A real disruptor or a big talker? The myth of LeEco

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LeEco has banked on building an ecosystem around its different verticals. Is it succeeding? Here’s a closer look

LeEco, the Chinese internet conglomerate, has just made a big splash in America with a lavish press event held in San Francisco on October 19th. Founded by Chinese multibillionaire Jia Yueting, commonly referred to as YT Jia, LeEco has great ambitions for the U.S. market with a whole slew of products, from televisions, to smartphones, to VR headsets, to bicycles, all expected for simultaneous release across the U.S.

But for many the question remains, just who is this audacious company?

Established in 2004, LeEco began as a second-tier video streaming site in China. Its expansion began in earnest from 2012, and now it has transformed into a huge empire that encompasses a variety of businesses including: smart products, entertainment, cloud services, financial tech and electric self-driving cars. In the U.S., it’s likely better known as the company behind electric car maker Faraday Future and the new owner of TV manufacturer Vizio.

Also Read: LeEco rolls out high-spec packed LeEco Le Pro 3 at US$270

However, its sudden ascendancy has not been without controversy, both in the U.S. and also in its home market of China.

So what does the Chinese market think of this heady tech company and will it be able to establish a foothold in the American market or will it become just another inconsequential Chinese player?

A closer look at the LeEco Ecosystem

The empire of Jia Yueting, referred to as LeEco, originated from video streaming site letv.com. The video site, currently registered as Leshi Internet Information & Technology (hereafter referred to as Leshi Internet), listed on mainland China’s second board stock exchange ChiNext in 2010. Leshi Internet, with its 14 affiliates, is the core of LeEco. Its performance props up the development of the rest of the businesses.

Apart from the public video site and its affiliates, the LeEco Group also consists of privately held assets collected under Le Holdings Co Ltd (hereafter referred to as Le Holdings). Registered in 2011, Le Holdings is connected to at least 34 private companies through direct and indirect shares. Subsidiaries affiliated to Le Holdings are frequently spun off as independent companies for fundraising purposes furthering the expansion of the empire.

Existing under a complex corporate structure, LeEco emcompasses seven different businesses aimed at providing a matrix of content, platform, applications and devices, and generating strong synergy between them. After rebranding from LeTV to LeEco in early 2016, the company prefixes each of its offshoots with ‘Le’, hoping to enter the international market with a more uniform brand name.

Building an Ecosystem

The diversification of LeEco started in 2012 when the company announced it planned to upend the traditional television industry. It touted TVs sold close to or even below cost to draw in customers. By selling TVs priced at least US$300 cheaper than the competition, it managed to move 7 million TV sets by July 2016, snapping up some market share from the establishment. This figure, however, lags considerably behind incumbents which typically sell over ten million units every year.

Different from traditional manufacturers, LeEco doesn’t plan to profit from the sale of hardware. Its profit model is built upon member subscriptions, built-in advertisements and paid content tied up with the sale of its smart TVs. This is a typical example of LeEco’s content and hardware bundling sales strategy, coined ‘EcoAction’ (i.e. Ecosystem Chemical Reaction) by the company.

Bundled together, ‘hardware’ serves as a tool to deliver LeEco’s content and services to a large population of users. To reinforce this strategy, LeEco has continuously introduced more hardware to the market since 2014, including smartphones, VR headsets and even a concept electric car in 2016.

At the same time, LeEco has been building on its advantage in content provision and production. Utilising the video resources it has with its streaming site, it set up a film distribution company in 2011 (later referred to as Le Vision Pictures) after poaching Zhang Zhao and his team from China’s top media production company Enlight Media Group.

Zhang was Founder and President of Enlight Media’s film production subsidiary and has been working in China’s film production industry since returning from the U.S. in 1996. Under Zhang’s leadership, Le Vision Pictures has made some impressive moves including notable success in co-distributing The Expendables III in 2014.

Also Read: Le Supercar scoops US$1.08B funding to fuel its fight against Tesla

Zhang is just one of the many high profile industry heads that have been drawn to LeEco. After the sports and music channels of letv.com were both separated from the website to run as independent companies, LeEco hired Lei Zhenjian, former Vice President of MySpace, as Executive Chief Editor at letv.com and later CEO of Le Sports; and Liu Jianhong, one of China Central Television’s most famous sports commentators, as Le Sports’ Chief Content Officer. Other prominent hires for the fast expanding company have included the former Vice Presidents of the Bank of China, SAIC Motor and Lenovo. These high-profile executives serve as big endorsements for LeEco.

Its chase after top talents has continued into the United States. On the list of LeEco’s North America team, we find former Samsung executives Danny Bowman and Shawn Williams as well as former Qualcomm veteran Rob Chandhok. But whether these experienced American executives can carry over their success to LeEco remains a question to be answered.

A highly controversial press event held in San Francisco in October, apparently was so bizarre that Recode Senior Editor, Ina Fried, remarked that LeEco “made ‘Silicon Valley’s’ craziness look tame.”

Taking a step back to analyse LeEco in its home market, there are also several questions regarding its fast growth that have yet to be answered.

Question #1: Does the Ecosystem really work?

LeEco’s offensives on all fronts have set many vigorous opponents against it, and have held it back from assuming top spots in any of the segments it competes in. 

LeEco has promoted itself as an innovator in the integration of online content and hardware. In this model, sales of its content and hardware have mutually enhanced the performance of one another. This model worked well when it first appeared as a disruptor in the smart television market but hasn’t as yet revealed any magic in the smartphone market. Exclusive content may possibly contribute to the charm of a smart television in the eye of consumers, but the same does not apply in the case of smartphones.

The LePhone hit the market in April 2015, when the market was already mature and saturated by global heavyweights and local giants. In the first quarter of 2015, China’s smartphone market shrank for the first time in a few years, according to market research firm IDC. The smartphone market in China is mostly dominated by strong local brands including Huawei, OPPO, Vivo and Xiaomi, along with global leader Apple. Market share leftover for LePhone was so slim that in May, the total sales volume of the LePhone was only ten million units.

Meanwhile, LeEco’s core content business has been drawn into a cash-burning war for video streaming supremacy in China. LeEco’s letv.com wasn’t in the same league as top players like Youku and iQiyi in terms of ranking and traffic, but it initially vaulted to fame by being the only profitable web-video site in China.

Also Read: This Chinese tech giant just sold a million of its new smartphones in 2 hours; but is it sustainable?

LeEco started early on acquiring copyrights when piracy was still prevalent among Chinese video streaming sites. It accumulated quite a number of properties at a relatively low price and is now benefiting from distribution of this content.

However, it still lags behind topnotch players in terms of its user base. According to a report released in October by data research firm QuestMobile, the top three sites see MAU of two to three hundred million, while letv.com sees little more than 90 million.

At the same time, iQiyi, Youku and Tencent Video, backed respectively by Baidu, Alibaba and Tencent, keep adding investments to bolster their top positions. While the parent company of Letv.com has been under much financial pressure for business development in its less dominant fields, the top three players have begun to dwarf Letv.com in rival copyright purchases. Both the automobile business and LeEco’s global expansion — LeEco’s top priority right now — demand high amounts of investment.

Question #2: Does LeEco have enough money to finance its multi-pronged expansion?

As LeEco is expanding into so many areas at the same time, its future looks precarious to some in terms of its profitability and financing ability, which doesn’t seem to have kept pace with its aggressive expansion.

Jia has admitted openly on many occasions that the biggest headache for the conglomerate is shortage of capital. The company has several channels for fundraising. However, all are presently being strained.

The publicly traded Leshi Internet raised capital through private equity placements in 2014. Its application for RMB 4.8 billion (US$710 million) didn’t pass until one year later by the China Securities Regulatory Commission. Jia, as the biggest shareholder of Leshi Internet, raised money by pledging his stake in the company. In 2011 to 2014, Jia pledged his stake as collateral 10 times. After pledging another five hundred million shares in October 2015, his pledged stake accounted for 77.74 per cent of the total shares that he held in Leshi Internet.

Jia also sold part of his shares last June and last October, raising around RMB 5.7 billion (US$843 million) in total, and announced he would lend them back to the listed company interest-free. After the shareholding reduction, Jia held 36.79 per cent in the company, compared with 62.41 per cent stated in the IPO Prospectus.

Meanwhile, affiliated companies were spun off to raise funds as independent companies. According to a leaked fundraising file, Jia had himself pledged a fundraising guarantee to ensure successful financing for the LeEco affiliated electric car company Faraday Future. As the financing plan of Faraday Future was questioned recently by the State Treasurer of Nevada, it’s also proper timing to ask whether the company’s financial capacity can sustain its ambitions in the global market.

Question #3: A real disruptor or a braggart?

LeEco’s widely touted Ecosystem is at the centre of controversy unto itself. The hype around LeEco’s Ecosystem model has directly contributed to a soaring market value for the public company. But based on people’s different stances, it has either been interpreted as a precocious business innovation that cannot be perceived by average minds, or eye-catching bluff and bluster aiming to boost its market value.

Skeptics believe the ‘ecosystem’ strategy is something elaborately crafted to impress the ‘concept’-driven Chinese stock market and to lure venture capitalists. Critics believe, after the money is in hand, the company will then continue to dive into red-hot new areas and begin new businesses from scratch, while profitability of the business remains beyond discussion.

For example: its electric car business. The idea that self-driving cars will be the ‘theatre on wheels’ is innovative. In this vision of the future, self-driving electric cars, like what LeEco is producing with Faraday Future, will be another prominent content platform for the future. Thus, the plan for LeEco to incorporate electric cars into its Ecosystem seems to be reasonable, and even inspirational in a sense.

However, doubts have surfaced as to whether LeEco can be the one to fulfill this vision. So far, LeEco has only managed to launch a concept car — which failed to appear at the launch conference of its U.S. branch — and now additionally seems to be having trouble with the financing of its car factory.

Also Read: LeEco commits US$3B to building futuristic auto park

Mass production of this self-driving electric car seems to be something far in the future, leaving aside questions of turning a profit. How long will this car business be able to continually attract funding, and how much patience will investors have with a non-performing asset? With the news that six high-level executives have recently left the car company, the future of the business seems to be hazy.

This is likely the essence of LeEco’s controversies. As an ancient Chinese saying goes, the legitimacy belongs to the victor. Is LeEco a real disruptor with an exceptional vision of the future, or is it just a braggart recklessly boasting about ambiguous concepts? It has yet to prove itself either in China or in the global market. Maybe only time will tell.

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By Danielle Li and Rhea Liu. With contributions from Ruchao Li and Editing by Rohan Malhotra. This article was originally published on China Tech Insight.

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