Apple Overtaken by Chinese Upstart Xiaomi in Key Metric

Xiaomi's customers may use their phones more often than Apple's.

Jul 10, 2014 at 10:30AM

Forget Samsung (NASDAQOTH:SSNLF) -- Apple's (NASDAQ:AAPL) fiercest rival for mobile computing dominance could be Chinese upstart Xiaomi. Using a heavily modified version of Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android operating system, Xiaomi's smartphones have seen staggering sales growth in recent quarters, outselling even Samsung in China.

But what's most impressive about Xiaomi's handsets is not that they've moved massive quantities; rather, it's to what extent they're being used. Recent research indicates that Xiaomi's customers may be more engaged than Apple's.

Apple's preferred metric
According to analytics firm Flurry, Chinese smartphone users with Xiaomi's handsets spend more time in apps than owners of Apple's iPhone. Not by a large margin -- just 7% -- but it is noticeable, and highly significant.

Apple's management has, in recent years, downplayed the market share of its iPhone and iPad, instead focusing on user-based metrics. At the D11 conference last year, Apple's CEO Tim Cook said he that prefers to focus on engagement, commerce, and customer satisfaction, rather than market share.

So far, Apple has won that battle. Although Google's Android powers the majority of smartphones and tablets, users of Apple's devices spend more on apps, shop more online, and browse the Internet more often. Apple's top management often emphasizes this fact in earnings calls. Last quarter, for example, Apple's CFO boasted that in North America, the iPad generates "almost four times the web traffic of all Android tablet users combined."

The fact that Xiaomi's customers spend more time in apps than Apple's do is significant in the sense that Xiaomi is beating Apple at its own game. The notion that handsets powered by Google's Android are simply dumb phones (and are thus not a competitive threat) does not apply to Xiaomi's devices.

Can Xiaomi go global?
Given its high level of user engagement, Apple may struggle against Xiaomi in China, especially because Xiaomi's handsets are so cheap. Xiaomi's 2013 flagship Mi 3, for instance, retails for just a fraction of the price of Apple's iPhone 5s.

But it's not clear if Xiaomi can compete outside of China. It is trying -- last year, Xiaomi hired former Google executive Hugo Barra to help expand its business into foreign markets; Barra recently announced that Xiaomi would enter India later this month. But Xiaomi relies on a unique business model that may not scale outside of China.

Unlike Samsung, which profits directly from the sale of hardware, Xiaomi sells its gadgets at (or near) cost. Rather than make money when the phone is sold, Xiaomi profits on the sale of digital goods and services.

In order to make that business model viable, Xiaomi must use a heavily modified version of Android -- called MIUI -- that strips out Google's cloud services and app store in place of its own.

Although MIUI is based on Google's mobile operating system, it exists in a distinct mobile ecosystem. In emerging markets where smartphone penetration remains low, Xiaomi may be able to win over customers -- in developed economies where the smartphone market is near saturation and Google's services and the Google Play app store are well-established, it may be far more difficult.

Apple is being beaten at its own game
With fantastic sales and a high level of user engagement, Xiaomi appears to beating Samsung and Apple in China. And even though it uses a form of Google's mobile operating, Google's services are not present, giving the search giant little reason to cheer Xiaomi's rise.

For now, Xiaomi is contained to China, but if it can succeed internationally, it could emerge as a major competitive threat to nearly all of the mobile industry's most established players.

Leaked: Apple's next smart device (warning, it may shock you)
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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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