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Here’s Why Chinese Tech Group LeEco Is Paying $2 Billion for Vizio

LeEco's driverless car concept. LeEco's driverless car concept.
LeEco's driverless car concept. Courtesy of LeEco

China’s newest headline-grabbing company LeEco may actually have a plan that makes sense. But there are a lot of qualifiers.

Yesterday LeEco (formerly LeTv and also known as Leshi Internet Information & Technology, which is traded on the Shenzhen stock exchange) announced it would buy U.S.-budget TV-maker Vizio for $2 billion. Vizio owns the second largest market share in the U.S. LeEco meanwhile sells millions of smart TVs in China. It sold almost as many LCD TVs in China as Samsung did last year, 2.85 million to 3 million, according to Euromonitor. Together, the U.S. and China markets add up to many millions in annual TV sales.

That’s important, because TVs throw off cash that LeEco needs for its heady ambitions. And LeEco certainly has a lot of them it needs to pay for.

Until now, LeEco was known for long-shot bets. Last year it created a driverless car division without much expertise in maps, driving data, or cars. Soon after the company jumped into the smartphone business just as China was about to plateau and become the most cutthroat smartphone market in the world.

LeEco also added new ventures in cloud computing, online music, and sports streaming. Before then, LeEco had been streaming content in China for years, including some original programming. “Netflix is the Letv of the U.S.,” its head of data analytics actually boasted last year.

But almost all those ventures are at very early stages. The streaming business doesn’t have Netflix-size sales, since few people in China pay for content. The sports division has inked deals to bring English Premier League soccer, Wimbledon tennis, U.S. PGA Tour golf, and Pac-12 Conference games to China and Hong Kong, but so far hasn’t generated subscription revenue. Cloud computing is small, as are smartphones.

None of LeEco’s bets can be called a success on its own yet, which is why TV sales remain key. For now they are keeping LeEco profitable: last year it earned $86 million on $2 billion in sales; in 2014, $55 million on $1 billion.

If LeEco didn’t overpay for Vizio, the multiplying numbers of hardware devices that it can pair with its services may bring it closer to fulfilling its Netflix-like ambitions. And if smartphones keep selling, LeEco could build a hardware ecosystem like many Chinese companies including Xiaomi are trying for.

Big ifs. But Vizio’s sale was at least part of a plan.