Microsoft Deal Stokes Xiaomi’s Ambitions

Software maker to sell about 1,500 patents to Xiaomi as part of the deal

Technology giant Microsoft Corp. (NASDAQ: MSFT), in a landmark deal that revolves around its flagship operating system Windows 10, is selling about 1,500 of its patents to Chinese device maker Xiaomi. The deal, announced on Wednesday, June 1st, 2016, also includes a patent cross-licensing arrangement as per which Xiaomi will install Microsoft software, including Office and Skype, on its phones and tablets. The Windows 10 platform, which Microsoft launched globally on July 29th, 2015, currently runs on 300 million plus active devices including smartphones, PCs, tablets, and gaming consoles.

Source: Company's Website
Source: Company’s Website

Similar to Microsoft’s previous deals with mobile manufacturers such as Asus, Samsung, Sony, and Dell, the Xiaomi-Microsoft will involve bundling of Office and Skype apps on Xiaomi’s Mi 5, Mi Max, Mi 4s, Redmi Note 3, and Redmi 3 smartphones, starting from September 2016. Further, the Windows 10 platform will run on the Mi Pad, with Microsoft Azure powering the Mi Cloud service. The deal is expected to provide Microsoft access to the new generation of young and affluent Chinese consumers. Ironically, Microsoft is also facing an antitrust investigation in China regarding the bundling of its software.

Xiaomi setting its sights on the U.S. markets

Xiaomi’s acquisition of Microsoft patents, which spans voice communications, multimedia and cloud computing, are in addition to about 3,700 patents that the Chinese company filed in 2015. The patents are an important part of the device maker’s plan to expand its operations in the international markets, especially the U.S. As a step in that direction, Xiaomi launched a TV set-top box that it developed in association with Alphabet Inc. (NASDAQ: GOOG), in the U.S. in May 2016. Alphabet, the parent company of Google, owns the Android operating system that most Xiaomi devices run on. Xiaomi has also launched a tablet that runs on a version of Microsoft’s Windows operating system.

Xiaomi fears patent legal standoff with rivals

Xiaomi’s ambitions to be a major player outside China are currently hindered by its negligible patent protection, which in turn could lead to prolonged legal battles. Seen as a strategic move, Xiaomi’s deal with Microsoft is expected to give the Chinese company enough teeth with regard to patents and technology to expand operations in the U.S. market. In the recent past, Xiaomi has faced legal hurdles from low end Chinese Android vendors, making the move to other markets an urgent necessity. What’s more, shipments of Xiaomi phones fell 9% Y-o-Y in China in Q1 FY16, and its market share dipped to 12% from 13%, as a result of intense competition from Huawei and Samsung Electronics as well as smaller contenders including Oppo and Vivo, as reported by Reuters.

Microsoft focusing on trimming device portfolio

Mr. Satya Nadella, who took over as CEO at Microsoft, in February 2014, has been focusing on reshaping and strengthening the PC division following the onslaught from rivals such as Apple Inc. (NASDAQ: AAPL) and Google, while protecting current franchises of the Windows and MS Office suites.

Mr. Nadella has also trimmed the Company’s device lineup, released versions of popular Microsoft applications for Android and iPhones, and reverted Microsoft’s focus in phones to business users. With Microsoft’s share of the global smartphone market seen to be steadily declining in 2015, the Company is channeling all efforts to put Windows 10 on as many devices as possible, including smartphones, personal computers, laptops, and its Xbox gaming consoles. Microsoft is focused on creating a huge user base for the Windows 10, and thereby has been prompting developers to create meaningful apps to lure mobile customers onto the platform.

Either way, the Microsoft-Xiaomi deal could be a win-win situation for both companies. For Xiaomi, the acquisition of Microsoft patents will enable the Chinese device maker to expand its operations in the international markets with minimal legal hurdles. On the other hand, Microsoft is clearly positioned to tap growth opportunities arising from Xiaomi’s meteoric rise as it now stands among the top five phone makers worldwide and the Chinese market at large.

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