LeEco Wants into Consumers’ Living Rooms before it gets into Their Pockets

on August 24, 2016

Over the past few months, if you cover consumer tech and are based in Silicon Valley, you may have come across a new name: LeEco. Formerly known as LeTV, had a slow ramp up as video content provider but its popularity picked up over the past few years thanks to deals like the one with the director of the movie, “House of Flying Daggers”, to create content for its smartphones. The change from delivering content to delivering an end-to-end solution that includes hardware spurred the change in name.

Consumers are still Precious about Their Smartphones

If current investments are something we could use to judge future performance, LeEco would be a winner. After opening its US head office in San Jose back in April, LeEco invested $250M in real estate, buying Yahoo’s property in Santa Clara in June and, in July, it invested $2 billion to acquire TV maker VIZIO. Just testing the waters is certainly not the approach LeEco is going for.

VIZIO commands the second largest market share in the US (after Samsung) which makes for a nice addressable market for LeEco content, apps, and cloud offering. Considering that the ultimate goal for LeEco is trying to get to US consumers through their TV vs. their smartphone, it seems like a smart move. While the smartphone market is changing in the US and new brands are making their way into consumers’ pockets, competition is still strong, especially at the high-end. Battling there might require more time and marketing budget than LeEco can afford. Gone are the times when a new brand could come and white label a phone for a carrier, take years to build trust and then build a brand. Time and decreasing margins no longer make this strategy viable and LeEco is very well aware of it. Furthermore, when the key differentiation is not hardware but services and content, brand matters even more and so does building a trusted relationship with consumers. It seems to me LeEco is trying to do that by acquiring talent from key players in the consumer electronics market and creating a strong Silicon Valley brand. While this might not immediately help with consumers, it certainly helps in building relationships with partners.

Smartphones sales might be decreasing and margins thinning but consumers are no less in love with these devices. Smartphones remain the most personal consumer electronic device yet – something wearables aspire to be – and because of that, brand choice remains a key factor in the purchasing process. Consumers do not feel the same way about their TVs. Quality, of course, plays a role but the purchasing process is more focused on value for money than “what does it say about me”. This makes getting into our living rooms easier for LeEco than getting into our pockets. However, getting consumers to engage with their content and cloud offering might pose more of a challenge than it has been in China. We have plenty of examples of new content platforms for smartphones that vendors have launched but never went anywhere — Samsung Milk Music being the latest casualty.

Consumers are cord cutting but the choice for content is certainly not limited which will require LeEco to spend big bucks to secure original content and rights acquisition of key events like sports or entertainment. While I would guess LeEco might be less demanding than other hardware vendors trying to secure deals with content providers, there are plenty of players out there lining up to sign the most popular TV shows. In China, LeEco TV channel has secured several popular Pay TV content deals to bring US PGA Tour golf, Wimbledon tennis and English Premier League soccer but subscribers have not come flocking so far.

While in the US, a phased approach that takes LeEco from the living room to the pocket might work best, in India and China a simultaneous attach makes more sense as consumers rely on their smartphones even more than consumers in the US. In June, LeEco became Coolpad’s largest shareholder with 28.9% ownership and, at the beginning of August, LeEco’s CEO became Coolpad’s Charmain of the Board. Pressure in the home market lead Coolpad to look at India, where they want to get to a 5% market share by the end of 2016, focusing on the high and mid-end of the market. Last week, the two companies launched their first device together — the Cool1 Dual, a 5.5” smartphone between $219 and $299 in price depending on the variant. In India, LeEco and Coolpad will focus on the online population first and then they will move offline. In China, however, as both brands are established, there will be a separation of the two linked to the channel: LeEco will focus on online while Coolpad will stay offline. LeEco’s content could give an interesting differentiator to Coolpad’s hardware while LeEco, which so far has had limited sales in China, could leverage Coolpad’s supply chain as well as patents for further international expansion.

The Ecosystem Challenge

Aside from fighting against major competitors in each market — Alibaba, Google, Apple — the big challenge LeEco faces is the same as others like Xiaomi, are facing: ecosystems rarely leverage. While international expansion leads to economies of scale and opportunities for better margins in hardware, closing content and services deals rarely take advantage of a more international play. Deals need to be done locally and cultural differences mean a lot of effort has to be put in understanding consumers’ habits in each market. Though, at the end of the day in each market, the winning formula will be the same: deliver a differentiated offering or one that delivers a better experience when all the pieces come together. This might lead LeEco to look at the areas they have invested thus far and rationalize which make sense together among TVs, smartphones, VR, self-driving cars, and smart bikes to name a few. From a hardware perspective, some of these segments like TVs and smartphone run on thin margins but could be enablers of further revenue opportunities. Others, like cars, have sizable revenue opportunity but already fierce competition and no apparent and immediate link to the remainder of the ecosystem. Narrow and deep vs. broad and shallow might give better returns in the end.