3 Reasons Mozilla’s Firefox Phones Will Fail

Microsoft's (NASDAQ: MSFT  ) Nokia Asha and lower-end Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Android smartphones could soon face a new competitor in emerging markets -- Mozilla's Firefox phones, which run on the open source Firefox OS.

Two Indian companies, Spice and Intex, are building the phones, based on a processor from Chinese company Spreadtrum. The phones, which start at $25, will be available in India and Indonesia later this year.

The Wall Street Journal reports that Spice's model will "specifically target the affordable segment and first-time smartphone buyers." The device will come loaded with an app store, the Firefox Marketplace, which includes apps for Facebook, Twitter, Line, and Pinterest. Spice did not reveal the price of its device; Intex stated that its phones would be priced under $33.

3 Firefox phones (L to R) -- from Alcatel, LG, and ZTE. Source: Mozilla.

Spice and Intex's phones aren't the first Firefox phones ever -- Alcatel and ZTE launched first-generation Firefox phones last July. The two companies will also launch new Firefox phones this summer -- Alcatel's One Touch Fire E and ZTE's Open II. A pricier $170 model, the Flame, is manufactured by Chinese company Thundersoft, and will be launched as the "reference device" for other Firefox phone manufacturers and developers.

In my opinion, Firefox's ambitious efforts to launch a mobile OS are admirable but flawed. Here are three key reasons why Firefox's phones will fail to gain traction in lower-end markets.

1. Everyone wants a piece of the low-end market
"Focusing on developing and emerging markets" has become the new mantra for mobile phone makers tired of competing against Apple (NASDAQ: AAPL  ) and Samsung in developed markets. Nokia launched the Asha in 2011 and the Nokia X Android earlier this year in India. BlackBerry (NASDAQ: BBRY  ) tried it last year with the Q5, and Google announced that it will launch its modular Project Ara phone in emerging markets next year.

But the problem is that prices tend to drop rapidly in saturated markets. Indian handset maker Celkon just launched the Campus A35K smartphone, touted as the cheapest Android 4.4 (KitKat) phone in the world at $50. With a 1GHz processor, 256MB of RAM, and both back and front-facing cameras, it's a more impressive package than comparably priced smartphones.

Microsoft's Nokia Asha 501, which has less RAM and runs on the proprietary Asha platform, costs around $67. Although a difference of $20 to $30 doesn't seem like much to Americans, it matters quite a bit to the average middle class Indian, who earns less than $300 per month.

If Firefox phones can sell for $25, they will not only threaten low-end smartphones like the Campus A35K and Asha 501, but could possibly crush the market for dumbphones, which can cost less than $20. However, if the costs of Asha phones, Android phones, and other low-end devices keep falling, Firefox phones could be a tough sell in emerging markets like India.

2. A lack of developers
Meanwhile, getting developers to create apps for Firefox OS will be a tough task. IDC forecasts that Android will finish 2014 with a 80.2% market share, followed by iOS with 14.8%, Windows Phone with 3.5%, and BlackBerry with 0.8%. That leaves a tiny 0.7% sliver for everyone else in the mobile OS market.

An OS' market share is directly related to the number of apps on the platform, since software developers generally like to reach the largest market possible. As a result, both Apple's iOS App Store and Google Play have over 1.2 million apps. Windows Phone has around 250,000 apps. BlackBerry has around 120,000 apps, but 47,000 of them were made by a single developer, S4BB.

Both Microsoft and BlackBerry offered incentives to attract app developers. Microsoft paid $100 per published app, and reportedly over $100,000 to secure some more popular apps. BlackBerry also paid out $100 per approved app and $10,000 for early BB10 apps that met certain quality standards.

If Mozilla and its partners want to lure more app developers to its platform, which currently has a non-existent market share in smartphones, it might need to resort to the same tactics. But the problem is that Mozilla is currently seeking new ways to generate more revenue, not spend it, since 90% of its revenue in 2012 came from Google through its pull-down search box. Mozilla actually needs to diversify its revenue so badly that it has flirted with selling ads on "Sponsored Tabs" within its browser.

3. Emerging markets are richer than they seem
Last but not least, companies like Mozilla and Microsoft overlook the massive income gaps in emerging markets like India.

According to a recent OECD (Organization for Economic Cooperation and Development) report, income inequality has doubled in India over the past two decades -- the biggest jump among all emerging economies. The top 10% of wage earners make roughly 12 times the bottom 10%, up from six times in the early 1990s. Meanwhile, India's top 5% spends 21.3% of total expenditures in the country.

Therefore, more than a fifth of the money being spent in India comes from people who can easily afford higher-end phones like the iPhone or Samsung Galaxy S. In fact, sales of iPhones (all models), jumped 55% year-over-year in Apple's second quarter. According to IDC, Apple remains the third largest smartphone maker in the country, behind Samsung and Sony.

Therefore, Mozilla and Microsoft's Nokia might capture portions of the lower-end market in emerging markets, but the margins there are paper-thin and depend on high sales volume to make a noticeable difference on the bottom line. Meanwhile, companies like Apple, Samsung, and Sony can simply sell a lower number of higher-margin devices to generate higher profits.

The Foolish takeaway
In conclusion, Mozilla's efforts to penetrate the smartphone market are ambitious, but intense competition, the lack of developer support, and the need for high sales to offset thin margins could prevent Firefox OS from ever evolving into a mainstream OS.

Mozilla clearly hopes that Firefox OS will become the next Android, but I firmly believe that it will more likely be mentioned in the same breath as other niche open source systems like Ubuntu, Jolla Sailfish, and Samsung's Tizen instead.

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