High profile smartphone maker Xioami is making headlines with word that it has purchased a stake in a unit of software maker Kingsoft (3888 .HK), in what could be the first in a new wave of tie-ups for this fast-rising company that aspires to be like global tech giant Apple (Nasdaq: AAPL). I have to admit that I'm not exactly sure what Xiaomi hopes to do with this new tie-up, which has it purchasing around 10 percent of Kingsoft Cloud Group , which is Kingsoft's cloud computing unit. The purchase price is quite modest, with Xioami paying just $1.82 million for its 10 percent stake. There's not much other information in the report, though it does point out that Xioami's charismatic co-founder Lei Jun is a major stakeholder in Kingsoft.
So, what do I make of this latest stake purchase? It certainly looks interesting and relatively cheap, since cloud services could become a key element in both of Xiaomi's main product areas – its original smartphone business as well as its newer Internet TV product launched in November. Unlike other makers of smartphones and TV set-top boxes, which typically sell their hardware to consumers and then let other companies supply services, Xiaomi appears to be taking a more holistic approach that will see it offer not only the hardware but also services like instant messaging that are specially designed for its products.Xiaomi Ties With Kingsoft in Cloud
That business model looks smart in some ways, as it can provide more steady revenue streams for the company from services and other fees. By comparison, smartphone rivals like Huawei and ZTE (0763 .HK Shenzhen: 000063) are more traditional hardware companies, only getting revenue each time they sell a smartphone.
This purchase of a stake in Kingsoft's cloud computing unit looks likely to support Xiaomi's broader approach to offering both products and services, since many of the services it would eventually like to offer would have be hosted in this kind of cloud computing center. In terms of partners, Kingsoft looks like a good choice for Xiaomi, not only due to Lei Jun's previous ties to the company but also because of its status as one of China's leading homegrown software makers.
Still, the cloud computing area in China is quite competitive, with big global names like IBM (NYSE: IBM) and Microsoft (Nasdaq: MSFT), as well as local names like Huawei and e-commerce giant Alibaba all taking initiatives in the space. Reflecting just how new and competitive the sector is, the media reports say that Kingsoft Cloud Group is losing money to the tune of about 19 million yuan, or about 3 million in the third quarter.
From a broader perspective, I suspect we'll see more of this kind of tie-up by Xiaomi with more service-related companies in the year ahead as Xiaomi builds up its product and service portfolio in the run-up to an offshore IPO that could come as soon as next year. This kind of investment is certainly interesting as it will make Xiaomi into a relatively unique company that offers both hardware and services.
But such a play into the services sector also comes with big risk, as it will put Xiaomi into direct competition with local names like Tencent (0700 .HK) and Alibaba, as well as global leaders like Google (Nasdaq: GOOG). The services area also carriers regulatory risk, as Xiaomi recently discovered  when it launched its Internet TV product, only to temporarily shut it down weeks later for apparently not getting all the necessary government approvals.
At the end of the day, I would probably say I like Xiaomi's approach, as it will help to differentiate the company from the many other hardware makers out in the market. But its continuing foray into services will also remain a constant risk as the company develops, exposing it to the potential for huge losses if and when some of those service offerings inevitably flop.
Bottom line: Xiaomi's investment in a cloud computing company looks like a smart extension of its effort to provide not only high-tech gadgets but also services to run on those gadgets.
Topics: Kingsoft Cloud Computing