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    China Business
     Aug 24, 2010
OPhone fails to connect
By Sherman So

HONG KONG - An attempt by China Mobile, the world's largest mobile phone operator, to grab the lion's share of China's smart-phone market through the company's "OPhone" appears to have failed, less than one year after its launch.

A change of leadership at China Mobile may be the last nail in the coffin for the project, launched last September. The OPhone, based on the Google-backed Android mobile phone operating system, was intended to capture half of China's growing smart-phone market, but it has received less-than-expected support from the phone industry.

China Mobile developed its own mobile operating system, Open Mobile System (OMS), and last year branded phones that use it


OPhones. The OMS, while based on the Android open source system, was tweaked by the company to localize it to China and China Mobile's own agenda. For example, Gmail and Google Map (included in the standard Android package) were removed, and China Mobile's own applications, such as its 139 e-mail, added.

"China Mobile's OPhone has failed," said a Beijing-based venture capitalist, who has invested in many mobile related companies in China. Talk of the project's failure has grown within the industry since Li Yue replaced Wang Jianzhou, China mobile's longtime boss, as general manager of the company in June.

Wang will continue as China Mobile chairman and will also head China Mobile Group as Communist Party secretary and chairman of its recently established board, the company said in June. The person actually in charge of the world's largest mobile operator will be Li, the company's former vice general manager.

"Bill Huang, the guy behind the OPhone project, belongs to Wang's camp. With Wang's departure, he [Huang] might not receive as much support as before," said a Hong Kong-based analyst in June, "The OPhone project will probably fail."

Huang, also known as Huang Xiaoqing, is president of China Mobile's Institute of Research. Apart from OPhone, he is also involved in China Mobile's other technology initiatives, such as TD-LTE, the next generation of China's home-grown 3G mobile standard, TD-SCDMA. Rivals China Unicom and the country's third mobile operator, China Telecom, use worldwide standard operating systems, WCDMA and CDMA2000.

Another project that began under Wang's reign, a proprietary 2.4GHz technology to use as a nationwide contactless mobile payment system, has also been affected since Li took over the leadership at China Mobile. "The mobile payment project is on hold right now," said an industry insider familiar with the situation.
The payment system is similar to the Octopus debit cards in widespread use in Hong Kong and elsewhere, but where these are stand-alone cards, China Mobile's system is built into a phone's sim card. For payments such as taking a subway ride or buying a cup of coffee, users need only to swipe their mobile phones over the card readers.

The project is now under review, even though China Mobile has already ordered millions of payment-enabled sim cards and hundreds of thousands of card readers, said the source.

Hopes for the OPhone project were initially high within China Mobile. "We hope OPhone will take at least 50% of China's smart-phone market in three to five years," Huang said at a ceremony last September when OPhone was officially launched, according to a China Daily report. The ceremony also showcased various OPhone handsets made by Lenovo, Dell, Philips and Samsung.

China Mobile at that time saw OPhone as a competitive lever against rivals such as China Unicom, which has a deal with Apple to sell iPhones in China.

"The release of the OPhone operating system is likely to dramatically cut the costs of developing TD-SCDMA handsets by mobile-phone makers," said Wang at the ceremony. Competitiveness of China Mobile 3G handsets would as a result be boosted, he said.

Analysts at that time also thought OPhone could help China Mobile to compete against its rivals. "The launch of OPhone, if it is successful, should help China Mobile to fend off challenges from iPhone," said Allan Ng, an analyst at BOC International.

It was believed that with its own operating system, China Mobile would be able to commission customized phones from handset makers and be in a better position to negotiate profit sharing with handset makers and application developers. This would help China Mobile to boost its profit growth, which has been slowing in the face of competition and increased maturity of the market.

However, handset makers did not embrace the new standard as much as China Mobile had hoped. One of the chief complaints is that the OPhone design is always slow to catch up with the latest trend.

"China Mobile has to add its own modifications on top of Android, therefore OPhone is always one generation behind Android in development," said the industry insider. "For example, currently, the latest Android version is 2.2. But the latest OPhone is built on top of Android version 1.5." He estimated OPhone's development to be three to six months behind Android's. "This is too long for handset makers, as trends change fast in this industry," the insider said.

Handset makers also worried about the popularity of TD-SCDMA. Although China Mobile has about 70% of the country's mobile-phone users, its portion of 3G users, wanting faster access to the Internet and data downloads, is much lower. According to China's Ministry of Industry and Information Technology, China Mobile had 42.5% of the country's total 3G users at the end of March, while China Telecom and China Unicom had 30.8% and 26.7%.

"Although China Mobile gives a 20% subsidy to handset makers for manufacturing OPhones, that might not enough to cover the risks involved," said the industry insider.

Application developers are also holding back on working on the OPhone. "They [China Mobile] are making an open standard into a closed one. This is not welcomed among application developers," said an industry specialist. Some application developers also complain that the profit sharing is not fair. "China Mobile takes about half of the revenue," said one. By April, only 600 applications had been developed specifically for OPhone.

Flora Wu, principal analyst of BDA, a Beijing-based market research firm, estimated that OPhone sales are less than half of the number of iPhones bought in China. BDA forecasts that up to 2 million iPhones could be sold in China this year after an estimated 300,000 were bought in 2009. "That is only through China Unicom, the official channel," said Wu.

Many iPhone handsets are also carried into China from Hong Kong, the United Kingdom and the United States, where the price is cheaper and newer models are available. For example, iPhone 4 became available in Hong Kong in early August but will not officially be available in China until September. It is estimated there are already at least 3 million "parallel imported" iPhones in China.

Although OPhone has probably failed, industry experts believe Android-based phones will be very popular in China. "Right now, Android is still rather new," said Wu. "There are only about 10 models of Android phone available in China at present, but many handset makers, such as Motorola, Sharp, Samsung, Lenovo, Huawei, and others plan to launch Andriod phones in China."

Android is becoming the de facto standard for smart-phones in China as it is free and open source, allowing desginers to have more integration and control over pre-loading applications and distribution, said Benjamin Joffe, a telecom expert based in Beijing. "Many manufacturers are already on board, including foreign ones," he said.

More than phonemakers are backing Android. Mediatek, a major chipset supplier for low-end mobile phones, plans to ship Android-supported chips later this year. "In the third quarter, a 400 MHz Android chip will be available," said Alvin Knock, analyst of JP Morgan for Asia Pacific technology hardware. "This might be a bit too slow to run Android, as the operating system needs a fast processor. But by the first quarter next year, a 700MHz model will be available. This will be fast enough. By the end of next year, a 1GHz model will be ready."

Last year, the Taiwan-based firm shipped a total of 360 million mobile chips, half of them sold in China. Between 30% and 40% of branded handsets and 90% of the no-brand handsets sold in China used Mediatek chips.

Worldwide, Android became the third-most-popular operating system for smart-phones in the second quarter, with sales of 10.61 million units and a 17.2% market share, up from only 1.8% a year earlier, according to US based researcher Gartner Inc. Apple's iPhone OS slipped to fourth with a 14.2% share.

Nokia's Symbian OS retained the top spot with 41.2% market share, after a loss of eight points from a year earlier. Canada's Research In Motion, which offers BlackBerry services, was second with 18.2%.

Sherman So is a Hong Kong-based correspondent and co-author of Red Wired: China's Internet Revolution.

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