Although Xiaomi has the 'Internet Service' and IoT eco-business based on advertising revenue, it only learns the form and fur of Amazon's 'flywheel effect' and does not inherit the essence of Amazon - focusing on long-term and customer experience.
On the evening of August 22, Xiaomi Group (1810.HK) released its second quarter earnings report for 2018, which is the first 'transcript' handed over since the listing of Xiaomi. The revenue increased by 68.3% year-on-year to 45.235 billion yuan. Adjusted net profit increased by 25.1% year-on-year to 2.117 billion yuan.
However, for this seemingly pleasing transcript, the capital market did not buy it. On August 23, Xiaomi once rose 7.2% in the early period, then the price evaporated and closed at a low level, closing at HK$17.44, down 1.4. %. Continued down on August 24, down 2.3%.
What is the capital worrying about?
On August 1st, Southwest Securities published a research report, "The Moat from the Amazon Flywheel." The 'Flywheel Effect' is the core operational idea of Amazon's founder Bezos's interpretation of Amazon's growth logic. It is a A closed-loop cycle with one point but no end point, the core is to promote the company's continued growth centering on improving user experience.
According to the research report, Amazon formed a bilateral network effect between customers and suppliers through Prime membership service and MarketPlace third-party merchants, and derived a trillion-dollar third flywheel - AWS cloud computing. Xiaomi through the Internet The two flywheels of the service and ecological chain form the bilateral network effect of the customer and supplier side, and explore their third flywheel, based on the IOT pan-interconnect and AI pan-intelligent star sea.
It looks very good. However, is the two flywheels of Xiaomi's Internet service and ecological chain strong enough to support Xiaoji's 100 billion dream?
Extreme price/performance ratio is a double-edged sword
Let's take a look at the core intelligent hardware. With the slogan of 'price/performance ratio', Xiaomi started a low-cost storm when it was born, and in 2014, it won the king of sales in China. The traffic dividend was exhausted, and Xiaomi once fell out of the top five in the world. In 2017, by copying the price/performance strategy to low-end markets such as India, Xiaomi rose again and returned to the top five in the world.
Undoubtedly, the extreme cost-effective strategy has contributed to the impact of sales. In Q2 this year, Xiaomi sold 32 million mobile phones, an increase of 43.9% over the same period of last year; the revenue of mobile phone business reached 30.501 billion yuan, an increase of 58.7%, accounting for Xiaomi. The total revenue is 67.48%.
Although the sales growth is good, but the average selling price of Xiaomi is still low. The average price of Xiaomi mobile phone Q2 is 953 yuan (about 139 US dollars), compared with the average price of 881.3 yuan in 2017, an increase of 8.17%. In contrast, domestic According to research firm Sino data, the average selling price of Chinese smartphones in 2017 has reached 2,200 yuan.
Of course, for Xiaomi, this is already a small improvement. Influenced by the performance of flagships such as Xiaomi Mix 2S and Xiaomi 8, the average selling price of mobile phones in mainland China has increased by more than 25% year-on-year. To know, its 2017 The average annual selling price is only 1.4 yuan more than 2016, which is 0.16%, while the global smartphone industry ASP has increased by 10% (Table 1).
While Xiaomi is busy occupying the low-end market, peers are doing consumption upgrades. According to data released by market research firm Counterpoint Research in August, Xiaomi has the lowest average retail price among the top seven global manufacturers. Specifically, Apple this year In the second quarter, the average retail price of mobile phones increased by 20% year-on-year to US$724, ranking first. Subsequently, OPPO was US$275, up 17% year-on-year; Huawei followed US$265, up 21% year-on-year; VIVO was 259. US dollar, up 14% year-on-year. Samsung ranked fifth, with an average retail price of US$247 in the second quarter. LG and Xiaomi ranked sixth and seventh, up 23% and 14% year-on-year. According to the second quarterly report, the average of Xiaomi The retail price is only $139, which is significantly lower than the competition.
The average retail price of smartphone brands has risen sharply, from mobile phone companies to continuously innovate and upgrade and increase the proportion of mid-to-high-end products. According to data released by GFK in May 2018, Huawei's high-end smartphone (Mate & P) series sales revenue increased year-on-year. 45%, the share of the high-end smartphone market in the global $500 or more has increased to 15.8%, which was 12.6% last year.
Huawei has always been known for its technical strength. The success of the P20 series is brought about by its revolutionary breakthrough in photography through AI+ Leica. Even the blue-green army, which is known for its marketing, has increased its product innovation. Visible fingerprints, hidden cameras and other visible innovations also show OPPO/VOVO's independent thinking on product design.
In May of this year, Xiaomi released the Xiaomi 8 transparent exploration version, the flagship machine Xiaomi 8 and the small screen flagship millet 8 SE three millet 8 series new machine, the average price is more than 2000 yuan. However, the millet 2000 yuan or more 'high-end flagship machine In the eyes of peers, it is also a mid-range machine. The sales of Xiaomi 8 series exceeded 1.1 million in the first month of launch. The Huawei P20 series with a minimum price of over 4,000 yuan was released for two and a half months, and the sales volume has reached 6 million units. .
Today, Huawei is the only domestic mobile phone company with the strength to challenge Apple and Samsung in the high-end market of more than 4,000 yuan. OPPO and VIVO have gradually consolidated their position in the 3,000 yuan position. Only Xiaomi has been struggling in the low-end sea tactics. .
In order to get the momentum, Xiaomi has been focusing on low-end machines for the past few years. The prospectus shows that the low-end machine under the millet of 1,299 yuan accounts for 77.64% of the total sales. The highest sales volume is the entry machine (below 799 yuan). The sales volume of 110.69 million was ridiculed by the media as 'no millet without red rice'.
The long-term low-price or low-profit strategy has already made Xiaomi's channel and channel management departments miserable. In addition, the products of Xiaomi have been difficult to form a premium in recent years. The Xiaomi channel has been complaining and unsustainable. If there is no other channel support, Only the millet e-commerce and millet homes, etc., Xiaomi is very vulnerable to collapse.
An industry insider who has been engaged in research on the mobile phone industry for a long time said that as a new retail benchmark for Xiaomi's home, the channel dealers do not make money; Xiaomi gives the channel operators only 6 points of gross profit, and many channels are in the state of being quilted. However, for channel operators, the range of cooperation they can choose is particularly small, and thousands of SKUs in Xiaomi can bring a large amount of passenger traffic, so even if the profit is thin, the channel vendors are bravely supporting.
Internet service ambiguity - more than 60% is advertising
The pattern dominated by low-end machines not only affects the profitability of hardware, but also brings about the profit model of Internet services.
In the second quarter, Xiaomi's Internet business revenue increased by 63.6% year-on-year to RMB 4 billion, which was lower than the overall revenue growth rate of 68.3%. At the same time, the proportion of Internet services to revenue was also declining. Internet service Q2 accounted for 8.8% of total revenue. , a year-on-year decline of 0.2 percentage points, compared with 9.4% in the first quarter, it fell by 0.6 percentage points, and Xiaomi has always stressed that it is the Internet company's positioning farther and farther.
In fact, the proportion of Xiaomi's Internet business revenue has been criticized by the outside world. In the past three years, Xiaomi's Internet service business accounted for 4.9%, 9.6%, and 8.6% of total revenue, respectively (Table 2).
The limited development of Internet services is closely related to the structure of low-end machines. Since the Xiaomi smartphones are close to 80% of the low-end machines below 1299 yuan, it is difficult for the company to collect the value-added charges for Internet services from these low-end users. In this case, Xiaomi mainly chooses the way of advertising, and carries out subsequent realization from the B side.
Xiaomi's Internet service source is very simple. In the past three years, advertising has become more and more high. Now more than 60% of the ads come from advertisements (Table 3), which lacks practical value for the final consumers. The second quarter report revealed that Xiaomi Group's advertising revenue increased by 69.6% year-on-year. To 2.5 billion yuan, accounting for 62.5% of the total revenue of the Internet service segment. Others are Internet value-added services, with revenue increasing by 54.1% year-on-year to RMB 1.5 billion. In Internet value-added services, game revenue reached 7.04 million yuan. Increased by 25.5%.
In the past three years, Xiaomi has vigorously developed its advertising business. From 2015 to 2017, Xiaomi's advertising revenue reached 1.821 billion yuan, 3.838 billion yuan and 5.614 billion yuan, with an average annual compound growth rate of over 30%. In the first quarter of 2018, Xiaomi's Advertising revenues have reached 1.874 billion yuan, surpassing the total advertising revenue for the whole year of 2015.
More than 60% of Internet service revenue comes from advertising. This model has obvious risks. First, the nature of advertising deviates from the user experience. The more ads inserted, the worse the user experience. More importantly, if the advertising is not strict, it may be for users. The benefits bring serious damage.
According to public information, since 2017, Xiaomi has recommended a lot of P2P financial platform in VIP missions, and has gold coins rewards for consumers, increased experience value and rewards for cash back after investment, and also specially marked 'rice powder specifically for Xiaomi channel. ', or return Xiaomi mobile phone, millet TV and other millet products. After entering the mine explosion period in June, according to preliminary statistics, Xiaomi received a total of 429 complaints about the risk of P2P platform, involving an amount of about 40 million yuan.
Due to the scarcity of traffic, the P2P platform is very hungry for channels that can lead to high conversion. Currently, there are usually three types of P2P platform advertising payment modes, namely, display advertising, pay-per-download and total investment. P2P platform Usually prefer the third mode of cooperation, and the percentage of commissions is gradually increasing.
The P2P industry is very risky. This is almost everyone's common knowledge. Why does Xiaomi still undertake P2P advertising?
The board of directors of Xiaomi has promised: The comprehensive net interest rate of Xiaomi's overall hardware business will not exceed 5% every year. In the case of long-term low-margin hardware, in order to impact the listing, the story of the 'Internet company' is rounded up in the capital market. Xiaomi can only vigorously Develop the so-called Internet service business.
In the case that 78% of the users are low-end machine owners below 1,300 yuan, it is difficult for Xiaomi to make money from cloud services, music and other paid services. Therefore, the C-end user first collects the advertising mode from the B-end. It has become the most suitable choice for the moment. However, due to the lack of risk control and censorship of the advertiser's qualifications, abilities and the authenticity of the advertising content, the user has finally lost.
In fact, it is not a Xiaomi family to undertake P2P advertising. According to industry insiders, except for Huawei's auditing requirements for P2P, the OPPO, VIVO, Meizu, Lenovo, Coolpad, Jinli and other companies have invested the most. Still a mobile app distribution store.
With Apple as the benchmark, we can see how the best mobile phone companies do. The Apple Q3 financial report shows that the service revenue of the quarter reached US$9.55 billion, up 31% year-on-year, accounting for 18% of revenue. Also wrote a record of the highest quarterly revenue of the Apple services business to date.
After relying on hardware products to obtain a one-time high profit, Apple continues to rely on content sales to obtain the continued profit of repetitive purchases. The soft and hard integration model can effectively avoid the risk of Moore's Law and lay the foundation for the ultimate user experience. Including App Store Service business such as iCloud, Apple Pay, iTunes and Apple Music has become one of Apple's biggest growth engines. It is the company's largest source of revenue outside the mobile phone business, and its growth rate has surpassed hardware for several consecutive quarters. Business, high hopes by Apple.
Amazon's Prime membership system is also a paid service, that is, members can enjoy free shipping services only for a certain fee each year. High-speed logistics and value-added services have kept the number of Amazon members growing steadily, and the number of Prime members increased between 2014 and 2017. Up to 208%.
Whether Apple's software and hardware are Apple Store, Apple Music and other services, or Amazon's paid logistics services, the end consumers are users, enhance the user experience while attracting more potential customers. Xiaomi's Internet business, but It is a tightrope between balancing the consumer experience and serving the corporate gold master. Its end customer is actually a B-end advertiser, which runs counter to Apple and Amazon's emphasis on the final consumer experience.
The IoT business has a weak ability to realize liquidity.
The IoT ecosystem created by the unique eco-chain investment model can be regarded as the biggest highlight of Xiaomi. The Xiaomi prospectus disclosed that as of March 31, 2018, Xiaomi had invested and managed more than 210 companies, including the entire ecological chain of Xiaomi. The system has more than 90 hardware companies, producing 1600 SKU products.
Q2 financial report shows that IoT and consumer products revenue was 10.379 billion yuan, up 104.3% year-on-year, which is also the fastest growth rate among Xiaomi's various business segments, far greater than the growth rate of 58.7% of mobile phones and 63.6% of Internet services (Table 4). .
Among them, the biggest contribution comes from smart TV. In February 2018, Xiaomi launched smart TV in India. As of 2018Q2, the global sales of Xiaomi Smart TV increased by more than 350% year-on-year, driving the sales revenue of major IoT products such as smart TVs and notebook computers. Increased by 147.2% to 4.178 billion yuan.
However, although IoT has quantity, the gross profit margin is not high. Overall, Xiaomi's gross profit margin in the second quarter fell by 1.8 percentage points to 12.5%. Among them, the gross profit margin of IoT and consumer products segment was 11.7% from the same period last year. Down to 9.4%. The financial report pointed out that the increase in sales costs is mainly due to the increase in product sales and the impact of exchange rates. The ToT products are not as good as mobile phones. After consumers purchase smart home hardware products, it is difficult to Continue to pay for various accessories, after-sales service or content services. And Xiaomi goes to the low-end market such as India and Southeast Asia. Under the constraints of consumption power, the subsequent liquidation effect is even worse. In the case of rising component costs today, Millet's pricing power has not improved, and profitability will be further weakened.
Not only IoT products, because the increase in sales cost is greater than sales revenue, Xiaomi’s gross profit margin in the smartphone business also fell, from 8.7% in the same period last year to 6.7%. This can not help but worry about the market, if stop burning, is Xiaomi? Can you maintain the same market share? If you open up new markets again, can Xiaomi maintain the same profitability?
Different from Amazon's introduction of third-party seller platform business to increase product diversity, Xiaomi chose the investment eco-chain model to expand suppliers and product matrix. It is undeniable that rich SKU can improve user experience and increase user stickiness, but continue to drive more The category increases hardware revenue. The whole process of quality control, quality and service control is a potential risk. After the problem occurs, the main brand will be dragged down.
In August of this year, a mobile phone of a Xiaomi user in Zhoukou, Henan suddenly exploded, causing the user's 1-year-old daughter to burn three times. Before that, the news of spontaneous combustion explosions such as Xiaomi MAX, Xiaomi NOTE4, and Xiaomi 8 emerged endlessly.
An industry insider pointed out that 'the advantage of an eco-company is that it can be used as a group. The business rises easily and breaks out together. The downside is that it is easy to be guilty. When the environment is not good, it will be affected together.'
In the quality control of the smart phone industry, Huawei can be regarded as the leader. China Mobile Intelligent Hardware Testing Center released the "2018 Intelligent Hardware Quality Report" in July to evaluate the 85 index systems of 53 hot mobile phones. According to the According to the report, Huawei's three mobile phones P20 Pro, Glory 10 and Nova 3e respectively occupied the champions of 1000-3000 yuan. If you look at the top five, the number of Huawei and Glory brands is up to 9, which is almost occupied. All of the top models are on the top of the mountain.
The high quality comes from the control of the whole process and the long-term investment. In order to control the consistency of product quality, Huawei must invest at least 200 million US dollars each year to purchase new equipment and continuously renovate the equipment. Ensure that the quality of each mobile phone going out from the production line is consistent. The high quality comes from a high standard. The industry's power button hit endurance standard is 200,000 times, Huawei has done 1 million times.
Short-term riches still focus on the long-term?
The development of enterprise business generally presents S-type, and even the best business will enter maturity after rapid growth and then gradually decline. And the continuation of 'S-curve' needs enterprises to be prepared for danger, not only pay attention to the development of existing business, but also be correct. Innovate in the direction, even leap-forward innovation. Great companies have the ability to continuously upgrade and iterate their business. R&D is the driving force behind the development of technology companies.
Amazon adheres to the business strategy of 'customer first' and 'focus on long-term value', attracting third-party sellers to offer diversified products to attract more consumers, and Prime membership allows consumers to quickly obtain goods and other products at the lowest price. Value-added services (high-speed logistics, video, music, reading, etc.) to increase user experience, increase customer traffic, and build customer loyalty.
Bezos has a famous saying: 'If everything you do is built around a three-year plan, then you have too many competitors; but if you are willing to invest in a seven-year plan, your competitors will A lot less - because few companies are willing to do this. '
The strategy of focusing on long-term value not only helps Amazon become an e-commerce giant, but also lays a solid foundation in the fields of cloud computing, intelligent hardware, and streaming media services. Although Amazon has never made money for more than 20 years, it does not affect his stock price. Continue to rise, become a company with a market value of more than 900 billion US dollars.
Obviously, Xiaomi’s investment in research and development is still too low. The financial report shows that due to the rapid growth of business, the number of personnel has increased. The research and development expenditure of Xiaomi Q2 increased by 92.8% year-on-year to 1.36 billion yuan, accounting for 3.01% of the total revenue. According to the disclosed data, the R&D expenses for 2017 are 3.151 billion yuan, accounting for 2.75% of the total revenue; the 2016 research and development expenses are 2.104 billion yuan, accounting for 3.07% of the total revenue; the 2015 research and development expenses are 1.512 billion yuan, accounting for the total revenue. 2.26%.
This ratio is not only lower than that of the United States, Gree and other hardware companies, compared with Xiaomi's positioning of the same category of Internet companies Baidu, Alibaba and so on, it is dwarfed. In the mobile phone industry, Huawei, the company engaged in research and development last year 80,000, accounting for 45% of the total number; R&D expenses are RMB 89.6 billion, accounting for 14.9% of total revenue. According to the European Commission, Huawei ranked sixth in the world in terms of R&D investment in 2017, leading Apple and other companies. .
Where did Xiaomi’s money go?
First, marketing investment exceeds research and development expenses. In 2017, Xiaomi's marketing and promotion investment accounted for 4.6% of revenue, an increase of 0.2 percentage points, which is higher than the proportion of 2.7% of research and development investment.
In the second quarter of this year, Lei Jun received a share-based compensation of RMB 9.9 billion, equivalent to 7.3 times of Q2 R&D expenditure, which is equivalent to 5.6 times of 15,000 Xiaomi employees' compensation. For 1.742 billion yuan, the per capita salary is only 145,500 yuan.
To sum up, although Xiaomi has the so-called 'Internet Service' and IoT Eco-Business, but only learned the form and fur of Amazon, and did not inherit the essence of Amazon - focus on the long-term and customer experience.
In comparison, Huawei may be more similar to Amazon. As Yu Chengdong said, 'We don't go public, don't pursue a night of wealth, we have to be 30 years cold, we don't pay much attention to short-term interests, we care about the long-term, for the future. With more launches, our R&D expenses are quickly the highest in the world, and R&D expenses are growing faster than profit growth.