Telefonica, luring first-time smartphone buyers in Brazil, is designing a handset software system that is freely available to network operators and manufacturers, similar to Google’s Android, the world’s biggest platform. For network carriers, it’s a chance to have a say over what consumers see, use and buy via their smartphones, lost to Google and Apple Inc. (AAPL) when such handsets became must-have devices.
Telefonica has teamed up with Mozilla Corp., the company whose Firefox program challenged the dominance of Microsoft Corp. (MSFT)’s Web browser. This week, six additional companies, including Germany’s Deutsche Telekom AG (DTE) and Sprint Nextel Corp. (S), said they will use the platform in other countries, such as Poland. While Android is free, operators currently must accept that the biggest search engine controls the software code and makes advertising money from pushing users to take its mapping, e-mail and search services.
“We don’t like the fact that one part of the value chain of our business is tightly controlled,” Carlos Domingo, director of product development at Telefonica’s digital unit, said in an interview. “In the case of the emerging countries it’s worse, because it becomes a monopoly by Google.”
By having access to the software and hardware from the beginning, Telefonica will be able to tailor additional services for users in fast-growing emerging markets in Latin America where many subscribers are buying their first smartphone. Every second U.S. consumer and 37 percent of western Europeans already own a smartphone.
Telefonica, Spain’s biggest phone company, will bring the first Firefox handset to Brazil as smartphone growth in South and Central America is soaring, with annual shipments climbing to 160 million devices by the end of 2015 from 31.2 million in 2011, according to estimates from Ovum, a London-based telecommunications industry research firm.
While Google has a head start, Telefonica is racing to compete, targeting “double-digit market” share for its low- priced Android challenger in Brazil by the end of 2015, Domingo said.
The deadline has already slipped. With its first phone initially due at the end of this year, Telefonica said before its investor conference in London today that the first handsets built by Chinese manufacturers ZTE Corp. (763) and TCL Communication Technology Holdings Ltd. (2618) will now be offered from early 2013.
Telefonica is in talks with six additional handset makers, Matthew Key, the head of the company’s digital unit, said at the investor meeting.
“We’re overly reliant on Android and that’s not a strategically strong position to be in,” he said.
To persuade Latin American consumers to upgrade to smartphones, and not take an Android device, the devices will need to be priced at about $100, Domingo said.
Deutsche Telekom is in talks to offer the handsets in its eastern European markets, Thomas Kiessling, the company’s chief innovation officer, said in an interview, adding that the phones would cost about 80 euros ($100) to 100 euros.
Telefonica’s smartphone software drive, overseen by Telefonica Chief Executive Officer Cesar Alierta, marks the latest attempt by operators to build out rival services and applications and convince investors that they are more than pipes that facilitate the surging demand for data-hungry devices. Their previous efforts to build app stores, send calls and messages over the Web, and develop payment systems, have been abandoned or brought out long after rivals have stolen a march.
“We’ve also been on board of other operator consortiums that have failed,” Domingo said, adding that these joint projects were never “as open as they claimed to be.”
Telefonica, which has net financial debt of 57 billion euros, in May reported an 8.8 percent drop in first-quarter operating profit after it lost customers in its home market to discounters. The shares dropped 2.6 percent to 10.21 euros in Madrid. The stock has fallen 24 percent this year, making it the worst performer in the 19-company Bloomberg Europe Telecommunication Services Index.
Telefonica today predicted its digital business to generate annual sales of about 5 billion euros by 2015. Revenues of Telefonica Digital, created in September 2011 by combining Internet assets over three continents such as social-networking site Tuenti and Web-phone unit Jajah, will expand at an annual growth rate of 20 percent, it said.
Google in April reported first-quarter profit that topped analysts’ estimates as CEO Larry Page, who took charge a year ago, has pushed Google deeper into display advertising and mobile services.
Android is installed on 56 percent of new smartphones, more than twice Apple’s share, researcher Gartner Inc. said in May. In the first quarter, global handset sales declined 2 percent to 419 million, while smartphone sales rose 45 percent.
“You need a powerful player to influence the road map,” said Malik Saadi, an analyst at Informa in London. “The operators are losing that battle, even with Android, and the only way is to create their own brand in the mass smartphone market.”
Mozilla, which has doubled its staffing in mobile in the last year, is starting from a low base as it aims to do the same thing with smartphones as it did to the desktop with its web browser. Mozilla’s existing mobile browser had less than 1 percent of the market at the end of 2011, according to Net Applications.
By designing a device where even the dialing screen is a web page, it’s a chance for Mozilla to differentiate devices, said CEO Gary Kovacs. “If you look at Android and Apple and Windows, a phone in Brazil looks the same as a phone in Cleveland,” he said in an interview.
At the same time, the operators are following a path littered with failures from both carriers and manufacturers to come up with a rival platform.
Hewlett-Packard Co. (HPQ) stopped making devices using its open- source WebOS software it acquired from Palm Inc. for $1.2 billion in 2011. Nokia Oyj (NOK1V) scrapped its own Meltemi platform in June, according to a person familiar with the matter.
Domingo is aware of those pitfalls. While Mozilla’s foray into Internet browsing made the web competitive, he said, “that is very different to the situation we have in mobile.”
“It is all about control, and once you have that control you can open up many doors,” said Nick Dillon, an analyst at Ovum. “It’s the ability to push apps on the home screen.”
To contact the reporter on this story: Jonathan Browning in London at email@example.com