Article / 01 July 2015 at 5:48 GMT

Tech firm LeTV riles Qihoo with Coolpad investment

China Watcher / Shanghai
China
  • Qihoo is working with Coolpad on producing the Dazen smartphone
  • Qihoo would not want LeTV to access Dazen technology via its Coolpad move
  • LeTV CEO Jia Yueting has publicly criticised smartphone rivals

By Neil Flynn

Online video platform LeTV has announced that it has acquired an 18% stake in smartphone manufacturer Coolpad for $350 million, through its smartphone division LeView Mobile. Whilst the collaboration between a media content rich firm that is developing its own smartphone business and an established Chinese smartphone manufacturer has been commonplace in the industry, this has come as somewhat of a surprise because Coolpad announced a major joint venture with Qihoo in December.

Qihoo has invested around $450 milllion in the joint venture with Coolpad, so its stake is different to that of LeTV. But it is very likely that problems will arise between the two large tech firms, as both have different views on the development of their respective smartphone business.


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Another data frontier ... tech firms like Alibaba and Baidu are keen on collecting data on car drivers, such as where they drive to, and what music they listen to. Photo: iStock

 
Coolpad’s largest shareholder, Data Dreamland, announced last week that it intends to sell some or all of its 38.3% stake in the firm, and the assumption in the market was that Qihoo would acquire the stake. However, the investment from LeTV gives the firm an equivalent stake to Qihoo, albeit through different investment vehicles.

Diversification name of the game


LeTV was originally an online video platform, but has since begun actively diversifying into different products. The launch of the smart TV is a natural way to use its media content library, and help to build a media ecosystem. The recent launch of a smartphone expands this further, because not only can the media ecosystem be transferred to mobile, but it allows the company to expand its mobile ecosystem, and monetize the increase in data that it collects from users.

The most curious business line is the electric super car, which is currently in production. In January, I discussed how the tech community saw the initial plans as a joke, and that it was nothing more than an example of the future of the Internet of Things. However, LeTV has hired senior auto executives and has become the second largest shareholder in a design and engineering firm that has worked on electric vehicles such as the Tesla Roadster and the Audi R8 eTron.

The concept of the internet connected car is something that Baidu and Alibaba are actively working on, because the car is the only place where tech firms can’t gather data on their users. At home, users are online, using their smartphones and watching their smart TVs, through devices connected to their smart home ecosystem. When out and about, users are on their smartphones, and this allows tech firms to gather data about where each user goes and what they do.

But when driving, users can’t (or at least shouldn’t) use their phones, so the amount of data that tech firms can collect is much smaller. The concept of the smart car ecosystem allows tech firms to understand where the user usually travels to, and what music they listen to, and it is estimated that each car could upload 10GB of user behavior data to the cloud every hour.

Clash of egos

On the surface, it would seem that Coolpad could collaborate with both LeTV and Qihoo. LeTV has the intention to build its mobile ecosystem through media content, whilst Qihoo’s intention is to develop the quality of the operating system and security software. However, this is very unlikely due to the nature of the two firms and the characters of the two CEOs.

LeTV’s founder and CEO Jia Yueting has made a name for himself with public criticism of major smartphone rivals, despite LeTV having only recently entered the industry. The firm’s unusual behavior includes a very public war of words with popular high tech firm Xiaomi, which is risky given Xiaomi’s strength in the smartphone and smart TV market, and LeTV’s relatively recent entry.

In addition, a recent smartphone advertising campaign compared Apple’s dominance in the market to the Nazis, by showing Hitler wearing an Apple armband. Whilst tasteless, it should be noted that when Steve Jobs died, Xiaomi’s official Weibo account posted ‘iDead’, before quickly deleting it. At the time, Xiaomi was already a respected smartphone manufacturer, and the publicity that the Weibo post created certainly helped to make the firm a household name.

Qihoo is working with Coolpad in order to produce the Dazen smartphone, which will combine Coolpad’s hardware knowledge with Qihoo’s software and application technology. However, with LeTV having only recently entered the smartphone business with its own device, its investment clearly has the intention of using Coolpad’s technology to improve the quality of its own device. This understandably creates a problem for Qihoo, because in the highly competitive smartphone market, product quality is key, and the concern would be that LeTV’s new phones would use technology from the the Dazen smartphone.

Impact on Qihoo’s privatisation plan


I remain convinced that Qihoo’s privatization bid will be completed, and the news of LeTV’s investment in Coolpad shouldn’t affect this. However, it will have implications on Qihoo’s smartphone business going forward. When Qihoo initially invested in a joint venture with Coolpad in December 2014, it was assumed that should the project be successful, Qihoo would eventually increase its stake in Coolpad as a whole, with the intention of acquiring the firm outright.

The investment by LeTV makes this more difficult, because whilst Coolpad’s major shareholder Data Dreamland is open to selling its stake, it’s difficult to imagine that LeTV would be willing to sell its stake to Qihoo without making a major profit. My expectations are that Qihoo will look to take a controlling stake in the joint venture Qiku, in order to protect its business direction and intellectual property from LeTV. 

– Edited by Robert Ryan

Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

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