Although Chinese smart TVs, mostly Android-based, are no more expensive than smartphones, tech companies who bet big on smart TV failed to meet sales expectations in 2015.

Hisense, one of the leading TV makers in China, believes one major problem is the consumer’s inability to touch and experience products through their online-only distribution channels. Citing a report from market research firm China Market Monitor, Hisense pointed out that about 73% of color TVs sold in China in 2015 were through offline distribution channels.

The tech industry prefers to blame the limited amount of content available due to regulations and restrictive business strategies, along with the lack of popular applications tailored for living room TV entertainment.

What’s In Store For China’s Android TVs in 2016?

2015 saw a distinct change in attitude among Chinese TV makers, who are increasingly investing in software over hardware. Five top Chinese TV makers, TCL, Konka, Skyworth, Hisense and Changhong, will run home screen ads during the upcoming 2016 Spring Festival holidays by partnering with content and services provider Voole. It appears that in 2016 TV vendors will continue to shell out for licensing and content production as well as online service development.

Despite a heightened barrier to entry, a number of new-comers emerged in 2015. Some of them are confident that they can solve existing problems, some are betting on explosive new markets like TV gaming, and some simply believe the market is big enough to accommodate more players.

Luo Chunjiang, CEO of Fun.TV, the latest comer into the smart TV market, said at an event in September 2015 that Xiaomi and LeTV had a combined market share of less than 10%, and that he believed the market was still ripe for newcomers.

Hardware Prices Shrink In The Hunt For Long-Term Dividends

The average cost for a Chinese smart TV sold online was RMB2983 (roughly US$480) as of September 2015, down more than 40% than two years ago, according to All View Cloud, a home appliances research firm. A model launched by LeTV in mid-2014 is priced at only 999 yuan (about $160).

The price decreases are to a large extent driven by tech companies’ hunger for users. What tech companies want more than the one-time profit from hardware sales, is long-term value created by content and products consumed by users, with revenue generated from advertising and paid offerings.

LeTV’s smart TV business was still losing money in hardware as of November 2015, but saw advertising revenue rising after sales picked up, according to Liang Jun, president of Leshi Xinzhi, the smart TV manufacturer in which LeTV has an approximate 60% stake. Starting with an online video streaming service, LeTV also charges its TV owners an annual subscription fee.

This low-cost strategy hasn’t boosted Android-based TV sales in the same way it made the Android smartphone ubiquitous in China.

As one of the first Chinese smart TV brands, launching their first model in May 2013, LeTV shipped some 1.5 million units in 2014, aiming for 3 million for 2015.

Xiaomi, whose first Android TV launched a few months after LeTV’s, shipped some 500,000 units in 2014 and about 1 million this year, according to Wang Chuan, head of Xiaomi’s smart TV division.

All View Cloud projected that the smart TV sales volume for 2015 would be more than 45 million and the total in China is about 86 million. Daily active users are estimated at 25 million.

These numbers are still dwarfed by the total number of Chinese television households and online video viewers, which were 423 million and 461 million respectively as of the first half of 2015.

China’s Content Vacuum: An Issue Of Competition And Regulation

Each Chinese smart TV maker is committed to building their own content and service inventory, different from the traditional TV market where content access depends on subscription providers instead of TV brands.

One of the biggest problems for smart TV vendors is that their offered content is just a fraction of the content available for Android systems. Players like LeTV and Xiaomi are only able to provide licensed or self-produced content, while Chinese regulations on TV content have become even more rigid than those for the internet.

The State Administration of Radio, Film and Television (SARFT) has a notorious history of interfering with Chinese TV, from soap opera themes to how many stars are allowed in one TV drama.

In 2012 SARFT issued a rule requiring TV streaming devices to source all content from seven licensed providers. All major Android TV makers have partnered with at least one of the seven. The video inventories of the providers varies considerably, and many popular TV dramas or variety shows are often not licensed by providers at all, but on Chinese video streaming websites.

SARFT issued a new regulation in July 2015 banning web browsers, third-party video apps and video aggregation services from Android TVs. It doesn’t allow users to control smart TVs through smartphones, or by transferring apps through a USB cable.

In October the SARFT revealed a blacklist of 81 video services who offer banned content from outside of mainland China. To implement these regulations, the SARFT jointly issued a new order with The Ministry of Public Security and China’s top court at the end of October 2015.

*

Despite the myriad of challenges, TV is still regarded as one of the big potential features in China’s future smart ecosystem.

Veteran media executive Li Ruigang, often referred to as China’s Rupert Murdoch, unveiled a smart TV startup in August 2015 called Whaley. Before Whaley, Mr. Li was president of Shanghai Media Group. He’s now leading China Media Capital, a venture capital firm that has invested a number of content production companies and content related services.

Whaley claims to have invested some ten billion yuan (more than $1.6 billion USD) into their content platform. The company runs a business model similar to LeTV’s which charges users an annual subscription fee.

Mr.Li said at the Whaley’s launch event that his startup was backed by both Tencent and Alibaba with strategic funding and technical support. Whaley TVs run on Yun OS, the custom operating system developed by Alibaba.

Whaley TV

Whaley TV

Not every one is powerful enough to build an end-to-end solution from scratch, like Whaley. So many choose to form joint ventures.

Baofeng TV, who launched their first Android TV in July 2015, is a joint venture established between BaofengAlpha Animation and Culture, consumer electronics manufacturer 3Nod and Ririshun, the logistics arm of home appliance giant Haier. Baofeng holds a  50% interest in the JV. The core team of the JV is from Tongshuai, a TV brand of Haier.

PPTV Smart TV

Suning’s online shopping platform on PPTV’s smart TV

 

Competition in 2016 is expected to be intense. Existing major players are forming alliances to increase their strength. Xiaomi has invested in iQiyi and Youku-Tudou, two of the leading online video services, Huace Film & TV and a few other video content related companies. Last month LeTV announced their intention to acquire a 20% stake in TCL Multimedia, one of China’s major TV makers with considerable sales from overseas.