Monday, September 2, 2013

Although it is true that Firefox OS' $80 phones are unlikely contenders to Xiaomi's $130 720p quad core smartphone, thanks to the inevitable drop in component prices, in the near future, they might be unwillingly tossed into the same ring and forced to box each other out. Read on to find out how.

by Bobby Situkangpoles

Historically, Xiaomi have always produced two phones every year. One is their current year’s flagship, and another one is a refresh of last year’s flagship to serve as their mid-range offering. All of their phones have always been offered at a close to cost price tag. Their last flagship was priced at around US$320 while their mid-range model was offered at around US$240 at launch.

A few weeks ago, they introduced a new model to complete their range with an offering for the low end sector. It is called the Red Rice (Hongmi) and the following are its specs:

·        4.7 inch 720p IPS display with 312 PPI (on par with Motorola’s latest flagship the Moto X and Google’s Nexus 4 in terms of pixel density)

·         1.5 GHz Quad Core A7 processor from Mediatek with Power VR 544 GPU

·         1 GB of Ram

·         8 megapixel BSI rear camera

·         1.3 megapixel front camera

·         2000 mAh battery from Samsung

·         4 GB of internal storage with support for external memory card

·         Xiaomi’s own android based MIUI firmware with weekly updates

Xiaomi offered all that for an off contract price of around US$130. Yes, that was not a typo, it is one hundred and thirty United States bucks outright, without any strings attached.

Let us soak all that information for a minute. This phone has similar specs to a lot of phones that cost more than three times as much. HTC’s One Mini also comes with only 1 GB of RAM and that thing cost at least $450 off contract. Even Google’s Nexus 4 sold through the Play Store, with Google subsidized price, is more than twice the price when it was launched.

Apart from the smallish RAM (it still has twice the amount of RAM as Apple’s iPad Mini btw) and internal storage, it is not like Xiaomi is cutting too many corners. That 8 megapixel camera? It’s a BSI sensor, made by Sony, the kind that goes into last year's flagship phones such as the 2012 iPhone.

If you think Xiaomi must have skimped on built quality, you can check out the following videos and decide for yourselves (courtesy of Gizchina).

How did Xiaomi manage to do that?

First, Xiaomi unveils their products long before their actual release, sometimes a full quarter ahead, so they can give time for component costs to decrease.

Second, they don’t rely on traditional distribution channels like carriers and brick and mortar shops. This allows them to reduce costs normally associated with these types of distribution. Most of their devices (some analysts say at least 72%) are sold through their own website.

Third, by not relying on traditional methods of distribution, Xiaomi can control their inventory better than others. Using an internet pre-sales model, they can accurately estimate their production, hence avoiding the risk of inventory surplus. They produce their devices in discrete batches of 200-300 thousand units. Historically, these batches are sold out in minutes, as shown below (courtesy of Visionmobile).

Xiaomi sales

Fourth, they minimize their marketing costs to close to zero by taking advantage of social media; building hype long before actual devices were released.

And lastly, Xiaomi does not aim to make the majority of their profit through device sales, but from services and accessories that their customers use. Some analysts have pointed out that, on average, Xiaomi makes 10% profit out of every device sold.

You won’t be mistaken to think that there are a number of uncanny parallels between the strategies that Xiaomi employs to that of Google’s Nexus program. But that has already been discussed in another article.
What we are going to discuss here is the significance of  Xiaomi’s Red Rice to the global low end market.

Smartphones that are designed from the ground up to cater for the super low end sector.

In the past few years, we have seen a number of high profile attempts from companies to cater to the low end market. For Example, Nokia does it with their Asha line of products. Simple, affordable feature phones priced at US$130 and lower.

Another company that has launched a project aimed specifically for the super low end sector in the emerging markets is Mozilla with their Firefox OS. These are budget spec'd phones running Mozilla's HTML 5 based smartphone OS that Mozilla aimed to appeal to the sub $100 (unsubsidized) market.

Phones that have been launched running the Firefox OS are, among others, the ZTE Open, Geeksphone Peak and Keon, as well as Alcatel’s One Touch Fire.

ZTE Open

Let’s take a closer look at the ZTE Open.

It has a 3.5 inch 320x480 HVGA TFT-TN screen

256 MB of RAM

512 MB of internal memory / 140 MB available with support of expandable memory

Firefox OS (obviously)

The ZTE Open is currently being sold at US$80 through eBay and also through carriers in a number of markets such as Germany, Spain, and Portugal.

Below is a video of the phone in action:

Of course, it would be scandalous to suggest that this phone is directly competing with Xiaomi’s Red Rice; Although the US$50 price difference begs us to think if the trade off is worth it. Xiaomi is not even currently available in the countries that the Firefox OS is planned to be launched. Furthermore, Xiaomi is operating with a business model that only Google’s Nexus program and Amazon’s Kindle Fire can match (i.e. selling devices close to cost and generate profit out of services).

While all of the above arguments are valid, and there’s no reason to believe that other companies would suddenly be able to ape Xiaomi’s Nexus like pricing model, the story does not end there. did a bill of materials analysis earlier this month on Xiaomi’s Red Rice and here are their results:

Xiaomi Red Rice BOM

We can see that it costs Xiaomi US$84.7 to make the Red Rice.

This is where it gets interesting.

While currently there are not many companies out there who would be willing to sell a device that cost US$85 to built for US$130, if we take into account the rate at which component prices are declining, it is not hard to imagine that in a year’s time, other companies would be able to sell devices with similar specs to Xiaomi’s Red Rice for close to the Red Rice’s current price. 

Add another 6 months, and prices of components could drop low enough to allow devices with similar specs to be sold for under $100.

The problem is, when asked about their plans for the Firefox OS at the Mobile World Congress in February this year a Mozilla spoke person stated the following:

“We know that there’s a certain parity gap (compared to Android); we’re looking to close that gap in about a year”.

That means, Mozilla does not expect Firefox to start to be competitive until at least February 2014. If we go by our previous prediction, that means Firefox OS devices have about 6 months from February 2014 before Android devices with similar specs and price to Xiaomi’s Red Rice start to flood the market and possibly a year before Red Rice like Android smartphones started to be sold for less than $100.

The questions is, is that enough time for Mozilla’s Firefox OS phones to gain any momentum? Because even if the specs of Firefox OS catches up, when the price is similar, why would anyone would choose to not go with the devices that runs the world’s leading ecosystem?

For comparison, it took a company like Microsoft 3 years to get their proprietary OS and ecosystem to where they are at the moment, and most people agree that Microsoft still got a lot of work to do to close Window Phone’s gap with Android and iOS. Microsoft achieved the feat of securing the third smart of the mobile ecosystem war with total commitment from Nokia and support from almost all of today's phone manufacturers in the past. With that said, does Mozilla really have any chance to make any mark with the Firefox OS?

When I asked this question to analyst, Sameer Singh, he replied that the answer to that question would be predicated upon how quickly Mozilla can make Firefox OS devices hit the 40- 50 USD mark.

If Firefox OS can get down to 40-50 dollars before Android devices with HD screens and quad core processors can hit the sub US$ 100 price range, then they might just have a chance to succeed in the emerging markets. If not, a less than 30 USD price gap between the two kinds of phones will present Mozilla with a very tough hill to climb.

If you are interested in predicting the fate of Mozilla’s Firefox OS, I suggest you mark August 2014 on your calendar and see how much the lowest price of a Firefox OS phone is then.