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. 

 

Amazon and Android forks

The general reaction to Amazon's Fire Phone has been a puzzled shrug. It's a good but unexceptional device with entirely conventional high-end and high-margin pricing - a move as out of character for Amazon as the purchase of Beats was for Apple (and probably driven in part by the way the US pricing structure makes even $400 phones ’free’). There's an interesting quasi-3D UI feature and a big flashing BUY button, in line with Amazon's role as the Sears Roebuck of the 21st century, but little that really changes anything or couldn’t be done on any other smartphone anyway. And that leaves people wondering why Amazon bothered. The most productive line of thought, I think, is to look at Prime, Amazon's whale service, and the role that the Fire Phone plays in securing that relationship. 

To me, though, the interesting thing is less the phone than the platform and what it it represents - that is to say, the first real attempt to sell phone that forks Android outside China*.  

Android itself is open source, and anyone is free to take the code (AOSP) and build whatever they want. Android is the new Linux, in this sense. But AOSP doesn't give you Google's own smartphone apps and it doesn’t give you all the system services Google has built. So if you make an Android device without reference to Google, and change a bunch of things ('fork Android') your device won’t have the app store and the maps, and it won’t have the Google services APIs that lots of third-party apps need, most obviously push notifications, in-app payments, location and embedded maps. There are lots of other things Google makes as well, but those are both the important and the hard parts. 

Without this Google layer you really only have a featurephone, and to get Google's layer you need to submit to Google's control over what you make, which amongst other things means that you have to use Google's interface and you have to take the whole package - whatever Google wants on the phone goes on the phone. (The core mechanic here is that you have to pass the compatibility test). Hence, Google uses access to its apps and services as a lever to control Android. This is pretty similar to the way that Microsoft used Office and Windows: selling an Android phone without Google's services is like selling a Windows PC that doesn't have Office and can't run it. 

In China all of this works differently. Google services are either blocked or weak or both (the Chinese unaccountably didn't let Google send its mapping cars down every road in the country), while the Chinese internet giants Baidu, Alibaba and Tencent ('BAT') and scores of others have built lots of great Android services of their own. So the vast majority of Android phones sold in China (even from Samsung or Motorola) come with no Google apps and integrate these instead. 

Outside China, though, if you want to use Android as a platform but do something different, you need to build or buy those core functions yourself, and that’s what Amazon has tried to do. It has licensed Nokia’s HERE mapping platform, it has built an app store for Android, and it has built its own versions of the key enabling APIS - location, push notifications etc. 

The problem is that the maps and the app store are not commodities. Adding them is not just a matter of spending the money. Google's Maps platform is very good and HERE, at least in western markets, is not as good. As with Apple Maps, it works, mostly, but the gap is clear and there is no roadmap that points to that gap closing. For apps, though an app store itself is perhaps a commodity, Amazon has only persuaded a minority of Android developers to load their apps into its store, partly since this means they have to swap out Google’s APIs (for maps etc) for Amazon’s, and that is not necessarily trivial. Amazon has done just about as good a job as one could expect anyone to do at this stage, and there are very few other companies that could get this far - perhaps only Microsoft. But it hasn’t, remotely, reached parity with Google. 

And so Amazon is testing the proposition that you have to have Play (or iTunes) and Google Maps to sell a smartphone outside China - or, rather, it is testing just how good the app store and maps have to be. How many of the latest cutting-edge apps do you have to have, if you cover the basics? How close do you have to get to Google Maps’ coverage? We know Windows Phone does not have enough apps, but can the Amazon store get there?

These same questions apply to any Android OEM that might be thinking of asserting greater independence from Google (such as Samsung), with a further complication. Google’s agreements with OEMs have been leaked several times, and they include clauses that prevent you from having a foot in both camps: you cannot sell a forked device and carry on selling official Google Android devices. So you can’t experiment on the margins (Samsung can't sell a phone running Amazon's Fire software) - you have to walk away from Google entirely, or not at all. That's really no choice at all at the moment. 

All of this takes us to the elemental question - why, exactly, are you forking Android? What important problem do you solve that’s worth reinventing the wheel, while taking on the risk of building on someone else’s platform, open-source or not? Why are you asking people to buy a phone with second-rate maps and a second-rate app store? Are you offering them something you couldn’t otherwise do in return, or just addressing your own strategic concerns? Are you solving a user problem or your own problem?

Both Xiaomi and Cyanogenmod (an a16z portfolio company) have built their own very custom versions of Android that do none the less pass the compatibility test. And though Xiaomi differentiates on software, Xiaomi phones outside of China ship with Google Apps. Hugo Barra called it 'a compatible fork'. After all, it’s not as though you’re not allowed to change Android at all. Google describes the compatibility test as follows: 

"Enable device manufacturers to differentiate while being compatible. The Android compatibility program focuses on the aspects of Android relevant to running third-party applications, which allows device manufacturers the flexibility to create unique devices that are nonetheless compatible."

Generally, Android OEMs have been no better at differentiating on software than were PC OEMs, even though Google allows you to change more than Microsoft did. But it doesn’t follow that you can’t make Android visibly better without forking it if you bring the right skills and culture - Xiaomi and Cyanogenmod (and a number of other Chinese companies) show that. 

Hence, it seems to me that the forking question really flows not from a specific feature that you want to implement but the fundamental principle of controlling your destiny - you want a platform that’s 'yours'. 

That is, a central strategic problem for both Amazon and Facebook, amongst others, is that their businesses have moved from the essentially neutral platform of the web browser, where there has been no real change in the user interaction model in 20 years, to the much messier, mediated and fast-changing platform of smartphones, where the web is just one icon and platform owners are continually adding new ways for users to discover and engage with content, such as iBeacon or Google Now. They didn’t need to make browsers because browsers had become transparent commodities, but smartphones aren’t. This of course is why Google itself made (or rather bought) Android - to make sure that it would not be shut out in this new environment. Making an entire new OS is not an sensible option for Amazon or Facebook at this stage, but building on top of a free, open-source one is worth at least thinking about. But, again, in doing that you need to solve the users' problems, not just your own. 

Facebook is also poking away at this issue (such as with the abortive Home), but as Mark Zuckerberg pointed out, even a really successful Facebook Phone would only be used by 5% or 10% of Facebook’s users, so would really just be a distraction. Instead, faced with a very different set of competitive dynamics on mobile, Facebook is exploring the unbundling of its product with a 'constellation' of different apps. That is, Facebook is embracing this new and more complex environment. With the Fire Phone Amazon is going the other way - greater bundling rather than less.

I do wonder what might appear if Facebook's strategy was applied to Amazon's product - if there were half-a-dozen different interesting and useful Amazon apps for finding and buying products. But Amazon has never been a user experience company in that sense - it thinks about user experience the way Fedex does, as something to focus on ruthlessly, but not as a playground for new experiences. That means it's going to be very interesting to see how it can enchant and delight people who buy its phone. 

 

*Note: when I wrote this on a Sunday evening the fact that Nokia (and hence now Microsoft) has been selling a forked Android phone for the last 6 months passed completely out of my mind, even though I played with one at MWC and rather liked it. It's done rather well in emerging markets, apparently, and is on sale in parts of  Europe) but isn't even for sale in the USA. The main driver is that Windows Phone doesn't fit well into the hardware required of that price. The points in the blog post all remain, though. 

The price of the 5C

 At this stage it looks as though everything about Apple's 'cheaper phone' has been leaked - plastic casing, choice of colours, '5C' name, same screen as the current iPhone 5, and a transparent box to help retail sales. Everything, of course, except the price - which is all that really matters.

What price would Apple choose for a genuinely cheaper phone? There are four brackets worth looking at:

  1. $100-$150 – this is where budget Chinese manufacturers are starting to deliver  usable dual-core 3G Android phones
  2. $150-$200 – the upper end of what is possible to sell to the unsubsidised prepay market - which is half the planet
  3. $200-$400 – almost certainly out of reach without subsidies but a solid mid-range smartphone price range
  4. Over $400 – similar price to the existing discounted two-year-old model, but with more up-to-date technology, possibly higher margins and probably an easier marketing sell than the ‘old’ phone 

The first of these price points requires too many product experience compromises from Apple, while the leaks we've seen so far seem to show a device that would not be priced $200 or under, ruling out most prepay.

So, the decision is where to sit in the mid-range. The interesting dynamic in this is the tension between the USA and China.  

The US contract phone pricing structure today effectively puts a lower limit on the viable price for a contract smartphone. The ($450) iPhone 4 and similar high-mid range Android phones are sold as 'free' on contract'; phones whose list price is actually much lower are sold at the same price. A $200 phone is sold to consumers at the same price as a $400 phone - and hence is very uncompetitive. 

One effect of this is that the iPhone 4 and 4S made up a quarter of Verizon Wireless contract smartphone sales in Q4 2012 and Q1 2013, a much higher share than they appear to have elsewhere. In the USA they're as cheap as any contract phone on the market - everywhere else they're cheaper than the iPhone 5 but still relatively expensive. The Android ASP, after all, is $250-300. Everywhere else $200 and $300 Android massively outsells $400-$600 iPhone: in the USA much of that price advantage is removed. 

So, a $300 or $250 iPhone is a tough sell in the USA. But a $450 iPhone is a tough sell in China. Xiaomi, after all, just announced a very compelling new phone, the M3, at $330, and that may not be staying in China

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Hence the tension: which is more important to Apple? It already has 40-45% share of smart sales in the USA, which was just 12% of the global smartphone market in Q2. But it can't launch a phone that doesn't work at all in the USA (nor is it likely to persuade the US operators to drop their pricing to remove this distortion) - which points to a higher price, higher spec model. The further you go below $400 the more you get a phone that's tough to sell in the USA. 

But too high, and the current dynamic may not change - Apple remains camped out in the top 10% of the global handset market while all the rest converts to Android - and this is a problem

The true unknown in this, of course, is that while we know that any $300 iPhone would sell very well, we don't know how much better a new $400 or $450 iPhone would sell than the current "two year old" $450 iPhone. How much difference would the screen, coloured plastic casing and 'newness' make?