Chinese smartphone giant Xiaomi recently jumped on the virtual reality bandwagon with a device called the Mi VR Play, which is tethered to a companion app loaded with VR films and other content. The device will work with any 4.7" to 5.7" phone, but Xiaomi recommends using its Redmi Note 3 for an optimal experience. The Mi VR Play has two main differences from similar headsets -- smartphones are secured by a zipper, and it comes in a wide variety of flashy prints and colors.

Image source: Xiaomi.

However, Xiaomi isn't selling the headset to mainstream consumers yet -- it's currently only available to a limited number of beta testers for a nominal price of 1 yuan ($0.15). It's unclear how big the beta group is, but Xiaomi claims over a million people signed up when the program was announced on Aug. 1. Let's take a closer look at the Mi VR Play and what it means to Xiaomi.

Another evolution of Google Cardboard

To understand where the Mi VR Play fits into the VR market, we should examine the evolution of VR headsets. Two years ago, Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google jump-started the VR market by introducing Google Cardboard. The simple DIY kit -- which generally includes a folded piece of cardboard, two 45mm focal length lenses, a single magnet, and a rubber band -- lets users convert most smartphones into entry-level headsets.

This low-tech approach reached a lot more consumers than Facebook's (NASDAQ:FB) high-end approach with the $600 Oculus Rift, which must be tethered to a high-end PC. Google's Cardboard app has been downloaded up to 10 million times from the Google Play Store, and that popularity inspired developers to create and port more VR apps to Android. Third-party companies started developing more durable and comfortable versions of the Cardboard with plastic cases, nose pads, and head straps. Xiaomi's headset seems to resemble these devices, which generally cost less than $10.

Last year, Samsung launched the Gear VR, another mobile-powered headset which included optimized sensors for head-tracking, OS-level changes for boosting latency (which reduces headache-inducing lag), and external physical buttons for controlling the device. The $99 headset, which was co-developed by Oculus, connects to the Oculus Home ecosystem and is only compatible with Samsung's top-tier smartphones.

Google Cardboard (L) and Samsung's Gear VR (R). Image source: Company websites.

Understanding the Chinese VR market

Huawei, one of Xiaomi's main rivals, recently unveiled the Huawei VR headset, which is only compatible with its P9, P9 Plus, and Mate 8 smartphones. Since those devices only have 1080p screens, the image isn't as crisp as the Gear VR's 1440p display. However, the Huawei VR has 360-degree audio, latency comparable to that of the Gear VR, and comes with free videos, games, and panoramic content in its companion app. The device's price hasn't been announced yet.

During the second quarter, Xiaomi was ousted from the top five smartphone makers worldwide by Chinese rivals Huawei, Oppo, and Vivo -- which respectively claimed the third, fourth, and fifth spots behind Samsung and Apple, according to IDC. Therefore, it wasn't surprising that Xiaomi launched its own VR headset to keep pace with its competitors.

Chinese smartphone makers probably aren't trying to generate revenue by selling the headsets. Instead, they're building VR app ecosystems similar to Oculus Home and Google's Daydream. Since Google Play is blocked in China, the major Chinese OEMs all offer their own Android app stores. The revenue from these stores helps offset the paper-thin margins of their smartphone businesses.

What VR means to Xiaomi

Xiaomi has been pivoting away from smartphones, which have become brutally tough due to the saturation of the Chinese market, and toward internet-based revenue from apps, games, and online-to-offline services. Xiaomi generated $564 million in internet-based revenue last year, but that missed the company's own target of $1 billion.

Xiaomi's VR app. Image source: Xiaomi.

If Xiaomi launches its VR app for all Android devices, it can expand its ecosystem onto other devices -- especially those which aren't already tethered to major app stores. That would be similar to what Amazon (NASDAQ:AMZN) did when it launched the Kindle app and Amazon AppStore across all Android devices, and would prioritize the growth of its ecosystem over the sales of lower-margin physical devices. That push could complement Xiaomi's expansion into smart homes with smart TVs, set-top boxes, air purifiers, lights, wearables, and other devices.

It's logical for Xiaomi to expand into the VR market, but I doubt that the initiative will truly differentiate its brand, ecosystem, and devices from the rest of the Chinese smartphone market. Its rivals are doing the same thing, and consumers can easily buy similar "plastic Cardboard" or "budget Gear VR" devices from other vendors. Therefore, Xiaomi's effort is worth watching, but I don't think it's a game-changing development for the Chinese VR market.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.