Why Xiaomi Will Probably Fail in the United States

By Markets Fool.com

It didn't take Xiaomi long to crack the Chinese smartphone market.

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Founded less than five years ago, Xiaomi is already one of China's largest smartphone vendors. In the second quarter last year, it sold more handsets in China than any other company. The release of the iPhone 6 allowed Apple to overtake Xiaomi in the fourth quarter, but the fast-growing start-up remained in second place.

But while Xiaomi appears to be a fierce competitor in China, don't expect that same sort of success in the United States. Xiaomi's reliance on a forked version of Google's Android operating system makes it unlikely that its business model will find much success overseas.

Xiaomi relies on MIUI
Xiaomi's business model is fairly straight-forward: It sells powerful devices at bargain prices. Xiaomi's current flagship, the Mi 4, packs technology on par with Samsung's competing Galaxy S5, but retails for a fraction of the price.

How does Xiaomi pull it off? The company's executives have cited a multitude of reasons (it spends almost nothing on traditional advertising, for example, and secures better supply chain agreements) but the single biggest factor comes down to the software.

Xiaomi's phones run a version of Android -- dubbed MIUI -- that strips out Google's services in favor of its own. There's MIUI Games, Mi Life, MIUI Directory, and most notably, MIUI Market, Xiaomi's app store. Users of Xiaomi's phones don't use Google Play to download apps, they use MIUI Market, and Xiaomi -- not Google -- takes a cut of the app revenue.

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In an interview with The Next Web, Xiaomi's Bin Lin explained the company's philosophy when it comes to profitability: Xiaomi doesn't look to make money when customers buy its hardware, but instead, when they use its devices.

"We think of hardware as just a platform to run services. We don't look to make money on the hardware, we are looking at users who have bought the hardware, then started to use our services ... It's the services that eventually bring in revenue."

The Fire sale phone
That philosophy is remarkably similar to one employed by Amazon . In 2012, Amazon's CEO Jeff Bezos told the BBC that the company wasn't looking to make money on its hardware, but rather through the sale of digital goods its hardware helped to facilitate.

Like Xiaomi's devices, Amazon's run a heavily modified version of Android -- FireOS -- that strips out Google's services in favor of Amazon's. Amazon's Kindle Fire tablets, for example, rely on Amazon's app store -- not Google Play -- and like Xiaomi, Amazon's hardware often packs technology far above its price point.

But that strategy has not been nearly as successful for Amazon as it's been for Xiaomi, particularly when it comes to handsets: Amazon's Fire Phone was one of the biggest disappointments of 2014, selling an estimated 35,000 units during its first 25 days on the market (for comparison, Apple sold 10 million iPhone 6 and iPhone 6 Pluses their debut weekend).

Amazon has had a bit more success in tablets, but not to a great degree. Amazon was one of the first companies to deliver a 7-inch tablet, but as soon as the competition caught up, the popularity of its products plummeted. Earlier this month, research firm IDC reported that shipments of Amazon's tablets last quarter fell almost 70% on a year-over-year basis.

China isn't like the United States
Xiaomi could do a better job than Amazon, but I wouldn't bet on it -- at least not in the current environment.

Americans may love a deal, but they're able to afford more expensive technology. American consumers are, as a whole, wealthier than their Chinese counterparts, and American carriers are more generous with subsidies and financing.

Unlike China, the U.S. is a mature smartphone market, and Google's services are well-established. While Google Play largely doesn't exist in China, it's dominant in the U.S., as is Google Search and Google Maps.

If Xiaomi hopes to compete in the U.S., it will either have to use a different business model, shipping devices with a more conventional version of Android, or offer smartphone owners something so compelling that they're willing to give up Google's services -- something no company, including Amazon, has been able to do.

Xiaomi is certainly a threat to Google and Apple in China, and possibly other emerging markets, but given the company's business model, it's unlikely to find success in the United States.

The article Why Xiaomi Will Probably Fail in the United States originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.