Startup lands $100 million to challenge smartphone superpowers Apple and Google
With a Firefox OS offshoot called H5OS, Acadine Technologies hopes to succeed where Microsoft and others have failed. A China-run backer has begun paying the bills.
A new startup emerged Wednesday with a new mobile operating system to challenge the dominance of Apple's iOS and Google's Android -- and it's backed with a whopping $100 million investment.
Acadine Technologies and plans for the new H5OS operating system were shrouded in secrecy since the Li Gong, the company's founder, chief executive and chairman, left his previous job as president of Firefox browser developer Mozilla at the end of March. Now his Hong Kong startup has revealed its business strategy and its funding is from an ambitious Chinese state-controlled company expanding into technology markets.
Acadine, which CNET previously reported was initially known by the placeholder name Gone Fishing, plans to build an operating system for smartphones, tablets, wearable devicess and the Internet of Things.
That'll be a tough challenge. But Gong believes Acadine's generous funding, fast development and international reach will mean consumers finally will see the alternative to Apple and Google that so many other companies have failed to build.
And of course that means his startup and its investors will reap the rewards. "Owning an OS is extremely important if you can do it," Gong said. "It's very profitable if you can do it."
A big challenge
Potential sources of money, Gong said, include being paid to promote services like search, storage, music streaming and e-commerce; revenue sharing from those services when customers pay to use them; and fees generated by advertising and game sales. All of those, though, depend on Acadine succeeding in finding and exploiting gaps where existing OSes are weak then expanding from there to a large user base.
The list of mobile operating systems that have struggled to compete against Android and iOS and gain that large population of users is long: Microsoft's Windows Phone, Samsung's Tizen, Jolla's Sailfish OS, Canonical's Ubuntu, Hewlett-Packard's WebOS, BlackBerry's BlackBerry OS and Mozilla's Firefox OS. This last project is the one Gong led at Mozilla until he left in April, and it's the starting point for H5OS.
Even having Firefox OS as a starting point won't make things easy. For the 334.4 million smartphones that shipped worldwide in the first quarter of 2015, 78 percent of them ran Android and 18.3 percent iOS, leaving all other OSes to scrap for the remaining 3.7 percent, according to analysis firm International Data Corp.
A $100 million vote of confidence
Acadine raised the funding from Hong Kong-based Tsinghua Unigroup International, a subsidiary of the Chinese company Tsinghua Unigroup that in turn is controlled by Tsinghua Holdings. This latter organization is run by the Chinese government and funded by the prestigious Tsinghua University in Beijing.
"I am very excited to support Dr. Gong and the team he has assembled to establish a truly open mobile operating system," Tsinghua Unigroup Chairman Zhao Weiguo said in a statement. Zhao has led Tsinghua Unigroup's recent high-tech expansion -- its $1.8 billion acquisition of smartphone chipmaker Spreadtrum in 2013, $907 million acquisition of phone radio chipmaker RDA Microelectronics, and $2.3 billion takeover of Hewlett-Packard's enterprise computing technology business in China. On Monday, the Wall Street Journal reported Tsinghua Unigroup also is making a bid for US memory chipmaker Micron.
Acadine will be independent, though, Gong said, noting that he is both chairman and CEO. "We are not a China company, we are not a US company, we are an international company," Gong said.
Along with its Hong Kong headquarters, it's opened other offices in Beijing and in Taiwan's capital, Taipei, and has labs in London and Palo Alto, California.
Firefox OS ties
Firefox OS is open-source software, meaning that Acadine and anyone else is allowed to copy its underlying source code, modify it and ship it as a different product. And Acadine has more than just the code: of the company's more than 70 employees hired since its founding in March, about 40 are from Mozilla, Gong said.
At the same time, Mozilla is retooling its Firefox OS effort. CEO Chris Beard concluded Gong's strategy of aiming for very low-cost smartphones flopped and now is focusing on a product that enthusiasts can install on their unlocked Android phones.
Beard said in June that Mozilla decided it needed to change Firefox OS management. Gong said the decision to depart was mutually agreed upon.
Mozilla also has lost its chief technology officer, Andreas Gal, to a separate startup. Sources said in June that Gal had been considering working with Acadine and taking an investment from it, but Gal said he's looking investors closer to his Santa Clara, California, headquarters. "We are in the process of raising venture funding in Silicon Valley," he said.
Mozilla declined to comment for this story.
Building on the Web
Acadine's operating system, like Mozilla's Firefox OS and Google's Chrome OS, runs Web apps -- software written with the same technologies used to build Web pages. For operating systems trying to challenge incumbents like Windows, iOS and Android, Web apps have two big advantages.
First, there lots of programmers are already familiar with foundations of Web software like HTML content, JavaScript programs and CSS formatting, and indeed many mobile-optimized websites are already available. Second, every modern operating system has a browser, so a Web app is useful on existing operating systems as well as new ones.
Firefox OS is aimed today chiefly at smartphones, though electronics manufacturer Foxconn has used it on tablets and Panasonic offers it on a 4K TV. Acadine also expects to offer its operating system on wearable devices -- smartwatches are the best example today -- and on "Internet of Things" devices -- products that are that of spreading network connectivity beyond today's computing devices.
Acadine expects to diverge from Mozilla's open-source Firefox OS project where it makes sense. Eventually, Acadine could end up with something completely different, Gong said.
"Firefox OS, for which project I was the owner and primary driver in my last job, has definitely broken fresh ground in mobile operating systems and has demonstrated the viability of a new Web-centric approach in a field dominated by Android and iOS devices," Gong said. "Nevertheless, to achieve market success we have to go much further than that. We must move and scale up at the supersonic speed of the mobile industry, be pragmatic and flexible, and look beyond Silicon Valley for inspiration."
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eBay bids for a chance at success after PayPal split
The struggles and triumphs of eBay could shape where we buy things online and for how much. Here's why.
Larry Phillips' business on eBay is plummeting and he doesn't know why.
The owner of 4StampSales.com has been selling rare and collectible stamps online since 1999, turning the side business into his main job in 2005 after he took an early retirement as an executive for banking company MBNA. He now pulls in annual sales in the "mid-six figures" and has two part-time employees helping him list and ship thousands of items, from US stamps commemorating the 1994 World Cup to Botswana stamps of birds.
But a few years ago, sales on eBay -- a major part of his revenue -- started to sink and haven't revived. A year and a half ago, Amazon asked him to start offering his stamps on its website. He said yes, and the decision helped reinvigorate his business.
"One of the reasons why I was interested when Amazon recruited me was because my eBay business was tanking," Phillips, of Wilmington, Delaware, said, blaming eBay for not giving him enough data to figure out why his sales soured.
The troubles at 4StampSales highlight several of eBay's larger problems. Many mom-and-pop sellers complain that eBay neglected them as it pursued big-name retailers such as Target and Best Buy to list on its site, trying to become more like an online mall and less an Internet flea market. Smaller sellers responded by shifting business toward larger rival Amazon or startup e-retailers like Poshmark and Twice. The strategy also didn't seem to impress consumers, many of whom continued to find eBay's site hard to navigate, regardless of what was sold there.
"They've really disenfranchised a lot of people out there," said Scot Wingo, executive chairman for ChannelAdvisor, which provides e-commerce services for sellers on eBay and Amazon. "eBay has a long history of messing things up."
The numbers illustrate eBay's struggles. In 2014, worldwide online retail sales grew 22 percent, according to eMarketer, but the company's marketplace revenue was up just 6 percent to $8.8 billion.
There will be a lot more attention paid to these troubles after eBay on Friday spins off its fast-growing PayPal digital payments unit, leaving the 20-year-old e-commerce pioneer to fend for itself as it works on a turnaround. The two businesses decided to separate following more than 10 years together after activist investor Carl Icahn pressured them to break up to so PayPal could focus on its own growing business. PayPal and eBay said a split would help narrow their respective strategies, though their smaller size make them both more vulnerable to a potential acquisition.
What's at stake for customers and small retailers is that if eBay fails to make needed fixes, it will weaken one of the few major online competitors to Amazon, the biggest e-commerce company worldwide by market share. That, in turn, could reduce choices and increase prices for consumers.
Devin Wenig, eBay's incoming CEO and the company's current marketplaces president, has outlined plans to refocus the San Jose, California-based retailer on its roots, getting back to its core customers and mom-and-pop sellers that have traditionally come to eBay to exchange unique and hard-to-find items. He also wants to encourage more consumers to try selling on eBay, hoping more people will again start listing items in their attics, garages and closets, which eBay claims have an estimated value in the US of $100 billion. Many of those amateur sellers have switched to Craigslist or Facebook groups to avoid eBay's higher fees. A data breach last May almost permanently drove away many of these infrequent users.
Bringing in a fresh crop of sellers could give the marketplace's community a helpful boost and spark more interest in browsing the site, thanks to an increase in selection of rare and random goods and stronger competition pushing down prices for buyers.
"One part we want to continue to grow and invest in is insights and the data we provide back to sellers to help inform them," Heather Friedland, eBay's vice president of local and seller experience, said when asked about some of the problems 4StampSales is facing. "We're really listening to our sellers."
Wenig was not available to comment for this story, an eBay representative said.
PayPal's chance to cash in
While eBay struggles to build itself back up after the split, PayPal will face a different set of challenges under the helm of its incoming leader, Dan Schulman, a former American Express and AT&T executive.
PayPal, which eBay purchased in 2002 for $1.5 billion, enjoys huge growth as online and mobile payments take off. Compared with eBay's marketplace sales growth of 6 percent last year, PayPal's revenue jumped 19 percent, to $7.9 billion. That faster growth means PayPal, for now a unit of its parent, will likely become the larger company by market value after the break-up. Marking that change, on Tuesday night, S&P Dow Jones Indices said PayPal will join the S&P 100 -- an index of some of the largest US companies. The company it replaces: eBay.
The divorce will let PayPal explore expansion in the $22.5 trillion worldwide retail market, where e-commerce is a small, but growing, sliver of sales. Thanks to an operating agreement, PayPal will keep its critical position as eBay's main payments service for five years, allowing PayPal to hold onto its biggest customer even while shopping around for other dates. On top of that, PayPal has become one of the most trusted and recognizable names in digital payments, according to surveys by Wedbush Securities, giving it a big advantage over rivals.
But PayPal is facing more competition, as tech giants Apple, Google and Amazon, payments networks Visa and Mastercard, and a slew of startups including Square are building up their own digital payments services and trying to catch on to a huge shift in how consumers spend their money and merchants take payments. PayPal will have to run even faster if it hopes to maintain its leading position.
"There's a proliferation of different choices that consumers have, whether its Apple Pay or Visa wallets," said Hill Ferguson, global head of PayPal's consumer business. "We continue to move the ball forward to make sure consumers know that there's a good reason to choose PayPal when they have that choice."
The eBay-PayPal operating agreement means eBay customers shouldn't expect any significant changes to its payments options in the coming years. However, a big shift will be PayPal's new freedom to partner with many more companies, including perhaps eBay's main competitors Amazon and Chinese e-commerce giant Alibaba. That would help PayPal reduce its heavy dependence on eBay, which today makes up about 30 percent of its payment volume, and give PayPal's more than 165 million active users more place to pay utilizing their accounts.
"We would love to work with Amazon," Ferguson said, "and we're talking to anyone and everyone in the industry, not just merchants, but large technology companies, large mobile operators, large financial institutions, literally every major player in the ecosystem."
An Amazon representative declined to comment for this story.
Hopes for an eBay turnaround
Despite eBay's problems, it continues to have sizable advantages that make a resurgence possible. Its business is highly profitable, thanks to its model of simply offering a platform for others to buy and sell items and avoiding the costs of owning inventory, warehouses and distribution networks. The marketplace's operating profit margin was 38 percent last year -- meaning the business pocketed 38 cents in profit per $1 in revenue -- compared with PayPal's 23 percent margins.
Amazon, meanwhile, continues to rapidly grow its revenue and expenses, resulting in an operating profit margin last year of less than 1 percent.
eBay also has maintained a massive following, with 25 million sellers offering about 800 million listings worldwide to more than 157 million active buyers. With a market value of about $76 billion before the split, it's the third largest online retailer globally, after Amazon and Alibaba, though its market share remains half that of Amazon's, according Euromonitor.
"There's no doubt that eBay's got an ability to turn around. They've still got this massive loyal base," said Kevin North, CEO of Terapeak, which provides products data for eBay and Amazon merchants. "There's a group of loyalists that want eBay to succeed."
He said eBay could win back sellers that have shifted to Amazon by providing more expert advice and resources on specific segments, such as antique or clothing sales. On the consumer side, eBay already is working on making it easier for people to jump into selling on its site, offering new services like eBay Valet, which lets people mail away items to more experienced sellers who then photograph and list for them. The company is also embarking on a multiyear project to better organize its millions of varied listings -- from socks to cars to antique hand-painted vases -- so it will be easier to find items.
North added that there's "a lot of optimism" from sellers that his company works with over Wenig's plans for change.
"They should do just fine after the spinoff," said Wedbush analyst Gil Luria. "They just won't be growing as fast as they did with PayPal."
Phillips, the owner of 4StampSales, isn't all that convinced by Wenig's plans and said he remains in "a holding pattern with eBay," not decreasing his listings on the site but not adding much to his storefront there either.
"I love the words, I love what he said," Phillips said about Wenig's vision of refocusing on small sellers and treasure-seeking buyers. "I'm not sure that's what's going to happen."
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