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Will Xiaomi Steal This Underrated Market From Apple?

By Leo Sun – Oct 17, 2016 at 2:41PM

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Will Xiaomi’s plans to undercut Apple, Amazon, and Roku in the set-top box market succeed?

Xiaomi is one of Apple's (AAPL 1.55%) biggest rivals in the Chinese smartphone market, but the six-year-old start-up has only taken baby steps into the U.S. market. It launched a U.S. shopping portal for headphones, power banks, fitness trackers, and other accessories last year. Earlier this year, it declared its intentions to enter the U.S. smartphone market despite tough competition and concerns about saturation.

But before taking that big step, Xiaomi is taking a swing at another market where Apple looms large -- set-top boxes. Xiaomi recently launched the Mi Box -- an Android TV box which comes with Sling TV, Pandora, and Vudu credit -- as its first major hardware push into the U.S. market. The device is currently available on its U.S. website and at Vudu parent company Wal-Mart's (WMT 1.08%) stores.

Image source: Xiaomi.

Will Xiaomi gain a foothold in this market?

At $69, the Mi Box is one of the cheapest 4K-capable streaming devices on the market. Roku's Premiere and Amazon's (AMZN -1.25%) second-gen Fire TV both stream 4K video, but respectively cost $80 and $100. The fourth-gen Apple TV, which starts at $150, doesn't support 4K video. Alphabet's (GOOG -0.52%) (GOOGL -0.39%) new Google Chromecast Ultra will support 4K streaming for $69, but it's a casting dongle (which streams content from a mobile device) instead of a full-featured Android TV box.

While the Mi Box is competitively priced, it faces tough competition from entrenched market leaders. Strategy Analytics reports that the Chromecast controlled 35% of the global streaming device in 2015, up from 24% in 2014. Apple TV's share slid from 22% to 20% between those two years, while Fire TV and Roku both claimed 15% shares to tie for third place. The remaining 13% of the market was split among smaller players.

Image source: Google.

Xiaomi's biggest weakness against these bigger players is its lack of brand recognition in the U.S., where it's probably only known to tech enthusiasts. So to compete against Apple, Amazon, and Roku, Xiaomi could boost its marketing spend. But doing so could be tough since Xiaomi's last known operating margin was less than 2% in 2013 -- a figure which is probably now much lower due to the commoditization of the Chinese smartphone market.

A smarter idea would be to co-promote the Mi Box with Wal-Mart, which would benefit from sales of set-top boxes pre-loaded with Vudu. Gaining more Vudu users might help Wal-Mart compete more effectively against Amazon Prime's sprawling digital ecosystem of streaming videos, e-books, cloud storage, and "frictionless" orders with Dash buttons and DRS-enabled appliances. Google, which would benefit from strong sales of the Android-powered Mi Box, could also be a strong ally -- the tech giant already promoted the device during the announcement of Google Home in May.

Is Xiaomi really making a play for smart homes?

On the surface, it seems like Xiaomi is just testing out the U.S. market with the Mi Box to see if it's suitable for a smartphone push in the future. But it could also be about establishing a hub for its other smart home devices. In the Greater China area, Xiaomi already sells smart home devices like smart TVs, air purifiers, water purifiers, smart LED lamps, and even rice cookers. These devices are all tethered together with its Mi Home app. The Mi Box would serve as a great central hub for all those devices.

Xiaomi's Air Purifier 2. Image source: Xiaomi.

Therefore, selling enough Mi Boxes into U.S. homes could pave the way for Xiaomi to bring its other smart home devices -- which are also sold on the same low-margin model as its smartphones -- to the U.S. market. Selling enough of those devices would make it a household brand, making it much easier to launch smartphones stateside.

It's arguably a bolder strategy than Apple's game plan of letting other companies create HomeKit compatible gadgets, and more ambitious than Amazon and Google's dependence on data-gathering smart speakers and partnerships with other hardware makers.

But it's still a long shot...

Xiaomi might take a bite out of the streaming device market with its low-cost 4K boxes, but it's still a long shot due to the brand's low recognition. Newer smart TVs, which already run Android, could also greatly reduce demand for Android TV set-top boxes this holiday season.

But despite those challenges, Xiaomi might surprise Apple, Amazon, and Roku if Wal-Mart heavily promotes the device during the holidays. If the Mi Box can help Xiaomi gain enough momentum in the U.S. market, more Mi branded devices might not be that far behind.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares),, and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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.

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