Xiaomi was proclaimed the most valuable tech startup in the world after recent $1.1B funding at a monster $45B valuation. There is fair deal of confusion about Xiaomi’s business model, as reflected in a recent Re/Code article:
“With a focus on rapid innovation and nifty software, Xiaomi has quickly grown to become the world’s third-largest phone maker. However, a recent financial report showed profits remain slim, just $56 million in 2013.”
Xiaomi indeed sells lots of smartphones, but how can low profits justify $45B valuation? It appears that smartphones are just the tip of the iceberg for Xiaomi — Investors who poured $1.1B into the company saw a much better future for Xiaomi than selling millions of cheap smartphones at meager margins.
Comparing Xiaomi with other traditional smartphone makers is like comparing Apple with Orange (a mobile network operator). The two happen to be in the same industry, but they are really in different businesses. Apple, Samsung, Huawei, Lenovo sell phones to make profits. Xiaomi sells phones to seed competitive e-commerce business that goes far beyond mobile.
Xiaomi’s “Just for fans” slogan is the key to understanding the company. Xiaomi builds community of engaged fans by selling smartphones online and using Internet-age marketing methods. Fans are offered weekly software updates, active involvement in forum discussion about new product features, frequent updates in social media (Weibo and WeChat) and more.
Flurry data shows that Xiaomi users are more engaged with their smartphones even than the users of Apple devices.
“The average Xiaomi consumer spent 7% more time in apps than an average iPhone consumer.”
Xiaomi’s community of fans (and future e-commerce customers) grows at a fast pace: The company sold 61M smartphones in 2014 and expects to sell another 100M in 2015.
I first discovered Xiaomi almost 3 years ago, when it was still a nascent handset maker. It was clear even then that there is more to the company than cheap smartphones. We wrote in our VisionMobile research note called “The Xiaomi Tribe” (August 2012):
“Marketing guru Seth Godin explains that the purpose of marketing is not to impose products on uninterested customers, but to stand up as the leader of a group that has formed around an idea. He calls this community a ‘tribe’. Once you lead a tribe, you will have their permission to sell them souvenirs.”
On January 5th, 2015 Xiaomi CEO Lei Jun published an update on Weibo with sales and revenue numbers (61.12M smartphones and revenues of $11.9B). The update is unsurprisingly directed to Xiaomi fans and not to industry analysts:
“Dear Mi Fans, I’d like to share a piece of good news with all of you…”
Smartphones helped Xiaomi incubate large community of fans that becomes strong competitive advantage for the e-commerce business. Today, Xiaomi is coming of age and growing to become one of the largest e-commerce players in China. Harry McCracken recently tweeted:
Xiaomi is the third biggest ecommerce site in China. Approaching $10 billion a year. Sells 1000 different products.
— Harry McCracken (@harrymccracken) October 28, 2014
Xiaomi aggressively grows its product portfolio beyond its own smartphones and tablets. The company plans to invest in 100 specialist hardware companies and sell co-branded “souvenirs” to its raving fans. Xiaomi entered smart home with WiFi routers, smart TVs, media centers, webcams, lightbulbs, air purifiers, and a wall plug, as well as wearables and wellness with the Mi fitness band, headphones and a blood pressure monitor. In December 2014 Xiaomi invested $203M in Chinese home-appliances maker Midea Group.
The company also established an online entertainment division in the beginning of 2014 and will invest $1B in the creation of video content. In a move that can signal expansion into enterprise services and building a developer ecosystem, Xiaomi will invest $1B in Kingsoft Cloud Services.
And if all that is not enough, Xiaomi also obtained a Mobile Virtual Network Operator (MVNO) license from China’s Ministry of Industry and Information Technology in September 2014.
Yuri Milner, one of Xiaomi investors, says Xiaomi valuation could more than double to $100 billion as the company has the same potential as Facebook Inc. and Alibaba (where he also invested).
“In smartphones, Xiaomi can take significant market share globally, but that doesn’t cover the whole opportunity. There are a number of other interesting categories that Xiaomi can target.”
We could see a glimpse of this future opportunity in the opening slides of the January 15th, 2015 company event as reported by Ben Thompson live on Twitter:
It’s clear that those who view Xiaomi as a smartphone company miss the point. Xiaomi operates a new kind of business model in which smartphones serve as a distribution channel and not a source of profits, as we explained on the VisionMobile blog in August 2013.
Ben Evans recently wrote his “Next Questions in Mobile” post, looking beyond the usual “iPhone vs. Android” polemic. Xiaomi answers some of these “next questions in mobile”, and also shows how to use “mobile” to create asymmetric competitive advantage in other industries.