A peek at Xiaomi’s smart home strategy, under the lights

Xiaomi, while best-known for cranking out hardware, has often referred to itself as an “internet company.”

Calling a company an “internet company” can mean many things. Internet businesses are often defined by low distribution costs, network effects, and owning channels. While it’s easy to see how this applies to Xiaomi the smartphone maker, it’s less apparent how this applies to its internet of things strategy.

Over the past year, Xiaomi has steadily released a series of smart home products – including a camera, a blood pressure monitor, a smart plug, and other devices. What’s not often discussed is that many of these devices are not made by Xiaomi, but by third parties. Lei Jun will repeatedly state that Xiaomi only makes three categories of products – smartphones and tablets, TVs and set-top boxes, and routers. But if that’s the case, what can Xiaomi gain from outsourcing its IoT devices, and what can its partners gain from Xiaomi?

It’s still too early to assess Xiaomi’s influence on IoT in China or other emerging markets. But its relationship with Yeelink, a Qingdao-based firm that sells smart lightbulbs through Xiaomi, illustrates how the tech giant is steadily paving the way for a gadget boom.

A lightbulb went off

Like many entrepreneurs, Jiang Zhaoning and Liu Daping spent their off-time from their jobs at Lucent dreaming up startup ideas. In October 2012, after years of making haphazard business plans, the two caught news of Philips Hue – the dutch company’s foray into internet-enabled lighting. Immediately, they quit left Lucent to build an analogous product for China.

“Yeelink started from our belief that the market for smartphones would boost the market for home automation,” says Jiang. “We picked lighting as a starting point because we thought that lighting is important for everyday life, and that internet connectivity could bring a new experience into this domain.”

Immediately, Jiang and Liu looked to Xiaomi for inspiration. The duo envisioned its first product, Yeelight Blue, as an alternative to Hue that was more customizable but also cheaper. Whereas Hues uses Zigbee to connect phones to its bulbs, Yeelight Blue used only Wifi and Bluetooth Low Energy.

“We chose technology with a low barrier-to-entry so we can sell our products as single units, compared to Philips Hue, which has to sell in sets of three. We set our price about about US$20 to US$30 per bulb, so even if users are [only vaguely] interested, they still won’t hesitate to buy one,” says Jiang.

Jiang and Liu built a working prototype for Yeelight in just three months. Jiang attributes their speed to their background in telecom, which in his view tends to foster extremely skilled engineers. After they hacked up a demo for Yeelight, the two joined HAXLR8R, the Shenzhen-based hardware accelerator, in early 2013.

According to Jiang, while HAXLR8R provided the team with a little seed funding, the two couldn’t scrape together any money from VCs.

“They thought it was fun, but didn’t think anyone one would use it,” says Jiang.

But their fortunes turned as the program came to a close. The team raised US$20,000 on Demohour, one of China’s leading crowdfunding sites. While that figure is modest by current crowdfunding standards, Jiang says the campaign helped them earn visibility as one of the site’s first smart hardware campaigns.

More importantly, soon after the campaign’s close, Google purchsed Nest for US$3.2 billion in cash. According to Jiang, many of the investors that once turned them away were now calling them back. One of the investment teams that expressed interest in Yeelight was Xiaomi. Jiang says that some talent spillover from Google might have helped boost Yeelink’s credibility.

“Since most of the earlier stage employees in Xiaomi are actually former Google China employees, they have done a lot of research on [the smart home] market. They found that we’re one of the best smart hardware startups in China, and felt that our team was capable of starting a business and delivering a quality final product.”

The Beijing tech giant led an investment in Yeelink in early 2014, and brought its products to the Xiaomi’s online store later that year.

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