Xiaotiancai might be Duan Yongping's best business.

For a long time, Duan Yongping didn't think that BBK, which he founded, was a good business.

He said straightforwardly on Xueqiu: "Our business model is not good, and it's not a good investment target." (Posted on April 6, 2012)

This is not false modesty. The 3C digital consumer goods sector has always been the most competitive arena. Product differentiation is relatively small, and the assets are too heavy. Even in the era of smartphones integrating software and hardware, the differentiation among Android phones remains limited. The profit margins of listed companies in the industry, such as Xiaomi, Samsung, and Sony, generally hover between single - digits and around 10%.

This fails to meet Duan Yongping's investment requirements. The stocks he invests in, such as Kweichow Moutai, Pinduoduo, and Apple, generally have profit margins of over 25%.

However, there might be an exception among the products under BBK - the Xiaotiancai phone watch.

Although its profit margin is not publicly disclosed, its premium ability and social attributes have successfully broken through the niche and are well - known to adults. Without a Xiaotiancai watch, you can't participate in classmates' chats or view their updates. Many people are willing to pay a higher price to buy it or ask their parents to buy this unique social function.

After all, if a kid's network device can't integrate into the class group, it's not just a matter of convenience; it's also a stifling of their social pursuits.

Those familiar with Apple will easily notice that this is similar to Apple's ecological moat.

01 Xiaotiancai: The Apple for Kids

Since more than a decade ago, Duan Yongping's US stock account has almost only bought one company: Apple. At most, about 90% of his funds were in this single stock.

For Duan Yongping, who has been in the digital product business for a lifetime, Apple is almost his dream business model. Especially its exclusive system gives Apple a software ecological moat. Although BBK is also quite excellent, he admitted, "Our business model is indeed not as good as Apple's."

One of the reasons why Apple's business model is so good is that it plays a part of the role of WeChat in the United States. Its built - in communication software Facetime and messaging software iMessager are important social apps, and these two apps can only be used on Apple phones.

If you use an Android phone? Of course, you can still chat, but the functions such as clarity, privacy protection, and group chat will all be downgraded. More importantly, the blue chat bubbles in iMessager will turn green, which in the eyes of American kids implies a kind of social shame, meaning you can't afford an Apple phone.

Caption: Simply put, when iPhones send messages to each other, the bubbles are blue, while those from Android phones are green. Image source: Apple's official website.

The Android camp has never achieved a similar moat. Not to mention Duan Yongping's Vivo and OPPO, even Google has failed to build its own social network.

But what Google couldn't do, Xiaotiancai has achieved.

Due to its dominant market share in the children's watch field, Xiaotiancai's social software "Weiliao" has become the iMessager for Chinese kids. It is a closed - loop first - party app, which means you have to buy a Xiaotiancai watch to chat with classmates who use Xiaotiancai.

— Exactly the same as Apple's iMessager.

Even more, Xiaotiancai's social network is even more powerful than Apple's. It not only does the work of iMessager and Facetime but also that of Facebook. Its friend circle and homepage have a display function similar to QQ Space, which is a teenage version of the Moments.

Caption: This is not an ordinary function; it's a "Facebook".

Teenagers around the world have similar concerns: how to attract the attention of the opposite sex and how to gain recognition among the same sex. So, Xiaotiancai has become a channel for them to meet these social needs. Phoenix Tech reported that a girl earned 60,000 yuan a year through the business of getting likes on the Xiaotiancai watch.

The fact that this business can earn 60,000 yuan shows how much kids care about the social function of the Xiaotiancai watch. Buffett once described Apple's competitiveness like this: If you are an Apple user and someone offers you $10,000 to throw away your iPhone and never buy it again, you won't accept it.

Buffett's description might also fit Xiaotiancai. Of course, the price of $10,000 might need to be adjusted because most kids aren't that wealthy.

Besides social aspects, Xiaotiancai has another powerful moat: the lock - in effect.

For example, Xiaotiancai has a points system, which can be obtained through social activities, check - ins, and sports. Its function is similar to Q - coins, which can be used to upgrade account levels, change special nicknames, and unlock special watch faces. These benefits all have social attributes, similar to QQ members and QQ's premium service.

For users, these points and levels are valuable virtual assets, which will be reset to zero once they switch to other devices.

It also has an ecological system of device interconnection and collaboration similar to Apple's: the collaboration between the Xiaotiancai watch and parents' phones.

Through the parent - function on the mobile APP, Xiaotiancai has also integrated adults into the social network. A Xiaotiancai phone watch can not only be bound to parents but also to grandparents, aunts, uncles, and other family members, up to 50 family members in total. They can all directly call the Xiaotiancai watch through the APP, view the user's real - time location, and receive notifications.

If you replace the Xiaotiancai watch, all the previously set administrators, chat records, and monitoring settings will be lost, and resetting them requires time and effort.

As a business with a stratified consumer and user base, competitors often have to convince both parents and kids to take away Xiaotiancai's users. And both parties have reasons not to change the device.

02 Duan Yongping's Best Business

Duan Yongping likes to invest in good businesses, but his own business might not be that great.

In a video conversation on Xueqiu, Duan Yongping talked about the difficult times BBK once faced. During the transformation from feature phones to smartphones, BBK encountered serious inventory and cash - flow crises and was on the verge of bankruptcy.

This reflects the common drawbacks of the 3C digital business: heavy assets and rapid changes. Even in "peaceful times", due to the small differentiation, the profit margins and free cash flows in this industry are very limited, which ultimately makes it lack the ability to resist risks.

Not to mention BBK, even Apple was a tough business before becoming a software company. It once suffered losses and was on the verge of bankruptcy in the late 1990s, which led to the story of Steve Jobs' return to save the company.

This doesn't seem like the kind of business Duan Yongping would invest in.

The stocks he loves are all businesses with high gross margins, low capital expenditures, and strong cash flows. For example, Kweichow Moutai, Apple after the launch of iOS, NetEase, and Pinduoduo all have profit margins of 25% - 30% or even higher. In the 3C digital industry, the profit margins of Sony, Samsung, and Xiaomi in the fiscal year 2024 didn't reach 10%.

No wonder Duan Yongping said that his own company was not a good investment target.

However, in 2019, Duan Yongping's view of his own business model changed. He thought that smartphones were making his business better: "Now it's an internet portal and a platform." (Posted on August 1, 2019)

But in the view of "Lüedà Cānkǎo", the business model of Android smartphones is far inferior to that of the Xiaotiancai phone watch.

Android smartphones do have parts related to the internet portal business, such as app stores and browsers. But due to the openness of the system and other reasons, the proportion of this part of the revenue in Android phones is too small. In Xiaomi's latest third - quarter financial report, the internet revenue was less than 10 billion yuan, less than one - tenth of the group's total revenue.

Not to mention Xiaomi, Vivo, and OPPO. According to a report from Sensor Tower, even Google, the owner of Android, only has about half as much revenue from Google Play as Apple from the APP Store.

Android phones still can't get out of the dilemma of homogeneous competition. Duan Yongping himself predicted as early as 2013 that the differentiation among Android phones would become smaller and smaller in the future, and it would be difficult for Samsung to maintain its price.

Indeed, relying on the same system, the differentiation that Android manufacturers can achieve is quite limited, making it difficult for each brand to outperform its competitors. Over the years, the sales volumes of OPPO, Vivo, Xiaomi, Honor, and other manufacturers have been neck - and - neck, and no one can dominate the market.

This will ultimately affect the profit margin.

Although Samsung doesn't separately disclose the profit margin of its mobile phone business in its financial reports, according to various third - party estimates, the operating profit margin of Samsung's mobile division, where its phones belong, is around 8% - 12%. Samsung is the global leader in the Android camp, and the figures of other Android phone brands will only be lower, not higher.

Compared with other watches, the Xiaotiancai phone watch has essential differences in basic functions.

There might be parameter differences between Sony's Android phones and Samsung's Android phones, but both can download WeChat and Taobao. Only products like Samsung Pay are exclusive to Samsung, but unlike Facetime, it's not a necessity for every user.

However, Xiaotiancai's social function is exclusive, unique, and a closed - loop, integrated system. Only by buying a Xiaotiancai watch can you participate in classmates' like - giving activities. This is a huge difference between having and not having the core function.

Although it doesn't have as many software monetization methods as Apple, this software competitiveness can be directly translated into the hardware price. In 2024, the new Xiaotiancai Z10 was priced at 2,299 yuan, approaching the price of the Apple Watch, while other brands like Xiaomi's C7A were priced at less than 300 yuan.

Even Samsung might not be able to achieve such an ecological moat and premium ability.

Of course, the user base of the Xiaotiancai phone watch is very limited, not in the same league as the smartphone market. But Duan Yongping has repeatedly expressed that he cares more about how far, how strong, and how healthy a business can be rather than how large its scale can be.

From this perspective, Xiaotiancai might be the best business he's ever been involved in, and perhaps the best digital consumer goods business in China.

This article is from the WeChat official account “Lüedà Cānkǎo” (ID: hyzibenlun), author: Yang Zhichao, published by 36Kr with permission.