China's New Smartphone OS May Be A Dark Horse In The Mobile Horse Race

by: Michael Blair

A Chinese firm with government support has quietly built a new mobile OS. Is it a threat to Google's (NASDAQ:GOOG), Apple's (NASDAQ:AAPL) iOS or Microsoft's (NASDAQ:MSFT) Windows phone? In the long term and in China perhaps, but not today.

Chinese company Shanghai Liantong in partnership with the China Institute of Software at the Chinese Academy of Sciences with the support of the Chinese government have launched a new mobile operating system known as COS, an acronym for China Operating System. SA subscriber Samuel Liu tipped me to the development for which I thank him greatly. Samuel commutes between North America and Asia relatively frequently and has been a terrific source of insights and common sense in trying to understand the Asian consumer.

COS is interesting in that it seems not to have the security risks of open source OS like Ubuntu or Android, the developers having learned from those OS and separated the development of the User Interface from the underlying codes which were built independently. COS may launch with as many as 100,000 applications according to reports.

The Wall Street Journal had an article last summer suggesting HTC (OTC:HTCCY) was embarked on a program with the blessing of the Chinese state and it seems that speculation had substance. The COS Unix based OS is quite similar to Android and follows a similar venture by Samsung (OTC:SSNLF) to develop its own OS named Tizen. Tizen has proceeded and Samsung will introduce its first Tizen based smartphones this February, according to reports.

The question is what these moves mean for investors. That remains to be seen. Introducing a new OS and getting developer support is no mean feat and one that certainly seems to have eluded BlackBerry (BBRY) with its BB10 initiative that faltered badly over the past year.

What may be different with COS is that it has Chinese state support and the OS is expected to be tightly integrated into Chinese Internet services such as Weibo, for example. That sort of integration could make it attractive to Chinese consumers.

The China market has everyone's attention right now with Apple launching its iPhone 5S and iPhone 5C on China Mobile. Speculation on just how successful that launch will be is all over the map with some commentators thinking this is the next leg of growth for Apple and others thinking it will be relatively minor. Time will tell and no doubt a lot of eyes will be on its progress and measuring its relative success. A Bloomberg report yesterday suggested Apple's success might be somewhat muted by the growth in demand for smartphones with larger screens, called phablets. Every other 4G devices offered by China Mobile has a screen at least one half inch larger than the iPhone.

Apple faces a few hurdles in China in any event. Its devices are relatively highly priced with the iPhone 5S offered by China Mobile for 5,488 Yuan or about $874 U.S. while the iPhone 5C is being sold for about 15% less. Initial responses to an online poll of over 6,000 Chinese found almost 84% thought the China Mobile plans were unreasonable and three quarters said they would not buy an iPhone from China Mobile.

Apple may introduce its own larger screen version of the iPhone later this year and neutralize that issue but the pricing issue is almost certain to confine the iPhone to the very top tier of consumers in my opinion. That space is a bit crowded as well with smartphones from LG, Google and Sony rated above the iPhone 5S by PC advisor and like the Samsung Galaxy 4 seen as "asprirational" as is the iPhone. There is little doubt that Apple will have tough competition for its iPhone in China.

Regardless of its success, COS based phones won't have much of an effect on Windows OS in China simply because Windows is barely present. Tizen and COS phones may take a bite out of Android if they gather steam with Samsung likely to put more emphasis on its own OS than Android and HTC similarly backing COS if it catches on. IN any event, Phones based on the Tizen OS and COS are dark horses in this race. Until February, we can only speculate as to what a Tizen OS smartphone will be like or how well accepted it will be, and with respect to COS at this point I see it as little more than a bet by HTC to try to rebuild itself, albeit with Chinese government encouragement and help.

One thing is certain. The smartphone market is becoming more competitive and consumers everywhere including China are being and will be offered more choices. Competition is central to the American business ethic and most would argue that competition results in more value being delivered to consumers for less money. If it plays out that way in the Chinese smartphone market those who are looking to it for massive growth in Apple sales and earnings might be disappointed.

I hold a few calls on Microsoft and a few puts on Apple, neither position being very large at this point.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.