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China's Xiaomi to Buy 1500 Patents From Microsoft

Beijing-based smartphone startup Xiaomi has agreed to buy about 1,500 patents from Microsoft as part of its bid to grow outside China. Photo: Reuters

By

Eva Dou and

Jay Greene

Updated May 31, 2016 10:05 p.m. ET


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BEIJING—Xiaomi Corp. has agreed to purchase around 1,500 patents from Microsoft Corp.
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in an example of the rising 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, the move is the latest in a yearslong push to collect royalties from electronics makers who use Google Inc.’s 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 Mr. 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 Mr. Nadella will meet with Chinese regulators during his visit.

Xiaomi's new model Mi Max devices on display a launching ceremony in Beijing on May 10.
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Xiaomi’s new model Mi Max devices on display a launching ceremony in Beijing on May 10.


Photo:

Reuters

Beijing-based Xiaomi shot to the top of China’s smartphone market in 2014 with a lean online-sales strategy that helped it keep costs down, but it is gradually spending more on patent licensing, brick-and-mortar stores and advertising as it matures.

The mounting costs come at a time of slowing revenue growth, as Xiaomi faces a saturated domestic phone market and overseas regulatory hurdles.

Xiaomi has temporarily halted the launch of new products in Brazil due to uncertainty in government policy, Hugo Barra, Xiaomi’s vice president of international, said in an interview on Tuesday. Xiaomi will also bring its international marketing teams back to Beijing, he said.

Xiaomi will purchase the patents from Microsoft for an undisclosed sum, said Wang Xiang, Xiaomi’s senior vice president of strategic cooperation, in an interview.

The smartphone maker, whose name means “little rice” in Chinese, also signed a cross-licensing agreement with Microsoft, similar to ones struck a year earlier by big global electronics brands like Samsung Electronics Co. and Dell Inc. As part of the agreement, Xiaomi will preload Microsoft Office and Skype—the video-chat app owned by Microsoft—onto some of its devices, including the Mi 5, Mi Max, Redmi Note 3 and Mi 4S.

“Both Xiaomi and Microsoft respect intellectual-property rights,” Mr. Wang said. “We believe that with this kind of collaboration and also our commitment for the long-term investment in IP, we are going to build a very strong patent portfolio.”

Microsoft holds more than 60,000 patents, so the patents sold to Xiaomi represent just a small share, said Jennifer Crider, a spokeswoman in Microsoft’s legal department. “We do this periodically,” she said.

Microsoft Corporate Vice President Jonathan Tinter said in a telephone interview that the licensing agreement included wireless communications patents as well as other technologies, including video.

“This is much broader than some of the other partnerships we’ve had,” he said.

There is still no timeline for smartphone sales in the U.S., although it won’t be this year, Mr. Barra said. Xiaomi has brought some other products to the U.S., including an Android TV set-top box announced this month. Xiaomi would likely need more patents and regulatory approval to sell smartphones in the U.S., according to analysts.

“We are taking the necessary steps for launching in the U.S., but for the time being, the focus remains in India,” Mr. Barra said.

Xiaomi entered the Indian market last year, but its scale there is still relatively small. Xiaomi wasn’t among the top five smartphone vendors in India in the first quarter, according to IDC.

Xiaomi fell out of the world’s top five smartphone sellers in the first quarter, after being overtaken by rival Chinese companies Huawei Technologies Co., Oppo Electronics Corp. and Vivo Electronics Corp., according to market research firm IDC. The top two sellers are Samsung Electronics Co. and Apple Inc.

Mr. Wang said Xiaomi is focusing this year on higher-end products instead of sales volume.

Write to Eva Dou at eva.dou@wsj.com and Jay Greene at Jay.Greene@wsj.com

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