Facebook (FB +0.68%) and Xiaomi -- a match made in heaven?
In December, the social network considered investing in the fast-growing Chinese handset maker, according to Reuters. Unfortunately, the deal never materialized, but the two firms' management teams remain on good terms.
A deal between the companies would make strong strategic sense, and could be particularly beneficial to Facebook.
Facebook could return to China
Facebook has been blocked in mainland China since 2009. Being shut out by the most populous country on Earth is an obvious problem for a company whose stated goal is to connect the world.
Facebook's absence has allowed homegrown competitors to flourish. There are plenty of other social networking sites, but few similar to Facebook -- the company has managed to steamroll virtually all of its foreign competitors as its moved into new markets. Once dominant social networks such as Hyves (Europe) and Orkut (India and Brazil) were obliterated as Facebook went global. But in China, companies such as Renren, Qzone, and Sina have been able to carve out similar, successful niches.
A deal with Xiaomi could help Facebook facilitate a return to the Chinese market. Last October, China's Internet regulator Lu Wei said that it would be possible for Facebook to reenter the country at some future date.
Xiaomi has become one of China's largest handset vendors -- according to recent data from research firm Canalys, it was the second biggest seller of smartphones in the country last quarter. Users of Xiaomi's handsets are active and particularly engaged, and preloaded Facebook apps on future Xiaomi handsets could allow the company to rapidly gain users if it ever successfully returns to China.
A successful Chinese expansion would be a boon to Facebook's business, as it could add potentially hundreds of millions of active new users.
Xiaomi will need help to expand outside of China
For its part, Facebook could also help Xiaomi expand outside of China, and in the process, gain a stronger foothold in mobile.
Facebook has attempted to take control of the Android operating system in the past, but hasn't been successful. In April 2013, it unveiled Facebook Home -- an app that, if installed, put the Facebook application at the center of the Android interface. But despite some early buzz, it never caught on, and was eventually recognized as one of the biggest tech flops of 2013.
Xiaomi, however, has managed to take control of Android -- its handsets run a heavily modified version of the operating system, dubbed MIUI, that strips out Google's services in favor of its own. As an Android fork, MIUI has been successful in China where Google does not compete, but its chances of catching on internationally remain unclear. To date, no Android fork has succeeded in the West -- the recent failure of Amazon's Fire Phone stands out -- as the lack of Google Maps, Google Play, and other services make the prospect of forked Android unattractive.
Xiaomi plans to enter markets like the U.S. eventually, and Facebook could help Xiaomi plug some of these gaps, particularly as its search-related ambitions continue to expand. A Facebook/Xiaomi phone could eventually give the search giant a mobile platform it seemingly desires.
There's no telling if Facebook and Xiaomi will eventually strike a deal, but it makes perfect strategic sense. Xiaomi would give Facebook a perfect partner to break into China, and expand its mobile ambitions. If Facebook does eventually take a stake in Xiaomi, Facebook shareholders should welcome the deal.
