Internet Service: Xiaomi’s Key Profit Generator

Beijing, Boston, Toronto, London, New Delhi, Hong Kong, Taipei, Seoul – September 1, 2021

Ten years ago, Xiaomi entered the smartphone market with the slogan “best performance-price ratio”. It has done a good job since then, disrupting the market by offering great budget choices. Xiaomi founder Lei Jun has also claimed that the “comprehensive profit margin” of Xiaomi smartphones would not be above 5%. But as a listed company, Xiaomi surely needs a much higher profit margin to please investors. The answer lies in its internet service business unit.

Since Xiaomi went public in 2018, its internet service has made up no more than 10% of the company’s quarterly revenue, but the unit’s profit margins have averaged at 65.12% through Q2 2021. Moreover, 42.74% of Xiaomi’s gross profit is contributed by this unit, according to Counterpoint Research’s latest report ‘Ecosystem Analysis: Xiaomi Internet & Services Segment’.

Gross Profit Margins of Xiaomi and its Business Units

Counterpoint Research Gross Profit Margins of Xiaomi and its Business Units
Source: Xiaomi reports, Counterpoint analysis

Xiaomi’s internet service includes advertainment distribution on its mobile game operation, e-commerce, fintech and other products. Most of Xiaomi’s internet service revenues come from advertisements.

Revenue Share of Advertisements in Xiaomi’s Internet Service

Counterpoint Research Xiaomi Advertisements Revenue Share
Source: Xiaomi reports, Counterpoint analysis

However, the YoY growth of Xiaomi’s internet service revenue slowed to 19.1% in Q2 2021. The YoY growth for the smartphone and IoT businesses was 86.8% and 35.9% respectively during the same period. The average revenue per user (ARPU), the ratio measuring the efficiency of traffic monetization, has been dropping in recent quarters as well, reflecting the difficulties in making profits from the traffic on its smartphones.

Xiaomi’s Average Revenue Per User Declining

Counterpoint Research Xiaomi’s Average Revenue Per User Declining
Source: Xiaomi reports, Counterpoint analysis

Stronger regulations on privacy globally have challenged Xiaomi’s current advertisement model. Mobile game developers such as Tencent and NetEase are demanding more revenue share

. Xiaomi users too have been complaining of ads and other services on MIUI.

However, Xiaomi is a step ahead of many Chinese smartphone OEMs. It has formed an ecosystem of its various gadgets and home appliances, from smartwatches and smart speakers to air conditioners and dishwashers. Such an ecosystem gives Xiaomi more opportunities to provide value-added services. Yet, except TVs, Xiaomi has not figured out an efficient way to monetize traffic from IoT products.

The ‘Ecosystem Analysis: Xiaomi Internet & Services Segment’ report combs through Xiaomi’s internet service business unit and breaks down the business model to point out the current difficulties and future opportunities in traffic monetization. The report is available here for subscribing clients.

Background:

Counterpoint Technology Market Research is a global research firm specializing in products in the TMT (technology, media and telecom) industry. It services major technology and financial firms with a mix of monthly reports, customized projects and detailed analyses of the mobile and technology markets. Its key analysts are seasoned experts in the high-tech industry.

Analyst Contacts:

Archie Zhang

 

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