Developed by the Chinese e-commerce titan Alibaba in 2011, YunOS has become the third largest mobile operating system in China. This year, Alibaba set the ambitious target of shipping 100 million YunOS-based smart phones by the end of 2016. Meizu, the rising Chinese vendor that received a US$590 million investment from Alibaba in 2015, has alone committed to ship 15 million units.

In August, Meizu launched a new YunOS-powered smart phone, the M3E, the highlight of which is its ability to remotely control the Roewe RX5, an ‘Internet-connected car’ jointly launched by SAIC Motor and Alibaba, featuring the ‘YunOS for Car’ operating system. With the launch of the M3E, the first phone in China that can connect to an in-car infotainment system, Alibaba has shown great ambitions in establishing itself as a leading player in the Internet of Things (IoT) by virtue of its self-built operating system. But expanding the YunOS smart phone user base must be Alibaba’s next step.

Alibaba’s main intentions are to succeed in IoT and integrate mobile services

By investing billions of dollars and making Alibaba’s CTO Dr Wang Jian the head of the YunOS business unit, the company is betting big on its mobile platform. There are two main reasons for this.

  • First and foremost, YunOS offers Alibaba opportunities to be a market leader in IoT. In areas such as the smart home and connected cars, where the market is still fragmented and without a dominant operating system, YunOS has opportunities to shake things up with some unique selling points, one of which is its interoperable capabilities. Alibaba has launched variants of YunOS, such as ‘YunOS for Wear’, ‘YunOS for Car’ and ‘YunOS for Home’, to power various devices. The unified operating system that enables the connection between different devices will give Alibaba access to a vast number of terminals and thus allow its services to enter consumers’ everyday lives.
  • Secondly, by pushing its own operating system, Alibaba aims to integrate its multiple mobile services seamlessly with devices so that it can gain greater access to user data. Apart from Taobao and the largest third-party payment application, Alipay, Alibaba has also invested in applications in a wide range of segments, such as web browsing, maps, music, video and social networking. By expanding its product range beyond smart phones, Alibaba will be able to integrate most related services into different use scenarios to improve the possibility and profitability of services, for example, embedding online shopping services into kitchen appliances.

Government support is a huge advantage

YunOS enjoys wide support from government and public sectors. This is because home-grown platforms are considered more ‘reliable in regards of national security’ than Android and iOS in these areas. YunOS is the only platform that passed the National Research Center for Information Technology Security’s security test. In 2014, YunOS worked with the Ministry of Public Security on its PMOS, a system designed particularly for the police force; it is also the only mobile platform on the government procurement list published in July 2014. At the launch event for YunOS 5 last December, the vice minister of the Ministry of Industry and Information Technology declared that the Chinese government will fully support the development of YunOS, through policy and resource allocation and a proposed goal of 100 million YunOS users in 2016. As the Chinese government is pushing forward the adoption of local technologies, YunOS is well-placed to benefit.

Partnering with IDHs brought YunOS a breakthrough

The platform was unable to stand out in the Chinese market for a long time. Three years after launch, YunOS’ share still stood at less than 1%. From the end of 2014, Alibaba has been pushing to increase its installed base, which led to the market share of YunOS-based smart phones in China leaping from 0.9% in Q4 2014 to 5.2% in Q2 2016. Three main factors helped:

  • Rather than only working with vendors, Alibaba emphasized partnering with independent design houses (IDHs). IDHs are outsourcing companies that are developing YunOS and offering solutions based on chipmakers’ integrated circuits. They offer services to multiple vendors and their production, shipments and geographic coverage are usually greater than that of small vendors. Partnerships reduce R&D costs for small vendors and improve efficiency as they offer integrated solutions. In 2015, the largest IDH partner for YunOS was Water World. According to Alibaba, this partnership contributed more than a quarter of YunOS’ total users last year.
  • Alibaba provided strong financial support to its partners. Last year, it invested US$590 million to acquire a stake in Meizu. This investment accelerated Meizu’s development, with its shipments increasing nearly 400% in 2015 and making it the seventh largest vendor in China. For other small vendors, such as Little Pepper and Lephone, the company also offers subsidies based on the vendors’ shipments, as long as the owners use the devices. This incentive is appealing to small vendors due to their slim profit margins. It is also beneficial to operators that need a lot of low-cost LTE-enabled smart phones to increase their market share. The subsidies provided by Alibaba will reduce operators’ cost of procuring from the small vendors. Therefore, YunOS can use operators’ vast channel presence to expand its user base quickly.
  • Alibaba used its strength in e-commerce, data analytics and cloud services to provide a customized search, app store and entertainment for vendors to improve the ARPU (average revenue per user) of their devices. For example, Doov, a small smart phone vendor targeting female users, obtained user habit data from Alibaba’s cloud computing to better customize its smart phones for its intended audience. The big data gave Doov insights so that it could uncover the potential of cross-selling products and services. In November 2015, Doov launched the L5 Pro with YunOS, based on Aliyun’s cloud computing services. It is equipped with the ‘Xiaoyun’ human-interactive program to act as a voice assistant in daily life as well as to entertain users.

Lack of support from large vendors is YunOS’ Achilles’ heel

Though YunOS had a breakthrough in 2015, Canalys remains skeptical about it becoming a large platform in China. It is aiming for 100 million smart phone shipments in 2016, which, in Canalys’ view, will be tough to achieve.

Lack of support from large vendors is YunOS’ fatal weakness. Its compatibility with Android apps ensures users have access to numerous applications, but it led to Google’s objection, prohibiting major Android smart phone vendors from producing YunOS devices. Hence, Alibaba can only work with local emerging vendors, which have little visibility, such as Doov and Little Pepper. Though Alibaba offers a wide range of support, covering financial, channel, user data analytics and cloud services, in a bid to drive the growth of small vendors and build an integrated ecosystem, Canalys doubts whether these small vendors can become major players considering competition in China is getting much more intense. Currently, most YunOS partners are serving consumers in the lower-tier cities with low-end handsets. The most popular devices are the ones priced below CNY500 (US$75). Even Meizu, which is YunOS’ largest smart phone partner, only has YunOS on its low-end Meilan series rather than its flagship devices. Recently, Meizu unveiled three YunOS-powered smart phones, the M3E, U10 and U20, all priced under US$200. Meizu is aiming for 25 million shipments in 2016, of which 15 million are intended to be YunOS phones. But, so far, YunOS-based models still account for a small portion of Meizu’s portfolio and none of them are flagship devices. It is questionable whether Meizu can meet its 15 million target this year. Canalys believes as more major vendors enter lower-tier cities, it will be increasingly difficult for small vendors to maintain the growth momentum.

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