Xiaomi – All mod cons. – Radio Free Mobile

The new Mi5 has everything except profit.

Xiaomi’s strategy of getting users on board is working but the need to make money from them is becoming increasingly acute.
Registrations for its latest flagship launch, the Mi5, have passed 16.8m for today’s flash sale in China which does not come as an enormous surprise.
This is because fans have been waiting 18 months for an upgrade and Xiaomi seems to be virtually giving the phone away.
Everything about the Mi5 is high end except the screen which has an acceptable resolution at 1080p.
The Mi5 sports a 16MP Sensor, a Snapdragon 820 processor, 3GB of RAM and 32GB of storage for an incredibly reasonable $305.
At the same time the company has said that it has passed 170m users but there is no sign of monetising them.
One of the main reasons for this is that a large proportion of its users are not using a Xiaomi device.
RFM calculates that at the end of Q4 15A, that there were 103.2m users with a Xiaomi device leaving 66.8m that have used one of the 69 or more mods that are available to put MIUI on a non-Xiaomi device.
I believe that the vast majority of these ‘mods’ are outside of China where Xiaomi has no ecosystem and instead pushes Google.
This means that the effective user base from which it could potentially make money is actually around 100m.
Xiaomi has chosen the hardware route of monetisation but unlike Apple, the ecosystem is clearly not exclusive to the device.
Consequently, should Xiaomi’s ecosystem become popular, it will be unable to put its prices up because users will be able to download a ‘mod’ and get the ecosystem for free.
This is why I think that Xiaomi will have to either shut down the ‘mods’ or start charging for them to begin the monetisation of its ecosystem.
This is still a long way in the future, and the Xiaomi ecosystem still needs an awful lot of work before it gets to the point where it can begin to make money for its owner.
Xiaomi currently offers, media consumption, messaging and shopping giving it 25% coverage of the Radio Free Mobile Digital Life Pie.
In order to be considered a fully-fledged ecosystem, it needs more services which in turn necessitates heavy investment.
Xiaomi’s rivals (Baidu, Tencent, Alibaba and China Mobile) are all investing heavily and critically they also have internal cash flow to pay for it.
Xiaomi does not and it will be very difficult to come back to the market as this will necessitate raising money far below the 2014 valuation of $42bn.
I have recently valued Xiaomi at $5.9bn (see here) and I see nothing in these more recent numbers that leads me to change that view.
There is pent up demand for the Mi5 which is likely to cause a bump in shipments but once this has been satisfied units are likely to revert to around 18m per quarter.
Furthermore, I suspect that the bulk of the demand is coming from existing Xiaomi users, meaning that the user number is unlikely to see a sudden jump.
Hence, I think that Xiaomi remains in a very difficult position despite its early lead in China, as it does not have the internal cash flow to out-invest its large rivals.
I can see it being forced into the arms of one of the larger Chinese players as further fund raising is needed and this is going to be a real challenge.