Xiaomi – MI phone home

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MVNO builds users but not profits.

• Xiaomi has updated its flagship Chinese smartphone with the launch of the Xiaomi Mi 4c and also launched an MVNO to support its devices and ecosystem.
• Although the product logo makes it look an awful lot like the iPhone 5c, I suspect that the c stands for China just as the “i” in the 4i stands for India.
• The Mi 4c sports a 5” 1080p screen, 13MP / 5MP rear and front facing cameras, a 64bit Snapdragon 808 processor, fast charging and the Xiaomi Ecosystem on top of MIUI.
• The Mi 4c will be available for $204 – $235 (depending on memory and storage).
• Xiaomi also launched its MVNO service, Mi Mobile with a triple cut SIM card (fits all devices) and two PAYG packages: 1) $0.02 / minute and 2) 3GB of data for $10 per month.
• The voice plan uses China Telecom’s network while the data tariff uses China Unicom but users can bolt on voice to the data plan at the same rate being offered on CT’s network.
• These plans are significantly cheaper than tariffs being offered by China Mobile and as long as network quality is acceptable, it could see some traction.
• These two launches clearly demonstrate Xiaomi’s continuing strategy to entice users into its ecosystem and worry about the profits later.
• This continues to be my only real concern about Xiaomi but from an investment perspective and a $45bn valuation, it’s a pretty big one.
• The most pressing problem from Xiaomi’s perspective is that its momentum has ground to halt.
• After a fantastic run in 2014, Xiaomi’s quarterly unit shipment growth has been flat in 2015 at around 18m per quarter.
• I suspect that this has happened because there are limits to the volumes of devices than can be sold over the Internet.
• To fix this, Xiaomi is expanding into other countries as well as exploring the more traditional distribution methods such as mobile operators and distributers.
• Unfortunately, both of these mean increased costs and / or lower prices which will consume any volume based savings that result from higher volumes.
• The end result is that margins are likely to stay exactly where they are, meaning that the business itself will continue to generate very little cash.
• I think that this is a major problem because Xiaomi needs to develop its ecosystem in China and take advantage of the fact that its competitors in this field (BAT) are still at an early stage of development.
• Only by having hundreds of millions of users demanding to use Xiaomi Digital Life services on its devices can Xiaomi hope to make a decent margin on the devices that it sells.
• This is why it must restart its growth as RFM calculates that with its current volumes, it will fail to achieve the critical mass required to achieve high profitability before 2018.
• Xiaomi needs to invest heavily to build its ecosystem and I think that its internal cash flow is not strong enough to support this without returning to the market.
• At $10 for 3GB and $0.02 / minute, the MVNO is also unlikely to be able to plug the gap.
• I see potential for another round as it becomes clear just how much its competitors are investing to build their own ecosystems and important it is for Xiaomi to keep up.