Why Alibaba jumped into the smartphone fray

February 9, 2015, 10:37 AM UTC

Alibaba Group announced Monday that it invested $590 million in one of China’s lesser-known smartphone makers, Meizu, a company with small market share but a long history as one of the country’s smartest device makers. In the 2000s it turned out popular Mp3 players and one of China’s first smartphones it called an iPhone-killer.

The big investment, which earned Alibaba a minority but undisclosed stake in Meizu, comes eight months after Alibaba bought outright China’s largest mobile browser company, UCWeb. That purchase was the first signal that Alibaba wanted a piece of China’s booming smartphone landscape.

China’s more than 550 million smartphone users represent a lucrative market. Apple’s iPhone and products, for instance, were recently named the top luxury gift to give someone in Mainland China. Xiaomi, the most successful of China’s dozens of smartphone startups, raised money at a $46 billion valuation late last year to become the highest-valued private startup in the world—after only selling phones since 2011.

“The (Meizu) investment like any other is ‘future betting’ on a company which has some promise and could be a dark-horse in the smartphone race,” says Counterpoint Research director Neil Shah. “Alibaba is essentially locking-in cool and bright brands to expand its ecosystem with its investment spree.”

It’s also catching up with the competition. Rival Tencent has a partnership with Xiaomi through their mutual stake in software maker Kingsoft and Qihoo, another Chinese Internet player specializing in security, invested $400 million in Shenzhen-based smartphone maker Coolpad in December. By those standards, Alibaba has been behind the game.

Alibaba said its mobile operating system, YunOS, will be integrated into Meizu’s phones that now run on Google’s free Android operating system. A handful of tiny Chinese smartphone makers use YunOS, but the system is basically unknown in China where 80% of smartphones run on Android. In pushing its own operating system, Alibaba is taking a page from Amazon’s playbook and creating a platform on which consumers are seamlessly plugged into its shopping and entertainment sites through their phone. (Only Alibaba isn’t taking the concept quite as far as Amazon—it will leave building the phones to Meizu.)

“The investment in Meizu represents a significant expansion of the Alibaba Group ecosystem,” said Jian Wang, Chief Technology Officer of Alibaba, in a statement. An Alibaba spokeswoman declined to comment more on the deal.

While Alibaba gets a new (bigger) host for its operating system, Meizu gets a shot at greater sales across Alibaba’s e-commerce platforms, which can spell life or death for brands. On the biggest online shopping day last year in China, Single’s Day in November, when Alibaba’s platforms become the de facto shopping destinations, Xiaomi sold $250 million worth of phones in 24 hours. A Meizu spokesperson said the investment will help the company get more aggressive in pricing and product lines to reach its sales goal of 20 million phones this year.

A strong comeback for Meizu, using Alibaba’s operating system, could resurrect an old fight. More than two years ago Google protested that YunOS, also known as Aliyun, was ripping off Android’s source code. When Acer announced a phone based on the operating system, after Acer had agreed not to ship “non-compatible” Android versions, Google cried foul. Alibaba responded that its engineers spent three years developing the operating system. Acer’s phone was never released.

The arguments haven’t been raised since. But Shah of Counterpoint says for Meizu, the Alibaba tie-up “could significantly improve its product portfolio, retail presence and overall visibility for its products.” That greater visibility could also bring renewed scrutiny from Google.

For now, Alibaba’s $590 million splurge on Monday earns the e-commerce giant a play in smartphones and makes the China market even more competitive than it was.

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