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Article

Abstract

Free open-source operating system (OS) has driven both ad revenue and Internet traffic from smartphones to the historically high levels. Though achieving huge market share, there is no record showing that the profit of a handset maker from the smartphone market can surpass the firm implementing vertical integration ever since the first smartphone has been launched in the market. In this study, we consider that an open-source OS provider free offers its operating system but gain mobile advertising revenue by demanding the hardware maker to install preload apps. After trading off between homogenizing each open-source smartphone but gaining more “eyeball shares” on advertising via handsets due to more preload apps, we examine how the OS provider’s optimal agreement with hardware makers changes with market factors. In addition, we also compare and analyze the profit of the OS provider between launching its own brand of smartphones and receiving advertising revenue only. Our results suggest that the OS provider should enhance the quality of its own product when entering the smartphone market. Moreover, if outsourcing the production work to a hardware maker can achieve the economies of scale and increase its profit, our analytic results suggest that the OS provider shouldn’t partner with the hardware maker dominating the smartphone market.

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