LeEco: China’s Netflix sets its sights on Hollywood and the American consumer

Chinese companies are posturing to play a much bigger role in the entertainment we consume and the technology we use. Perhaps no tech company has bigger ambitions for the US than LeEco, known for running one of China’s most popular subscription video services, but now also a purveyor of TVs, phones, and, soon, electric cars. It wants to build the ultimate closed ecosystem for entertainment — hence the company’s name — so that the average American can spend all day with LeEco devices and content.

Needless to this say, this is a tall order. LeEco currently has essentially zero brand recognition in the US, but its CEO, Jia Yueting (贾跃亭) is already saying that the company will have a “dual market” strategy, with its San Jose office as co-headquarters with its Beijing office.

How will the company tackle the US market? The strategy is complex. To open up a conduit for content, it recently acquired TV maker Vizio, giving it instant access to millions of American living rooms. It’s also planning a big launch of its subscription video service in the US and has been rumored to be in talks with Netflix for a content deal. Its subsidiary LeVision Pictures, already one of China’s most successful film distributors, has been investing in Hollywood films, presumably to secure better deals for distributing American films in China, but also to learn about American tastes so it can tailor Chinese content it owns to American sensibilities. And certainly not least of all, it has a strategic partnership with secretive electric car maker Faraday Future, another future screen for its content.

At this point, it’s hard to tell whether the is plan is masterful or a scattershot collection of projects. Even in China, LeEco has a reputation for leaving analysts scratching their heads about its relentless product line expansion. But for Jia Yueting, every new puzzle piece can catalyze what he calls “chemical reactions” and create invaluable synergies with other pieces.

Beethoven can be fun too on LeEco’s smart piano

Our hope is that people keep criticizing LeEco. That’s how we’ll know we’re alive and our genes for disruption are still alive. If there’s praise from all around, that’s when the collapse of our company won’t be far.

Putting all the pieces together

At heart, LeEco is a content company. It streams movies and TV shows for 15 RMB (US$2.25) a month on its video service, 乐视 (Lèshì). Of the 13 billion RMB (US$1.95 billion) in revenue it made in 2015, 47% was from hardware sales, 21% from member fees, and 20% from advertising on its platforms.

But even if hardware brings the most money in the door, the company takes a substantial loss on it — 2.1 billion RMB in 2015 (US$310 million). This is a defining feature of what LeEco calls its “Platform + Content + Devices + Apps” ecosystem. In the short run, the company is content to use hardware as a loss leader for the video memberships it sells with every TV and smartphone. And in the long run it may not care whether its hardware margins are slightly positive, zero, or slightly negative.

The more entertainment you receive from LeEco screens every day, the more you’ll be willing to fork over in fees. And the more time you spend with LeEco screens, the more opportunities there’ll be to deliver valuable commercial information, whether those are ads or ecommerce opportunities tailored to suit the location, time of day, and your recent interests.

Jia Yueting vows that after a period of aggressive horizontal expansion, LeEco will now focus on its vertical dimension. “Horizontal” appears to mean devices on which users can consume content, while “vertical” means content production, hosting, and distribution.

LeEco already has a significant footprint along its vertical axis. It runs a cloud computing platform called 乐视云 (Lèshì Yún or Leshi Cloud), similar to Amazon Web Services but with a focus on video storage and distribution. It's angling to be a leader in cutting edge technologies like live streaming VR.

The company also operates LeVision pictures, its in-house film production and distribution company that’s getting more and more involved in Hollywood productions.

Coming to soon to a screen near you

If LeEco succeeds in America, it’ll be the first Chinese consumer internet company to gain a foothold in the US market. It’s going to be tough — the challenges LeEco faces are both cultural and structural.

Content is maybe the toughest type of product to take overseas. Content is culture, and culture (almost by definition) is lost in translation. So even if LeEco can distribute content through Vizio TVs or a set top box, what it’ll send through those pipes is still a big unknown.

There’s some indication that LeEco will take a hybrid approach — it’ll attempt to expand the American palette by importing Chinese content as well as strike deals with American content producers.

LeVision Pictures itself is one of the most successful privately-owned film distributors in China. In 2015 it released 13 films for a combined box-office of RMB2.3 billion or $344 million. Although this pales in comparison to market leader China Film, the state owned film distributor that controls about half of the Chinese film market along with its state-owned sibling Huaxia Films, it’s an influential film company with revered director Zhang Yimou headlining its stable of creators.

Le Vision hopes that upcoming China-US co-productions like its Matt Damon feature, The Great Wall, will open up American sensibilities to more China-themed films. I’m pretty pessimistic about Americans finding a new taste for Chinese historical epics, but if these partnerships prompt Le Vision to pump out more blockbuster action/adventure flicks in the vein of Fast 7 and the Expendables franchise (both of which it was involved with) but with Chinese stars and production in China, this could be the dawn of Americans watching Chinese movies on a regular basis. If the fate of the earth is at stake or lots of stuff blows up, people will not care what language the cast speaks.

The company is also releasing a set-top box in the US market this month with the same programming it offers in China. It’s geared towards Chinese-Americans and new immigrants, but also seems like a toe-dipping exercise to see if it can turn any Americans onto its catalog of original movies and TV shows.

Hong Kong still putting out great crime flicks, now streaming on Leshi

Although the company’s Chinese offering is quite impressive with movies, licensed and original TV series, talk shows, live sports — including rights to live stream NBA games, which are very popular in China—as well as live streams of regional TV channels, there’s no reason to believe LeEco will be able to put together as robust a bundle in the US where most high quality content is still caught up in the maw of the cable companies. Other formidable technology companies like Apple have desperately wanted to offer a slate of programming that can replace cable, but so far have failed to close the necessary deals.

Meanwhile, China’s media industry is underdeveloped and still dominated by state broadcasters. Most of the channels found on Chinese TV are state-run channels from China’s many provinces and are poorly differentiated. While some have been more innovative than others — Hunan Television, for instance, has become the nation’s second most watched channel through singing contents and reality shows, and operates a streaming video platform called Mango TV that competes with Leshi—the industry has lots of opportunities for privately owned companies to come in and provide more appealing content.

More US-Chinese co-productions are in the offing

Chinese entertainment companies like LeEco and Wanda Group, run by China’s richest man, Wang Jianlin, are keenly interested in America. Wanda Group has already purchased AMC Theatres as well as film company Legendary Pictures. It wants a feather in its cap by acquiring one of the major Hollywood studios.

Partially, this represents the growing confidence of Chinese companies, who want to play a bigger role on the global stage. But seen in another light, these moves continue the tradition of Chinese companies absorbing the best techniques from abroad in service of China’s own industries. Both LeEco and Wanda Group want to learn what it is that makes Hollywood shine. They want to get in on that money making, but also build up China’s own media-entertainment complex.

This is a positive trend. Though many Americans fear the long arm of the Chinese government in any Chinese-produced media, more Chinese involvement in making and distributing content in the US means Americans will come into contact with more Chinese faces and the Chinese way of life, and this will go a long ways towards creating trust between the two nations.

Part of a series about life on the Chinese internet.