Why do we care about Xiaomi?

'If you have nothing to tell us, but that on the banks of the Oxus and the Jaxartes, one barbarian has been succeeded by another barbarian, in what respect do you benefit the public?' - Voltaire

The Android smartphone business can feel like it's a rerun of the PC business, but compressed into 5 years instead of 20 or 30. The component layer is mostly a commodity, especially below the high end, and so is the operating system layer, and manufacturers are stuck in the middle, all of them using the same basic components and the same software (Windows for PCs, Android for phones), and so unable to differentiate on much beyond than price. The result is a race to the bottom with distribution, marketing and manufacturing scale the bases of competition. 

Today, Samsung's dominance of Android (with close to half of unit sales) appears to have peaked and a wave of companies appear to be able to use the entire Shenzhen manufacturing cluster or ecosystem to achieve many of the benefits of scale without having vast factories themselves. We see this in Chinese companies such as Xiaomi, OnePlus or Gionee, and also in local companies around the world that are having their phones made in China and basing their business on branding and distribution - some examples are Micromax in India, Cherry in the Philippines, Blu in Latin America or Wiko in France, which claims over 10% market share. Many of these are simply picking standard models from the big contractors in China and adding a brand - hence one big OEM told me 'when those guys say they designed it, they mean they went to Foxconn and asked for models 4, 23 and 39'. It's not clear quite how big you can get on this model, nor how like the PC clone business (i.e. eventually consolidated) it will end up. Equally importantly, it's far from clear how global these companies will be, but that may not matter. 

In this environment, just as in the PC business, some companies and some business models do better than others, but that doesn't necessarily matter to anyone else further up the stack. Gateway 2000 disappeared and Dell prospered, but that didn't much matter to PC buyers, let alone software developers or anyone on the web. Equally, Samsung rose to dominance and now slips, Lenovo buys Motorola and invests in mobile, HTC faltered and Sony goes sideways and Chinese OEMs are rising, but the phones keep coming.

(This issue is also one of the problems with Mobile World Congress in Barcelona, from which I've just returned. When I started going to this conference, in 2000, operators and handset makers drove the agenda for the whole consumer experience and the show was the place to see that, but today that agenda is driven at Google IO, Apple's WWDC and, perhaps, Facebook's F8.) 

So these companies, XIaomi included, are interesting to people who are interested in the handset business, then, but why do they matter to anyone else? Xiaomi sold 75m phones last year, yes, but isn't it just another OEM with a new branding and distribution model, and its rise relative to Samsung, say, no more interesting to anyone not in the handset business than the rise of Dell relative to IBM's PC division was? And it's mostly in China, for now  - isn't it just one 'barbarian' defeating another in a far away place

Well, up to a point. Though it's certainly possible to get over-excited about Xiaomi, this sort of dismissal misses several important threads worth pulling on. 

First, PC OEMs mostly failed to differentiate in design, and this has also been true of the Android market (and especially of the biggest OEMs), but the Chinese appear to be learning design, and quickly. Xiaomi, Gionee and several other companies are making phones that are visually appealing, using materials and finishes to differentiate from the run of black plastic rectangles that predominate in Android below the high-end (there are several consultancies composed of former Nokia people serving this market). A couple of these phones look superficially similar to Apple products - most do not. They're nice-looking, interesting, and half the price. (Interestingly, the way this has played out in China so far is that Samsung's share has fallen fast but Apple's has grown: they're selling to different customers.) 

Second, PC OEMs never managed to create any meaningful differentiation in software, and neither again did the Android OEMs, but Xiaomi has, and so have some of its imitators. The difference is that unlike most previous OEM attempts at software, they are not trying to compete with the whole internet. Instead of relying on vertical point solutions (photo editing and music services etc, though it does have some of these too), Xiaomi builds a thin horizontal layer between the commodity AOSP OS and third party applications. It has rebuilt the Android front-end - the whole UI from the launcher and notification panel down to the preference panels - to make it simpler and cleaner, changing the experience of using Android. This sometimes looks superficially rather similar to iOS 7, but this is a little misleading, which is hard to get from screenshots: a big part of the uniqueness is the animation. A Xiaomi phone feels very different from an iPhone or 'stock' Android phone, across the whole experience.

In addition, Xiaomi has packaged together a suite of integrated OS-level services that remix what Google and Apple provide in a similarly integrated way. In this it is of course helped by the fact that those Google services are mostly unavailable inside China and Apple's require you to spend 2-3x more on a phone. People tend to talk a lot about Xiaomi's services as a way to sell the phones at lower prices, but we know from various leaks that the revenue from these is actually immaterial, at  least for now - the point again is the experience that they give. 

It's a common reflex in the USA to call Xiaomi and similar companies copycats, on both a hardware and software level, and there's certainly a lot of design inspiration going on, but dismissing these phones as rip-offs is rather lazy. When you actually hold them and use them you would never mistake them for iPhones, any more than you'd mistake a $500 coat or bag for the $2,000 example that sometimes inspires the colour or trim. You can sometimes see where it came from, but it's not the same, nor is it trying to be. Rather, they deliver a similar approach to the user experience at a lower price in a way that's often been absent from Android so far (it's hard not to look at some of Nokia's beautiful Lumia devices and wonder what impact they might have had on Apple if they'd run Android).   

The result of this is that we now appear to have at least a couple of Chinese companies doing what was supposed not to be possible - low-margin companies using commodity components and a commodity OS, yet achieving differentiation in design, software and services. Looking at China always challenges your assumptions about what's inevitable in technology. Hardware companies doing good software and UI? Commodity box-shifters learning design? How far might that spread? 

Finally, this shift in what handsets might look like also has a broader implication: the spread of new types of Android OEM might change Google's control of Android. 

Historically, Google's lock on Android outside China has therefore been based on three things: 

  • You can't experiment outside very tight constraints: making even one forked device means Google won't allow you to sell a single phone running Google services. And all the OEMs have too much to lose to risk experimenting
  • There's a widespread belief that an Android device without Google services (really, this means Maps and the app store) is unsaleable outside China (I'm not entirely sure about this, as I wrote here)
  • No OEM managed to build a compelling set of services or tools of its own that might offer alternatives to Google, because, well, that was impossible (see above)

These new trends place all of those in question. The growth of smaller operators pursuing different models, with no existing base of sales and hence nothing to fear from  Google ban, may mean more experiments with forks. Xiaomi and its imitators point to a new potential model to differentiate (and note that Xiaomi is not a fork), and Cyanogen (an a16z portfolio company) offers the tools to do it. Smaller OEMs are less powerful than Samsung as a counterpart to Google, but also harder collectively to impose upon - Google can't shout at them all. This isn't to say that I necessarily expect to there to be lots of local attempts at the Kindle Fire, but we may start seeing a lot less uniformity in how Android comes to market, and what it looks like. 

 

In mobile, disruption comes from above

The classical description of disruption in business, and especially technology, is that a new product (method, business model etc) appears that’s not as good as the existing way of doing things, but that’s much cheaper. The existing industry thinks it’s a joke, and certainly not a threat. But over time, it gets better while staying cheaper, and then, sooner or later, it’s not a joke at all. 

You can see this basic story over and over again in the history of the technology industry. The future always comes looking like a toy. But right now the tech industry is being reset by the mobile, and in mobile, disruption tends to work the other way around. The new thing tends to arrive looking like an expensive luxury for rich people, doing far more than any normal person would need. But over time it gets cheaper, and the new, unnecessary characteristics turn out to be very necessary, and the the old, cheaper, less capable model gets squashed. 

That is, in tech the cheap weak product generally gets better quicker than the good expensive product gets cheaper. But in mobile, the good expensive product has generally got cheaper faster than the cheap, weak product got good. Moore’s Law is operating in both cases, but the effects are different. 

As for all theories, there are exceptions and gaps (‘all theories are wrong but many are useful’), but it’s worth looking at those cases where it does hold true. 

The really obvious example is mobile itself. Twenty years ago cellular was an expensive luxury for millionaires and drug dealers - status symbols no normal, sensible person would ever need. You have a telephone already - who needed mobile? But once the devices and networks reached a minimum threshold the appeal of mobility was much greater than the appeal of a landline's price. (Moreover, price turned out to be more nuanced - a prepay phone can look cheaper or more expensive than a landline depending on your point of view.)

At the same time, there was a lot of debate about quite what kind of mobile network was best. Anticipating the ‘wifi is good enough’ argument of the early 2000s, there were several attempts to offer cheaper ‘limited mobility’ services that would only work if you were in a specific place. You can see an (appallingly bad) ad below for one of these in the UK, Rabbit: the PHS networks in Japan were the only, Galapogean survivor of this. It turned out that mobile phones need to be, well, mobile. (An old colleague of mine suggested that the root of all the problems in the USA was calling them ‘cell phones’ instead of the British ‘mobile phones’, but then the Germans call them ‘handys’ so who knows.)

Now, did you notice that little message at the beginning saying 'outgoing calls only'? I'd forgotten that part. 

The contemporary counter to this, of course, is Iridium, which was too expensive and ‘too good’, with global coverage out of the box overshooting customer needs relative to cellular. However, though Iridium could give you a signal in the middle of the ocean or desert, it couldn’t give you a signal inside a car or an office, needing line of sight to a satellite, and the phones needed their own porter, so I’d suggest that actually, Iridium was more expensive and worse than cellular, not better.

Exactly the same thing then happened with the idea that wifi would threaten cellular - 3G got cheap enough and fast enough that ‘free’ wifi data for your phone was irrelevant, while wifi coverage never matched even the ‘good enough’ target of ‘most of a city’. Better and more expensive beat cheaper and good enough.

Arguably, you can see the same thing happening again with projects like Firefox OS. Entry-level Android phones are now well under $50 - the price window between ‘only a feature phone’ and ‘I can’t afford Android but want more’ is moving down fast. It’s tough to compete with the scale effects of the whole Shenzhen ecosystem. Again, the better, expensive product gets cheaper. 

Most recently, of course, the iPhone came in at a very, very high price in the context of the phone market in 2007 (even after Apple realized it needed subsidies after all). It’s certainly valid to say that it disrupted PCs from below, but it did, actually, disrupt mobile phones as well - just ask Nokia, what’s left of it. The new paradigm was a large phone with a multi-touch screen, ‘PC-class’ OS, relative indifference to bandwidth efficiency, target battery life of a day instead of a week, and durability targeted as ‘well, don’t drop it then’. It was also an MVP (no 3G, basic camera, etc, etc). For all these reasons and more the industry laughed at it, but Apple created demand for a $600 phone on a scale that had never existed before and its cousin Android then drove the same model down to much lower prices. The Symbian model, and the feature phone model, didn’t grow to meet the new, expensive challenge - the expensive challenger model took the top of the market at a new, higher price point, and then (incarnated as Android) got cheaper and took the rest. 

The fact that multitouch smartphones make different trade offs to feature phones around durability and battery life does of course blur the question of whether it is 'better' or just different. But I'd suggest 'better' is subjective: what is not in doubt is that the more expensive approach has beaten the cheaper one. 

There are a bunch of different subsets to this story, of course. Another counter-example, stronger than Iridium, is that within the mobile operator industry each country generally has some operators with strong networks (good coverage, high speeds and capacity) and others with weaker networks - the stronger networks generally charge a premium, and some consumers choose to pay the extra and some decide the cheaper one is good enough. Most recently, this is what Iliad/Free is doing in France (helped by heavy regulatory support) and Deutsche Telekom's subsidiary T-Mobile is trying in the USA. But I’m not sure that counts as ‘disruption’ so much as ‘cheaper competition’, which is where I’d put Android as well: a similar product at a lower price, not a different product serving the same needs at a different price.  

I don’t propose a perfect, unified theory to explain why mobile seems so often to work like this, but that's less important than the observation, I think (or, perhaps, I’m just suspicious of unified theories). The tech industry is very used to the idea that incumbents always laugh at disruption because though it’s cheap, it’s also crap, not realizing that history tells us it will get better. But we also have to remember not to laugh at things that are amazing but way too expensive, because history tells us they might get better and cheaper, faster than you can add 'amazing' and put it through a waterfall. 

Podcast: Slack, messaging and institutional memory

You've heard the story: Slack began as a game. But almost exactly 1 year ago today, the internal tool the team built for its own use became a team communication app that anyone (and especially enterprises) can use -- and is now one of the fastest growing ones at that.

It seems like collaboration is "something software should be helping us with” Slack co-founder Stewart Butterfield observes, yet it typically isn't. So what can an app like Slack tell us about how we work today, and how the nature of work will change (fewer meetings? less emails)?

Butterfield is joined in this edition of the a16z podcast by a16z board partner Steven Sinofsky and a16z's Benedict Evans. The trio examines the origins of messaging and task management tools (many of which Sinofsky worked on at Microsoft) -- and how the advent of cloud-based services and mobile in particular have changed the requirements for modern workplace tools and information management.