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Xunlei Suspends IPO Amid Market Volatility

Chinese digital media conglomerate Xunlei filed its registration statement with the SEC on July 18, 2011 seeking approval for an IPO on NASDAQ. According to the statement, Xunlei hoped to raise upwards of $140 million and was to be underwritten by the likes of J.P. Morgan and Deutsche Bank Securities on July 21, 2011.
However, despite careful planning Xunlei reversed its decision, amid concern over market volatility. This concern was likely not only directed at the US debt crisis and its subsequent effect on world markets, but also due to fear of the looming Chinese tech bubble. In addition, poor financial oversight both in the US and China has resulted in widespread fraud, which has eroded investor confidence towards Chinese stocks overall.
As described previously, Xunlei is a Chinese digital media giant. Xunlei is similar to what Napster was in the U.S., essentially a file and/or media-sharing platform. They also have a cloud-computing service that allows users to stream digital content. With 291 million active users, their proprietary software is the most popular around. Their “Xunlei Downloader” accelerates the speed of downloads, and is responsible for approximately 138 million downloads a day in 2010.
Xunlei has postponed listing on NASDAQ, but some of its problems may not be resolved by simply waiting. The first of these problems is Xunlei’s business model.
Xunlei has a tiered system for downloads based on points. Users are given points for time spent downloading and the number of successful downloads. The speed of downloads increases as you accumulate more points. While online advertising generates 51% of Xunlei revenue, there is considerable growth on their paid model, which buys faster speeds without ads. Upgrading in order to remove ads and increase downloading speed has actually become almost more of a status symbol than anything. In fact, many users have questioned whether their speed has actually increased, both when attaining a higher level through collecting points or by upgrading to the paid model. In addition, many paid users have complained about how slow their login connection is, so that by the time they actually are able to download files, they have already been exposed to a large amount of advertisement waiting for their login to complete.
Then there is also the looming question over how Xunlei is able to offer essentially “free” downloads without voilating copyright laws. This is a problem in several different ways. The first being how can the U.S. force Napster and others to discontinue their piracy, but Chinese companies like Xunlei are not punished. The short answer is that the US doesn’t have control over China’s enforcement, even when they are pirating US material. In fact, of the many cases brought against Xunlei, only one has actually resulted in a small claim.
The other issue, and more of a question of ethics, is how could this company possibly be listed on a US exchange like the NASDAQ? How could a company that supports the very things that we don’t allow, be free to list? So if I buy stock in this company, I might essentially be supporting the continued downfall of the US movie and music industry. That just doesn’t seem logical.
In conclusion, Xunlei has had quite a bit of success, with over 75% market share among downloads. However, with this success comes issues of their business point model that seems more about status and less about actual improvement. Then there’s also the issue of ethics and whether investors would feel comfortable supporting a company that legally could not operate in the US. I question Xunlei’s true value and don’t see how the SEC or American investors would feel right about investing in such a company.