New Rule To Hit Smartphone Makers, App Developers
China’s unruly markets for emerging sectors are famous for Trojan Horses, which often come as hidden traps in many products and services that ultimately harm consumers. The nation’s tourism authority just launched a new law to eliminate such traps in the travel sector, and now we’re getting word that the telecoms regulator is preparing a similar move against hidden and sometimes malicious apps that often come pre-installed on many new smartphones. This new crackdown will help to rid the market of such unwanted apps, such as ones that provide users’ personal data to third-parties without the users’ knowledge or consent. But the move could also ultimately drive up smartphone prices and perhaps even drive some companies out of business.
Let’s start our review of this latest smartphone development by looking at the new tourism-sector law that I discussed above, as there are many parallels between the 2 cases. The tourism law that took effect on October 1 forbids travel agencies and other tour operators from subsidizing their packages using funds from third parties. Most often those third-parties were retailers, which paid the funds as a sort of kick-back to have their shops visited by big tourist groups supplied by the tour operators. Such practice often resulted in complaints by tourists who felt pressured to buy goods when they visited the shops, even though those same tourists often bought their tour packages at highly subsidized prices.
From that example, let’s move to the latest cases involving the Ministry of Industry and Information Technology (MIIT), China’s telecoms regulator, which is reportedly preparing to roll out new rules to limit the apps that come pre-installed on new smartphones. According to the reports, all smartphone sellers would have to tell the MIIT in advance what apps they planned to pre-install on their models, giving the regulator the authority to either approve or veto such apps. (English article; Chinese article)
The draft rules were first announced back in April, and will come into effect next month, the reports say. They would apply to anyone who pre-installs software on smartphones, and thus could cover not only manufacturers like Huawei and Xiaomi, but also carriers like China Mobile (HKEx: 941; NYSE: CHL) that sell phones directly to consumers. The rules could also apply to Internet companies like Baidu (Nasdaq: BIDU) and Alibaba, which have also recently launched their own smartphones.
This new rule will ultimately help consumers, much the way the tourism rule did, by ridding new smartphones of unwanted and sometimes malicious software. But as that happens, consumers could also see the prices of their smartphones rise, much the way that tour package prices have risen since the beginning of this month. That’s because handset makers probably depended on fees from app developers like software security maker Qihoo 360 (NYSE: QIHU), which paid to have their software pre-installed on new smartphone models. Thus if the MIIT bans pre-installation of certain apps, that could hurt both the manufacturers and also the developers of those apps.
Smartphone sales in China have boomed over the past year, putting the country on track to surpass the US this year to become the world’s biggest market. Much of that boom has been driven by a flood of cheap models, many costing as little as $100, from domestic names like Lenovo (HKEx: 992), Huawei, ZTE (HKEx: 763; Shenzhen: 000063) and Coolpad.
Margins for such phones were already extremely thin, and I suspect that many manufacturers depended on fees from third-party app developers to squeeze their prices even more. Many of those more intrusive apps may now get vetoed by the MIIT under this new regulation. That would put the squeeze not only on the smartphone manufacturers but also on the app developers who may suddenly find themselves losing one of their most important distribution channels.
Bottom line: A new law limiting pre-installed apps on new smartphones could undermine manufacturers and app makers, driving some out of business and raising prices for new smartphones.
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