Xiaomi doubles down on smartphone business with Meitu deal

Photo by Xiaomi

Sometimes you just have to play to your strengths.

While Xiaomi Inc. proclaims its status as an internet player, the Chinese company has been unable to shed its reputation for being basically a smartphone maker.

Its inability to convince investors has been a major reason the stock has fallen 20 percent since Xiaomi’s July IPO.

So it makes sense for the Beijing-based company to double down by acquiring the branded smartphone business of compatriot Meitu Inc.

Xiaomi was savvy enough to leverage Meitu’s financial troubles to buy the brand without spending a dime. We shouldn’t be surprised — its CFO is a Goldman Sachs Inc. alum.

Instead, Xiaomi will hand just 10 percent of the gross profit from each Meitu smartphone to its counterpart for up to five years — with various minimum thresholds — in return for it taking over R&D, production and sales of the brand, according to a Meitu statement on Monday. Thereafter, Xiaomi will pay $10 million per year.

Meitu’s website gives the details, and includes a warning that its net loss this year will widen approximately fivefold. Xiaomi declined to make any executives immediately available for comment beyond a media call on its earnings Monday night.

Meitu’s downfall was predictable. Like Xiaomi, it tried to sell the world on the story that it’s an app and software company, when really it’s another smartphone maker.

Investors didn’t buy it: neither the marketing ploy, nor the shares.

Xiaomi is far more successful at smartphones than Meitu, because it had billions of dollars of VC capital to keep it going for a decade, and it used that cushion to build an international name with a unique business model.

As recently as three months ago, I suggested Xiaomi embrace its smartphone moniker, given that other areas weren’t so hot.

That pattern played out again in the third quarter. Handset revenue climbed 14.4 percent from the prior quarter, outpacing corporate-level growth of 12.4 percent. So it seems Xiaomi has taken note of Meitu’s self-destruction and realized that it needs to call a spade a spade.

Not only does Xiaomi remove a competitor (albeit a not very threatening one) for next to nothing, it gets to roll out a multibrand smartphone strategy just as it’s seeking broader international appeal.

And while it hasn’t given up on the internet and services model, Xiaomi at least recognizes what it does best. Perhaps investors will reward the company accordingly.