Can Xiaomi or Meitu Win as Platforms / Ecosystems? (2 of 2) (Tech Strategy – Podcast 44)

This is part 2 about Xiaomi, Meitu and 7 reasons why platforms / ecosystems succeed or fail. Part 1 is here.

You can listen here or at iTunes, Google Podcasts and Himalaya.

7 reasons why ecosystems (and platforms) fail (by BCG):

  1. Insufficient problem to solve
  2. Wrong ecosystem configuration
  3. Wrong governance choices
  4. Inadequate monetization
  5. Weak launch strategy
  6. Weak defensibility
  7. Bad execution

Cited in this talk:

This is part of Learning Goals: Level 7, with a focus on:
  • #30: Ecosystems vs. Digital Platforms

Concepts for this class:

  • Ecosystems vs. Digital Platforms
  • SMILE Marathon #5: Ecosystem Orchestration and Management
  • Switching costs
  • Share of consumer mind

Companies for this class:

  • Xiaomi
  • Meitu


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

——transcription below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today, can Xiaomi or Meitu win as a platform or ecosystem? Now this is really part two of two that this is a continuation of the previous podcast which was number 43. And that was titled Xiaomi, Meitu and Seven Reasons Why Platforms Fail. And if you haven’t listened to that, I sort of suggest you pause here, go back and listen to that, because that was a bit of theory about platforms versus ecosystems, which is an important distinction, as well as I went through a Boston Consulting Group paper, which was quite good about seven common reasons platforms or ecosystems fail. And we’re gonna kind of build on that and then apply that to Xiaomi and Meitu. So this is part two. So if you haven’t listened to that, I suggest you do that. Now this is gonna be a case, actually two cases. So wake up if you’re kinda laying back on the sofa, engage, I’m gonna ask you to kinda make the call on what’s going on with these two companies. And I’ll take you through it first. So we’ll also cover some of the basics of both of these companies, both of which are really interesting. Sort of… I think they’re important and we haven’t talked about them, so we’ll also sort of do the basics of Xiaomi and Meitu and then I’ll ask you what you think is going on. Now for those of you who are subscribers to the class, the kind of key ideas here, this is all going under Learning Goal 30, which is level 7. Same as last week, digital platforms versus ecosystems. We’re going to dig a lot more into this probably in a month or so. But the two key ideas I want you to remember from this are pretty much the same ones from last week, concept of ecosystem shaping and management, and ecosystems versus platforms. Also we’ll touch on switching costs and share of the consumer mind. Now I have been getting feedback from people which is super helpful. I really appreciate those of you who are doing that. And I think one of the things we hear, I’ve been hearing is, how to put it all together in your head. Because there’s a lot of ideas. I just mentioned like three or four of them and it’s easy to get lost. And for those of you who are subscribers, there is a, you know, there’s six levels and 35 learning goals. So it’s kind of laid out systematically what you should be learning where. But I think that’s hard to, I think it doesn’t come across real well during the podcast because I can’t point to it like I can when I send you emails. I can point to the chart and say, this is where this one fits. I’m gonna try and start putting that into the notes of the podcast so maybe there’s a little more structure for people who, while they listen. But yeah, I’ve gotten that from several people. So I’ll try and figure out how to make that a little easier so maybe people don’t get lost in the content. Or you could just take notes as I talk here. But yeah, the three ideas for today, one is Learning Goal 30, which is digital platforms versus ecosystems, and then the… Couple ideas under that, ecosystem shaping and management, ecosystems versus platforms, switching costs, share of the consumer mind. That’s kind of what we’re gonna focus on as we go through these companies. Oh, it’s what I’m gonna focus on. And for those that aren’t members, as always, you can go over to and sign up there. There’s a free 30 day trial. So we’ll see how it goes. And it’s podcasts and emails and more and more of the content is going behind the paywall over time. So we’ve really got about six to seven levels worth of content now built out, which took a lot of time actually. So we’re gonna start putting that together in different formats. I think we’ll start doing more assignments and more sort of qualifiers to move from level to level. So we’ll keep enriching that. We’re kind of at version 2.0 of this classwork. We’re gonna try and bump it up to 3.0 in the next month. So we’re getting closer. Anyways, let’s get into the content. Now, the first bit I think we should go through is just a quick review of the last podcast, which is the seven reasons why, what they say, business ecosystems fail. They kind of use that language a little differently than me. I use the word ecosystem and platform differently. Ecosystems is a broader idea. A lot of this is technology companies where you’re not just, connecting to people chatting through an app, like a WhatsApp or a WeChat, that would be a platform business model, or it’s not just a marketplace, like an eBay or an Alibaba. It’s much broader than that. You’re often having lots of other people doing research and development, creating the hardware, creating technology, that all has to integrate together for the solution to work. So if you’re gonna make semiconductors, you need an ecosystem of lots of partners. all collaborating and coordinating, even though they are in fact competing at the same time to get it to work. So the foundry has to have machinery that can make the chips, but it depends on designs out of the design firm, but it coordinates with NVIDIA who’s making the chips. It all has to coordinate across multiple partners to get the ecosystem to work. And ecosystems tend to be very useful when… when you’re seeing a major technological disruption, where you’re seeing something new emerge that we’ve never seen happen before. And at that first step, it’s usually to get the thing to go, to get, hey, here’s a new type of semiconductor for AI. Here’s a new type of smartphone, as opposed to a dumb traditional phone. Here’s a PC, which we hadn’t had before. To get that jump to happen, it takes, it’s beyond the ability of any one company. It takes one company or several all working together, coordinating that activity. Now one is often the orchestrator, one’s more in charge, but it can’t be done by one company and you all work together, Intel, Microsoft, IBM in the 80s, all these semiconductor players, you know, to make the jump and to get the product out into the market. And then after that, you know, they can break apart or they can stay together depending what you’re talking about. But that, you know, ecosystems tend to be very powerful at that moment in time, a lot of coordination, a lot of R&D and innovation at scale beyond what any one company could ever do. Now within that, and that could be hardware, it could be peripherals that plug into your computer in addition to the PC, in addition to the operating system, in addition to the apps, in addition to the chips. You know, all of that could be considered an ecosystem. Within that, I consider sort of platform business models, a simplified business model that usually sits within a greater ecosystem or environment, but it’s much more focused and simple. And it’s usually under one company’s control almost entirely. So that’s, you know, how you connect with people in the world, that’s an ecosystem, a social network. Facebook digitized parts of that. connectivity, communication, sharing of content, and they basically own that platform business model which operates within a larger network or ecosystem. So that’s kinda how I break it apart in my head, but you will see other people refer to this in different ways. BCG, which is Martin Reeves, he uses the term ecosystem business models. I don’t really do that phrase. I kinda just, I don’t know. I’m going to probably have him on the podcast. I think we agreed in a week or two, we’re going to do something. So we’ll talk about probably rate of learning and some other things. And I think we’ll also have the first guest on the podcast next week, which will be about pin duo duo and social commerce. So that should be fun as well. Now the BCG report I cited last time had seven reasons why platforms or ecosystem business models fail. You can kind of apply it to both. And they looked, I guess they looked at a lot of companies. They didn’t really say which companies they looked at, but their conclusions were, look, most of these things fail. Everyone wants to be an ecosystem orchestrator. Everyone wants to be a platform business model. Most efforts fail. And they had seven reasons. One of the seven, which was the least important, was execution. So they said that was about 15% of them, I think. I’m not remembering that off the top of my head, but very small. And then there were six of them that were much more strategy problems. And they were, and these are in the show notes because I’m gonna ask you which of these apply to Xiaomi and Meitu. Their number one was insufficient problem to solve, which is you’re trying to coordinate an ecosystem for something that’s just too small. The opportunity is too small, there’s not enough activity, there’s not enough money, there’s not enough players. Yeah, you gotta go bigger. Wrong ecosystem configuration. This is kind of the main design phase, which is, you know, we’re building eBay against the merchants on one side who are mostly individuals and then consumers on the other. The model we’re using for interaction is an auction, at least in the early days, and it’s gonna be a marketplace model. That’s the design of eBay circa 1999. Okay. You gotta get the ecosystem design right, the configuration. It’s actually very, very difficult to get that right because you’re always balancing various people’s interests and you’ll know when you get it because both sides of the, let’s say, platform business model, both user groups, start to engage in significant numbers. Not one side alone, not both sides not happening, both sides start to run. It’s pretty tricky to get that to figure out. I call that like the magic equation. It usually is not the first mover in an industry that figures that out. It’s often a second or third player who figures it out. Number three reason for failure, wrong governance choices. Once you design the ecosystem, design the platform business model, the users, their roles, the primary core interactions, once you do that, then your other goal as the boss, the owner of this, the ecosystem orchestrator. is you’re in the governance business. That when people break the rules, you have to engage and say, yep, content violation right there, fraudulent activity there, we don’t allow those types of goods to be sold, dating site, you can absolutely not post that picture, which happens a lot, I think. And you become almost like a private government. that goes on in time and it actually gets harder and harder in many cases, the more successful you get, YouTube, Facebook, and TikTok, they are all struggling on a daily basis for how to moderate content at massive scale. And it’s really hard. And the nice thing about two and three, ecosystem configuration and governance choices is this is an evolving creature. It’s, you know, when you start as eBay in 1998, 1999, eBay is gonna be very different three to five years later. The design is going to evolve and therefore your governance roles are going to evolve. That’s the nature. Like when you’re not a standalone company like a factory or a restaurant, where you kind of control your own little world, but when you are something that extends out into the world with participants, well, that changes. So you have to evolve and it turns out the development of these businesses is usually path dependent, which is a whole subject. Okay, so that’s number three is governance choices. Number four, inadequate monetization. Hey, you’ve got a lot of activity, everyone loves your site, everyone’s there all the time, there’s no money. That’s a problem, can be a problem. Number five, weak launch strategy, getting platforms and ecosystem. business models launched can be particularly difficult. You have the chicken and the egg problem, which is actually not as bad if you’re a traditional business. This is one of the advantages traditional businesses have. If you’re a pharmacy, a boots pharmacy or whatever, you already have one user group, which is you have a lot of consumers. So you’re actually just having to add a second user group once you digitize them, which they’ll get you to sign up as a membership card to Central World or… you know, Boots Pharmacy or whatever, then you just have to connect that with another group, which might be, I don’t know, clinical service providers or something like that. So it’s actually easier if you’re a traditional business to add the second user group rather than trying to get both of them from day one, which is difficult. And number six, weak defensibility. That’s the competitive advantage problem. You know, hey, you built a great platform. You’ve built a great ecosystem. You’ve got everyone engaged. and it turns out you’re really easy to copy and it’s really easy to take your business. So that’s kind of a frustrating scenario when you finally break out and create something. And then because it’s successful, you get a lot of people’s attention, competitors, and then they take it because you’re not defendable. And number seven, bad execution, which I mentioned. Okay, so those are the seven. They’re in the show notes. on whatever podcast service you’re listening, or if you’re watching on my website, all seven of them are there. Let’s get into the companies. So we start with Xiaomi, which is, they went public in 2018, and they had a very clear strategy outlined within their IPO documents. I wanna talk about that, and then I wanna talk about what they’re saying now, which is not very, just two years later, which is actually quite different. So it’s the idea of, look, they wanted to be a platform business model. They wanted to be an ecosystem when they went public and it didn’t really work out. And so now I wanna talk about what they’re doing now and how that’s different and why didn’t it work out? Or maybe you think it did work out, but it certainly didn’t work out as well as they, they sort of presented in their IPO. So we go back to their IPO document and I’ll give you some quotes. for how they describe themselves. They said, we are quote, an internet company with smartphones and smart hardware connected by an IoT platform, unquote. So, I mean, immediately they bring up three pieces of hardware. One is their smartphones, which is what they’re known as. They’re a smartphone company. You know, they have their two brands, they’re sort of dual brands. And second, they talk about other smart hardware. of which some of they do themselves, like televisions and PCs and whatever, and others they do through various partnerships of smart, I don’t know, they have smart everything, smart scooters and smart chopsticks and smart backpacks and smart air conditioner units. And their stores are actually quite fun. Every time you go into a Xiaomi store, there’s always new fun stuff and a lot of smart home stuff they’re doing. And then they also said connected by an IoT platform. So this is this idea of we’re going to put sensors in everything. We’re going to be the operating system that connects all of them. And for a long time, they, they sort of describe themselves as we’re an internet company and they say, quote, we’re a quote, innovation driven internet company that has hardware, that has internet services, that has e-commerce and new retail. This is from their IPO document. And that was kind of their strategy. And. They also, they kind of go a little bit further. They say, hey, we have, we’re like lifestyle products because they also had some clothes and other things. But, you know, there was this general idea that we’re an internet company first that makes a lot of devices either ourselves or with others and smartphones is number one. And within that, there was this idea that we’re gonna sell the hardware and really it’s the smartphone that people care about most. We’re going to sell that at a very low gross margin, under 5%. This is what they always say. That’s our promise. We sell this under 5% and we will make our money on internet services, which is literally the exact opposite of the Apple strategy, which is now Apple has two products, they have the handsets, the smartphone, and then they have the ecosystem and they charge you a premium for the handset because they’re kind of luxury ish and they’re expensive. but they pretty much give you everything in the ecosystem for free. I mean, you can do messaging and you get some free cloud. You can pay at a certain point for internet services, but everything in the app store, I mean, overwhelmingly they’re monetizing the hardware and giving you the software in the ecosystem for free. So it’s a massive consumer surplus. Xiaomi was kind of the opposite. We’re gonna charge you. for the internet services, because we are an internet company, and we’re gonna give you mostly the hardware at a very small gross margin. And in the marketplace, that positioned them very, very well early on as a cheaper version of the iPhone, which is how they kind of broke out in China originally. So, you know, from their original document, IPO, they’ve invested in 90 IoT and lifestyle companies. That’s back then. They expanded in China, did very well for a while. Then they got hammered by OPPO and Vivo. They moved into India, they were number one for smartphones there. They tend to be in the top four to five for smartphones in, at this time, 15 plus countries. So just lots of people buying these nice, cool smartphones that are cheaper than the iPhones and everything else. And they all run their proprietary operating system. and they try and get you to use the various apps they have. So they want you to sign up for their cloud service. They want you to use their video player, their browser, all of those things where if you get activity in theory, you can monetize it. Now the idea, there was a really cool idea underneath this, which was, and this is from their document, that we’re gonna sell iPhones, or smartphones, that look a lot like the iPhones in the early days, at quote unquote, mass market pricing. We’re gonna make it cheap. Because they’re mostly focused on the developing economies, oh no, now they’re pretty big in Europe. And by doing this, one, we’re gonna make money, but not a lot, because the gross margin is very, very small. But we’re gonna get users. We’re gonna get users into our ecosystem. That’s both, you know, you can think about the ecosystem and then the software. So it’s kind of like ecosystem plus platform business models. The ecosystem would be, look, there’s all these smart devices that are connected. IoT devices, smart speakers, smart homes, smartphone. It’s the hardware plus the operating system that connects all of them. That’s really an ecosystem business model. And then on top of that, we have lots of applications running, let’s say the cloud or let’s say the browser, those would be individual platforms. So they’re kind of going for the ecosystem and then they’re going for certain types of platforms on that as well. They’re kind of playing at both levels. So what we will do by selling stuff cheap at mass market pricing, we will get a huge number of users and we’ll actually get them much cheaper than all these companies trying to build out software by marketing. We don’t have to do marketing. because if someone buys our phone, it already has all the apps uploaded. So you could view it as like a cheaper form, well not a cheaper form, a free type of organic marketing, which is a contrast to what most app companies do where they have to spend a lot to attract people. So we get all the users, that builds our ecosystem, maybe it builds out some of our platform apps. And from there, then we go back and we sell people more hardware. Well, you bought one of our phones, you should buy one of our laptops. You should buy our smart speakers. You should buy our smart TV for your home. You know, you can buy the whole smart home thing. And that in theory makes it more. So it’s kind of like a different approach to ecosystem building, where instead of trying to attract people, we will sell them cheap, good hardware. And that’s how we’ll get users. And based on this back in, you know, at the time of the IPO 2018, they had 190 million monthly average users on their operating system. Okay, you always got to take those things with a grain of salt. And a lot of these people, you know, were using more than one app or they were using more than one device. But you had the me app store was obviously important. The me browser, the me video function, the me music, the cloud service, you know, and if you’re in this ecosystem, you have a unified ID. You have sort of your contact information logged in. You have your device information logged in. You have your cloud data upload. You have the app store and software usage and you have your location and internet browsing and transactions and social. In theory, you can build all that out. And if you look at their revenue for 2017, which was right before, you know, right before this is sort of the first numbers that came out was. You know, okay, there’s sales revenue for smartphones, about 12 billion rem and be. So divide that by six to seven, that gives you US dollars. IOT and lifestyle products, about four billion. And then internet services, about two billion. So basically 65 to 70% of revenue was selling smartphones. 20% was the IOT and other products, and then 10% was internet services. and the internet services they’re talking about are mostly advertising and then some gaming revenue. So I mean there wasn’t a lot going on there. All right so that was the official story and you know a lot of people didn’t really buy it. A lot of people are like come on you’re a smartphone company. You know you’re a smartphone company that sells cool phones. that are pretty interesting and you sell them relatively cheap, one because you’re sort of going for the middle lower market and you’re not taking a big gross profit. And the rest, okay, maybe that’s what you will be one day, but that’s kind of not what you are today. And if you’re a smartphone business, nothing wrong with being a smartphone business, the first thing you kind of start to realize is, oh, this is kind of a hard business. One, it’s global. If you’re going to compete as a smartphone player, a Huawei, Oboe, Vivo, Apple, Samsung, it’s pretty much a global game. So you have to go global and you have to compete everywhere and it’s very difficult. And you have to keep advancing your technology and your product life cycles are very, very short. You know, every year you have to release one or two or three or whatever new phones. And if they do well, the revenue keeps coming in. And if they don’t… it drops pretty fast. It’s not as bad as being a movie studio where you have to keep making hit movies to stay alive, but it’s definitely not easy. The tech is always advancing, you have to stay on top of that. The competitors are very aggressive. OPPO and Vivo have been pretty brutal competitors. And, you know, there’s always this question of do you retain your users? Now, one of Apple’s biggest strengths is repeat buyers because once you get locked into the ecosystem, which is very robust, it almost guarantees that the next phone you are going to buy is an iPhone. My mom could not switch to another phone because everything she uses is on the iPhone and her messenger contacts her cloud, her photos, all of that. So if you have people locked into your ecosystem, that’s good. But if you don’t, which a lot of these companies don’t because it’s just Android and they’re all using WeChat. It’s just a pretty brutal game to continually reacquire your same customers every year. Because people do shop around when they decide I’m gonna buy a new phone, they look at what’s new. Oh, the new hallway looks pretty good. So there’s a constant fight to develop the next cool phone every year and to reacquire your customers. And that means you have to dump a ton of money, time, energy, and focus on R&D and marketing. It doesn’t leave you a lot of free bandwidth mentally to think about let’s build an ecosystem and internet services, because you’re just trying to stay alive every 12 months by reselling phones all the time. And I think Xiaomi has done quite well at this game. They come up with really nice stuff all the time. They’re very good at sort of thrilling their customers by always having new products, new introductions, and they’ve expanded geographically quite well. did, you know, came out of nowhere in China, did real well, then they moved out to Southeast Asia, and then they moved to India, then they’re in Europe. So the smartphone game, not the internet services game, but the smartphone game, they’re actually quite good at this game, but it’s pretty hard. If you look at their financials, it’s, I mean, it basically looks like a smartphone company. Like I always like to look at head count, what are, you know, how many employees and what are they actually doing? So back then they had about 14,500 employees. and they were basically focused 5,000 in R&D, 6,000 in sales, and then 2,000 working on their operating system. So I mean, overwhelmingly, they look like a smartphone company. And my take on this was, okay, it depends what store you buy. Is this an internet company that’s got a clever mechanism of customer acquisition, and they’re building an ecosystem of hardware and software, and then some platform business models on top of that? is this just basically a smartphone company telling a story that what they really are was their apple for the mass market. They copied the iphone, they brought the prices way down, they brought it to the mass market of mostly emerging markets, bringing them iphones at basically affordable prices by dropping it and having a low gross margin, and you know they’re in the business of basically playing that game and continually trying to thrill people with their new new phones, new IoT, new smart everything. And that’s 85% of what’s going on here. And then from that, okay, maybe they’re getting users into their operating system and they’re, you know, maybe they’re getting better retention of their people the more they use their operating system. Maybe they can build out some platforms on top of that. Maybe they can monetize the internet traffic and the activity, maybe. But you know, when they went public, despite their story, they were… not really a platform ecosystem or internet company. So the two factors I’d be looking at, and the kind of the questions I wrote in my notes when I looked at this a couple of years ago was, what are their switching, what are their retention rates? What are their switching costs? That’s the game I’d be trying to play. It’s like every year we have to thrill our customers with new products and new smartphones that are on the leading edge. And we need to build in as many switching costs as we possibly can so that we retain users. product life cycle after life cycle and keep them in and don’t have to start from scratch every year to convince everyone to buy our phones again. That’s kind of the game I’d be playing. But within that, the second question I wrote was, okay, apart from whatever switching costs they’re building in, what’s their kind of activity level within their software functions, within their various apps? Okay, they’re buying the phones. We know that number. How many of them are using the ecosystem? How many of them are buying multiple devices and then using the operating system to connect them? And how many within each of the apps on top, how many people are in your cloud service? How many people are using these apps? Show me the software numbers independent of the handset numbers. And try and get an estimate of that activity level and retention level. But that was kind of my notes at the time. Okay, then we jump forward to today. I pulled their 2019 annual report, so sort of the full year pre-COVID. And it’s really interesting. First of all, it’s like the most boring annual report I’ve like ever, well, not ever read, but one of the most boring. Like the language is so dry and it’s, you know, the chairman’s lettuce has laid you and it’s so boring. It was kind of a bear to get through, but the language is different. I mean, they have… They’re describing themselves very different. So here’s sort of a 2019 annual report. The goal is to quote, build amazing products with honest prices, unquote. That we wanna have a dual brand strategy, which is the Redmi and their Xiaomi brands. Redmi is lower price and Xiaomi is higher. Top four market share globally. Work on the transition from 4G to 5G. The little. phrase they use a lot is 5G plus AI plus IoT. They wanna focus on all those sort of technological dimensions, which are mostly about smartphones and smart devices, you know, incorporating 5G, AI, IoT. And focus on operational efficiencies, organizational restructuring, the hardware vision remains never more than 5% gross profit, that’s their pledge. It was actually lower than that. But this sounds like the strategy of a smartphone company. It does not sound like the strategy that they used to have. The language is different. This, I mean, this sounds like kind of what you’d read from OPPO or Samsung in their consumer business. It’s really different language. I thought that was kind of fascinating. And when you look at their revenue, it turns out their revenue has just been, you know, kind of rocking and rolling. Rem and B, 2015, they were 66. billion rem and B, now they’re up to about 200. So they’ve basically doubled their revenue since the time they went public. Their gross profit’s about the same, depending what product line, hardware-wise, you’re looking at it, it’s five to 8%. And then you’ve got a couple percent on marketing, things like that, but basically they’re coming out at an operating profit under 5%. So it’s fine. Their monthly average users of their operating system, they self-report at 309 million. So that’s gone up quite a bit as well. The number of connected IoT devices has gone up. Basically everything grew, grew, grew, and they’ve done a lot overseas, which is about 40 to 50% of their business. Okay, you break down the revenue by product line. It looks pretty much like it did at the time of IPO. Smartphones are still about 60% of their revenue, growing 7% per year, so not exactly rocketing upward. their IoT and lifestyle products, which is pretty much everything else. You know, you’re talking 30% of their business, that’s going up a lot faster, that’s 41%. And then their internet service business, again, is about 20%, going up. And that’s still mostly ad revenue and online gaming revenue. So it looks pretty much the same. It’s just sort of grown and they’ve changed their language. which I thought was interesting. They did lay out there and they’re doing a lot of investments. That’s kind of the other way you could look at Xiaomi if you’re an investor. They’ve been doing a lot of investments all along the way that look like they’re worth a lot of money probably. So they could be considered a bit of an investment company. But here’s their strategy. One, two, three, five points. Point number one, to innovate quality design and user, to innovate along quality design and the user experience. to get engaged, loyal user base, artisanal craftsmanship. This is basically about making phones and smart devices that people love. Thrill your customers, that’s what that is. Number two, leadership in AI, IoT. Okay, fine. That’s kind of their technological dimension. Number three, relentless efficiency, including omni-channel retail. So that’s very typical of a smartphone maker. Next one, enrich internet services, user experience, grow the user base, collect the data, try to monetize, and then international expansion. Okay. And, you know, when you look at the financials, they’re what I told you in terms of the top line. But when you actually look at gross profit, that’s where this internet business, even though it’s only 10% of their revenue, you’ve got a 60 to 65% gross profit on that component compared to the fairly low profits on everything else. So when you actually look at their financials, their 10% business that comes from internet services, is about 40 plus percent of their gross profit. So they are making money there, just because even though it’s quite small, 10% of their business, the margins are so much higher that they are shifting profits to the internet side, even though the usage is not spectacular. Okay, so here is my first question for you. Did they succeed as an ecosystem or a platform? And you can put those on two levels. The ecosystem would be the operating system that connects all the smart devices, the IOT things, the televisions, the smart speakers, with the smartphone at the center. That’s really the ecosystem. And then on top of that, there’s a couple of platform business models, like their cloud service, their browser, whatever. Did they succeed in that? Or did they fail? And what would be the reason for that? And I gave you seven reasons from the BCG report. What do you think? I mean, is it working? And the seven reasons which are in the show notes are insufficient problem to solve, wrong ecosystem configuration, wrong governance choices, inadequate monetization, weak launch strategy, weak defensibility, bad execution. You know, is this a smartphone company and an ecosystem platform? Or is this just really like, this is overwhelmingly just a smartphone company? You know, make the call. Cause it kind of determines what strategy we would do going forward. So that’s your question. I want you to pause the podcast and take a shot. Did they succeed or not as an ecosystem? Did they succeed or not as a platform? You can focus on one of those if it’s too much. And then say the seven reasons. Choose your top one or two that you think explained what was going on and see where you land. It’s a good framework to think about. I think it’s helpful to think about it. Okay, do that, pause, and then come back. Okay, how did you do? I’ve been asking people, do you actually pause the recording when I ask to? And some people say, yeah, well, I do. I stop and I sort of make notes or I think about it. Often what someone said is, you know, ahead of time as you’re talking, I tend to think about the question ahead of time. So I’m already there by the time you say pause. So anyways, I think it’s incredibly important, but all I can do is nag a little bit. Okay, I’ll give you my take on this. My basic take is, I don’t think they’ve succeeded as a platform or as an ecosystem. Now they are mostly focused on becoming an ecosystem. That’s the whole, we’re going to make a whole series of IoT and smart devices, connect them all, you know, the smart home, the smart lifestyle, all of that, and they’re all going to run through your phone and we’re going to own the operating system. I don’t think that has succeeded. And I would point to problem number one on the BCG list, which is it’s an insufficient problem to solve. Connecting all the devices in my home, it’s just not that big of a deal. I mean, I can kind of connect, things connect pretty easily. There’s Wi-Fi, there’s Bluetooth. I don’t need to run through one system. I really, I have yet to find the need for this in life. I don’t get the idea. Now, maybe it will emerge, maybe the, maybe the sort of AI and the whole big data thing will play out more. and this system will come a lot smarter than it is today. But mostly right now when you’re connecting devices, all you’re really doing is connecting devices. I still don’t, I don’t get the ecosystem value. I don’t think it’s a significant problem yet, but maybe I’m open to the idea that as the system gets smarter, a connected ecosystem of multiple devices will be able to do things that are very impressive, but I don’t see it today. So I think that’s the problem there. At the platform level, these various apps they’re using, cloud, whatever, I think those are not, the problem I point to there is problem six, which is weak defensibility. I think each of those has a problem defending itself from pure breed players like an Alibaba or like a Tencent or like a cloud services company. I think when you’re mostly a smartphone maker and you’re dabbling in cloud and other stuff, I just think it’s too hard to play with the big data companies and the big tech giants. that are not smartphone makers who are really good at software and they’re very hyper focused. So I think it’s hard to win on the platform level as mostly a smartphone maker with not terribly predictable cash flows. So I’d say no, I’d say no. And then problem number four, I think they have weak monetization kind of across the board. I think the internet services is nice. and that they’re getting some advertising money. It’s not huge money. If you look at other people who are doing digital advertising, they’re making dramatically more. So it’s not awesome in terms of a business model, which is to monetize by advertising, and then the handsets aren’t making that much. So I think there’s kind of weak monetization across the board. It ain’t a huge cash machine, like, you know. the tech giants of China or Huawei. I mean, it’s just not a major cash machine. So I think they’ve got monetization across the board. That’s an issue. That said, if you view this mostly as a smartphone and smart device maker, I actually like them. I think they’re doing well. I think the three dimensions I’d be competing on, number one, I’d be going for share of the consumer mind. I’d be trying to thrill my customers. every single year with just fun stuff and smart scooters and smart fans and clever things and and they’re actually very very good at this. If you ever go into an Apple store in Beijing it’s actually quite boring because it’s the same stuff they’ve been selling forever. Now they have air buds whatever the earphones. You go across I’ve literally walked right across to the Xiaomi store a crop from the Apple store and it’s just packed with people and they’re rolling out new products every month. They’re very good at sort of just captivating their customers and showing them fun, great stuff with artisanal quality. I like that phrase. So I think they’re doing that well. I think they’re building and switching costs into the ecosystem and the apps as much as they can. Please sign up for our cloud service. Please put your photos here. Try and just lock people in as much as you can. I suspect they’re doing that, but I can’t get the numbers. And number three. they are increasing their overall profitability and cash flow with this internet services business. Even though it’s small, it’s actually helping their bottom line quite a lot. So I think the internet services business is good for switching costs and I think it’s good for boosting profitability. I actually like it in that regard, but not as an ecosystem or a platform play. And that’s kind of where I fall on that one. But I thought that was a pretty good framework. And the concepts, to sort of circle around, the concepts that I think that matter here are pretty much the ones I mentioned, which is ecosystems versus platforms. That’s really what’s going on here in terms of their discussion, if not necessarily the actual business. Switching costs, share of the consumer mind, talked about both of those many times. And then the smile operational marathon, which is ecosystem shaping and management. I think that’s the business they wanted to be in. I don’t think it’s really the business they’re in. With that, let’s go on to Meitu, which I think is actually much more interesting. So Meitu is not really that well known outside of China, although it’s in parts of Asia and certain countries, it’s definitely well known. But it became crazy popular, this is 2015-ish, when it was basically a photo editing app, for those of you who aren’t familiar with it. I mean, it was a photo editing app and you know, you could… adjust photos and whatever and they got good at sort of making your face look a little better and it took off as sort of the self the selfie beautification app where people were taking selfies you know like they always do and it turns out you could make yourself look better in the selfie by cleaning up your skin and maybe making your eyes a little bigger chin a little narrower or whatever you wanted to do put on makeup things like that And then when you share it on social media, you’d look better. So it’s just sort of your quintessential surprise hot app where even the CEO didn’t see it coming. I mean, he just thought it was a photo editing app and then it just took off like crazy. You know, and they go up to, you know, they go public in 2016. So I’m giving you the numbers right after they went public. But you know, 450 million monthly average users. 500 million users outside of China. I mean, just huge, and this is overwhelmingly women, not entirely, but mostly. And it was just ridiculous, you know, it was Brazil and India and Indonesia and Japan and Thailand made to people were just using this thing. And there was a funny story in, I think it was Beijing, it was China, definitely maybe Beijing, where, you know, a woman got pulled over by on the side of the street. the police, you know, whatever for and then you know, please take your picture. And she wouldn’t, you know, for the record and she wouldn’t let them take the photo. She demanded they use May 2 to take her photo as she was getting arrested and or maybe just ticketed on the side of the road. And to their credit, the cops did it. They used May 2. So it’s pretty cool. It just became ridiculously profitable. And it went public. And we got to look at their numbers, and I’ll give you the numbers of sort of as they went public in 2016, which was about 1.6 billion renminbi. So you’re talking about 200 to $300 million of revenue, which is not a huge amount. The vast majority of that 90 plus percent comes from the sale of smartphones. And the smartphones have about a 20% gross margin. And you know, that’s kind of weird. And then the other business they had was a little bit of internet services, which was like advertising, which was actually losing money. So their net gross profit across everything was about 15%, which was the 20% off the smartphones, and then you lose a little bit because the internet services were losing money. So it was kind of a weird business. They had three apps made to… Beauty cam and may pie and they’re all basically similar actually there were four they all had about a hundred million plus users it’s just people I mean they people called it like the beauty selfie app and I Won’t go into it too much, but just crazy usage and then there’s this question of all right What’s your business model and this was their question even before they went public and even after they went public like a year later They’ve gone public and people are still asking them, what’s your business model again? Because the smartphone thing, we’re gonna sell smartphones, that was kind of a last minute idea. That was not their original play. And what they put in their IPO document was, we are gonna be the quote beauty ecosystem. And these are their words, platformization, globalization, monetization. So they’re basically talking ecosystems and platforms. That’s what we’re doing. We’re gonna leverage our super popular app into this. And it’s like, okay, 1.6 billion renminbi is revenue, 15% gross margin, but then their sales and marketing expenses were huge. 25, 30% of sales were being spent on sales and marketing. So that’s wiping out their gross profits right there. Their admin expense was 12%, their R&D was 15%. So they are just super negative in terms of operating profits. 650 million Rem and B negative operating loss against 1.6 billion in total profits. I mean, this is not great. So they have what you, they had a lot of capital, they raised a lot of money, they went public, so they got a lot of money there. but they had two things you really don’t wanna see, which is they didn’t have a clear business model and they appear to be heavily dependent on a lot of sales and marketing spend, probably to get those big usage numbers. You know, those things probably aren’t independent. You cut one, I bet those numbers fall. And the money they were making was from selling these smartphones, which they were contract manufacturing out. They were selling them for about $200 to $300 per phone. They were selling them to their users. They were kind of customized, made-to-phones. I went to one of their little stores in the mall, and they were like beauty phones where the camera’s specially made to take the best photo of you, and it’s stylish. So it was kind of the beauty smartphone. That was their idea. And that’s kind of where I left them when I stopped looking at them was… Okay, this is a problem. They’ve got a pile of cash, but it’ll last probably two to three years and that’s it. Now my notes at the time, I kind of said look, you know, it’s a free popular app. That’s good. Giving something away for free is great. It’s incredibly popular and what I really liked about it was the psychology. that there was something very interesting going on between this app and the consumers using it. I mean, when you see something so popular so fast, I mean, that’s usually not a rational sales pitch doing. It usually means it’s tapping into something emotional, maybe addictive a little bit. There’s gotta be some interesting psychology there to get such incredible adoption. So I thought that was really interesting. And I said, okay, you’ve got this really interesting psychology and usage, but you’ve tied it to a mediocre cell phone business, which happens to be incredibly competitive. Cell phones, that’s a hard business to be into. And I sort of said some questions, look, how sticky is it? How much can you monetize? And you probably can’t compete as a smartphone business, for sure. How long until one of these big giants comes after your business and comes up with a better beauty app and tries to take your business. How sticky is it? Have you locked your people in? Or is this overwhelmingly the story of a first mover who got this idea first, discovered it probably by accident, used a lot of investor cash to do a ton of marketing to give away something free, and then has sort of found they can’t really charge for it? They’re in a very weak competitive position against smartphones and they’re probably at a very weak competitive position against any of these other digital giants who also want consumer attention, bite dance, Tencent. If they decide to go after that, how are you possibly going to stop them? So weak and very vulnerable position and then you got to figure out what to do. That’s an interesting strategy question. It’s easy to beat up on companies when they have trouble like this. which is not really fair because everybody has trouble. Any business you’re in, you’re going to have trouble at some point. So I tend to think these are the most interesting cases where you’ve got one part that’s very strong and interesting, and then you’ve got a couple of weaknesses. That’s a good scenario to kind of put your brain against. So we jump forward to 2019 and May 2 got really interesting. Like it’s really surprising. I’ll show you some of the numbers, but let’s say we pulled their 2019 financials. Well, their revenue has dropped. So it was 1.6 billion renminbi per year. Now it’s about a billion. So went down kind of a lot. But when you look at what’s under the revenue, it’s 75% of the revenue is now online advertising. There’s no more smartphone sales. They divested and stopped that business, which was 90 plus percent of all of their revenue just a couple of years ago. They dumped it. And 75% about 750 million rem and B is online advertising Another 85 million is premium subscriptions another 50 is value-added internet services So they’re making all their money from software That’s really kind of interesting and because it’s software you’re not talking about 20% gross margins on a smartphone You know their gross margins about 70% on all of this software. Suddenly their gross profit’s 700 million rem and B. I mean, that’s kind of, I saw that, I was like, wow, I hadn’t paid attention to this company. And wow, that’s really interesting. When you look at their monthly average users, they’re about a third down from what they were at the time of OPO. So it’s no longer 400 to 500, it’s 280 million. And it’s coming from the same basic apps, BeautyCam, Beauty Plus, May Two, Maypie. Most of it’s May Two, that’s their biggest one. Well, not most of it, half of it. So, okay, their monthly average users have dropped. Their revenue has dropped. And then it’s about 60% in China, 40% overseas. It’s no longer the 500 million overseas that they’re reporting now, it’s monthly average user 100. Now you could argue that, oh, that’s not goods, but what happened, they have all this activity that has decreased. Generally, I thought that was actually quite good because the first thing I saw when I saw that, the first thing I checked was, have they cut all that marketing spend? Did they get off, did they break their addiction to marketing spending? Anyone can get a lot of users if you, well, not anyone, but it’s easier to get a lot of users if you’re pumping out marketing spend. supplied by VCs and an IPO. Did they manage to break that? And that’s exactly what the management talks about is they are not doing marketing like that anymore. They’re doing organic growth. So yeah, that’s really kind of interesting what’s going on with them. And their selling and marketing expense dropped from 2018. It was about 780 million renminbi. So last the year before, last year it was about half of that. So they’ve really slashed and burned their marketing expense and they lost a lot of activity, but it’s still high and the activity they’re getting, they appear to be monetizing. So all of this, it’s like, huh, that’s really interesting. What are they doing? And in 2019, they turned operating cashflow positive, I think for the first time ever. I mean, it’s very, very small, but it’s technically positive according to their statements. Okay, so here’s what the CEO, or not the CEO, the founder is talking about. And I looked at what they kind of said strategy-wise, and I’m curious who wrote this. Is it the founder or whatever? But the strategy section of their annual report is really interesting. Like it’s completely different thinking. None of this was there two years ago, and I wanna read some of it to you. So what they talk about their mission, they say, quote, to refine the strategy around social and beauty.” Quote, refreshed our mission, unquote. Quote, let everyone become beautiful easily, unquote. Last one, quote, to empower the beauty industry and make beauty more accessible to the user. Okay, those are sort of four quotes I pull from the front. That sounds to me exactly like a platform strategy. Each one of those statements you can tell who they’re talking to, like the third one, to quote, let everyone become beautiful easily. That is their value proposition to consumers. They’re going to make it easy. The other one, to empower the beauty industry and make beauty more accessible to the user. That is clearly a value proposition to merchants and brands. So they’re speaking to two different user groups at the same time here. And The two words is to refine our strategy around social and beauty. Okay, then they lay out some of their strategy. They’re focused on content that is beauty related. So product reviews, makeup tutorials, fashion, health, awareness, wellness. Okay, you’re talking about content creators and influencers. So that’s definitely part of their strategy. Next one, we are gonna launch tailored advertising. for brand advertisers, or sorry, launch tailored advertising products for brand advertisers. So they’re going after the major merchants with a brand product, a branded product, not, hey, we’re gonna do a lot of conversions in sales. It’s branding related. We’re gonna launch a skin analyzer and we’re gonna partner with beauty industry participants. So they’re gonna start to build some functionality and intelligence into the fact that People are taking lots of photos of their faces and videos as well. They do videos and photos. Partnership with the Shanghai Skin Disease, some institute, to do remote dermatological consultants within the app. So if people are using the app and taking videos and photos of their faces, they’re gonna start to connect those people with doctors. That’s platform as well. Interesting. They keep going. They’re going for user engagement, which is time on app, number of users and the amount of time on the app. They’re going for high quality content creators and they’re going for a social ecosystem, social digital ecosystem. That’s fair, that sounds exactly like a platform strategy. They are going for organic downloads and by creating a better user experience and user interface instead of their traditional reliance on marketing. Those are my words, not them. I mean, this sounds a lot more like Tencent and ByteDance, which is like, look, our game is to get users attention, consumers, and get their engagement by providing them with a… tremendous user experience about something they care deeply about. It’s the user engagement. It’s the user experience. A core part of that is going to be high quality content about this subject. And based on that, we are then going to connect these people with brands. And we’re going to charge the brands advertising. That’s a solid platform strategy. That is like right up the middle of that one. And as I mentioned, their sales and marketing dropped from 80% of their revenue to 33% in 2018 to 2019. Admin expense is pretty common, pretty standard, R&D is pretty stable. That’s really their big move. And they discontinued their smartphone business in April of 2019. Some more of their strategy. They are focused on basically women users. And on the merchant side, they’re focused on luxury brands and fast moving consumer goods. They wanna be a social media platform, a niche. They’re combining basically content. I mean, the sort of way this stuff is all emerging is content plus commerce plus social. That’s a very common strategy. That’s where Facebook’s going. That’s where Alibaba already is. This looks like they’re just focusing on the content plus the social aspects. and then really just trying to knock it out of the park in terms of the user experience and user engagement. And a lot of that is just, you have to find something people care deeply about. It’s hard to have an amazing user experience when you’re buying a cup of coffee on your smartphone. But beauty in this, I mean, there’s clearly some interesting psychology going on. The advertising, they’re going for the big spending brand advertisers. They’re offering them more comprehensive marketing solutions. They’re building out their ad tech. And then they’re also offering subscriptions on some of their sort of Beauty Plus and other stuff. That was kind of launched more recently and then they have internet value added services. That’s not terribly interesting. So that’s great. I think that’s just solid. And two other little things is I look, you know, you look at their balance sheet and it looks pretty good. They got a lot of cash, don’t have any debt really. A little bit. Working capital is a bit much, about 20% of revenue, but I think that has a lot to do with where they are in terms of scale more than anything right now. The balance sheet looks fine, and they did acquire a company. where I think it was mostly, this was August 2019, Dajie, which is a human resources company, which is strange. But I think it was for the person, the founder of this has sort of a long history of founding multiple or being involved in multiple companies, Ren Ren, China Ren. And this is the person who’s now listed as the COO, this founder of this company they bought. It was the COO in charge of monetization strategies. and innovation ecosystem. So I think this woman is kind of their point person on a lot of that and what’s going on. But I don’t know, I’m guessing about that part. So here is my question for you. Will this work? I wouldn’t call this an ecosystem. This is clearly just a platform business model. Is this gonna work? Of the seven reasons these things commonly fail, which of them do you see here if any? Or which of them maybe do you think they’re strong at? That hey, not only they’re not weak at that, they seem good at that. So kind of make the call. How do you feel about this as a platform play? And the seven again, which I’ll repeat again, is insufficient problem to solve. Number two, wrong ecosystem configuration. Number three, wrong governance choices. Number four, inadequate monetization. Number five, weak launch strategy. Number six, weak defensibility, and number seven, bad execution. Are they going to make it or not? I mean, what would you do? Okay, so hit pause, take your best shot at this, and try and use the seven. Try and use the frameworks because it’s a way of embedding it in your brain. Okay, pause and then come back. Okay, welcome back. And that’s pretty much it for today. How did you do on that one? I’ll give you my take on this is, this looks solid to me. It sounds solid. Going through the seven common reasons they fail, is there a big problem to solve here? I wouldn’t use the word problem, but social and beauty, that’s a huge subject. And we already have somewhat of proof of concept that we know the users care about this. They’re already on the app doing stuff. So you’re in the right zone. Now maybe is it a problem? I don’t know. It looks like a reasonably large sized opportunity there. The ecosystem configuration that they have outlined looks solid. I mean, it’s commerce, I’m sorry, it’s content plus social. That’s a good start. That’s pretty similar to what ByteDance has been doing. It’s pretty similar to what a lot of Tencent has been doing. Maybe they could move to commerce one day. They could start selling that stuff. Who knows? I think they tried that years ago, but that creates a whole lot of operational problems. But no, focusing on content and the social aspects with basically three user groups, the major luxury brands, that’s your advertisers, the content creators, and then the consumers. And you already have the consumers. And it looks like they’ve got some good Attraction on the merchant side as well. Okay, fine the monetization monetization looks fine They’re going for advertising. That’s a clear strategy. It’s hard But it’s you know, it’s a well-known approach. Okay. I actually think they’re pretty good on the launch side I mean when you try and launch a platform like this, the biggest problem is getting the two user groups at the same time Well, they already have You know couple hundred million people who are engaged on this app So linking that up with merchants is actually not that hard. So that’s fine. And then defensibility and execution with this new COO who I think is probably the point person. I put it as a question mark because I don’t really know what they’re doing on the defensibility side, how much they’re locking people in, if they’re starting to get network effects, all those things we talk about, unclear at this point. We’ll have to watch that over time. But that would be kind of what I’d be keeping my eye on. Yeah. I thought that was fairly compelling. And it’s a world away from what they said just two years ago. So I’m curious if it’s the founder who’s still in charge, he’s still there, or if this is somebody new. Like has someone else come in and really just pulled this thing into a different course? Because these are major strategic moves. They jettisoned the business line, smartphones, that was 90% of their sales. That is a… gutsy strategic move when you say we’re gonna drop 90% of our revenue and probably half our users That’s a gutsy call in terms of strategy So anyways, that’s kind of a major pivot Okay, that’s it for this one. I hope that was helpful I think those are really kind of fascinating stories Because there’s a lot of pros and cons and I think you can learn a lot when it’s not Alibaba is awesome But everything’s awesome. Everything they do looks easy It’s not how most businesses, most thing it’s like, well, I got this, this is good, but this part of my business is messed up and I don’t know what to do here. That’s a better business problem to bend your brain again. So I think both of these are like that, which is kind of why I like them. Okay, that’s it. This all goes under learning goal 30, which is digital platforms versus ecosystems. The two learning, you know, two concepts are ecosystem shaping and management. That’s part of the operational smile, the smile operational marathon. and then ecosystems versus platforms. So those are the two concepts, but we also touched on switching costs and share of the consumer mind. I think share of the consumer mind is actually a big part of Xiaomi and Meitu, that it’s that interface with the consumer. There’s a lot going on on both of those companies. Okay. I had kind of a pretty nice week actually. Oh, and I went out with… Several of the listeners slash subscribers here in Bangkok, we went to a lunch. Well, they invited me out, which was really nice. I appreciated that great conversation. So thank you to you guys. You know who you are. It was a real pleasure and it was it was nice to meet you. You know, I spent a lot of time on this, but it’s it’s largely me talking to the wall. So it’s actually nice to meet people who are on the other side. And it was fun to have some chat and talk about this stuff. So I appreciate it. I am sending out a bit of a survey to try and take this up to the next level from 2.0 to 3.0. So if you’d like to participate in that, please just send me a note. I’m on my email all the time. Very easy to reach me and I’ll send you the survey. But I’d really appreciate your feedback. What sucks, what’s good, and what needs to happen next. And really what people have been doing versus not doing. You know, some people are like, I always listen to the podcast, I love that, and I do the notes, and other people are like, nah, I don’t do that, I just read the emails. So it really is a mix of what’s working for people and what’s not, and then sort of moving forward, step by step, and this sort of long, call it like the long walk, the long hike, to get you from where you are to hopefully a couple levels above in terms of your expertise. Anyways, that’s it for me. If you’re open to doing the survey, please send me a note. I’d greatly appreciate it. Other than that, I hope everyone’s doing well. I’m gonna do a bit of TV this week. So that’s always fun. It’s because TikTok is in the news like all the time. So keep going down there and I’m trying not to be mean to them. But yeah, it’s a pretty brutal environment for the TikTok management this month, which is, you know, sometimes that’s the way business is. It’s a contact sport and sometimes you’re charging the field and sometimes you’re getting pounded and they’re kind of getting pounded right now. So anyways, that’ll be fun. But that’s it from me. I hope you’re doing well and I will talk to you next week.

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