Xiaomi can’t afford to let its hype go to waste
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Xiaomi has poached one of Google’s top executives – but can it steal Silicon Valley’s tech crown? The Chinese smartphone maker already outsold Apple’s iPhone in the Chinese market in the second quarter of 2013. Its valuation has ballooned from $4 billion to $10 billion in a year, based on a recent capital increase. Hiring former Googler Hugo Barra will fuel the hype; Xiaomi shouldn’t waste it.
Xiaomi’s business model is part hardware, part software and part social networking. Xiaomi’s Android-based operating system is updated every week, making it a hit with tech nerds. Service and clubbiness are its other strengths. Users can ask for help via microblog Weibo and get a reply in minutes. A dose of scarcity marketing adds secret sauce: the low-cost Hongmi model sold out within 90 seconds of its recent launch.
The company, whose name means “small rice”, hasn’t released details of its latest funding round, but the $10 billion valuation isn’t too demanding. Xiaomi aims to sell 20 million handsets in 2013, almost three times as many as last year. Assuming an average price of $250, that’s $5 billion of revenue. After applying the company’s net margin of roughly ten percent, the new valuation is a pretty un-racy 20 times earnings.
What’s missing is a “moat” to protect Xiaomi’s share of the viciously competitive smartphone market. Its operating system has won over around 20 million near-fanatical users, but companies with bigger budgets, from Baidu and Alibaba to Huawei, are also targeting users’ small screens. Xiaomi has so far relied more on charming customers than locking them in, as Apple did with its closed ecosystem, or as Blackberry did by targeting large-scale corporate email users.
Hot tech upstarts have waxed and waned in other markets. For Xiaomi, the biggest challenge may be expanding its user base while retaining the core fans. So far the focus on service and schmoozing consumers, rather than relying on hardware, suggests the hype is deserved. Raiding Google is a coup. But it will take something stickier to turn Xiaomi into China’s Apple rather than its Palm Inc.