Author(s): Raghu Gopal
Xiaomi's executives have long talked about selling its smartphones in Western markets, particularly in the US. Earlier in 2016, the company practically committed itself to such a move, assuring fans that its phones would become available next year. But it takes more than a solid product portfolio to compete; it takes a strong patent portfolio as well.
Earlier this week, an agreement between Microsoft and Xiaomi was announced, under which about 1,500 Microsoft patents would be transferred to Xiaomi. In return, Xiaomi will pre-install Microsoft's Office suite on all of its smartphones. Without knowing details of the patents, the deal appears perplexing.
Xiaomi's primary smartphone market is still its home country of China, though it has had noticeable success in Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore and Taiwan. Xiaomi has become a top-five global player in less than five years of existence, but its momentum has recently slowed in China, where competition among other Chinese brands is getting intense, and in India, where local brands such as Micromax and Lava have been making things difficult for foreign competitors.
The deal with Microsoft reflects Xiaomi's efforts to acquire the intellectual property it needs to sell its devices beyond developing markets. If the patents were acquired in exchange for preloading Microsoft apps onto Mi smartphones, it was a good deal for Xiaomi, however some ongoing or one-time financial transaction in addition to the preloading deal seems likely. Microsoft will be hoping to get more exposure in China, a market where Microsoft Office is widely used but seldom paid for. Getting even a small subset of Xiaomi smartphone users interacting with Office 365 would be a solid step forward.
The deal could now mean that Xiaomi has the patent ammunition to defend itself in markets where it was vulnerable to intellectual property lawsuits. Xiaomi certainly won't be immune to such problems, but, assuming that the majority of the transferred patents are related to wireless technology, this should give Xiaomi a new level of confidence.
But patents alone won't assure success in any country Xiaomi enters. Most markets have become saturated, flooded with similar-looking devices that are declining in price. If smartphones are essentially the same these days, Xiaomi could attempt to differentiate itself with its flash sales model — potential buyers must preregister for a sale that begins at a set date and time. When the sale begins, there's a rush to buy. Many potential customers are left empty-handed, reinforcing the scarcity and excitement around the device launch.
However other companies such as OnePlus, which have historically used flash sales, have started to abandon them in favour of a more traditional go-to-market approach. Furthermore, Xiaomi cannot keep selling devices at near cost if it can't find ongoing revenue elsewhere — for example from content and services on its phones — something it has attempted in China but will be harder in international markets.
There's still no exact timeline for Xiaomi to enter the US market, though it's not a complete stranger to it. The company sells several accessories through its mi.com e-commerce site, but it's more of a placeholder for larger ambitions. Last month at Google I/O, Xiaomi introduced its first US-specific device, a TV set-top box based on Android TV.
Xiaomi has certainly been expanding beyond smartphones. It recently launched a tablet that runs a version of Microsoft Windows and has introduced a series of connected home products.
CCS Insight believes that the patent deal with Microsoft is a big boost for Xiaomi and should allow it to accelerate its expansion plans into developed markets. However, we don't expect Xiaomi to have an easy time entering new markets. It will need to secure distribution partners, a significant marketing budget to build a brand, and will likely need to address further patent and intellectual property challenges. It's not going to be easy being Mi.