Even in the Internet age, mobile phone hardware is still the money maker

Xiaomi, which released its first mobile phone in 2011, became the No. 1 mobile phone company in China in just four years. This is undoubtedly very scary. But what is even more scary is that Xiaomi has established its own set of rules and made almost all domestic mobile phone manufacturers obey the rules they have established, competing with their competitors in their best areas. The rules sound simple: sell mobile phones at cost price and make money through Internet services.

Under this rule, Xiaomi thrived, easily surpassing the four giants of China Cool Alliance, and dragged Samsung down from the altar in the third quarter of 2014. In the Chinese market, Samsung seems to have lost to Xiaomi, and other mobile phone manufacturers with more than ten years of accumulation also seem to have lost to Xiaomi. So can we draw such a conclusion - hardware manufacturers have lost to Internet manufacturers, and the future mobile phone industry will move towards selling hardware at cost and making money from Internet services.

To answer this question, let's first look at another Internet company, 360. The mobile phone market a few years ago was like the antivirus software market a few years ago. Everyone sold antivirus software to make a profit, until 360 Antivirus was launched. 360 changed the rules of the industry, using free antivirus software to gain users and making money through Internet services. Everyone knows what happened later. Several major domestic antivirus software companies all announced that they were free, and the profits of the entire antivirus software market dropped directly to 0. Antivirus software no longer made money, and everyone made money through Internet services.

The result of applying 360's story to the mobile phone industry is that in the future all mobile phone manufacturers will transform into Internet companies, selling mobile phones at cost price and making money from Internet services. Mobile phone manufacturers that fail to transform in time will die.

This inference seems reasonable, but what I want to say today is the opposite conclusion - the vast majority of profits in the mobile phone industry in the future will still come from hardware, because mobile phones and antivirus software are too different.

According to Wang Yang, research director of iSuppli Corp. in China, despite the shortage of iPhones, Apple's sales in China exceeded 6.5 million in November alone, which is almost the sales volume of Apple in the fourth quarter of last year. Looking further ahead, Apple's market share in China was almost never in the top 5 in 2012. Since the iPhone 3GS was launched in China, the iPhone has not dropped a penny, but its market share has been rising. Looking at the financial report, Apple's fourth quarter results for fiscal year 2014 show that the company's revenue from iPhone was 23.678 billion US dollars, a year-on-year increase of 20%; while the revenue from iTunes, software and services was 4.608 billion US dollars, a year-on-year increase of 8%. It is simplistic to think that Apple's revenue from Internet services is less than 1/5 of the revenue from iPhone hardware sales, and the growth rate of hardware sales is much higher than that of Internet services.

When looking at Apple's data, don't forget that iOS is not an Android-based "platform" like MIUI, but an "ecosystem." In other words, Apple's ability to make money from iOS and Xiaomi's ability to make money from MIUI are not on the same level at all.

Xiaomi is becoming more and more popular, and Apple is making more and more money from hardware.

Of course, some people will say, look at how much Samsung’s market share in China has dropped?

It is inevitable that Samsung's low-end phones will be replaced by Xiaomi, Honor, Meizu and other cost-effective manufacturers, but the failure of Samsung's high-end phones is more due to itself, no social marketing, passive word of mouth, no localized UI, ugly appearance, etc. I will not analyze the reasons for the decline of Samsung's high-end phones here, but it is certain that Xiaomi has not received many users lost by the Galaxy S series and Galaxy Note series. The sales of Note4 are not as good as Note3, but Huawei Mate7 and iPhone 6 are very popular!

Assuming that the answer to the question raised at the beginning of the article is no, and mobile phone hardware can no longer make money, then through reasoning we can conclude that Apple should decline like Samsung, Huawei P7 and mate7 should not sell well, and OPPO and VIVO sales should not increase significantly.

So why did this happen? Because mobile phones and antivirus software are very different.

What’s the difference? The brand.

Antivirus software are just a few programs running on the computer, while mobile phones are physical objects that need to be shown in person. Antivirus software has no brand concept, but people will buy mobile phones for a brand premium of thousands of yuan.

Of course, some people will say that Apple's performance comes from inertia and will eventually change in the future. Then, how do you explain the substantial increase in profits of Huawei, OPPO, and VIVO?

Xiaomi established such a game rule, conveying such an idea to the world: With me, hardware will eventually become something that does not make money, so major mobile phone manufacturers followed suit, and Xiaomi ranked first among domestic mobile phone manufacturers with a profit of 3 billion yuan. This result is surprising, but what is more surprising is that the second and third places are precisely OPPO and VIVO, which are the only ones who have not joined the Xiaomi game. Another thing worth noting is that in 2013, Huawei's total shipments were 52 million, and the P6, which sold 4 million units, accounted for 70% of all mobile phone profits.

The author believes that even if domestically produced smartphones are launched at a price of 2,500 yuan, smartphones priced above 4,000 yuan will still exist and will exist in a healthy manner. More profits in the mobile phone industry will come from these high-end phones priced above 4,000 yuan.

Since the release of Xiaomi mobile phone, domestic mobile phone manufacturers have followed suit, and launched several cost-effective mobile phones to sell through e-commerce, and then shouted that they have transformed into Internet companies. In fact, all major manufacturers also understand that companies related to Xiaomi cover almost every corner of the Internet, including software developers, e-book sellers, browsers, navigation software, games, and music. It is almost impossible to reach the level of Xiaomi on the Internet. After all, these companies are still hardware companies. They have no choice but to launch mobile phones with the same cost-effectiveness as Xiaomi, but they have damaged their own brands.

Speaking of brands, let's talk about Huawei again. At the end of 2013, Huawei launched Honor to compete with Xiaomi, and Huawei cut off ultra-low-end phones and positioned itself as a mid-to-high-end mobile phone brand. In 2013, P6 greatly improved Huawei's brand, and in 2014, Mate7 took Huawei's brand to a higher level. In 2015, Xiaomi's sales volume is likely to exceed Huawei's, but as long as Xiaomi's positioning remains unchanged, Huawei's profit will definitely be higher.

For an Internet company, the number of users is crucial. Xiaomi's mission is to acquire more users, not how much money to make from mobile phones. So even though Redmi has affected Xiaomi's brand and the average price of mobile phones has been declining, Xiaomi has abandoned the slogan of "born for enthusiasts" and is still determined to fight on models priced below 1,000 yuan.

Xiaomi is undoubtedly right, but that doesn't mean people don't pursue brands anymore. A 2,000 yuan phone is still a 2,000 yuan phone no matter how high its configuration is. Now I offer you to buy any phone. Would you rather buy an iPhone 6, Note 4 or Xiaomi 4?

90% of the profits in the mobile phone industry belong to Samsung and Apple, and 90% of the profits of Samsung mobile phones and iPhones come from hardware revenue. If we conclude that hardware cannot make money, is it because we are influenced by a certain extremely popular company and are unable to see the big picture?

Internet companies that sell hardware at cost are doing well, and hardware companies that focus on making products and building brands will also be doing well. But how will hardware companies that sell hardware at cost fare?

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.