Xiaomi likes to copy Apple (NASDAQ:AAPL). This we know. But that mostly applies to the realm of hardware and software design. For the most part, Xiaomi's business model is decidedly different than the Mac maker's.
While most industry watchers had figured Xiaomi was using a razor-blade model, selling handsets near cost with the hope of profiting off content and services later on, it turns out that Xiaomi is surprisingly profitable and 94% of revenue is hardware. Xiaomi's pricing strategy is also markedly different than Apple's.
Well, Xiaomi might be about to pursue a strategy that Apple once considered – but decided against. Xiaomi might try to become a wireless carrier.
More specifically, we're talking about becoming a mobile virtual network operator, or MVNO. MVNOs purchase wholesale capacity from existing wireless carriers that have network infrastructure and then resell wireless service under a different brand.
Xiaomi has just obtained a MVNO license from China's Ministry of Industry and Technology. The red-hot Chinese smartphone maker is but one of many companies who have received a license, but it's also one of the most prominent and could catalyze the local MVNO industry. Unlike in the U.S. where MVNOs are relatively common (but on the decline), the Chinese MVNO scene is practically nonexistent. The vast majority of Chinese consumers simply sign up with one of the three major carriers.
It's unclear to what extent Xiaomi will utilize this license, but of all the companies that have received a license it has the most potential and there are obvious potential benefits in vertical integration with its handset business. Xiaomi has made it clear that it wants to expand its services, and what better service to offer a smartphone buyer than wireless service.
Why Apple never became an MVNO
Over the years, there have been numerous reports that Apple has considered becoming its own wireless carrier in some form or fashion.
In 2011, wireless industry veteran John Stanton said that before the iPhone was introduced, Steve Jobs once dreamed of replacing wireless carriers by creating an entire network around Wi-Fi spectrum, which is unlicensed and less regulated. Jobs reportedly abandoned the idea in 2007.
Apple has also filed numerous patents that would be useful if it wanted to become an MVNO. For instance, Apple filed a patent application in 2006 that detailed how it could become a multi-carrier MVNO. Traditionally, MVNOs primarily purchase capacity from one carrier, or in some cases two. But Apple's idea was to enable iPhones to switch between all carriers, and carriers could offer discounts and other promotional services if it had excess capacity or wanted to win over customers. It goes without saying that this never came to fruition, although industry analyst Whitey Bluestein predicted in 2012 that Apple would become a MVNO.
The new Apple SIM that is being included on cellular-equipped iPads bought directly from Apple seems to be the product of this initiative, as it attempts to allow dynamic switching between carriers. I say "attempts" because Verizon is not supporting Apple SIM at all, while AT&T locks you in once you activate an Apple SIM on its network. Apple says Apple SIM isn't coming to iPhones anytime soon anyway.
At this point, becoming an MVNO would likely be more trouble than it's worth for Apple. Doing so would ruin its relationships with carriers, it would be unable to efficiently do so on a global basis, and distribution would suffer since the majority of iPhones are sold through carrier retail stores. That's why Apple never proceeded with its MVNO ambitions.
Would it be worth it?
Becoming an MVNO would make more sense for Xiaomi though, since as an Android OEM it risks commoditization and integrating service would be a strong differentiating factor that could allow it to build customer loyalty. Its customer base is also heavily concentrated in China (its international expansion plans are just getting started) so it could simply partner with a massive carrier like China Mobile.
There would be some notable challenges, such as the soft MVNO landscape and risk that Xiaomi becomes distracted, but it could be worth it.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple and China Mobile. The Motley Fool owns shares of Apple. 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.