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LeEco US play relies on video to subsidize smartphones, TVs

LeEco splash

China’s LeEco is looking to create a content and hardware ecosystem to challenge Amazon and Apple in the US. Can the company pull it off?

LeEco’s approach

LeEco is a difficult company to classify. It started life as LeTV, an OTT streaming service in the Chinese market. The company then entered the hardware market, leveraging the streaming service to help sell smartphones and televisions. According to Feng Xing, President of LeEco’s smartphone business, the video content subsidizes the hardware, allowing the company to undersell its competitors. Mr. Xing says the approach is to get people hooked on popular movies and shows, and then sell them hardware which they can use to watch.

This is similar, in some ways, to Amazon’s eBook approach here in the US. Amazon sells the Paperwhite readers at, or near, cost and makes up the difference on book and media sales through the devices. Apple is the most successful company in the world at coupling content and hardware into a tightly bound ecosystem. However, Apple has no need to subsidize its hardware. People are willing to stand in line to pay a premium for it.

Bringing the model to the US

Using this model, LeEco has launched phones, smart TVs and streaming services in China and India.  It appears to be following the same playbook when it launches US services in September. The company has just completed the purchase of Vizio for $2B. Vizio is the number 2 television manufacturer in the US. Samsung is number 1 with 37% market share, more than twice Vizio’s sales.

LeEco will launch its line of smartphones in the US in September. It is likely the phones will be similar to ones just launched in India, the Le 2 and higher-end Le 2 Max. The Le 2 has a 5.5 inch 1080p display, 3GB of RAM and Snapdragon 652 processor. The Le 2 Max has a 5.7 inch quad HD display, 4-6GB of RAM and a Snapdragon 820 processor. The Le 2 Max costs ₹29,999 ($450).

What content will LeEco lean on to subsidize the sale of smartphones and TVs in the US? According to Phone Scoop, negotiations are well underway for on-demand and live rights to video content from US rights holders. Some of this content is rumored to be coming from Netflix.

Co-founder and Vice Chairman of LeEco Liu Hong says his company is in deep negotiations with Netflix:

“We are planning a very significant cooperation with Netflix. Details will be announced in the third quarter.”

As reported in Variety, sources close to the deal claim Netflix will license some of its shows to LeEco for inclusion in the company’s US and India streaming service. At least in the US, the rumor is simply not credible. Netflix has plenty of reasons not to help a competitor service such as LeTV. Conversely, LeEco devices simply must have Netflix to be credible in the market. A much more likely scenario is that the Netflix client will be available on LeEco devices. It is possible, however, that Netflix may license some shows for the Chinese market, where it currently does not have service.

Can LeEco succeed?

Samsung Milk VideoIn a supersaturated content market such as the US, it’s hard to see how LeEco will be able to differentiate its streaming service. The company is unlikely to prize loose anything from mainstream TV providers that hasn’t already been licensed. So, it is unlikely to offer a large amount of exclusive video to lure consumers. And without that, the service will struggle to find a voice in a very crowded market.

Samsung found this out to its cost with the video aggregation service Milk Video. The short lived service was shuttered after only one year in November of 2015.

Why it matters

LeEco is using its premium streaming video service to subsidize sales of smartphones and televisions in China and India.

It plans to use the same model in the US.

The US online video market is radically different than Asia, and LeEco will struggle to achieve the same synergies between service and hardware.

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