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.
Write to Juro Osawa at juro.osawa@wsj.com
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