Why Xunlei's Market Value Contracted by $350m After its IPO

In June, Xunlei eventually realised its dream of listing on the NASDAQ. It closed at $14.90 on its first day of trading, 24.17% higher than its issue price. Based on the closing price that day, Xunlei’s market value was at $1.03bn. However, its stock price has since been in decline. By far, it has dropped by 18%, with the market value contracting to $686m. Why did it see such an abrupt decrease of $350m?

It started with its rocky journey to the IPO. In 2011, Xunlei tried to float in America for the first time. It submitted two listing applications in June and July. Yet it uncommonly deferred its IPO four times in two months because of “some problems”. One of the factors was the knock-on effects brought by some negative events in the capital markets at the time. Another was Xunlei’s copyright disputes over its video service, resulting in Xunlei’s value “substantially undervalued”. It then gave up.

Three years later, it re-launched its listing plan. Though it had finished five rounds of financing of over $500m in aggregate, Xunlei failed to win itself a decent valuation. Yet it compromised on a valuation of mere $1bn, for fear that its IPO might never happen.

The sword of Damocles

Copyright issues were the main hurdle for Xunlei’s floatation. In October 2013, the Motion Picture Association of America (MPAA) released a blacklist of piracy of films and television programmes around the world. Xunlei was on the list. In order to go public successfully, Xunlei did make some “sacrifice”, as American capital markets have a strong awareness in intellectual property protection. It overhauled those of its products that were exposed to copyright risks. Before going public in June, it signed an agreement with the MPAA, vowing to increase efforts to protect copyrighted content. It banned illegal downloads of the association’s movies and television programmes. As a result, both sides reconciled.

While Xunlei cracked down on copyrighted resources, its users were not willing to “be sacrificed”. Those resources were their incentives to pay. When the amount of the resources dipped, they thought their interests were “hurt”. Most of its paid users got angry. Its online forum was full of complaints and threats to stop subscribing to its service. That was definitely a nightmare for Xunlei, whose revenues heavily rely on paid subscriptions.

Apart from that, in terms of copyrighted resources, Xunlei has lagged behind its rivals like Tencent, Sohu and Youku. Worse still, it has failed to make efforts in self-made shows. It is a video site without attractive content. Its “piracy dividends” are disappearing.

In April, the authorities launched a new round of “purifying the web” campaign. Popular applications like VeryCD and Qvod fell victim to the previous campaigns like this. Some of Xunlei’s services, such as its “cloud player”, have been used by many as a convenient tool to download porns, and are thusly prone to be shut down. In response to this crisis, Xunlei enables users to suspend their subscriptions. But this is not a thorough solution.

Xunlei is clear about its shortcomings. It persuaded Xiaomi to become its largest investor holding a stake of 31.8%. Xunlei and Xiaomi announced to cooperate on the cloud technology and enter the hardware market, hoping to join the war for the living room. Yet the competition is fierce for Xiaomi, with rivals like Alibaba, Tencent and LeTV. Judging from recent reports, Lei Jun’s emphasis will still be on smartphones in next four years. And there is a fear in the market that the authorities might fiddle with other products after they introduced harsh regulations on internet TV boxes. Therefore, it remains to be seen whether Xunlei will be able to transform itself by joining Xiaomi’s ecosystem.

Every entrepreneur has a dream of going public. It is particularly important to think clearly about the future after going public and remove the Sword of Damocles above the head.