However, industry watchers have been wondering how Xiaomi can offer such impressive hardware at [relatively] low prices while still maintaining a profit. The quick answer is that it can’t — the company simply isn’t making any profit on the hardware sales of its smartphones.
"Basically we're giving [handsets] to you without making any money… we care about the recurring revenue streams over many years," said Xiaomi Global VP (and former Google exec) Hugo Barra. "We could sell 10 billion smartphones and we wouldn't make a single dime in profits.”
While there’s no chance of Xiaomi selling 10 billion smartphones any time soon, it should keep an eye on the fact that its global sales dipped 12 percent last year, and that its Q3 2016 sales in China declined by 45 percent.
Xiaomi Mi MIX
So if Xiaomi isn’t making any money in the red hot smartphone category — one in which Apple reportedly commands 91 percent of the profits worldwide — and its sales are sinking, where exactly is its revenue stream coming from? According to Barra, Xiaomi generates the bulk of its profits from smart home devices including rice cookers and air/water purifiers and products in new categories like its new 4K drone. The company is also banking on recurring revenue streams from its software and services — something that Amazon relies upon heavily with its hot-selling hardware like the Fire tablets and Fire TV streaming devices.
Looking forward, Barra hinted that Xiaomi would unveil a new product at next year’s Consumer Electronics Show in Las Vegas. Given the U.S.-centric themes of the show, we could possibly see the company introduce a smartphone that is tailored to an American audience, as Barra made it clear that Xiaomi is looking to initiate direct sales to U.S. residents.