appendix A).

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availability of complementary applications to their platform to quickly build up both a large number of applications and a large installed user base (Appendix K).

However, when managers aim to design a differentiated platform that focuses on the specific needs of a local customer base, in which strong within-country network externalities exist, managers should aim to sign exclusivity agreements with providers of high-quality local applications in a bid to become the go-to platform for the local customer group (Appendix M). Thus, the paper provides managers with new insights that can support managerial decision-making throughout different stages of a platform’s design and development.

Limitations and future research

Though this case study has shed new light on digital platform competition, the single case study approach inherently has important shortcomings. Firstly, this paper focuses on the case of a single firm, which means that the findings are hard to generalize across different contexts (Yin, 2017).

For example, there are stark differences between Western smartphone users and Chinese smartphone users, which may allow Chinese firms to build their ecosystem in their domestic market. However, whether the HarmonyOS platform can become a fierce competitor in markets in which Google’s Android and Apple’s iOS already satisfy the majority of customer needs remains to be seen. Therefore, future research should aim to extend the findings presented in this paper beyond the Chinese context. Moreover, in addition to the Huawei case discussed in this paper, future research should also investigate other firms that rely on the Android operating system for their business continuity.

Secondly, this paper only focuses on the smartphone operating systems industry, which gives a limited view of digital platform competition and platform internationalization. It may be possible that other operating systems, such as the PC operating systems, do not exhibit strong within-country and cross-country network externalities, thereby limiting the possibility that multiple platforms that focus on different geographical regions and local customer preferences can coexist.

Future research should expand the scope beyond the smartphone operating systems industry and

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Moreover, future research could quantitatively test the theoretical framework as provided in Appendix A to investigate the interrelationship between customer demand, the strength of location-bound network externalities, and the role of platform growth strategies to further aid the understanding of platform design and platform competition.

Conclusion

This paper started by showing how IT developments have led to the emergence of dominant platforms, in which the platform owners can unilaterally decide which actors it allows on its platform and which actors can get expelled from its platform. The paper has shown how dominant platforms can affect a firm’s business continuity by studying the case of Huawei, focusing on the implications and strategic considerations following Huawei’s expulsion from the Android ecosystem.

To more profoundly understand Huawei’s competitive response and the underlying theoretical reasoning for its parallel platform strategy, this paper developed a theoretical framework that aimed to explain the interrelationship between customer demand, the strength of location-bound network externalities, and the role of two dominant platform growth strategies (Appendix A).

Based on the underlying interrelationship between customer demand, the strength of location-bound network externalities, and two dominant platform growth strategies, this paper has aimed to explain how the platform structure in the smartphone operating systems industry may be affected. This paper shows - contrary to prior beliefs about the WTA paradigm in the smartphone operating systems industry - that the smartphone operating systems industry may allow multiple platforms to coexist if these platforms are sufficiently differentiated from each other. Therefore, this paper enriches the platform literature and explains how the role of geographically-grounded network externalities affects the competitive dynamics of this industry and how firms can capitalize on these findings by appropriately designing their platforms.

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THE EFFECTS AND IMPLICATIONS OF A DOUBLE INTERMEDIATION NETWORK FOLLOWING A SUDDEN PLATFORM CLOSURE

Table of Contents

Introduction

Theoretical Framework

Research Method

Results

Discussion and conclusion

References