Before the lawsuit was restarted, former CEO Chen Lei of Xunlei misappropriated public funds to trade cryptocurrencies. What happened that year?

Editor's Note: This article was first published on October 10, 2020. At that time, Xunlei was publicly breaking with former CEO Chen Lei, accusing him of embezzling tens of millions of company funds for cryptocurrency trading and fleeing overseas.

Years have passed, and the aftermath of this internal struggle has surged again. Today, Xunlei announced the restart of litigation against Chen Lei and his core team, accusing them of harming the company's interests, with the amount in question rising to 200 million yuan. Looking back at the dramatic events of 2020 surrounding "fabricated contracts, profit transfer, and traveling abroad with a lover," there are still many details worth re-examining. The following is the original content:

On the last day of the National Day holiday, Xunlei, a publicly listed company in the US, released an announcement accusing former CEO Chen Lei of embezzling tens of millions of company funds for cryptocurrency trading and arranging for relatives to fabricate contracts within the company to siphon off company funds. The Shenzhen Public Security Bureau has already initiated an investigation into Chen Lei and others for suspected embezzlement.

At the same time, Chen Lei, who claims to be innocent, was abroad with his lover and has not returned since the "Xunlei palace struggle" began in April this year.

The rapid development of streaming media has almost made Xunlei fade from the sight of internet users, but it cannot be denied that Xunlei is indeed a product of an era.

From a download software used by 100 million people daily to firing the CEO who made the company take off, from a publicly listed company in the US to being suspected of illegal fundraising in blockchain, what has Xunlei experienced in these 20 years?

The First in the Download Business

At the end of the last century, there were very few families with computers and internet access; it was still the era of dial-up internet. The download function of computers was very limited, often interrupted by a phone call or network fluctuations, causing downloads to fail halfway.

People urgently needed a technology that could resume downloads from where they left off, known as breakpoint resume. This led to the creation of NetAnts in 1998, FlashGet in 2001, and Xunlei, founded by Zou Shenglong in 2003.

Interestingly, all three of these download software were developed by Chinese people. FlashGet added multi-threading capabilities and a Chinese interface based on NetAnts, making it more popular among Chinese users.

However, just as FlashGet was thriving in the Chinese market, Xunlei was still a newcomer when Blizzard's "World of Warcraft" entered open beta.

"World of Warcraft" truly influenced many people; Ethereum founder Vitalik Buterin was inspired to focus on decentralization because of it. Xunlei also benefited significantly from this game: "World of Warcraft" was so enjoyable that FlashGet's developer, Hou Yantang, paused updates for over a year to play the game.

This was a golden opportunity for Xunlei, which was established in 2002.

Xunlei took all the features of FlashGet and added many new functions, allowing even rare resources to be downloaded at high speeds, and in an instant, every Chinese internet user's computer had Xunlei installed. Subsequently, Xunlei further upgraded the dead link prevention feature to P2SP, incorporating resources from Xunlei users' computers and servers not belonging to Xunlei into its download network, accelerating downloads through multiple sources.

Although this approach is debatable, product experience was paramount, and at that time, Xunlei's download speed was unmatched.

Thus, by "smartly utilizing" the computer resources and network bandwidth of Chinese users, Xunlei successfully became the number one download software in China. In Xunlei's first IPO prospectus, it reported a market share of 73% in 2008; no one was unaware of Xunlei, and no one could do without it. In the capital market, Xunlei also gained favor, securing over 30 million USD in funding.

Logically, Xunlei should have become a company like Tencent, making money effortlessly with traffic support; however, the reality was that apart from its download business, the company was a mess.

A Messy Business

In 2007, Xunlei ventured into online video playback with Xunlei Kan Kan, which even Youku had not attempted, and it became a subpar player; in 2008, it acquired PhotoMagic to enter photo processing, the same year Meitu Xiuxiu launched. Today, Meitu Xiuxiu, which has long been listed, is well-known, while PhotoMagic quietly shut down in 2014.

According to Nan Qidao's description in "The Power Games Behind the Xunlei Palace Struggle," during Zou Shenglong's management, the company lost money on everything it did, resulting in the demise of dozens of products. All features were launched at the best market opportunities, only to die due to various institutional and management constraints within the company.

After years of financing, Xunlei was close to going public when it encountered a "short-selling wave." At the end of 2010, capital institutions began shorting Chinese stocks, and many Chinese companies accused of financial fraud saw their stocks become worthless; within a year, 42 Chinese stocks were suspended from trading. The US capital market began to question the Chinese companies listing in the US.

Against this backdrop, in June 2011, Xunlei submitted its IPO application.

Not only was the timing for the IPO poor, but the prospectus also revealed that the company was burdened with a total of 21.8 million in copyright lawsuits. This was a fatal issue for Xunlei, as the Motion Picture Association of America had publicly stated that Xunlei helped internet users download pirated movies, harming film copyrights.

With external pressures compounded by internal problems, Xunlei's 2011 IPO journey failed. Even after multiple attempts to lower the issuance price and reduce the financing scale, it still failed to attract the capital market's attention, leading to the suspension of its IPO.

Reflecting on that period, it was also the time when mobile internet began to develop, with China's internet shifting from home computers to smartphones, making it increasingly difficult for Xunlei, which started with computer downloads.

Xiaomi's Rescue

In 2014, mobile internet newcomer Lei Jun invested 310 million USD in Xunlei (including 200 million USD from Xiaomi and 90 million USD from Kingsoft), becoming Xunlei's largest shareholder. Xiaomi held 27.95% of the shares, while Kingsoft held 11.19%, giving Lei Jun a total of 39% ownership in Xunlei, while founder Zou Shenglong's shares dropped to only 9.5%, losing control of the company.

In Xiaomi's eyes, Xunlei was a cloud service provider that could enhance Xiaomi's ecosystem with video playback, download, and other functional experiences, perhaps squeezing the last bit of value from public computers. With Lei Jun's help, Xunlei finally went public on NASDAQ in June 2014. Just when everyone thought Xunlei had emerged from its low point and was on the rise, Xunlei acted to contradict everyone's expectations.

During the years from 2014 to 2017, Xunlei was as quiet as a dead chicken. Next door, Baofeng Video was making VR glasses, LeEco was making mobile TVs and cars, Baidu was working on artificial intelligence, and Didi was dominating the market, while Xunlei did not chase any trends.

However, after three years of silence, in October 2017, Xunlei's stock experienced an unprecedented surge, becoming a star company in the entire internet world. Did their business make a qualitative leap? Not really; the reason was simple: as Bitcoin surged towards its historical peak, Xunlei jumped on the bandwagon and directly issued its own cryptocurrency.

Xunlei Issues Cryptocurrency

As early as the beginning of 2014, Zou Shenglong personally oversaw a new business called the "Crystal Plan," which sold Xunlei users' idle bandwidth resources and storage space to internet companies in need, such as video sites, music sites, and download sites. Essentially, it formed a CDN network using users' computers at a very low and competitive price. They even launched the Xunlei router to provide hardware support.

However, during Zou Shenglong's time in charge, the product experience was not ideal, and it was gradually shelved, even not appearing in Xunlei's own introductions.

At the end of 2014, Chen Lei, the head of Tencent's cloud business, was persuaded by Lei Jun to join Xunlei as CTO, taking over the cloud service business and the Xunlei subsidiary, Wangxin Technology, which had been established in September 2013.

Chen Lei Source: Internet

From then on, Xunlei's main focus shifted to Wangxin Technology, and the download business of Xunlei Group saw little new content.

After taking over Wangxin Technology, Chen Lei began to revive the Crystal Plan, creating the "Zhuanqianbao," which focused on making money using idle bandwidth and storage. Starting in April 2015, they began selling Zhuanqianbao boxes, and they indeed managed to monetize this CDN service, starting to provide cheap CDN services for live streaming sites a year later. Many live streaming platforms still use it today, such as Bilibili live streaming. By August 2016, Zhuanqianbao users exceeded 4 million.

4 million may seem small today, but imagine 4 million households choosing to plug their internet lines into Zhuanqianbao, using their hard drives and bandwidth to accelerate video sites across the country, equivalent to adding 4 million servers nationwide. This was an absolute innovation at the time.

However, greatness comes with sacrifices. Initially, to encourage users to buy Zhuanqianbao and participate in this network, Xunlei adopted a cash buyback model for users' bandwidth and storage. The more Zhuanqianbao was sold, the more Xunlei lost, which is not a phenomenon any company would want to see.

In 2017, a wave of virtual currency speculation began in China, with Bitcoin's price skyrocketing from 1,000 USD. This gave Chen Lei new ideas. In June of the same year, he was appointed CEO of Xunlei Group, and a month later, Zhuanqianbao was renamed "Wankeyun" and issued the virtual currency "Wankebi."

Once the cryptocurrency was issued, things changed.

Xunlei transformed its cash subsidy model into a system where users earned virtual currency based on the amount of resources they shared. The 4 million Zhuanqianbao players became Wankeyun miners, with some earning dozens or even hundreds of Wankebi in a day, while others could still earn a few. The price of Wankebi on exchanges surged from 0.01 to over ten yuan, allowing some to break even in a day.

With the trend of profit, the entire network scrambled to buy Wankeyun machines, with the original price of 399 yuan being listed on second-hand platforms for 2,000 to 3,000 yuan; buying one was a profit. At that time, Xunlei could generate 100 million yuan in revenue just from selling Wankeyun, marking one of the few high points in Xunlei's history.

As Chinese speculators frantically traded Wankeyun and Wankebi, Xunlei's stock soared to an unprecedented 27 USD, a staggering increase of 900%.

A 9-fold increase, even in today's environment of excessive liquidity, few US stocks have seen such a rise from their lows; Xunlei's stock became a "diamond" in the eyes of all US stock traders.

Xunlei Stock Price

By November 2017, Chen Lei seemed to have been intoxicated by the results, starting to cut off Xunlei's unprofitable old businesses. At the end of November 2017, Xunlei announced the cancellation of brand and trademark licenses for Xunlei Big Data, Xunlei Finance, Xunlei Mini Games, and others.

However, this move undermined the interests of Xunlei's veterans, leading to infighting within the management. The most significant uproar came from Xunlei Big Data, whose actual controller, Yu Fei, was a former senior vice president of Xunlei. She publicly accused Wankebi of being a scam and illegal fundraising, even starting to report Wangxin Technology.

A company reporting on itself.

The good times did not last long. In January 2018, the virtual currency market crashed, and national regulations came into effect; Wankeyun collapsed, and Xunlei's stock also plummeted. In 2019, Xunlei Group's losses continued to expand, and its once-proud CDN business began to face challenges from companies like Alibaba Cloud, Tencent Cloud, and Wangsu Technology. The blockchain business that was once touted also saw little progress.

All of this was a prelude to this "palace struggle."

Cleaning House

In January 2014, Xunlei CTO Li Jinbo left the company and founded the "Most Right" app in July of the same year, which has been doing quite well. In April 2019, Xiaomi invested 80 million USD in Most Right, and Most Right reached an agreement with various investors to exchange its shares in Xunlei for shares in Most Right. Through this method, Most Right transformed into Xunlei's largest shareholder, holding 39.8% of the shares, and the old guard of Xunlei, represented by Li Jinbo, was about to return to take over Xunlei.

The first thing they did upon returning was: cleaning house.

In early April 2020, Xunlei announced personnel adjustments, with Chen Lei no longer serving as CEO of Xunlei and its affiliated companies, and Li Jinbo took over. Soon after, Wangxin Technology was physically taken over by bodyguards.

Faced with this sudden loss of power, Chen Lei expressed regret for accepting Lei Jun's invitation to join Xunlei in 2014, stating that he had committed many taboos of professional managers: first, he offended some people, and second, he was too naive.

However, the veterans of Xunlei did not feel the same way.

In the investigation details released by Xunlei, a broadband supplier named Xingronghe was discovered, a company personally controlled by Chen Lei, through which he transferred huge amounts of money using various illegal means.

During Chen Lei's tenure, there were ongoing doubts about his relationship with Xunlei's senior vice president and Wangxin Technology vice president Dong Xue. Rumors circulated that the two were in a romantic relationship, and during a board meeting, the board confronted Chen Lei, who guaranteed with his Christian reputation that there was no relationship beyond colleagues.

However, after leaving, Xunlei discovered that the two had a child during their tenure, and Chen Lei had also brought in a group of fellow townsmen and friends from Hegang, Heilongjiang, to key positions in the company, siphoning off company funds through fabricated transactions and devalued false contracts, and was even found to be suspected of embezzling tens of millions for cryptocurrency trading.

Xunlei could no longer tolerate this. On October 8, Xunlei announced that former CEO Chen Lei and others were suspected of embezzlement, and the Shenzhen Public Security Bureau had initiated an investigation into Chen Lei for suspected embezzlement, urging him to return to China to cooperate with the investigation.

Although Chen Lei's side expressed different views in an interview with the Daily Economic News, since a case has been filed, everything will be subject to police judgment. This "Xunlei palace struggle," which began in April this year, has also come to a close. Whether or not Chen Lei truly regrets coming to Xunlei, the six-year relationship has been declared broken in this palace struggle.

Compared to the palace struggle, the business of Xunlei itself deserves our attention. As the core download function is no longer a high-frequency application for people, and Xunlei's stock price has dropped nearly 90% from its peak, how will Xunlei find its former glory?