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.

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.

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, source: Yahoo Finance

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Kodera isn’t the only recent departure, however, which makes the situation a little more bleak. Here are a few more joining the exodus, per The Verge:

“It’s not just Kodera. In the past three-odd months, HTC has lost a number of employees in rapid succession — most recently Jason Gordon, the company’s vice president of global communications. Other fresh departures include global retail marketing manager Rebecca Rowland, director of digital marketing John Starkweather, and product strategy manager Eric Lin.”

I knew that Lin had left: He moved recently to become a Product Marketing Manager for Skype after five years with HTC. The others are news to me, but in hindsight, perhaps not surprising given the company’s rough ride of late: delays for the HTC One flagship phone due to supply issues and the lack of buzz around the HTC First, a phone that highlights the Facebook experience.

With HTC’s fall from prominence in the U.S., it’s possible — likely even — that the Tawian-based company consolidates operations back to its home country. With Apple and Samsung dominating U.S. phone sales, it may make sense for HTC to concentrate more effort on the bigger opportunities in Asia. To do so really doesn’t require much of a U.S. presence, sadly.

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It’s not uncommon for handsets to see reduced prices over time. After all, new models appear, making older phones a little more obsolete. Carriers, which generally buy inventory in advance, then discount the older phones to spur higher sales and the service revenues that come along for the ride. But in terms of the HTC First, there is no successor model available.

I reached out to AT&T for some thoughts and while the carrier won’t comment on individual manufacturer handset sales, I was told that it’s a promotion, which as I noted above, isn’t uncommon. There is no indication if or when the reduced prices may end.

So this could be due to sales or not. I suspect it is, mainly because I’m ruling out the other options. For starters, the phone works on AT&T’s LTE network and falls back to speedy HSPA+ service, so there’s no reason to blame the network. As far as the phone: It’s a mid-range handset made by HTC that I’d consider fairly generic.

My colleague Om reviewed it — I haven’t had a chance to use the First yet — and as someone who vastly prefers iOS to Android, his impressions were better than I expected. He mostly liked the Facebook Home software, which I have used. I think it’s actually very well done and runs nicely on my Galaxy Note 2. But I think this alludes to the key problem: The market is clamoring for a Facebook phone just as much as it is for a phone built around Twitter or another social service. Meaning: It’s not.

It’s difficult enough for a high-end flagship phone to stand out from its peers, let alone a mid-range handset. Frankly, I can’t see how Facebook Home helps the HTC First differentiate itself enough; particularly when the software is already available for download on better phones and is expected to arrive on other handsets in the future. Sorry Facebook, I don’t think the market likes your attempt at a smartphone.

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HTC’s prior tablets and the market for Windows RT

HTC did create a 7-inch Intel Atom-powered tablet in 2007 called the HTC Shift. It had a hardware keyboard and ran Windows, but like many other UMPC models from that time, it was never a hit. The company doesn’t have expertise with Intel chips and the full version of Windows, however. A few Android tablets from HTC — the Flyer and the Jetstream — came and went without fanfare as well. Given HTC’s experience with ARM-powered chips in smartphones, it would likely build new tablets with similar silicon. That would mean both would run Windows RT and not the full Windows 8 software.

Unfortunately, I’m not yet convinced there’s a market for Windows RT devices. I fully understand that some readers may have purchased one and are quite happy with it. However, there’s no data to support that Windows RT is a success by any measure: Microsoft hasn’t yet broken out Windows RT license sales from Windows 8 sales.

And after spending time with Surface RT and other Windows RT slates, I haven’t been able to recommend them to anyone. It’s not because they’re bad products; I actually like the user interface and the hardware of the various models. But at a similar price point, it may make more sense to buy an Intel Atom slate that provides similar battery life and performance to RT tablets but also adds support for legacy Windows software.

HTC’s current issues stem from several problems

I can understand why HTC might want to expand its product line to include Windows tablets: The company’s smartphone sales have been falling and so too are HTC’s revenues and profits. Instead of leading the pack with Android phones like it used to, HTC is losing out to Samsung. So too are other companies that used be smartphone stars; HTC isn’t unique. As a result, HTC reported just $2.88 million profit on $1.45 billion in revenues last quarter and unless it can quickly reverse its fortunes with the new HTC One, it could see profits dip into losses.

We’ve previously discussed why HTC is in its current predicament. Stronger competition is one part of it. The relative lack of brand awareness and marketing is another big reason. And a lack of focus — too many different permutations and combinations of similar products — haven’t helped either. And therein lies the rub: all three of these issues would only be magnified in the market for Windows tablets.

Losing focus isn’t a winning strategy

A better idea for HTC might be to get its smartphone house in order. It’s definitely on the right path with the HTC One; it’s a top-notch Android smartphone. If the phone is successful, I supposed the company could re-invest profits into designing a Windows tablet or two, but it might be better to continue improving the smartphone line first.

Tablet sales are growing, even as PC sales are slowing, but the market for smartphones is still bigger than both. I’d hate to see HTC lose focus by entering an already crowded market for products that haven’t yet proven successful. It just seems like a big risk that HTC isn’t in a position to take right now.

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It certainly didn’t help this quarter that HTC had to delay its new HTC One launch by a few weeks. The flagship smartphone has outstanding design and performance; it will surely help HTC this quarter once the global sales channels have inventory to sell. But I recently noted that HTC’s problems run much deeper than just an HTC One handset delay.

The company — once the biggest up-and-coming Android phone manufacturer — has watched itself be overtaken by Samsung, ZTE and Huawei, to name a few.

Brand awareness and a relative lack of marketing haven’t helped. Neither has money spent on poor decisions: The investment in Beats Audio hasn’t proven to be that helpful and efforts to create a small Android tablet — before such devices were truly popular — didn’t pan out either. And I’m not yet sold on the HTC First, a Facebook-centric handset, on helping the company stand out from the crowd.

For all of its struggles, HTC still has a positive outlook for next quarter; mainly due to the HTC One. The company expects a huge bump in revenues: NT$70 billion. Gross margin should be between 22 and 24 percent — up from the 20.3 percent of the most recent quarter — and operating margins are expected in the 1 to 3 percent range.

If I were HTC, I’d take as much of the profits as possible and dump them into marketing its latest handset. What good is a winning device if people are surrounded by ads from Samsung, Apple and others?

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The smartphone situation is the complete opposite of the PC and tablet markets where Microsoft surprised many with the Surface RT and Surface Pro computers it announced last June. These machines compete directly against Microsoft’s long-time licensing partners such as Dell, HP, Lenovo, and Samsung, to name a few. It also may be why some of these companies are trying to break away from from Windows. HP introduced an inexpensive Android tablet in February while Lenovo now offers a Google Chromebook for the education market, for example.

Myerson’s comments don’t surprise me, even though we’ve heard rumors of a Surface phone for months. I don’t see what Microsoft can offer from a hardware perspective that its Windows Phone 8 partners aren’t already offering.

In particular, Nokia is building a wide range of superb hardware for the mobile platform; the direct result of a huge partnership with Microsoft it began in February of 2011. The flagship Nokia handsets meet nearly all, if not all, of Microsoft’s current Windows Phone 8 hardware requirements. There’s simply no reason for Microsoft to build a Surface phone at this point; it may make sense in the future if the company plans a vertical product design strategy.

Because of that, Myerson’s comments raise a different question in my mind: If the available Windows Phone 8 hardware is already good enough to keep Microsoft from designing its own, is the software simply not resonating with enough people at this point? The operating system is intuitive and fresh, but outside of Microsoft’s own horn-tooting, very little independent data shows that Windows Phone 8 is a raging success.

As Microsoft likes to say, however, its phone effort is a marathon, not a sprint. Perhaps later in the race the company will design and sell its own phone hardware. For now, there’s no need to wait for a Surface phone.

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Since then we’ve seen flagship smartphones, mostly running Android, with displays first at 4-inches, quickly followed by 4.3 and 4.5-inches, now up to 5-inches and even beyond. You’d think that’s great if people want larger screens on their phones, and according to T-Mobile, 77 percent of their customers do. But can this growth in Android flagship phone displays actually hurt the most used mobile phone platform? It already has lost at least one customer.

See you later, Android!

Sascha Segan at PC Mag is done with Android and screen sizes are the sole reason. After speaking with several phone manufacturers, the issue is one of “moar”, he says: Consumers in the U.S. and Canada equate value with phones packed with as many features and top hardware components as possible. We want more screen space, more functions, more of everything in our mobile devices. So based on the trend of larger screens, Segan isn’t likely to switch back to Android any time soon, if ever. As he put it:

“But the Android world has been seized by the tyranny of moar. To switch back, I need a decent one-handed phone. Like about 25 million other Americans and Canadians, I take public transportation to work, and I really like to play games standing up.”

I know Segan personally as we’re peers in our industry and often see each other at trade shows and launch events. Truth be told, we’re both smaller than average in size. And yet, while I understand his complaint, I’m actually fine with larger devices. Why the difference? I am, and always have been (even with the original iPhone), primarily a two-handed smartphone user.

Could others follow suit? It depends on how big phones get

Regardless, Segan makes an excellent point. In today’s market — and likely for some time — if you want a top o’ the line Android smartphone, you’ll either need hands sized like Andre the Giant (and pants pockets to match) or you’re going to use your handset with two hands in most circumstances. Who knows; small tablets might replace smartphones for many as our perceptions of portability evolve.

There’s an alternative of course: Android phones start getting too big for a large audience and consumers turn to smaller devices that run iOS, Windows Phone or BlackBerry 10. Obviously, one person leaving Android due to flagship phone sizes isn’t even close to being a trend. Looking forward, however, this could become an issue if handset makers continue down this path.

And I see no reason why those who make phones will stop with the “bigger is better” approach to design. The top selling Android phones these days tend to be larger than average. Add in the fact that we now have high-resolution 1080p display panels, and there’s even more room for phone screens to grow.

After all, after a certain pixel density, there’s little benefit to cramming more pixels in a smaller screen. The new 1080p screens should still look just as good to most people on a 6- or 7-inch device as they do on the 4.7-inch HTC One or 5-inch Samsung Galaxy S 4. Maybe “moar” is better for now? If not though, opportunities for Android competitors could get as big as the screen on Android flagship phones.

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To be sure, the smartphone game is one of timing and momentum. So delays of the HTC One aren’t helping the situation. But that device alone won’t instantly turn around a company that’s been free-falling for the past 18 months. The One was introduced on Feb. 19 and due out in mid to late March. Even if the phone did launch on time, it couldn’t save a bad quarter with just two weeks of sales. The next month and quarter could be negatively impacted if delays continue, but faulting delays on the prior quarter doesn’t make sense.

Here are the real issues for HTC’s challenges

So what’s the deal with HTC? The company is facing the same problems it has had for several quarters. It doesn’t have the marketing budget of a Samsung, for starters. That means it relies heavily on carriers for support and that’s risky business. Then there was the $300 million investment in Beats Audio; a nice feature that a few crave but not one that’s going to sell phones to the masses. HTC later sold back half of its interest in Beats.

Lastly, there’s the perception of how much people value well-built Android hardware. I’d argue that HTC designs and makes some of the best Android handsets. They have heft but aren’t too heavy, have few actual hardware issues and are solidly built. And there are many folks that don’t like the “plasticky” cases of competitors’ phones — I’m looking at you, Samsung.

But in the overall Android market, which is quite vast, software trumps hardware. And while I don’t intend to point at one player here, it’s Samsung’s plastic phones that are pushing the envelope faster with software. When people see unique features — think multiple apps on the screen, hovering with a finger, exceptionally good note-taking with a stylus — they can overlook something such as phone case quality.

That doesn’t mean HTC isn’t making strides in software; they are. But I’d say they’re a half-step behind Samsung’s pace and when you combine that with the other factors involved — a marketing disadvantage and brand awareness, to name a few — it’s easy to see the problem.

The HTC One will help boost revenues for the company, of that I have no doubt. But this one phone, delayed or not, won’t save or damn the company. Much of the damage has already been done. Now it’s up to HTC to react in a way that convinces people it can turn things around in the long run. For now, it’s Samsung’s galaxy and HTC is just living in it.

Update: This post was updated at 8:33 am to correct the reference for HTC’s March revenue from million to billion.

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Facebook avoided several traps

Facebook clearly did many things right. First, it elected not to get into the hardware business by developing its own handset, and thus competing directly with Apple, Samsung, HTC, Motorola, LG and others. Second, it didn’t try to build a new operating system, and compete with Apple’s iOS, Google’s Android and Microsoft’s Windows Phone (which is battling BlackBerry for third spot). And if it had to pick one OS, Android was definitely the right option, both because of the design choices that open source provides and the sheer number of Android devices being activated.

More importantly, as anyone watching the Facebook Home event yesterday saw, Facebook went big. Facebook Home is ambitious, well designed, stunning and immersive in the experience; Mark Zuckerberg is justifiably proud of what his company has created. But the question remains, will it move the needle?

The numbers tell the story

There are 130 million smartphone users in the U.S., as of the end of January (all figures are according to ComScore’s most recent report). Currently 76 percent of U.S. smartphone users, or 98 million people, have the Facebook app installed on their phones. Android currently has 52 percent of the smartphone market, which, barring switching from iPhones or other smartphones, leaves the total available market of U.S. Android users with Facebook installed to 51 million.

But, crucially, Facebook Home will only work on newer (less than a year old) Android handsets, for now the HTC One X, HTC One X+, Samsung Galaxy S III, Note II, HTC One, Samsung Galaxy S4, and HTC First. (Hey, where’s my Samsung Galaxy Nexus and any number of other, newer Android handsets?) So once we take Android users currently with the Facebook app installed (about 50 million users) and subtract from that those with older and/or lower-end Android handsets, we’re left with some 25 million possible Home users in the U.S.

But there’s more. Facebook Home is not for everyone. We can assume that casual users who check Facebook infrequently – those who have it installed on their Android handset but aren’t frequent users – aren’t likely to convert to Facebook Home. According to Facebook’s year-end presentation, when comparing the number of Monthly Active Users to Daily Active Users, 59 percent of Facebook’s MAUs are DAUs, which makes sense and provides some insight into casual users who don’t check in daily. Nor can we ignore non-contract (prepaid) mobile users – who account for about 25 percent of the mobile user base, and often pay for data by the KB – who will find Facebook Home “immersion” to be very costly.

So using the best data available, we see that Facebook’s maximum potential reach is seriously impaired by the realities that three-quarters of Facebook smartphone users have iPhones, Blackberries, Windows Phone, Symbian devices or older or low-end Android handsets. Are Facebook users with iPhones or any competing devices going to switch en masse? Certainly not enough to move the needle.

Consumer concerns will factor

For casual users, and those concerned about data consumption, the Facebook mobile app will suffice. Likewise for  those who are justifiably concerned about Facebook Home’s ability to monitor every minute detail of their whereabouts, activities, habits, and so on – even when they’re using other apps.

And then, there’s battery life, already a big issue for smartphone users, as an endless stream of pictures pops up on their handsets.

At least for the U.S. market, where revenue per user is highest, Facebook Home will simply not move the needle, and shouldn’t add up to more than 10 million  to 20 million of Facebook’s current 100 million U.S. mobile users.

Exclusive hardware limits reach

And what about the HTC First, the Facebook handset to be offered exclusively by AT&T on April 12, the same day Facebook Home is scheduled to become available on Google Play? The HTC First is a mid-range and very well-designed handset with a good price point, four pleasing colors, and a great screen. HTC is clearly a contender, and builds gorgeous handsets. But why is this deal, where reach is critical, an exclusive? It simply further limits reach for Facebook.

Two years ago, AT&T and HTC offered the first Facebook Phone, the HTC Status with QWERTY keyboard and a dedicated Facebook button that took you right into FB. The phone sold in AT&T stores for half the price of the HTC First, and was pulled within a few months for lack of interest. Again, the HTC First (ironically, HTC’s second Facebook handset) should sell okay, but don’t expect lines around the block, or even out the door. Most AT&T smartphone customers use iPhones, which accounted for 85 percent of smartphone sales last quarter.

The bigger play, and where this can move the needle for Facebook, in time, is to produce a lower-cost handset with Facebook Home for India and other international markets where revenue per user is very low and upside is considerable.

Whitey Bluestein is an international strategic advisor and corporate development specialist focused on mobile applications, prepaid, MVNOs, payments and roaming services. He is a GigaOM Pro Analyst and Mobile Industry expert, and frequent commentator on CNBC Fast Money. Visit whiteybluestein.com.

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All other major manufacturers lost share in a market that includes 133.7 million American smartphone owners. HTC, which Thursday debuted HTC First, a phone that comes pre-installed with Facebook custom launcher Facebook Home, had the biggest decline, with its share of smartphone users dropping 1.7 percent. Apple, meanwhile, was up almost 3.9 percentage points.

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