19 Comments

Summary:

HTC was the shining star during the early days of Android. Now it is reeling under the pressure of cheap Androids, a dominant Samsung and a management disarray. It’s a damn shame, as the new HTC One is actually a nice device.

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A few days ago when hanging out with a friend, I got a chance to play around with HTC One, the newest and shiniest Android phone on the market (of course until it wasn’t when Sony launched its Xperia Z.) I was quite impressed by the build quality, the industrial design and the beauty of the device. Despite its supersize — I have normal people’s hands — it did feel like something I would want to buy, especially if I was picking amongst the ever increasing array of Android smartphones.

Maybe, I thought to myself, HTC was going to make a comeback. I mean, these were the guys who jumpstarted the Android smartphone ecosystem in partnership with Google and T-Mobile USA. These were the guys who innovated fast and even came up with their own skin for Android. They pushed the design and speed envelope. They had edgy marketing. They were the first movers and their early sales were red-hot.

And yet, when they spent $300 million on headphones maker Beats by Dre, it became obvious that this company was going to run into some stormy weather. Of course, it was an idea that didn’t go down well with many of its fans and its investors — HTC eventually sold back half its stake.

This (relatively) tiny Taiwanese company was going to get squeezed by cheaper Android phones on one end and Samsung on the other. In fact, as far back as 2010 we have argued that the real smartphone battle was going to be between Apple and Samsung. And when it comes to hardware, nothing really has changed. It is Apple vs Samsung.

According to Strategy Analytics, Samsung now accounts for about 95 percent of the total operating profits of the global Android business. During the first quarter of 2013, Samsung had an operating profit of $5.1 billion, while LG made $100 million and all other vendors (HTC, ZTE, Huawei, Sony and no-name brands) collectively made $100 million in operating (not net) profit.

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It is hardly surprising to see that HTC is in trouble. A report in The Verge suggested that HTC’s chief product officer, Kouji Kodera, has left the company. The report also implied that other senior executives are leaving the company. The most recent high-profile bet — the HTC First, which was launched in partnership with Facebook — has been a flop and one wonders if the company really has the wherewithal, both intellectual and financial, to undertake such experiments.

I am not sure if people remember, but Motorola was another company that found itself on a Sysephian quest and eventually found a $12 billion bailout from Google. The trouble with the smaller Android players is that despite all the talk about a PC-like ecosystem of sourcing components and using others to assemble their products, it is fundamentally not true.

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Apple has used all the billions in the bank to lock up supplies for processors, memory chips, radios, displays and other such components at favorable prices. It has worked out long term manufacturing arrangements with the likes of Foxconn. It has its own retail outlets. While most of us try and focus on Apple’s hardware and software integration, we forget that it is software, hardware and supply chain integration that allows the company to sell 37.5 million phones in the most recent quarter. It allows the company to make phones that meet the needs of different carriers.

Samsung too is an integration beast. It owns memory chip plants. It makes its own processors. It makes displays and it owns the factories. It has the unique ability to churn out new products faster than anyone else in the consumer electronics business and thus overwhelm the market with dozens of models. Just look at the many flavors on its latest Samsung S4 device and you start to see that this is a game only for big boys.

The only other company with Apple and Samsung-like manufacturing oomph was Nokia. I say was, because they are losing a grip on the phone business. However, their supply chain and manufacturing was legendary. It still is. I have yet to see a badly made Nokia smartphone — I just see smartphones with an OS that makes no sense. I bet if they entered the market with their own flavor of Android — something we suggested in 2010 — they would instantly become number three in the smartphone market, behind Samsung and Apple.

Sadly, smaller players like HTC can’t compete with the manufacturing and marketing capabilities of Samsung. The HTC One, which is an awesome looking device, was hit by manufacturing issues earlier this year. So it needs to rethink its strategies. HTC needs to become comfortable with the idea of being a one or two product company, and hope that it can keep comping up with winning products every single time. Even that is a long shot. The marketing budgets of Samsung and Apple are enough to finance some small nations.

HTC’s story is all too familiar to those who have studied the first mover phenomenon. A story in Economist points out that innovators captured seven percent of their market over time. THey point to various examples like White Castle who invented the idea of fast food burger joint but McDonalds is the big daddy now. Apple and Samsung are going through some of that as well. The lesson here for everyone — even tiny startups — is as Scott Anthony once perfectly said (and I paraphrase him): no one remembers who was leading the race midway through, and everyone remembers who finished first. And in order to finish first, a lot has to go right.

So where do companies like HTC go? And sad as it might be, perhaps nowhere. I am going to do my bit to give them some support — I will buy that HTC One, just because it is actually a great little device. It truly is.

5-year HTC stock chart, Yahoo Finance

5-year HTC stock chart, source: Yahoo Finance

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  1. Nikohl Vandel Wednesday, May 22, 2013

    “A few days ago when hanging out a friend,” lol, what a difference a small word like “with” can make . . . perhaps a small investment in vibration integration is just as important.

    “And yet, when they spent $300 million on headphones maker Beats by Dre, it became obvious that this company was going to run into a some stormy weather.”

    I guess I just have a question more than a comment on this statement — why would this an indicator to YOU that it was “obvious that … stormy weather?” To me, that kind of development reminds me more of Sony and Mac’s early decision-makings. But yes, I guess its impossible to find any company that is not going to experience stormy weather of some sort.

    To me, while YES, the nuts and bolts are necessary pieces of the mechanical side of the device manufacturing market — to me, this shows, on a very superficial level, a potentially deeper understanding and perhaps vision of the connection of device manufacturing and pushing the third piece of the 3D integration: vibration.

    In looking to the bigger picture — the nuts and bolts can always be bought (perhaps creating a more expensive piece of equipment), but expanding on the creative side early has empowered that to eventually be integrated into the entire industry.

    So, as a creative, I don’t mind companies going into the storm and am thankful for them. As an investor, I would ride the stock market flow this kind of harsh truth reflection on the nuts and bolts side can make for this company and watch.

    Thanks for the thoughtful recommendation … =)

    1. You clearly need English lessons before criticizing other people’s work, it makes a mockery of your response.

  2. Have used HTC Phones going back to when they didn’t put their name on them and have always been impressed with both the depth and breadth of the work put into the product. They made my transistion from WinMo to Android almost painless by identifying and addressing most of the gaps in the Android platform and my first Android (EVO 4G) continued to provide a better experience than most products on the market until I moved to the new One and what a great phone it is.

    I do miss the removeable battery and integrated kickstand, but surprising the missing SD card slot is a non-issue and eliminates the headaches of apps that will not use the SD card. I am figuring out how to deal with fixed battery, but I still miss the kickstand and do not want to cover a beautiful phone with an ugly case to recover that functionality.

    The final testament to the product would be the fact that my wife, who has used nothing but iPhones since they first appeared has flagged the date her contract is up, so she can move to the One.

    So, don’t count HTC out. Apple can only own the Supply Chain as long as people are funding that ownership and their One Trick pony is running out of new and cool and Samsung is evolving into a One Trick pony which sets them up to miss the next big thing (pun intended).

  3. You are ignoring many important factors.
    First it’s carriers , they offer very few products and regulators are allowing it. Carriers also mess up the software and add a lot of headaches for the phone makers and users.
    You also got the actual product , the industry decided that they need to differentiate and everybody made it’s own Android skin, for HTC that went very wrong and they damaged their reputation. HTC One is nice but no microSD, the low res cam will lead to outdated memories in a few years when we’ll use 4k screens,.S4 also has a removable battery, more sensors and a thinner bezel than HTC One. They could have done better,easily. Execs nowadays are scared to have their own ideas, they all move in the same direction like a herd of sheep and we end up with so many devices yet so few real options.

    1. @realjjj

      I am not ignoring the so called important factors. The only factor to notice in this business now is scale and efficiency of the supply chain. Carriers are as much a headache for Samsung as they are for HTC and others. Again, focusing on the “missing features” is missing the point: this is a game for the big boys and HTC isn’t one.

  4. one word, Thunderbolt.

    1. @jivester

      “one word, Thunderbolt.”

      Never heard of it (I’m from the UK)

      ..Ahh yes, that carrier specific device who owner managed to screw up their version of the Galaxy Nexus too.

      Don’t blame HTC when it’s obvious who the real culprits are.

  5. This is true. Most of the HTC phone gets slow when you have too many apps in it.
    Thanls

  6. Reblogged this on Today In Tech and commented:
    Great read

  7. HTC are an arrogant company – ‘Quietly Brilliant’ is their moto, but the only ‘brilliance’ they have shown is skinning an operating system made by others and copying another companies device. China is now the new HTC, producing multiple generic high quality Android devices which offer better value and equal performance.

  8. So in a nutshell we can say that the HCL top management strategy did not paid off !

  9. There’s no doubt HTC have years of experience producing smartphones but the smartphone industry is now mostly commoditized. If one can get the components one can build a highend smartphone using stock Android build. HTC still retain certain edge because of their extensive knowledge on phone design but they are now increasingly relying on the same components as others. Even HTC has to source Samsung dram. When you are lining your competitor’s pocket just to make a profit it becomes disadvantageous to the enterprise and certainly not sustainable. I imagine that given market forces somebody will eventually step in to increase supply.

    I know a lot of fans feels bad about HTC but they become too obsess with this brand. There always will be better phone around to corner and I don’t really care much when any company goes the way of the Dinos, it’s just progress.

  10. Om,

    Thanks for the article, I too have been wondering how HTC so quickly lost its way. But I wonder…

    We in the business know that unless your Apple or Samsung, the telecoms make decisions that make or break entire companies every day.

    And there are now reports that Facebook may have sabotaged the HTC first rollout by simultaneously releasing Home on google play.

    HTC has been known for build quality for years. Although the First may not be a stellar example, I think Facebook Home is (rough edges and all) one of the most innovative things we have seen in the smartphone space in a while.

    ATT pulling the plug on the HTC First seems like a seriously undeserved gut-punch to HTC. I was about to go and buy one just for fun of kicking the tires. And I cant stand Android and have never owned one, so as an iPhone user since 2007 I think that says enough. Also I dont use Facebook. But I thought it was about time to see what that could look like. Now I cant. Unless I want to delve into the fragmented world of Android. Not gonna happen.

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