Could Xiaomi start the Android 2-in-1 ball rolling?

If you follow Xiaomi, you know the company has diversified from being a one trick pony with a smartphone to creating a whole host of tech accessories, TV’s and gadgets, including a new scooter they developed with Segway. Xiaomi’s smartphone business has done very well in China but there is increased competition from Apple, Lenovo, and Huawei and the company has seen the need to expand their presence by creating new devices and services to broaden their overall tech portfolio.

But the one area the PC guys were watching closely was Xaiomi’s interest in moving up the tech chain, perhaps trying to compete with them in PCs. PC manufacturers don’t have to wonder about Xiaomi’s intentions now. Word has leaked this Chinese company is getting ready to bring out their “Surface” killer, or a full 2-in-1 design. It is unclear at this point whether it will run Android or Windows, but I assume we will find out before too long.

If you have read my columns here recently, you know I have suggested the market could be ripe for an Android 2-in-1 or even an Android laptop. I know of at least two Android laptops in the works and the folks at JIDE in China are doing their own 2-in-1 they plan to license to vendors later this year.

While I don’t see what Xiaomi is doing with their 2-in-1 necessarily impacting the traditional PC vendors anytime soon, you can bet they will be watching  three key things closely. First, they will watch what the uptake will be for an Android 2-in-1 or laptop (if indeed it does run Android). This will be on the heels of Apple’s intro of the iPad Pro, which I have stated in numerous columns will be an important product with which Apple starts taking iOS into a broader business and enterprise market. If this is successful, I could see it driving an interest in Android in similar form factors.

The second thing they will be interested in is if the channel has interest. Today, Android smartphones are well accepted in most channels and Android tablets have seen serious growth through traditional retail as well. However, an Android 2-in-1 or laptop has not been tested in the channel and these devices will require sales and aftermarket support the channel would need training on to offer them effectively. They could most likely go through VAR’s and specialty retailers at first but, if there is SMB interest, then mainstream channels would be needed to get them into these smaller markets.

Third, if there is an interest in an Android 2-in-1 or laptop in enterprise, if and when should a traditional PC company do one of their own? Today, the PC vendors are still focused on Windows, but with Microsoft doing 2-in-1s and laptops of their own now and treading on their hallowed ground, their loyalty to Microsoft is weakened and they would be more open to doing something more aggressive with Android on hardware.

There is one last thing that would need to happen if an Android 2-in-1 or laptop is to have any chance of success. It needs Google’s blessing. The Jide version from China appears to have Google backing and, if so, then Google seems to be at least marginally behind this idea. Although they are still pushing Chrome to the desktop and laptops, I do think they see the future of Android in 2-in-1s and laptops could be important as they would tap into 1.5 million apps and could be used to expand Android’s presence to business audiences in the same way Apple plans to use the iPad Pros with iOS and its 1.5 millions apps for the same reason.

It seems at first Xiaomi plans to sell an Android 2-in-1 in China but I would not be surprised if they decide to make their 2-in-1 the first hardware they bring into the US market — one they have had their eyes on for some time. I think it is too early to tell if Android in these new form factors could be successful but I do see Xiaomi’s move into getting the ball rolling towards Android in these new personal computing designs.

Xiaomi Phones: Headed for U.S., but Some Wait to Come

Xiaomi’s Hugh Barra is ready to bring the hot growth of its Chinese phones to the the U.S. But, in a presentation at Re/code’s Coder conference, Barra made it clear there is a whole lot of change that needs to be made before it can sell anything more than a handful of accessories in the US market. Unlike other losses such as Huawei found in the market, he’s not going make a lot of mistakes heading for the top.

The problem isn’t the phones themselves. They are beautiful, matching leaders such as Apple and Samsung. And their pricing is phenomenal, selling high quality phones at $315 with no service charges. Barra says the prices are primarily the result of direct sales to consumers, excellent cost from key suppliers such as Qualcomm, and keeping the product in market for about 18 months allowing for falling component parts.

The U.S. market, however, will be difficult for Xiaomi to be a big player. Even though some carriers say they are getting tired of the duopoly of Apple and Samsung, they are actually increasing the market for a duopoly with their payment plans. Even phones being sold handled by retailers with carrier sales, whether it’s at Amazon or Best Buy.

It is unlikely carriers will front the advertising bill for Xiaomi like they do for other devices. Which means they would also need to create their own advertising, which is expensive and would eat into margins (ask Samsung how much that can cost). Primarily however, Xiaomi would need to change their phones for the U.S. market and they will have a tough time with retailers.

Another thing in the way of Xiaomi are areas where they seem to have more focus than the US for the time being. The company is, of course, already a major player in China (fighting mainly with Apple, Samsung, and Huawei) but its offerings in a rapidly growing market like India seems more attractive than pushing for the U.S. “There are countless things that need to be done,” Barra says. “And I don’t want to try to live in both San Francisco and Bangalore.”

Xiaomi will also have software challenges in the U.S. There are two approaches in the bulk of U.S. — Apple and full Google Android. The Xiaomi phones sold in China avoid the Google services, which are not allowed there, by using the Android Open Source Project and proprietary local services. In Hong Kong, India, and elsewhere, Xiaomi are sold with AOSP helped with a collection of Google standard services. Will that provide success in the U.S.? Time will tell.

The company is trying a very slow and simple retailing effort in the U.S. It has opened some Mi Stores, but currently offers only three products: a tracking band, a battery charging brick, and wireless headset. They are very attractive and at very competitive prices, but that is pretty limited competition. The products are not made by Xiaomi, but are only made by approval and co-branded.

Barra once ran Android’s Nexus phones, not a great experience. But he does seem to have learned a great deal in the U.S. Watch for Xiaomi to take its time and not move hard into the U.S. for quite some time.

Report: The Smartphone Market in 2014 and Beyond

Fascinating things happened in 2014 with regards to the smart phone market. Two striking ones from my predictions article happened in Q4 2014 rather than in 2015 as I predicted. I hedged my bet saying they could happen in Q4 2014 and, sure enough, they did.

Smart phone vendors sold more in the December quarter than the PC industry has ever sold in an entire calendar year. Apple also passed Samsung as the number one smart phone vendor in sales in the quarter as well. Both, in my opinion, were inflection points on the entire mobile industry and have striking implications going forward. Before diving into the takeaways, I want to walk through a number of data points.

Installed Bases

On of the things I work hard to track is the installed base of smart phone platforms. Here is my chart breaking down the installed base of each current platform.

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As we have been tracking this over time, you can see how Symbian essentially got eaten by Android. AOSP has been on a steady rise, thanks to China, and has an installed base slightly more than the iPhone’s. Blackberry continues to lose customers but may likely hold steady and normalize at some point.

Another interesting way to look at this is to show YoY growth.

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As you can see from a platform like AOSP, when you start from very small numbers and grow fast, you achieve huge YoY growth. But as your share size increases, the growth begins to normalize. I visualize this data this way to see what patterns may emerge. While Android and Apple are holding steady, we are still watching AOSP normalize. Given AOSP’s total addressable market is really only China for the time being, it is likely to hit a stopping point at some time as China becomes saturated. This growth chart will highlight that when it does. Windows Phone has modest gains annually, enough to keep their line in the positive but, in terms of size, we are talking very small numbers. I measure this YoY using a year ago quarter to track growth.

The last way I like to slice my installed base data is as a platform’s percentage of the installed base by quarter.

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The point is we are seeing a normalization pattern among the major platforms. Android continues to add modestly, as does AOSP, as does Apple. What makes Apple’s installed base interesting, however, is the continued growth from hand-me-down devices and the secondary market. By my installed base estimates, about 66% of all iPhones sold to date are still in active use. This can only be achieved by making products that last long enough to get handed down to family members or sold again in the secondary markets of China and India. All of which is a contributing factor to Apple steadily growing their active user base.

Quarterly

Quarterly snapshots give us equally useful views of the market. For this we need both a global picture and a regional picture. First the global view.

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As everyone knows by now, Apple sold more smart phones than anyone else in the quarter. While I don’t chart feature phones, it is interesting to note that Apple became the second largest phone manufacturer as well. Samsung was number one — selling ~95m phones, both smart and feature phones. Apple was #2 overall with 74.5m. Microsoft/Nokia came in at number three at 50m. It is a historic moment as the market rapidly transitions from feature to smart phones. While it is fun to appreciate Apple beating Samsung in Q4, we know it will be short lived as Samsung will be back in the top spot in Q1 2015 and likely sell in the 65-68m range. Apple will likely be in the 57-58m range but could possibly hit 60, largely driven by the Chinese New Year. I’ll update my Q1 2015 estimates closer to March.

Key Regions

I’d like to provide a snapshot of a few key regions broken down by smart phone vendor and by quarter. Let’s start with the US.

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The US has always been Apple’s largest market and this quarter they followed a similar pattern — gaining over 50% of quarterly sell through into the US market thanks to the holidays. Apple’s share of the postpaid market was well over 60% and their share of premium smart phone sales was over 70%.

In China, the number one vendor crown was very close between Apple and Xiaomi. So close we will again see analyst firms disagree on this. However, they all will agree it is close. I am able to see some live network data from Baidu/Umeng, which is a challenge because I see how many iPhones, roughly, are active but not all are sold just in China. Some are purchased or imported from elsewhere but still end up on the network. I’ve created a model to help balance this by using what I believe the percentage being imported vs. bought locally is using a range of data points. Based on this model, I have Apple as the #2 smartphone vendor in China but very close to Xiaomi. Here is my chart.

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With Chinese New Year coming, this quarter will be fascinating to watch. I’m fairly confident Apple will sell more smart phones in China this quarter than in US for the first time. They may also be the number one smart phone vendor in the region and, this time, it may not be close.

Samsung continues to have significant troubles in China despite being a top 10 brand in the region. Xiaomi also posted their first QoQ decline largely due to the larger iPhones. A key storyline I am watching in China is Motorola. Lenovo moves decent volume in China, but they are perceived as a lower end brand even though some of their hardware is quite nice. Motorola fits nicely into a higher price point, more in line with some of the Oppo and Xiaomi mid-range offerings. All our research continues to show significant interest in foreign brands. Chinese brands are having trouble moving upstream in the market and selling smart phones at higher priced tiers. This creates an opportunity for foreign brands. The key point is that, while ZTE, Huawei, and Xiaomi have their eyes set on international expansion, brands like Apple and Motorola are looking to gain share in the region.

Lastly, India. Other than strong continuous growth, India’s picture has not changed very much. Samsung is still the number one vendor, and Micromax is catching up. Apple is slowly but surely climbing but it is very slow.

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Where do We Go From Here

As we look at where we are today, we have to also make some points about where we are going. As I pointed out in my column yesterday, it is clear Apple is getting a near lock on the most profitable segment of the market. As Samsung’s strategy becomes clear, we will cover it for subscribers but the trend lines are not favorable for them to recover much, if at all, in premium. With all the future smart phone growth coming from lower end devices, the next phase of mobile is going to look nothing like the first. These markets will separate and it is unclear what the picture looks like for the next two billion smart phone users. To illustrate this, I’ve created this chart.

tiers

This chart is a picture of the current 2 billion smart phone owners. What I’ve done is illustrate the smart phone platform share of the current price tiers. However, at the bottom I have left it intentionally open to highlight that the battle for the next two billion smart phone users is anyone’s game. Certainly Android could grow to fill that gap or maybe it will be an Android fork or alternate platform like Cyanogen. Perhaps Windows Phone is positioned well for the next few billion. Or perhaps something out of left field like FireFox OS. What’s clear is if there is an opportunity for a third OS the opportunity exists in the gap pictured in my chart.

The majority of smart phone’s sold and in use at the end of 2014 were in the mid-range and high end price points. Increasingly toward the end of 2014, we saw an acceleration in phones costing less that $200. Which brings this nugget from ABI Research into light.

seq

Why did Android smart phones decline? My answer is because the market for smart phones above $200 is drying up. The next phase, as we get out of tier 1,2, and 3 China and into the rural villages, will demand smart phones much cheaper than $200. Similarly in India, getting past the nearly 200m smart phone owners in the region and into the next phase of growth will happen with much lower cost devices. We are in a slight pause, as we look to re-accelerate growth as very good, low cost devices enter the market. Sometime in 2015, we will likely cross the 400m mark for smart phone shipments in a quarter. And this will be the new normal as we near 2b smartphones sold in a single year. To see how we believe that plays out, I’ll leave you with my chart on smart phone price tier forecasts. We will soon be living in a mobile first world.

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Understanding Xiaomi Part 2: As an Internet of Things Company

In part one of this series, we looked at Xiaomi as a smart phone company. While smart phones are essential to their lineup, I don’t believe Xiaomi is a smart phone company. In the same way companies such as LG, Samsung, Apple, are in the smart phone business but are not smart phone companies. Every company has a lineup of products. These product portfolio’s are generally quite strategic. Xiaomi is also in more categories that just smart phones. They also make TVs, smart set top boxes, routers, portable power bricks, and even air purifiers. I fully expect the number of connected products Xiaomi makes to grow and grow quickly. For Xiaomi, I believe the smart phone is the gateway to not just the lifestyle but the connected ecosystem they want to build.

This by itself does not sound too terribly unfamiliar, since you could make a case Apple, Samsung, LG, Sony, and others are oriented the same way. Xiaomi, I feel, may be in a slightly different position due to their relationship with the Shenzhen manufacturing ecosystem. For his TIME column, Tim Bajarin highlights a high level view of our thinking on this ecosystem. The Shenzhen manufacturing ecosystem, known by insiders as CTE (China tech ecosystem) is potentially extremely disruptive, something I will look deeper into for subscribers in the coming weeks. What you need to know for now is their capabilities to make things fast, at high quality, at scale, is increasing at an incredible rate. Using this ecosystem, the connected products Xiaomi can make is nearly limitless. A wide array of smart home and other Internet of Things products are all options for them using this ecosystem. And as Xiaomi is able to keep lowering costs of components even as devices are being made and sold, they increasingly generate more margins with current products in real time using their model.

Many will rightly point out Xiaomi simply can’t make every connected product. This is certainly true. They may not make them all but they want to build around this category whether they make the hardware or not. My guess is the hardware that has a static fit, like routers, TVs, tablets, and power bricks are all related. In no time they will have a smart watch. Connected security cameras, home automation, etc., are all within their ecosystem as I understand it today. What the China tech ecosystem allows Xiaomi to do is quickly get into connected product markets that fit their ecosystem and strategically help drive the lock-in loyalty they seek. When we analyze platforms and ecosystems, we like to use the word “moat.” Companies are trying to build a moat to protect their castle. Xiaomi is building a moat and I believe the combination of the China tech ecosystem and accompanying connected products are part of this moat.

Xiaomi is also looking to enable the third party ecosystem by offering modules and platforms for other connected products companies to utilize. Ben Thompson in his daily email update after the Xiaomi event shared how the module was positioned:

Lei Jun, though, went on to say that this would not be the only way to get devices that can be a part of Xiaomi ecosystem. Instead he announced a new Xiaomi module, available to manufacturers for $3.50 that, if added to their appliances would allow them to be controlled by Xiaomi phones, greatly expanding the ecosystem of devices.

Lei Jun, has gone on record saying Xioami is an internet company. He broadly and loosely uses this term but the core of it is significant. The Internet is clearly an enabler for their connected systems, but even the software and services components of this idea have significance to the kind of connected products Xiaomi can make. Ben Thompson also took this picture, which is not just an image of Xiaomi’s vision but of how they position their products in the ecosystem.

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Look where the smart phone is in relation to the cloud, then where the cloud is in relation to other connected products. The cloud sits right in the middle. I bring out this point because the name brands I mentioned earlier, LG, Samsung, Apple, etc., all seem to have varying degrees of difference on this chart and the role of the cloud. All are similar in that the smart phone is the primary endpoint, but the relationship of the cloud seems to differ depending on what cloud means to their ecosystem.

Years ago I used this slide to articulate the concept of the smart phone at the center of a connected products ecosystem. Here is my slide.

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In my slide, I talk through how not all products may be connected to the internet. Some may be more machine-to-machine communication. Meaning, something like a connected door lock may only be able to be connected from a short range wireless solution like ZigBee or Bluetooth. Connected product vendors will ultimately make these decisions but the cloud still plays a holistic role in each platform player’s vision.

Everything I see from Xiaomi related to their cloud solution, apps, services, and connected products beyond phones, still appears to be very China specific. It will be interesting to see how Xiaomi can take this connected product vision and create regionally relevant connected products and services. It seems Xiaomi’s ultimate goal is not to just sell smartphones into other areas like India, Indonesia, Brazil, etc., but more connected products. Yet things like air purifiers aren’t necessary in other markets like they are in China. Ultimately, this is Xiaomi’s challenge. To not only provide localized software and services, but also hardware. The Shenzhen ecosystem is their wild card in this venture but it is no slam dunk.

I said in part 1 of this series Xiaomi is not a smart phone company. I believe as we analyze them as an Internet of Things company we are getting closer to the type of company they are. However, in part three of this series we will analyze them as an internet services company.

Understanding Xiaomi Part 1: As a Smart phone Company

I am going to embark on a three part series about Xiaomi. Today, I’ll talk about Xiaomi as a smart phone company. Next, I’ll talk about them as an Internet of Things company. Lastly, I’ll talk about them as an internet services company.

Their Role As a Smart phone Company

Where does Xiaomi fit as a smart phone company? Right now, 95% or more of their volume is in China. It took them five months to sell 1m units in India. Apple still sells more phones in India than Xiaomi in terms of quarterly volume. However, I don’t believe that will be true for long. But, as of the end of 2014, China has been Xiaomi’s primary market. Quite a bit of their strategy and positioning has been focused on China. I detail it in this video analysis. In China, Xiaomi has an app store, an e-commerce store, an e-book store, a video games store, a cloud synchronization and backup service, and more. All of this is regionalized to mainland China.

To take a snapshot with updated data to date, here is Xiaomi’s current quarterly trend line.

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You’re probably asking: what happened in Q4? This is where an important point of how Xiaomi is positioned comes out. What happened to them in Q4 was Apple. Apple had its best quarter by a significant margin in China. The demand of iPhone 6 and 6 Plus was extremely strong in China. Understandable since Apple is arguably the most aspirational technology brand in the world.

Here lies the key point which became clear, for me but not everyone, from Xiaomi’s launch of their latest flagship smartphone. Xiaomi is not actually going after Apple’s customer base. Rather, they are setting themselves up to go after those who ASPIRE to buy an iPhone but can’t afford one. Xiaomi’s bet, and I would agree, is this could be a very large audience. This is why they compared the Mi Note to the iPhone 6 Plus. This comparison is designed to make the statement that it’s on par with the iPhone 6 Plus but less expensive. Xiaomi knows they don’t have the aspirational brand Apple does and, while they are building a fan base and a good brand, it is not clear they are trying to build the status symbol like brand Apple has. As I point out in this Insider post, in China everything about a person externally says something about them. Everything from the car they drive, the clothes they wear, the technology they use, etc., says something about them. A Xiaomi phone says, “I’m upwardly mobile”. An iPhone says “I’ve made it.” While there are similar dynamics in western markets, It is exceptionally pronounced in China.

The price of the new Mi Note is $370, which is the one I believe Xiaomi thinks is their mainstream flagship. They also released a Mi Note Pro that costs $532 and is loaded with specs, which the China market likes. This product, while some may think is designed to go after Apple customers, is actually more of a test of their offerings at this price range. I do not have high hopes it will sell in volume in China or any other market.

Comparing Apple to Xiaomi is certainly apt in some areas where there are similarities. But we have to recognize that, while they have similarities in approach, ecosystem, etc., they are targeting different customers. They are, if I can summarize, bringing an Apple-like solution to the middle-low end of the market. They are bringing Apple’s device, software, and services approach to markets Apple does not care about.

All of this leads us to the next question and analysis. Can their positioning go global?

The Biggest Phone Company in the World

Xiaomi’s CEO Lei Jun said publicly, “we want to be the biggest phone company in the world.” I’m not sure I believe Xiaomi is a smart phone company. I’m also not sure Xiaomi believes they are just a smart phone company. However, the Xiaomi team understands the centrality of the smart phone as the primary computer for billions of people. So, whether or not they are ultimately a smart phone company, the smart phone is central to their strategy. This is where we analyze them on the basis of a phone company and ask the question: can they become the biggest phone company in the world?

Honestly, I really struggle with believing they can. Primarily because it goes against the strongest trend wave I’m observing in the market right now, which is what I call “home field advantage.” Xiaomi understands the future is in software and services, not hardware, at least for the market they are going after. I see two fundamental global headwinds against Xiaomi in many markets.

  1. Local Brands: One of the main points in favor of local brands is local consumer sentiment for local brands. The Chinese are very proud of their local brands. In many cases, supporting a quality local brand like Xiaomi has a great deal of national and cultural pride behind it. We see the same thing in India with Micromax. There are local vendors growing in UK, Russia, Brazil, Indonesia, etc. Not in all cases is local pride a part of the success but there are certainly more than a few pockets where this is taking place. I believe this sentiment exists and it will continue to grow as a trend, assuming the local vendors do not make fatal mistakes in the market.
  2. Local Services: One of the other reasons local brands are doing well is because they are tightly integrating local services. Local services are driving a great deal of the growing demand in many of these high growth regions. Commerce, media, internet services, etc., are all key parts of local experiences. It is becoming increasingly difficult for foreign brands to identify the key local services and integrate them quickly enough to compete with the brands on the ground in these markets.

The question often comes up as to whether Xiaomi will attempt to enter Western markets like the US and Europe. IP issues are quickly noted, but Xiaomi appears to be taking steps at a component level to take their products international and even to regions where they may have faced IP issues in the past. However, I still think they are a long way, if ever, from coming to the West. These major points play into this opinion but it’s also a matter of how unique the US is when it comes to subsidies. So what if Xiaomi offers an affordable premium product? You can get an iPhone for $199. I’m not sure Xiaomi can offer any product, even for free, that could remotely compete with an iPhone even if that iPhone is $199. Maybe some day, but not in the near future. It is also important to note, Xiaomi doesn’t need to come to the West to be the largest smart phone maker in the world, or to even be successful.

It seems as though, for now, Xiaomi is going to use Google’s services outside of China. Which means price competition will remain a key factor. When you run someone else’s software and services, you are only as good as your lower cost competitor. Fascinatingly, Xiaomi’s greatest competition is the very thing that enabled them to become what they are today, Shenzhen’s manufacturing industry (I’ll dive into why this industry is disruptive in a later post). This industry enables extremely good and very low cost hardware. While Xiaomi may attempt to create lock-in with hardware and services, what is to stop local vendors from using the Shenzhen manufacturing industry to create equally good hardware and tightly integrate their own local software and services? Yes, Xiaomi will try for lock-in via their own software and services but it is very difficult to create globally differentiated and regionally specific services plays at the same time.

Xiaomi would have to fight against these headwinds. They are the exact same ones causing Samsung’s decline. Keep in mind, Samsung has a good, strong brand in many of these markets. Yet, they are running into the above issues themselves. So what does Xiaomi do or offer that Samsung hasn’t or doesn’t in these regions? More importantly what will Xiaomi offer that local vendors can not or are not? We will explore this in part 3 of this series.