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Alibaba fights for smartphone users in China with $590m stake in Meizu

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Andrew Burton/Getty Images

Chinese e-commerce giant Alibaba has invested $590 million for a part of domestic smartphone manufacturer Meizu. The unspecified stake gives the internet giant a foothold in hardware for its smartphone operating system YunOS — best known previously as an iOS-clone — but the company faces serious competition from domestic and international rivals trying to tap the country's growing number of mobile internet users.

China has 557 million mobile internet users

Although internet penetration is still under 50 percent in China, the country already has 649 million web users — 86 percent of whom are logging on with smartphones and tablets. Chinese internet giants like search company Baidu and gaming-and-chat firm Tencent have already made the move to mobile, while a clutch of domestic smartphone manufacturers including Lenovo, Huawei, and Xiaomi are battling it out with multinational companies like Samsung and Apple to sell the actual hardware. Together, these five brands account for 60 percent of China’s smartphone market.

Meizu, by comparison, has less than a 2 percent market share, but has grown its manufacturing output from a few hundred thousand units in previous years to close to 2 million in the last three months of 2014. It’s a relatively small base for Alibaba to break into the world’s largest smartphone market with, but it doesn’t have much of a choice. Google has previously forced manufacturers to drop Alibaba’s YunOS, with the US company protesting that the software is based on its own Android mobile OS but is not compatible with the wider Android ecosystem. Alibaba, meanwhile, maintains that YunOS is not a version of Android at all.

Alibaba doesn't just need to attract mobile users — it needs to make money off them

Whatever the case may be, Chinese mobile users can expect to see more of YunOS in the near future. Alibaba, meanwhile, has more immediate problems to deal with. Although the company says that mobile sales accounted for 42 percent of its business last quarter, its mobile ad revenue was less than 2 percent — below analysts' estimates. The company can fight for all the mobile users it likes, but market share won't matter until customers start paying out.