Xiaomi bought nearly 1,500 technology patents from Microsoft in a deal that may smooth potential legal tangles over intellectual property as it pushes beyond China.
The patents cover a range of wireless communications, video, cloud and multimedia technologies, spokeswoman Kaylene Hong said. The acquisition came as part of a broader agreement announced Wednesday with the U.S. software giant, under which Microsoft Office and Skype will come pre-installed on the Chinese smartphone maker devices.
Xiaomi, which vies with Huawei Technologies 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.
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.
"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."
Xiaomi sold more than 70 million smartphones last year, falling well short of its target and prompting founder Lei Jun to tell employees he was refocusing research efforts into "cool stuff" like robotics and virtual reality. Xiaomi must also secure a foothold in developed markets to staunch a decline in sales growth, Mr. Lu added.
In India, Xiaomi has so far failed to penetrate the top five in a market dominated by Samsung Electronics and local brands that compete on cost. The company valued at $45 billion after a 2014 funding round is also exploring its U.S. options, though it's not yet begun selling phones in that carrier-dominated arena.
"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," Mr. 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 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.
-- Bloomberg News