LeEco (formerly LeTV) initially made its name as a leading video content provider in China, alongside Youku Tudou and iQiyi. Akin to Netflix and Amazon Prime Instant Video, LeEco offers paid-up members an ad-free, exclusive, on-demand content streaming service and other benefits. It made a foray into hardware offerings since 2009 when it released set top boxes and finally entered the smart phone market in 2015 in an attempt to replicate its experience in the smart TV business. 

According to Canalys estimates, LeEco leaped to become the 8th largest smart phone vendor in China with 5.5 million shipments in Q2 2016. The result is impressive for a new player that has only been in the market for one year. Aiming to build an integrated ecosystem based on ‘platform, content, device and application’, LeEco now spans a wide range of verticals covering cloud, content, TVs, smart phones, electronic cars, sports and finance. Smart phone, which is the most prevalent smart terminal serving as the major access point to Internet services, is an essential component of LeEco’s ecosystem.

 

Noticeably LeEco hires senior executives from its local rivals such as Lenovo, Huawei, Meizu and Xiaomi, to join its emerging smart phone business. Feng Xing, who is the president of LeEco’s smart phone business, was the former vice president of Lenovo. These experienced executives bring LeEco their valuable expertise in various fields including marketing, channel distribution, business development and R&D.

Content is LeEco’s core asset and key differentiator

Starting as a video content provider, LeEco has made early efforts to acquire a great number of content copyrights when they were still at a low price. It also attempts to save resources and win viewers with original content creation. Moreover, to improve user stickiness, it is expanding its strength on entertainment content to sports events. These efforts are essential in order for LeEco to maintain content uniqueness and improve its ability of making profit from video content in China where viewer loyalty is relatively low.

LeEco’s content streaming service is the largest differentiator for its smart phones, offering it more flexibility in pricing than the incumbents in the smart phone industry such as Huawei, Samsung and Xiaomi. The phones are priced lower than BOM (bill of materials) and bundled with different types of memberships. For example, for one year’s Leciyuan membership, which costs CNY198 (US$30), consumers receive CNY100 (US$15) discount on the phone. The discount could go as high as CNY600 (US$90) with a two-year Super Film membership, which costs CNY980 (US$147). At LeEco’s two online festivals 414 and 919, the phone was offered free of charge, with the consumer only having to pay for the content. Through this, LeEco aims to quickly expand its smart phone user base and cultivate habits of consuming online content through the subscription model.

 

Omni-channel strategy contributes to LeEco’s rapid growth

Unlike other Internet companies, LeEco comes to the market fully leveraging all available channel resources. To sell phones on the online channel, LeEco uses its own LeMall and third-party e-commerce platforms such as T-mall and JD.com. Through the introduction of its two online sales events on 14 April and 19 September 2016, LeEco aims to boost sales as well as gain popularity as both events are heavily promoted both online and offline, focusing on one key message - offering free devices when signing up for LeEco memberships. At LeEco’s EPIC 919 SuperFan Festival on 19 September, LeEco achieved CNY4.48 billion (US$0.67 billion) of sales, selling over one million smart phones, which account for 25% of its sales volume in 2015 (LeEco officially announced that it shipped 4 million smart phones in 2015), which speaks volumes of its growth story.

On the offline channel, LeEco is working closely with operators. Its entertainment features lead to heavy data traffic, boosting data usage and increasing operator ARPU. After working successfully with China Unicom to promote Le 1, this year LeEco partners with China Telecom to release Le 2 and Le 2 Pro customized version. With each device, China Telecom provides 15GB of free data per month for the first six months. LeEco’s retail partner, LePar, also plays an important role. Currently, there are more than 5000 LePar stores across China, mainly focusing on penetrating lower-tier cities where e-commerce is still in development, ensuring a unified online-to-offline customer experience.

LeEco’s multiple market bets may become difficult to manage

  • High upfront investment: LeEco must make continuous investments in content to maintain its edge as content tends to become outdated quickly. In 2013, 2014 and 2015, LeEco spent CNY1.28 billion (US$ 0.19billion), CNY1.46 billion (US$0.2 billion) and CNY2.39 billion (US$0.35 billion) respectively in producing and procuring content copyrights. The already-high investment will continue to increase over years as fierce competition between various content platforms pushes up the price of high-quality content. Overseas markets are expected to be fiercer.
  • Consumer habits: The consumer habit of paying for content is still at its nascent stage. In the long run, LeEco must make sure it secures enough profit from content to make up for its high investment in video content and the loss in hardware offerings. Compared to TV, it is even more difficult to make profit from memberships and content on smart phones, which have shorter lifetime (typically 18-24 months in China for Android phones).
  • Diversification: The company’s overly ambitious expansion plan over a wide-ranging businesses causes concern over financial sustainability and organizational stability. Firstly, failure in any single business unit can adversely affect the brand perception. Secondly, creating proper synergies between different business units to realize the value of its ecosystem it has been claiming is highly challenging for LeEco. Last but not least, increased diversification in multiple businesses increases LeEco’s financial risks. Concerns have been raised within the industry on LeEco’s internal transactions and complicated accounting treatment. In 2015, Le.com, the listing company of LeEco Holdings, reported a 90% growth in revenue. However, the net profit margin has declined to 2% from 30% in 2010, calling LeEco’s profitability into question.
  • Quality: LeEco must pay close attention to quality control as well as after-sales services, which tend to be overlooked in many of the fast-growing companies. There have been some overheating complaints and reports of slow charge speed and fragile screen issues. Besides its content feature, LeEco must also convince consumers of the high quality of its phones.

LeEco has potential to break into top 5 China vendors

Considering LeEco’s disruptive pricing, strong marketing ability and good relation with component suppliers and channel partners, Canalys believes it is well placed to hit its 15 million shipments target and will see a strong growth momentum in the next 12 months. It exhibits potential to break into the list of top 5 smart phone vendors in China.

The acquisition of Coolpad, which was once the top Chinese vendor, will strengthen LeEco’s ability in smart phone manufacturing, supply chain management, patents and overseas channel relation. Jiangfeng Liu, the former president of Huawei’s Honor brand, has been appointed CEO of Coolpad. Liu’s experience in Honor is of high value for LeEco.

Canalys believes that LeEco is not in direct competition with Huawei, Oppo and Vivo as these are focusing on more premium smart phones. It is, however, a threat to the Internet companies such as Xiaomi and 360 and micro vendors in lower-tier cities which rely on value-for-money devices to drive volume.

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