Chinese smartphone giant Xiaomi has announced it will purchase 1,500 of Microsoft’s patents, many of those related to mobile software, as it marks the next step in its pursuit of Western expansion. The financial terms of the deal were not disclosed. While the Android maker dominates its home market with an intimidating 26% share of the fast-growing scene, intellectual property challenges inhibit its ability to grow as quickly outside. Xiaomi had been one of China’s most exciting startup stories, earning a valuation of $45 billion by marketing cut-rate but reliable devices directly to consumers online and offering then-innovative social media and customization features. It now needs to sell into overseas markets with Chinese smartphone growth grinding to a halt. Yet while an acquired portfolio may help it avert legal hassles, Xiaomi itself has yet to demonstrate an ability to carve out a global business.
Agreed purchase to showcase its demand to expand outside China
Xiaomi Corp. has agreed to purchase around 1,500 patents from Microsoft Corp. in an example of the risino shg costs facing the Chinese smartphone startup as it expands outside China. The deal reflects Xiaomi’s efforts to acquire the intellectual property it needs to one day sell its devices beyond developing markets. One of its ultimate goals is to sell its phones in the U.S.
For Microsoft MSFT, +0.34% , the move is the latest in a year’s long push to collect royalties from electronics makers who use Google Inc.’s GOOG, +0.74%GOOGL, +0.67% Android operating system, which Microsoft says uses some of its technology. The deal comes as Microsoft Chief Executive Satya Nadella starts a visit to Beijing. A company spokesman said Nadella will be in China’s capital as part of a trip to visit developers across Asia. Microsoft faces a continuing antitrust investigation in China over bundling of software. The spokesman declined to say if Nadella will meet with Chinese regulators during his visit. Xiaomi, which vies with Huawei Technologies Co. for the title of China’s biggest mobile brand, has begun selling phones in emerging markets, but its lack of a wide-ranging mobile patents portfolio has been perceived as a stumbling block to expansion into regions such as Europe or the U.S. The company’s push into India, currently its biggest overseas market, was met with a lawsuit from Ericsson AB.
“Patents give you a ticket to developed markets but you still have to prove you can be successful overseas,” said C.K. Lu, a senior research analyst with Gartner Inc. “The challenge Xiaomi is facing now is that even in countries with looser regulations like India they still can’t expand as they hoped.”
“The U.S. and China together account for nearly half of the mobile phone revenues so if you want to be in the premium market and get revenue, the U.S. is a market you cannot miss. But it’s extremely difficult,” Lu said.
The deal also marks a rare sale of patents by Microsoft to a company in China, where it’s facing a government antitrust investigation while simultaneously trying to fight piracy. Microsoft moved into phone production almost two years ago when it bought Nokia’s handset division for $9.5 billion in a bid to make the company relevant in consumer computing beyond PCs. The company has since written down most of that purchase and in May agreed to sell its feature phone business to FIH Mobile Ltd. and HMD Global for $350 million. Microsoft, after its failure to drive the Windows platform as a key vehicle for its cloud, apps and services in mobile, is turning to a Google-style partner-led model,” said Neil Shah, research director at Counterpoint Research. “Microsoft is using its IP arsenal as leverage to lure and lock-in vulnerable players such as Xiaomi. So possibly it’s a win-win for both parties as Xiaomi gets IP-protected and Microsoft grows its roster of partners.”
Technology companies use their intellectual property, including patents and trademarks, to protect innovations and provide a type of currency when it comes to using that of others through cross-licensing deals. The 2014 Indian lawsuit, which focused on Ericsson inventions enabling wireless devices to connect to networks, resulted in a court banning some Xiaomi devices in India. The agreement announced on Wednesday also covered cross-licensing, though neither side would provide specifics.
“As demonstrated by this agreement with Microsoft, Xiaomi is looking to build sustainable, long-term partnerships with global technology leaders,” Xiang Wang, a senior vice president at Xiaomi, said in a statement.