Chinese Internet Giants Get Into the Mobile Game
02/27/2015 @ 5:42AM
Dow Jones News
By Juro Osawa
HONG KONG--The battle over mobile operating systems and app distribution is intensifying in China as Internet giants Tencent Holdings Ltd. and Alibaba Group Holding Ltd. step up their efforts to influence how consumers use smartphones.
Next week, Tencent--whose main businesses are social networks and online games--will start a trial service for Tencent OS, its customized version of Google Inc.'s Android operating system. Earlier this month, Alibaba, China's biggest e-commerce company, agreed to buy a minority stake in Chinese handset maker Meizu Technology Co. for $590 million, whereby the two companies plan to collaborate to further develop Alibaba's existing mobile operating system.
The stakes are high. In China, where Google's Play app store and its other services like search and maps are blocked, local handset makers and Internet companies could earn additional revenue by controlling the core mobile software as well as app distribution. Outside China, most handset makers modify the look and feel of Android's interface with their additional software, but users typically download their apps from Google Play, allowing Google to take a cut from app makers' sales. A rare exception among well-known brands is Amazon.com Inc.'s Fire Phone, which uses a customized version of Android that doesn't have Google Play or other Google services.
Like the Amazon Fire Phone, Android phones sold in China also lack Google services. Having one's own version of Android in China is almost like having a system that is independent from Google, industry executives say. For example, Xiaomi Corp., one of China's best-selling smartphone makers, equips each handset with its Android-based operating system called MIUI that comes with its own app store.
"The most critical thing is who controls the gateway for mobile traffic, " and the operating system plays a key role, said Tony Chu, a portfolio manager for U.S. fund management firm RS Investments, which bought Alibaba shares in the e-commerce company's $25 billion initial public offering last year.
Tencent already offers its own app store that Android users can install on their phones. But the benefits of having the app store can be limited if the operating system is controlled by handset makers, industry executives say.
Last month, Tencent set up a website where it called on people to apply to participate in a trial for Tencent OS. After receiving nearly 62,000 applications, Tencent picked 200 participants for the trial, which begins March 3.
For Tencent, the main challenge is convincing device makers to use Tencent OS. Analysts say Tencent could offer incentives such as subsidies, technical support and social-media marketing opportunities. As the mobile hardware market is becoming less lucrative, some handset makers may want to work with Tencent to move ahead of competitors.
A Tencent spokeswoman declined to comment on the company's strategy.
Earlier attempts by Chinese Internet companies to expand in the mobile OS market yielded little success. Alibaba and search provider Baidu Inc. launched their own mobile operating systems in 2011, but struggled to find strong handset partners with whom they could team up. Tencent developed its own version of Android called Tita in 2012, only to scrap the project.
But now, the Internet companies are renewing their efforts and investing in mobile software as a way to gain more control over smartphone user behavior and to collect data. In addition, Xiaomi's success with its MIUI operating system is putting more pressure on Internet companies to step up their game, analysts say.
Xiaomi's app store, a key component of MIUI, had 12 billion cumulative app downloads at the end of last year, marking a sixfold increase in just one year. Xiaomi wants MIUI to be "an Internet services platform with a number of integrated services built into it," Vice President Hugo Barra said at a company event in San Francisco earlier this month.
"What Xiaomi is trying to do is similar to what Internet companies want to do," said Forrester Research analyst Bryan Wang. Following Xiaomi's success, other Chinese handset makers are also trying to turn their versions of Android into mobile service platforms, creating a potential threat to Internet companies.
Alibaba invested in Meizu after making repeated attempts to promote its YunOS, which had 10 million users as of October. The operating system could make Alibaba's mobile platform more complete, given that the company has already acquired several major mobile software companies such as UCWeb Inc., a Chinese mobile browser maker that also runs an app store, and mobile-map maker AutoNavi Holdings Ltd.
In October, Meizu unveiled a version of its smartphone that uses Alibaba's YunOS. Software engineers at the two companies are working together to refine the mobile operating system for future handsets, according to Meizu.
Through the YunOS, Alibaba is trying to create a better distribution system for its e-commerce apps as well as the Alipay online-payment service, UCWeb and AutoNavi, an Alibaba spokeswoman said.
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