Smartphone wars: Hunting with the hounds
8 min read 16 Mar 2015, 11:48 PM ISTRahul Sharma has built audacity into Micromax. He wants to take on the might of Xiaomi, Samsung and even Google, in the smartphone market
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For Rahul Sharma, the affable and dapper co-founder of Micromax, the last few months of 2014 were about running with the hares and hunting with the hounds. In September, Micromax was one of Google Inc.’s three key partners to launch its Android One range of devices for emerging markets featuring pure, unadulterated and stock Android OS. And then in December, he was launching YU, a new brand that eschewed the stock Android in favour of a heavily modified version, Cyanogen OS.
“There’s a battle being fought in India, and as Cyanogen plus YU, we intend to win that battle," said, Kirt McMaster, Cyanogen’s CEO and co-founder, during YU’s launch press conference via webcast.
Is market leader Samsung their adversary in this battle? Unlikely. Because Micromax is either just a few percentage points behind Samsung in market share, or if you go by the latest numbers from research firm Canalys, already number one.
But that’s an offline story, says Sharma, and one that Micromax is already winning. Hence the decision to launch a completely new brand and distribution strategy.
“YU will be a global brand, first launched in India. While Micromax releases over 50 phone models every year, YU will only have a limited number of models targeted at power users. Distribution will be purely online," he says.
Almost every element in that playbook—the customized OS, powerful specifications at low prices, targeting power users and online-only distribution—is taken from the company that’s Micromax’s potential nemesis in India: Xiaomi.
Xiaomi rising
In 2014, Xiaomi became China’s largest smartphone vendor, beating Samsung. That was also when it entered India. Like in China, it attempted to change the rules of the smartphone selling game to the ones it devised. The most notable of these was the “flash sales" model under which the company sells small batches of its products periodically through online sales that customers must register for.
In India, Xiaomi’s partner for these sales was Flipkart.
Most of these sales last mere seconds and usually leave more disappointed users than happy ones. And yet, this seemingly counter-intuitive tactic helps Xiaomi in multiple ways. Each event creates its own PR and marketing, as disappointed users from previous rounds and new ones sign up in the hope of “winning" a phone they’re really only purchasing. This obviates the need to spend money on expensive advertising or marketing campaigns.
Asking people to first sign up in order to buy their products and then participate in periodic draws gives Xiaomi two valuable lead indicators to estimate demand for its products—registered demand and confirmed pre-purchases. Using these, it can tweak its manufacturing strategy while other competitors rely on gut or unreliable market research.
In a race-to-the-bottom market where players fight each other with better features or lower prices, Xiaomi’s flash sales also reframe a potential customer’s choice as “Will I get to buy Xiaomi or not?" which earlier may have been “Should I buy a Xiaomi or another phone?"
Adopting this playbook to India allowed Xiaomi to sell a million phones in 2014, by its own admission. That’s an insignificant number next to the 61 million it sold globally, but mostly in China. And yet, Xiaomi’s investors (who most recently gave it $1.1 billion at a valuation of $45 billion) will be looking mostly at its success in India in 2015.
India is also a test-case for Xiaomi to prove to sceptics and investors that its growth thus far isn’t because of uniquely Chinese factors.
Xiaomi becomes Samsung?
Indian consumers, by and large and across product categories, gravitate towards lower prices and more features instead of passionate brand loyalty. So as Xiaomi replicates its playbook, the likelihood of Indian users reciprocating with their wallets and loyalties is likely to be significantly lower than in China.
Xiaomi’s Chinese origins, including those of its cloud servers that store all the data and logs of its users, will also face challenges from both competitors and regulators. In August, it was hastily forced to make some of its cloud services optional after a critical report from security firm F-Secure showed how user data like phone numbers, text messages and contacts were being uploaded without permission or warning to Xiaomi’s servers in China. Xiaomi subsequently also said it would move its services for international users to Amazon’s servers.
In India, it has partnered with Bharti Airtel Ltd to sell its products through the latter’s stores and is reported to be considering an online marketplace to sell its phones. In China, Xiaomi only sells its products online, and through its own site. Xiaomi has announced its plans to set up a manufacturing facility in India over the next 18 months
But as it compromises the very qualities that made it successful in China, could Xiaomi become yet another global conglomerate, like Samsung?
“Xiaomi and other regional brands will have difficulty expanding outside their core markets because local brands can move quickly to replicate its benefits," says Horace Dediu, a telecom and technology analyst at Asymco.
In order to fight Xiaomi, Micromax will need capital. It is reported to be considering reviving a pending initial public offering in order to raise $500 milllion. Though he doesn’t offer specifics, Sharma says Micromax is deep at work funding an ecosystem of its own, comprising independent developers and services to begin with.
Taking on a juggernaut like Xiaomi will take more than just that, which is where YU’s partnership with Cyanogen comes in.
“Xiaomi will have a hard time in India because it doesn’t get marketing or distribution like Micromax does. YU plus Cyanogen will be the Xiaomi of India. There’s no question about that," says McMaster.
Dragon slayers
The partnership between Micromax and Cyanogen in India is an interesting one because while their common enemy is Xiaomi, they’re also taking aim at Google’s Android.
Sharma offers a glimpse of his vision. “If I’m listening to an A.R. Rahman song, why should I not get more options to buy it? Why do movie releases have to be limited to just 4,000 theatre screens when I have millions of screens? If I want to dial a plumber, my contact book should tell me if my friend knows one already. And why can’t I become like a Flipkart or Snapdeal by offering comparison shopping? Monday nights you may be able to buy “air tickets at ₹ 1"; Tuesday nights could be “disco-themed" promotions; Wednesdays could be “ladies-special" nights etc. We want to seamlessly integrate these experiences, like butter, into our phones," says Sharma.
The value of these features lies in them being exclusive, so YU can claim features which none of its cheaper or better-equipped Android competitors can match.
“The kinds of things we’re going to be doing with Micromax are not self-evident today but will become apparent over the next 12 months. There will be new services and new devices that will be dragonslayers," says McMaster.
Its partnership with Micromax in India is also a template that Cyanogen wants to replicate around the world. “We see Xiaomi’s attempts in India and to go to other countries around the world. Our intention isn’t to stop with India either, but to go to many countries by partnering local players like Micromax," says McMaster.
“Google is oriented around services and is not a systems software company. It still built Android because it didn’t want to be shut off from the plumbing built by someone else. But now with Cyanogen they’re faced with a player who says, “We’ll take your plumbing but we’ll still add someone else’s search to it," says Dediu.
“What if people don’t mind using Bing Search (instead of Google Search)? All of Google’s services, including Gmail, could be then threatened. The battle between Xiaomi and YU will therefore decide—do you even need to stock Android any more?" says Shiv Putcha, an analyst with IDC.
In response, Google emailed a statement from its vice-president responsible for Android, Caesar Sengupta, saying, “Android continues to be an open ecosystem. Carriers, OEMs (original equipment manufacturers) and others are free to customize Android and include their own offerings on devices. Of course, if an OEM wants to provide their users with access to Google’s digital content offerings in a simple, consistent way, they can do so with Google Play."
Xiaomi declined to comment for this story, citing official policy of not being part of stories involving competitors. However, Hugo Barra, Xiaomi’s vice-president and head of international operations, in an interview to technology newsletter Stratechery, obliquely referenced Micromax, saying, “I think there are established competitors like Samsung and the new guys—all these guys are bringing so many products so quickly and they’re responding very fast to how we work and how we operate. There seems to be a trend now—these guys realizing that in order for them to sell online at aggressive prices they have no choice but to create a new family of products or a new brand."
Note that Barra mentions only Samsung by name and not Micromax.
This refusal to acknowledge Micromax as a valid competitor has been a common tactic across all of its major rivals—Nokia, BlackBerry, Samsung and now Xiaomi. In 2013, when a Samsung spokesperson said they did not consider Micromax a competitor, Sharma paraphrases a quote commonly ascribed to Mahatma Gandhi: “First they ignore you, then they ridicule you, then they fight you, and then you win."
Sharma doesn’t appear perturbed today either, because Xiaomi doesn’t consider Micromax its competitor in India. “I don’t plan for five years, but two," he says, before adding that his two-year goal is to move up five places to become the world’s fifth-largest phone maker.
And what next?
“The whole world is moving towards connected devices. We want to make shirts that say “wash me!"; shoes that count calories burnt and give directions; health bands that nudge you to eat better; and audio headsets that start playing your favourite music when you wear them. We want to create the largest ecosystem in the world," says Sharma.
A longer version of this story and an audio interview with Rahul Sharma are available at www.foundingfuel.com
Rohin Dharmakumar is a co-founder of Owntastic, an early stage mobile start-up based in Bengaluru. Prior to turning entrepreneur, he was a journalist with Forbes India. He has an MBA from Indian Institute of Management, Calcutta, and an engineering degree in computer science.
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