US supply ban threatens to cripple Huawei’s global business

Another day, another escalation as Google heads a stampede of US companies apparently refusing to do business with Huawei.

As escalations go, however, this is a pretty big one. Reuters was the first report that Google has suspended some business with Huawei in response to the company being put on the US ‘entity list’, which means US companies need explicit permission from the US state before they’re allowed to sell anything to them. It seems that permission has been denied.

For Google this means denying access to those bits of Android Google licenses – mainly the Play Store and Google’s own mobile products such as the Gmail and Maps apps. Huawei can still access the core Android operating system as that has an open source license but, as companies such as Amazon have discovered, that’s pretty useless without all the other Google goodies.

We recently wrote that Huawei’s addition to the entity list is the most significant consequence of Trump’s executive order and here we have an immediate illustration of that. It looks like pretty much all other US companies are also rushing to comply with the new regulations, with Bloomberg reporting that Qualcomm and Intel are among others cutting of business with Huawei and others will presumably follow. Nikkei even reckons German chip-maker Infineon has joined the stampede.

Huawei already has an extensive chip-making operation of its own, so arguably it can cope without the likes of Qualcomm, but what about the millions of other bits and bobs that get crammed into a smartphone such as screens, cameras, memory, sensors, etc? A lot of these could be supplied by non-US companies like Samsung and, of course, Chinese ones, but there must surely be some areas in which Huawei is entirely reliant on the US supply chain.

But Google’s licensed mobile products and services are unique. An Android phone that doesn’t provide access to the Play store is massively diminished in its utility to the end user and Google Maps is the market leader. Google also has a near monopoly with YouTube and millions of people are reliant on things like Gmail, Google Pay, Play Movies. When there are so many great alternative Android smartphone vendors, why would anyone now buy a de-featured Huawei one?

In response to these reports Android moved to stress that it will continue to support existing Huawei Android phones in the following tweet.

Meanwhile Huawei issued the following statement. “Huawei has made substantial contributions to the development and growth of Android around the world. As one of Android’s key global partners, we have worked closely with their open-source platform to develop an ecosystem that has benefitted both users and the industry.

“Huawei will continue to provide security updates and after sales services to all existing Huawei and Honor smartphone and tablet products covering those have been sold or still in stock globally. We will continue to build a safe and sustainable software ecosystem, in order to provide the best experience for all users globally.”

Huawei has reportedly been working on its own smartphone OS in anticipation of this sort of thing happening but, as Microsoft, Samsung and others have found, there seems to be little public appetite for alternative to Android and iOS. Huawei may be able to sell a proprietary platform in China, where the Play Store is restricted anyway, but internationally this move will surely see Huawei smartphone sales fall off a cliff.

“If the US ban is permanent, we predict Huawei’s global smartphone shipments will tumble -25% in 2019,” Neil Mawston of Strategy Analytics told Telecoms.com. “If Huawei cannot offer Android’s wildly popular apps, like Maps or Gmail, Huawei’s smartphone demand outside China will collapse.

“If the US ban is temporary, and lifted within weeks, Huawei’s global smartphone growth will return to positive growth fairly swiftly. Huawei offers good smartphone models at decent prices through an extensive retail network, and it should recover reasonably well if it is allowed to compete.”

“We still don’t have a clear understanding of what Google has told Huawei and what elements of the Android operating system may be restricted, so it remains unclear what the ramifications will be,” said Ben Wood of CCS Insight. “However, any disruption in getting updates to the software or the associated applications would have considerable implications for Huawei’s consumer device business.”

There have been very few official statements on the matter from US companies, so Wood is right to tread carefully at this stage, but it’s hard to see this news as anything other than catastrophic for Huawei. Its consumer business, which is the most successful unit in the company, relies largely on Android to run its products and will surely be severely diminished by the Google move.

And there’s no reason to assume the damage will be contained there. Last year Huawei’s contemporary ZTE was almost driven out of business by a ban on US companies doing business with it. Huawei may have hedged its position regarding networking components suppliers more effectively than ZTE but it will presumably suffer greatly once those companies follow suit.

Huawei is one of the biggest companies in the world and has become so in spite of being largely excluded from the US market. The Chinese state will do everything it can to support Huawei, but at least some of its US suppliers offer unique products. At the very least this puts Huawei in a weak negotiating position with potential replacement partners and international customers, but the implications of this latest development are potentially existential.

Smartphone trafficking: have we finally cracked it?

Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this piece Ben Cade, CEO of Trustonic, gives us an overview of the black market in stolen smartphones.

Trafficking of fraudulently obtained and sold-but-not-activated smartphones has been a thorn in mobile network operators’ (MNOs) sides for almost as long as there have been smartphones. This is no surprise – wherever there is value, thieves will follow.

What did send shockwaves through the wider telecoms ecosystem recently, though, was Verizon and the GSM Association (GSMA) exposing the extent of the problem.

The GSMA conservatively estimates that over 4 million prepaid devices are trafficked in the United States each year, at a cost of $900 million. Verizon alone lost $190 million in 2018 – a huge increase from the $115 million that smartphone theft and fraud cost the carrier in 2017.

This criminal activity is occurring at all stages of the device lifecycle. Currently, between 5-25% of smartphone theft is committed during supply chain shipments, and in-store robberies are increasing dramatically. In 2017, Verizon reported a 200% year on year increase in store robberies. This impacts much more than the company’s bottom line, as employees and customers are put at risk of physical danger and fraud. Verizon also estimates that more than 7,000 customers have their identity stolen each month by thieves who use these identities to fraudulently order new smartphones and sell them on the black market.

With the figures and impact laid bare, it becomes clear that resolving this issue must be a priority. To do that, we must review the two solutions used by carriers until now, why they didn’t work, and what that can teach us about how to effectively reduce, and even prevent, smartphone trafficking.

Manual unlock codes

This is the most common approach currently in place, with most carriers leveraging software locks on active devices that prevent them from being used on other MNOs’ networks. This approach is reasonably straightforward to implement, but comes with many downsides.

First, it’s important to note that there are millions of consumers that would like to unlock their smartphone for legitimate reasons once the device finance has been settled. For these customers, receiving and inputting the unlock code manually involves phoning their operator’s customer service helpdesk, confirming their identity (usually through passwords), requesting and writing down the unlock code, attempting to input the code, and, usually, discovering they have made a mistake when either writing down or inputting the code and needing to go through the whole process again. It is time-consuming, error-prone, and deeply frustrating for the consumer, and creates high CARE costs for the mobile operator.

Historically, user and device authentication was a balancing act between customer experience and strong security (although thankfully, new technologies like biometrics are breaking this cycle). The uninitiated would be forgiven for thinking that the poor UX of manual unlock codes must be caused by strong security working in the background. Unfortunately, that’s not the case.

Not only are manual unlock codes open to abuse by unscrupulous carrier employees, which is why they can be bought and sold in black markets on the dark web, but they don’t protect devices until after they have been activated.

And, if the frustrating UX and limited security wasn’t enough, the manual unlock process is expensive to maintain for carriers, requiring large expenditure in contact centre systems and staffing.

Carriers have attempted to improve this process, but with limited results. Verizon, for example, is in the process of implementing a temporary lock period of 60 days to prevent customers from fraudulently switching to another operator. After the 60 day period has elapsed the smartphones can then be unlocked. While this does address the issues around poor user experience, therefore also reducing CARE costs, it still does not protect devices pre-activation.

Kill switches

‘Kill switches’ give consumers the power to deactivate devices remotely if stolen. In areas where this functionality is required by law it has been a successful theft deterrent. The state of California, for example, experienced a 22% decrease in smartphone related thefts within a year of the legislation being enacted.

Despite its successes, many mobile operators remain opposed to kill switches. Carriers have concerns about a negative impact on revenue, and the solution shares an issue with manual unlock codes – a large proportion of smartphone theft happens pre-activation. As kill switches do not remove the incentive for thieves to steal devices in transit, the risk is simply moved from consumers to supply chain employees and revenue is still lost.

So, with legacy solutions insufficient, where do we go from here?

Hardware-based device protection

The most recent development in this space differs from other solutions because it is rooted in device hardware, rather than being purely software based. Lock / unlock technology is embedded into devices during manufacture and does not require consumer activation. This means that the device is protected from the moment it leaves the production line and throughout its lifecycle, resolving a key problem left unanswered by post-activation manual unlock codes and kill switches. This means devices cannot be used if stolen, removing the incentive for fraudsters.

The use of a secure hardware “Root of Trust” means that manual unlock codes are unnecessary, the lock/unlock process is impossible to hack, even if the smartphone is re-flashed, and, crucially, that the mobile operator can lock the smartphone again at any point in the future if a subscriber does not fulfil their contractual obligations.

Already used by two of the world’s largest operators due to the ease with which the solution can be deployed at scale, the process is also smooth and simple at the consumer level. Customers only need to launch the secure, pre-loaded app on the device and press the “request unlock” button. If they meet the carrier’s eligibility criteria (for example if they have been a paying customer for a specific period of time), the phone is then automatically unlocked. The improved user experience is better for carriers’ customer relations and their bottom line, as much less investment in contact centres is required.

Removing the incentive

The combination of embedded hardware protection and software-based kill switches remove the incentive for smartphone trafficking by protecting devices throughout their lifecycle. Until the device is in a consumer’s hands, and even after, carriers can leverage the secure hardware to render devices unusable. The addition of kill switch technology enables consumers to de-activate their own smartphones if they are targeted individually, further reducing the opportunities for smartphone thieves to profit from their criminal activity.

The cost and process efficiencies are further benefits of a solution that is already protecting revenue, individuals throughout the supply chain and consumers from the dangers posed by organized smartphone theft and trafficking rings.

This is a small but significant change in the value chain that could have a huge impact globally – enabling carriers to crack smartphone crime once and for all.

 

Ben Cade TrustonicBen has a proven track record in establishing and scaling businesses. Prior to Trustonic, Ben founded Linaro the Open Source Software venture backed by IBM, Samsung, ARM and other key industry stakeholders. During his tenure at ARM he established and led the Security Division, helped scale the Infrastructure Business Unit from zero revenue to eight figures in under 18 months, and helped establish the ARM M&A and Corporate Venture Capital function. Over his career Ben has worked in major Asian and European blue chip companies as well as at the front line in small and medium enterprises (SMEs) operating globally. His passion lies in taking bold ideas and great people and turning them into businesses. He holds an Executive MBA from the London Business School and a Masters in Engineering from Southampton University.

Huawei set to launch 5G telly – report

A report is claiming Huawei wants to become a major TV and PC player and will use its 5G expertise as a differentiator.

The scoop comes courtesy of Nikkei Asian Review which was contacted by people who think they know what they’re talking about. Those people reckon Huawei is going big on TVs and will not only stick a 5G modem in its first device, which could even be launched this year, but will go with 8k resolution.

It looks like part of the point of this telly will be to show how great 5G is, which let’s not forget is a far bigger concern to Huawei, by steaming this mega high definition video wirelessly. Apparently Huawei fancies becoming as Samsung-like consumer electronics giant and judging by the momentum it has in the smartphone market it seems to have a decent chance of succeeding.

As part of that drive Nikkei reports that Huawei wants to become a top five PC vendor, which is a strange aspiration since that market has been in decline for years and the margins are miniscule. Again its motivation might be provide another market for its 5G modems as well as another front in Huawei’s continued search for western brand recognition.

Huawei has been making smartphone CPUs for a while but seems to fancy a move up to PC ones too. These would presumably be ARM-based and intended for Chromebook-style laptops rather than gaming PCs. Huawei started making PCs back in 2017 and apparently already has a 4% market share in China.

Global smartphone shipments plunge to lowest level since 2014

The decline of the global smartphone market continues but nobody sent Huawei the memo as it raced past Apple into second place.

According to Strategy Analytics, from which we derive the majority of our smartphone numbers below, 330.4 million smartphone units were shipped in Q1 2019. This represented a year-on-year decline of 4% and marked the lowest quarterly total since Q3 2014. Among the vendors Apple was the biggest loser and was easily overtaken for second place by Huawei thanks to remarkable 50% year-on-year shipment growth.

“The global smartphone market has declined again on an annual basis, but the fall is less severe than before, and this was the industry’s best performance for three quarters,” said SA’s Linda Sui. “Global smartphone shipments are finally showing signs of stabilizing, due to relatively improved demand in major markets like China. The outlook for later this year is improving.”

“Huawei surged 50% annually and outgrew all major rivals to ship 59.1 million smartphones worldwide during Q1 2019, up from 39.3 million in Q1 2018,” said Neil Mawston of SA. “Huawei captured a record 18 percent global smartphone marketshare in Q1 2019. Huawei is closing in on Samsung and streaking ahead of Apple, due to its strong presence across China, Western Europe and Africa.”

“Apple iPhone shipped 43.1 million units to capture 13 percent global smartphone marketshare in Q1 2019, dipping from 15 percent a year ago,” said Woody Oh of SA. “Apple lost ground in China during the quarter and is struggling to make headway in price-sensitive India. However, decent price cuts in China and India during recent weeks indicate the iPhone will bounce back slightly in those two countries in the next quarter.”

While shipments might be going down the toilet, the total value of those shipments seems to be stable thanks to increasing average selling prices. “By revenue, the situation is healthier, due to higher average prices (like expensive iPhones),” said Mawston. “Global revenue today is broadly around the same level as the average quarter last year.”

smartphone shipments q1 2019

Samsung’s profit crashes on weak semiconductor sales

Samsung Electronics reported a net profit decline of 57% in Q1, with total revenue going down by 14%. The semiconductor unit suffered the worst.

Samsung’s quarterly revenue went down from KRW60.56 trillion ($52 billion) a year ago to KRW52.39 ($45 billion) in Q1. The gross margin level came down from 47.3% to 37.5%. The operating profit dropped to KRW6.23 trillion ($5.3 billion) from KRW15.64 trillion ($13 billion), a decline of 60.2%. The net profit came down by 57% to KRW5.04 trillion ($4.4 billion).

 Samsung 2019_1Q_income

On business unit level, Device Solutions reported a 27% drop in revenue, the sharpest decline among all the business units. Inside the unit, Memory chips declined by 34%. Samsung attributed the weakness to “inventory adjustments at major customers”, indicating its customers including other smartphone makers, have been selling slower than expected.

IT & Mobile Communications, Samsung’s largest business unit by sales, the business was more stable. Revenue from the handset business dropped by 4% from a year ago, but grew sequentially by 17%. Samsung saw strong demand for its Galaxy S10 products, but the de-focus of mid-range and lower products limited the volume growth. The recent debacle of S10 fold, high profile as it may be, should not have had any material impact on Q1 as it was scheduled to launch in Q2. Samsung’s network business, though small in comparison to its competitors, reported a strong revenue growth of 62% to reach KRW1.28 trillion ($1.1 billion), benefiting from the “accelerating commercialization of 5G in Korea”.

Samsung 2019_1Q_BU

Samsung gave cautious lift to its outlook for Q2 but more optimistic with the second half of the year. It foresees the memory chip market stabilising in Q2 and stronger growth in the second half due to seasonality and product line refreshing. On the mobile side, Samsung sees growth in shipment in Q2 thanks to continued demand for the S10 products and positive market response to its new mid-range A series. It sees the 5G products and the fold form-factor making material contribution in the second half.

A weak France overshadowed Orange’s Q1

The telecom operator Orange reported a flat Q1, with a weak performance in its home market partially compensated by the strength in Africa and the Middle East.

Orange reported a set of stable top line numbers in its first quarter results. On Group level, the total revenue of €10.185 billion was largely flat from a year ago (-0.1%), and the EBITDAaL (earnings before interest, tax, depreciation and amortisation after lease) improved by 0.7% to reach €2.583. Due to the 8% increase in eCAPEX (“economic” CAPEX), the total operating cash flow decline by 10.2% to €951 million.

Orange 2019Q1 Group level numbers.pdf

Commenting on the results, Stéphane Richard, Chairman and CEO of the Orange Group, said that “the Group succeeded in maintaining its high quality commercial performance in spite of a particularly challenging competitive context notably in our two principal countries of France and Spain. Our strategy is paying off since EBITDAal is continuing to grow while revenues remain stable, allo wing us to reaffirm our 2019 objectives”

On geography level, France, its home and biggest market is going through a weak period. Despite registering net gain in the number of customers, the total income dropped by 1.8% to €4.408 billion, the first quarterly decline in two years. The company blamed competition, a one-off promotion of digital reading offer towards the end of the quarter, and “a weaker performance on high-end equipment sales in the 1st quarter of this year”. The move to “Convergence” was positive, but not fast enough to offset the lose in narrowband customers. The competition pressure is still visible. The Sosh package (home broadband + mobile) Orange rolled out to combat Free is gaining weight among its broadband customers, which resulted in a decline of revenues despite the growth in customer base.

Orange’s European markets, including Spain and the rest of Europe, reported modest growth, with strength in Poland (+2.6%) and Belgium & Luxembourg (+3.8%) offset by a weaker Central Europe (-1.9%). The bright spot was Africa and Middle East, which registered a 5.3% growth to reach €1.349 billion revenue, taking the market’s total revenue above Spain and just marginally behind the rest of Europe. The company’s drive to extend its 4G coverage in Africa is paying off, with mobile data service contributing to 2/3 of its mobile growth. Orange Money also saw strong enthusiasm, with the revenue up by 29% and total number of monthly active users totalling 15.5 million.

Both the Q1 results and outlook to the rest of the year spelled mixed messages for the wider telecom market and Orange’s suppliers, but negatives look to outweigh positives. On the consumer market side, the slowdown of high-end smartphone sales and prolonged replacement cycle has once again been demonstrated in the weak numbers in France. On the network market side, Orange predicts more efficiency. This includes both the network sharing deal signed with Vodafone Spain, which is expected to deliver €800 million savings over ten years, and an overall reduction in CAPEX this year.

As the CEO said, “while the level of eCapex for this quarter is higher, it should reduce slightly for 2019 as a whole, as predicted, excluding the effect of the network sharing agreement with Vodafone in Spain announced on 25 April.” This means, to achieve the annual target of reduced CAPEX, the spending will drop much faster in the rest of year. There is no timetable to start 5G auction in France yet, but it will be safe to say that any expectations of 5G spending extravaganza will be misplaced.

On the positive side, Orange has seen its efforts to diversify its business gaining traction, especially in IoT and smart homes. But these areas, fast as the growth may be, only make a small portion of Orange’s total business.

Apple is facing complaints from developers for removing competing apps

Apps that help users control screen time have been removed or been demanded to curtail their features after Apple rolled out similar features.

Many app makers have claimed that their parental control and screen time alert apps have either been removed by Apple or have been asked to change the features, shortly after Apple rolled out similar features on iOS, reported The New York Times. 11 out of the 17 most downloaded apps of this category have been taken down, according to the research by the app analytics firm Sensor Tower and the NYT.

Apple included screen time control tools when iOS 12 was unveiled at the WWDC event in June last year, integrated in the Settings menu when the new OS was officially launched. They enabled parents to control how much time their kids can spend on iPhones and iPads, as well as alert users the time they spend on their iOS devices. But they are not as feature rich as some specialised 3rd party apps, the developers told the NYT. They were also not terribly robust. Only a few days after the new iOS was released to the public, many kids already found ways to bypass the control, according to the parents who shared their experiences on Reddit.

Apple’s official response claimed that these apps were removed to help “protect our children from technologies that could be used to violate their privacy and security.” Its spokesperson also denied that the apps were removed for competition reasons, saying, “we treat all apps the same, including those that compete with our own services.”

However, both the timing and the reasons given by Apple would raise some eyebrows. While its defence of limiting the device management features for enterprise use is plausible, as was detailed in the response to MacRumor by Phil Schiller, Apple’s SVP for Worldwide Marketing, some other key features that have been in place for years and have been repeatedly approved by Apple are being asked to be removed, some developers told the newspaper. For example, these apps support device level blocking of certain content while Apple’s tool only blocks content inside the Safari browser.

At least three of the app developers, Kidslox, Qustodio, and Kaspersky Lab have filed complaints at the EU’s competition commission.

It is less likely that Apple purges the competing apps for the revenue. On one hand, Apple does not directly get revenue from their screen time apps, it is included in the phone price. On the other hand, by taking down these apps Apple is losing its share of the payment the apps receive (30%). A more plausible reason to trigger the Apple action is these apps can be used cross-platform, which means parents on iPhone can control their kids’ screen time on Android. It is not entirely out of the question that Apple may be using some feeble excuses to lock in as many users as possible.

This is another example that Apple is taking its role as platform and curator of apps too far, and inadvertently lending support to the rhetoric of Elizabeth Warren, the Democratic presidential candidate for 2020, when she said, without naming Apple, that “either they run the platform or they play in the store. They don’t get to do both at the same time.” These complaints also sound similar to Spotify’s accusation that Apple is being both the referee and a player.

Oppo zooms into Europe with the Reno 5G smartphone

Chinese smartphone maker Oppo has joined the likes of Xiaomi in seeking its fortunes further afield.

Oppo held its official European launch yesterday, with its new Reno 5G smartphone leading the charge. As well as a 5G modem, the main USP seems to be a camera that promises ‘lossless’ 10x hybrid zoom. Digital zoom tends to result in a loss of resolution, while optical zoom requires the physical movement of the lens, something that’s difficult to achieve to any great extend in a smartphone camera. Oppo seems to be saying it has achieved the best of both worlds.

On top of that (literally) is a front camera that pings out from the upper edge of the phone, thus enabling it to provide a screen uninterrupted by holes, notches, etc. Oppo has decided to equate this gimmick to a shark’s fin for reasons best known to its marketing department. The screen is a hefty 6.6” 1080p AMOLED and it comes with 256GB storage, so this is a pretty top-specced device.

In the UK EE will be the exclusive supplier of the Oppo Reno 5G, initially at least. “EE customers with an Oppo Reno 5G will be able to get the most from our new super-fast, high capacity 5G network,” said Sharon Meadows, Director of Devices, Partnerships & Business Development at EE. “Whether they are watching 4K content, trying out AR experiences or gaming with their friends, the Reno 5G will let them tap into the game-changing speeds and connectivity that 5G will bring.”

EE hasn’t committed to a price or release date but we would expect it to cost £800-900 SIM-free. Oppo has been a top five global smartphone brand for some time but has been slower than fellow Chinese vendors Huawei and Xiaomi to expand internationally. The European launch of the Reno 5G changes that and seems like a fairly aggressive statement of intent by Oppo. Here’s a vid of the launch.