(Ecns.cn)--China's web tycoons are taking great risks to break into China's growing smartphone market. But can they stomach the competition?
Invasions are rarely heralded with much fanfare. Alternately somber, tense, anxious, and even tearful, they rarely provoke the sort of pomp and splendor that characterize more joyous occasions. And yet that is exactly what happened when fans flooded a news conference meant to announce a new, if somewhat less violent, invasion.
Held on August 16 by Lei Jun, head and chief investor of China's Xiaomi Science and Technology, Ltd, a Chinese web company best known for its mobile voice-to-text and chat applications, the conference announced, in suspiciously Steve Jobs-esque terms, the launch of Xiaomi's new smart phone later this month. The move, itself unlikely to threaten any of China's established cell phone giants, marks the latest in a rising tide of web companies making bids for China's cell phone market, most lately marked by Google's 17.5 billion dollar purchase of Motorola Mobility, the branch of Motorola that owns all of the company's cell phone operations and patents. Other such companies include Alibaba Group, a Chinese online marketplace that joined with a Chinese cell phone manufacturer to produce a phone earlier this year, and Yahoo, who announced this August that it would join with SoftBank, Japan's third largest mobile provider, to produce an Android-based smartphone for sale in Asia.
Together, these companies are shaking up the traditional division between IT, communications, and cell phone companies, taking advantage of the relative weakness of traditional cell phone manufacturers in software production and development to expand into the cell phone market.
Mobile Internet: an Ironman event
Interestingly, despite Xiaomi's expansion into the cell phone industry, Lei Jun told reporters that he still considers Xiaomi an honest-to-goodness internet company. Miliao, the company's flagship mobile internet app whose name can be roughly translated to "rice chat," remains its most well-known product and is almost certainly its chief source of income. However, a look at the competition faced by Miliao illustrates some of the motivation behind Xiaomi's move. Released late in 2010, Miliao's rapid growth was quickly eclipsed by the even more meteoric growth of Weixin, a similar program produced by Tencent, the company's whose wildly successful desktop text messaging program, QQ, now has more than 700 million users. Tencent released Weixin less than a month after Miliao's and quickly snapped up more that 150 million users (a sum roughly three times the number that use Miliao), and more importantly, established itself as the dominant messaging app packaged with the majority of China's cell phone manufacturers.
In fact, as Zhang Wangyan, secretary of Cell Phone China United, notes, Xiaomi's creation of its own cell phone was a necessary step to circumvent Tencent's stranglehold on China's cell phone manufacturers, virtually none of whom would be willing to switch to Xiaomi's less-popular app, and continue to improve Miliao's name recognition and ability compete against its larger competitor. And, the importance of Miliao in Xiaomi's decision to expand into the cell phone industry is further borne out by reports by industry insiders that Xiaomi's new phone, while retailing at a mere 1999 RMB, costs as much as 1600 RMB to produce, suggesting that if Xiaomi is looking to make a profit from its expansion into the cell phone industry, it will not come from the sale of the phones themselves.
Rather, Lei Jun himself has stated that Xiaomi intends to make the majority of its profit from the provision of services and software by the phone's users. As he notes, the mobile internet business is reminiscent of a triathlon – in order to succeed, competitors must be proficient not only in the production of the hardware that physically makes up a mobile device, but also in the production of the software and services its users depend upon. And, despite doubts that his company can profit from a business model that makes so little from the initial sale of its phones, Lei is confident that his company's strength in software development, as well as its 500,000+ fan base, will enable it to compete with its larger, better established rivals, telling reporters that "the way Tencent makes money, the way Baidu makes money...that's how we'll make money."
