CELLPHONES: LeTV Dials Into Slowing Smartphone Market
Bottom line: LeTV’s smartphone gamble, based on relatively cheap phones tied to its video services, could succeed despite tough competition if its newly launched models get positive reviews.
Online video sensation LeTV (Shenzhen: 300104) is all over the tech headlines this morning, with the formal launch of the first 3 models for its previously announced foray into smartphones. The company is taking a page from its successful business model with smart TVs, once again selling what it’s billing as a relatively high-end product for low prices in a bid to attract customers to its core paid video services.
LeTV’s biggest problem will be finding an audience for these models, as it’s quite late to the smartphone game. That fact is being underscored by new industry data that shows China’s cellphone market contracted 5 percent in March, amid growing signs of saturation due to stiff competition.
I’ll begin by commending LeTV for attracting huge media attention for its smartphone launch. The company’s young and charismatic CEO Jia Yueting is rapidly emerging as the next hot Internet entrepreneur in China, and could soon command the same kind of attention frequently received by more established names like Alibaba (NYSE: BABA) founder Jack Ma and Xiaomi’s charismatic chief Lei Jun.
Jia has been hyping his company nonstop since he returned to the public realm late last year following an absence of several months for medical reasons. In addition to the smartphone foray, he also announced a push into smart cars, as his company moves into the devices that will serve as channels for customers to receive its core video services.
The company has now formally unveiled its first 3 smartphone models, saying they will provide comparable service to Apple at far lower prices. (Chinese article) The cheapest model will sell for about 1,500 yuan ($243), while a more upscale one will cost 2,500 yuan. The price for the third and highest-end model has yet to be set, and Jia said LeTV will use the gimmicky approach of letting consumers set the price through an Internet vote.
The new phones apparently won’t require buyers to purchase video service subscriptions, which was mandatory for LeTV’s smart TVs that sold for very low prices. But LeTV is providing some incentives for buyers to purchase its video services, offering a 300 yuan discount for new subscribers. An executive at the company’s recently-opened Silicon Valley office also indicated LeTV is aiming to sell its phones in the US, though I expect that any such plans are very preliminary and won’t come until next year at the earliest.
At the same time, the latest statistics from a research arm of the Chinese telecoms regulator showed the 5.2 percent decline for all cellphones in China last month, when a total of 37.5 million units were shipped. (English article) Within that figure, 4G handsets soared more than 7-fold, and accounted for nearly 80 percent of total shipments. Many of those phones are being offered at very cheap prices, as the telcos provide heavy subsidies to promote 4G and manufacturers struggle to clear bloated inventory.
Many observers have been predicting a shake-out for the smartphone industry for a while now, as the sector has become quite crowded and overheated, and many mid-sized and smaller manufacturers are probably losing money. Thus it seems a bit strange for LeTV to be entering the market at this particular time.
But that said, LeTV can afford this kind of foray because it is already quite profitable and valuable in terms of market capitalization. What’s more, it seems quite willing to subsidize its handset sales to win new users for its video services, a strategy that Xiaomi may also follow to promote its own foray into video. At the end of the day, product design and quality will be critical factors to LeTV’s smartphone foray. If its products get positive feedback, it could quickly become a major new player in the space. But negative feedback could have the opposite effect, causing this latest foray to fall flat.
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