It is often said that if you do not pay for the product, you are the product. While this may apply to advertising-supported services such as YouTube, it is rare for the maxim to be applied to the hardware business. From that perspective, Xiaomi is an outlier. This is a publicly traded company that claims to have established a profit margin of 5 percent for all hardware sales. Something is not being calculated. Or right?
Time and again Xiaomi has repeated that it is not really a hardware company. Instead, the company calls itself an internet company that happens to sell hardware. This starts to make sense when you notice that the company's first product was MIUI and not a smartphone.
Xiaomi's unique look on Android is how the company distinguishes its products in a sea of competitors. Okay, so this doesn't sound all that different from any smartphone brand that adds a custom skin to their hardware. Where the difference lies in how Xiaomi contains advertisements and service integrations between add-ons and sometimes even the main user interface. This advertising business enables Xiaomi to subsidize and compensate for hardware costs and achieve surprisingly low prices.
Telephones are essentially carriers of Xiaomi's services activities, allowing it to push a whole range of services to millions of users. Instead of a one-off, one-off gain from hardware sales, Xiaomi's strategy allows him to achieve smaller benefits for years to come. Although advertisements are perhaps the most visible and sometimes visually disturbing aspect, there are increasingly smaller integrations.
Telephones are essentially carriers for the Xiaomi service sector.
Popular themes, backgrounds and ringtones contribute significantly to business results. Innovative functions, such as the ability to interact via Mi Pay with banking services from the message box, is a strategic game where Xiaomi deserves a commission. These integrations and sales helped revenue from the Internet services division in the third quarter of 2018 grow 85.5 percent to 4.7 billion yuan (~ $ 700 million).
Although Xiaomi says it will never integrate ads into core system apps, the list of what is considered a core system app remains a mystery. Previously, the company was found guilty of adding ads to the Settings menu, which is just as important as getting apps. To his credit, Xiaomi quickly backtracked and resolved this. Anyway, it's hard to draw a line about where the company will stop. At the launch of Mi Pay, the company confirmed that it sees the payment gateway as a core app that will be used to generate payments through its video and audio streaming services.
In our review of the Redmi Note 7 Pro, we pointed out how annoying the user experience could be. Scanning apps that runs when you install an application from the Play Store is just another way to show ads to unsuspecting users. Of course it is possible to disable it, but the option is buried so deep in the settings that Xiaomi counts on the average user to leave it on.
In the third quarter of 2018, Xiaomi's advertising revenues increased by 109.8 percent on an annual basis and reached 3.2 billion yuan (~ $ 477 million). This growth was driven almost entirely by improved and highly targeted optimization of the ad recommendation algorithm used on Xiaomi phones.
It is clear that for Xiaomi everything from the core system apps, and sometimes not even that, is a fair game. Is it illegal? Not really, but it does raise some ethical challenges. Every action you perform on the phone is used to adjust the advertising recommendation algorithm. For a privacy-conscious user, this is a nightmare scenario.
In addition, apps that flood the notification box, take over the entire screen, or interfere with a normal user experience are by no means what you have in mind when you pay the full price for a phone. But that's just it. It seems that in itself it is not enough to get hardware for those stimulating prices. A solid software sales strategy is needed to support hardware sales. The limited competition that Xiaomi faces explains how difficult it is to achieve this balance.
With a business model that is so heavily dependent on advertisements and services, it is difficult for Xiaomi to remove or drastically reduce the number of ads on its devices. There is also the issue that consumers get used to buying premium hardware cheaply. Removing advertisements would certainly increase the price of the hardware, which is not something that would fly with buyers.
An interesting potential compromise can be added value in the form of subscription costs in an app to completely remove advertisements. This would help keep the price low enough, while users can sign up and pay for a cleaner experience.
Yet another option can be a higher level of devices that are not delivered with advertisements at all. This is similar to what Amazon does with the Kindle. A cheaper model is available that displays ads on the lock screen and you can purchase a premium device without ads. Perhaps that is a reason behind Xiaomi's recent decision to divest Redmi as its own sub-brand.
As the hardware range of Xiaomi expands to integrate larger viewing spaces such as televisions, it is clear that the model for internet and advertising services is the future for the company. Where the company draws the line remains to be seen. It is up to Xiaomi to offer a customer-friendly solution to unsubscribe from advertisements and to keep track of related information. But will Xiaomi do that? That is the question of a million dollars.