THE EFFECTS and IMPLICATIONS of a DOUBLE INTERMEDIATION NETWORK FOLLOWING a SUDDEN PLATFORM CLOSURE How the U.S. Blacklisting Of
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THE EFFECTS AND IMPLICATIONS OF A DOUBLE INTERMEDIATION NETWORK FOLLOWING A SUDDEN PLATFORM CLOSURE 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 contingencies surrounding the interconnectedness between customer demand, the strength of location- bound network externalities, and platform growth strategies. The paper examines how the interplay of these concepts affects a firm’s platform design choices and its platform positioning. Different types of network externalities may give rise to a new kind of platform structure - a double intermediation network - in the smartphone operating systems industry. From a managerial perspective, this paper shows the role of geographically-grounded customer demand on platform growth strategies. The paper argues that an app market competition strategy should be favored if the platform aims to focus on homogeneous customer needs and the exploitation of cross-country network externalities. When a platform is focused on differentiated customer needs and the exploitation of within-country network externalities, platform providers should ensure the exclusive availability of local and highly-valued applications. Table of Contents Introduction 2 Problem statement 2 Study purpose 3 Research question 3 Theoretical Framework 6 Platform competition 6 Platform growth strategies 7 Challenging the WTA paradigm 8 Research Method 11 Research design 11 Research setting 11 Case selection and description 12 Data collection 12 Data analysis 14 Results 16 A Three-Dimensional Ban 16 Short-term Strategy: AOSP and HMS 19 Long-term Strategy: U.S. Independence 22 Discussion and conclusion 26 Theoretical contributions 28 Managerial implications 29 Limitations and future research 30 Conclusion 31 References 33 Appendices 46 1 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. Regarding the rise of information technology and digital platforms, researchers found that sophisticated information technology systems have allowed digital platforms to scale at little to no costs (Eisenmann, Parker & Alstyne, 2006), creating platforms that span multiple countries or even multiple continents (Stallkamp & Schotter, 2019). These advancements in IT have allowed platforms to grow even further, resulting in IT firms that have created some of the most powerful and dominant platforms known today. As a consequence of the increasing dominance of platforms propelled by advanced IT systems, the dependence on these platforms has grown for all participating actors (Evans & Schmalensee, 2016). 2 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. From an academic perspective, the platform literature has mostly ignored the existence of national borders and assumed that digital platforms operate in homogeneous markets (Lee, Song & Yang, 2016). More specifically, Stallkamp & Schotter (2019) argued that the smartphone operating systems industry is likely to be a market in which consumers have homogeneous needs. This is supported by Siddiqui & Li (2017), who suggested that digital platforms are international by default, indicating that local differences in customer taste are either non-existent or not worthwhile for a platform to exploit. 3 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