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Analysts question viability of LeEco's business model

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2016-09-26 09:42Global Times Editor: Li Yan ECNS App Download

Deal rumor, sales promotion 'may be merely publicity stunts'

Fast-expanding tech company Leshi Internet Information and Technology Co, also known as LeEco, is facing a new round of questions over its "very risky" business model, following market rumors that it plans to acquire Amazon China.

The rumors were denied by the U.S. tech giant Amazon.com Inc on September 19, one day after the claim was widely circulated through China's popular social networking platform WeChat.

But that didn't end the speculation. Some analysts said that the Amazon China acquisition rumor was a publicity stunt by LeEco to garner attention for its online sales festival on September 19.

Li Chengdong, an e-commerce expert, was quoted by the China Business Journal on Saturday as saying that LeEco wanted to attract public attention and enhance its influence by "making up something that could create a sensation."

Zhang Zhiwei, president of LeEco's online-to-offline sales platform, said on his Weibo on September 18 that LeEco would announce something big that could reshuffle the e-commerce industry during the festival.

It turned out that the "something big" was LeEco's goal to forge its September 19 sales event into another e-commerce shopping event like Alibaba's Singles' Day Shopping Festival.

"The remarks of the LeEco senior executive came at a time when rumors are widely circulating over the Internet. This makes the acquisition rumor looks real in the eyes of some investors," an investor who declined to be identified told the Global Times on Sunday.

On September 19, shares of LeEco's listed unit on the Shenzhen bourse once surged about 9 percent to 49.74 yuan ($7.5).

It is hard to tell who originated the rumor, but this event indeed helped boost the stock price as well as LeEco's sales during the festival, Lu Zhenwang, founder of Shanghai Wanqing Commerce Consulting, told the Global Times Sunday.

The festival recorded sales of 1.18 million of its proprietary smartphones, 866,000 smart TVs and 2.7 billion yuan worth of online video memberships, according to a press release LeEco sent to the Global Times. The company declined to make further comments on the Amazon acquisition rumor.

Analysts said it is better to take a close look at the company's business model, which is full of uncertainties and risks.

Liu Dingding, a Beijing-based independent analyst, told the Global Times on Sunday that the Beijing-based company is posting losses due to its unique but "very risky" business model.

According to the financial report of LeEco, its net profit is growing at a fairly slow pace. In the first half of the current year, the company recorded 284 million yuan in net profit, up about 11 percent year-on-year. In the first half of 2015, its net profit grew 67.8 percent year-on-year.

Different from most Internet companies, LeEco is adopting a business model that tries to make money by selling Internet content and services instead of hardware devices. The company even pledged at the festival on September 19 to give its proprietary smartphones or TVs for free to those who bought an online content membership.

"The model could prove to be a promising one, as it is harder and harder to make profits by just selling devices," Zhu Dalin, an industry analyst with Beijing-based Analysys International, told the Global Times Sunday.

As more and more Chinese consumers get into the habit of buying online content, such a business model will eventually generate a profit, said Zhu.

He noted that LeEco, which made its fortune through streaming online content, has advantages in such a business model.

However, analysts expressed concern whether it can survive the initial period of losing money.

While actively diversifying its product range from smartphones to driverless cars and from sports to entertainment in its home market, LeEco is also aggressively expanding into overseas markets.

After making inroads into India and Russia, the company would make a grand entry into the U.S. consumer sector in late October, a source close to the company told the Global Times on condition of anonymity.

  

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