CELLPHONES: LeTV, China’s Next Xiaomi?

Bottom line: LeTV’s new smartphones should generate major buzz when they go on sale this weekend and could easily sell 1 million units in their first 3-4 months, challenging domestic “cool” incumbent Xiaomi.

LeTV takes pre-orders for new smartphones

Smartphone sensation Xiaomi has emerged as one of China’s hottest tech names in the last few years with its cool and trendy image, focusing its sights largely on global leaders Samsung (Seoul: 005930) and especially Apple (Nasdaq: AAPL) as it looks for a place on the global stage. But this globally-minded company could soon have to watch its back as well, with the recent meteoric rise of LeTV (Shenzhen: 300104) as the newest hipster in town.

LeTV went largely unnoticed for the first part of its life, when it was mostly an Internet-based provider of video content similar to YouTube. But it has zipped into the spotlight over the last year, first as it posed a serious challenge to China’s traditional broadcasters and now as it rolls out its own new line of smartphones.

I wrote about another new entrant to China’s smartphone scene earlier this week, when media reported that stodgy home appliance maker Gree (Shenzhen: 000651) had begun shipping its own new line of smartphones. (previous post) But while I largely derided that initiative as destined to fail due to its lateness to a very crowded market, I’m a bit more intrigued by this new LeTV smartphone line that has just begun taking online orders.

According to the latest reports, LeTV logged pre-orders for 1.2 million of its new smartphones in the first 5 hours after they were available via its online mall. (English article; Chinese article) Assuming that 10-15 percent of those turn into actual purchases, that would translate to around 150,000 sales of its new phones via its online store, not a bad figure for a company that has no history in the crowded space.

LeTV first announced its smartphone initiative at the beginning of this year, and I’ll admit that I was quite skeptical at that time due to the overheated state of a market where many models look and perform similarly. (previous post) But since then I’ve become more familiar with this company that has quietly became China’s leading seller of Internet-connected TVs and paid video content services over the last 3 years.

One of LeTVs biggest assets is its charismatic young leader Jia Yueting, who is quickly becoming able to attract the same kind of media attention as Lei Jun, the equally charismatic and media-savvy head of Xiaomi. But LeTV also has a relatively unique business model that made its Internet-connected TVs a hot seller in China and has the potential to do the same again for its smartphones.

That model has LeTV sell its relatively high quality phones and TVs at very low prices, and in return buyers agree to subscribe to its video services for a fixed period, typically a year or two. In the case of the smartphones, LeTV is selling the phones for as little as 1,499 yuan ($250) each, and is actually giving buyers free Internet data and online video services for a fixed period as part of the package.

The strategy is to get customers addicted to LeTV’s services, so that when the trial period expires people will continue to pay for service. I’ve spoken with a few users of LeTV, and most are quite positive about the service and consider it a more attractive alternative to traditional TV. By comparison, most of the traditional smartphone makers have no such service offering as part of their business plan, though Xiaomi is also trying to move into paid video services.

Investors have gotten quite excited about LeTV as its growth story and unique business strategy emerge, causing its shares to quadruple since the beginning of this year and making it the most valuable company on China’s Nasdaq-style ChiNext board. I have a few doubts about some of the company’s increasingly diverse investments, notably a major new initiative in smart cars. But on the whole I do like its business model for TVs and now cellphones, and expect we’ll see its new smartphones easily sell more than 1 million units in their first 3 or 4 months.

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