HTC: A canary in the Android mine?

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The Android smartphone market is an increasingly tough place to do business, as HTC's recent fortunes demonstrate.

Fortunes can change fast in the smartphone market. As recently as 2011, the market share ranking of leading smartphone vendors, in terms of units shipped, looked like this:

smartphone-market-2011.jpg
Data source: IDC

Apple and Samsung are still major players, but where are the others?

In April 2014, Nokia sold its mobile phone business to Microsoft, which subsequently formed the Microsoft Mobile division and removed the Nokia brand name from flagship Lumia devices. Recent Microsoft Mobile developments include planned layoffs of 7,800 workers, a $7.6 billion write-down on the Nokia acquisition and a significantly curtailed product release schedule. As of Q1 2015, Windows Phone devices accounted for just 2.7 percent of the worldwide smartphone market, according to IDC. (Nokia's once-dominant phone OS, Symbian, was by then long buried in the 'Others' category.)

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RIM changed its name to BlackBerry in January 2013, but neither that nor the release of BlackBerry 10 OS and attendant handsets could halt the Canadian firm's slide to a minuscule worldwide market share of 0.3 percent in IDC's Q1 2015 figures. The company remains very much in turnaround mode under CEO John Chen, as it seeks to boost the software-and-services side of its portfolio -- chiefly, cross-platform enterprise mobility management under BES 12.

As for HTC, the Taiwanese company hit the news recently when its share price fell so low that its market capitalisation was worth less than the cash it had in the bank -- thereby rendering the brand and other assets effectively worthless in the market's eyes:

htc-share-price-v2.jpg
Image: HTC

At the time of writing (11 August 2015), HTC's market capitalisation was NT$47.6 billion (US$1.47 billion). Compare that with its latest audited quarterly filing, for Q1 2015, which listed the company's cash reserves at NT$51.7 billion (US$1.6 billion). Q2 figures didn't look up either, the company posting a thumping net loss of NT$8.0 billion (US$248 million) on revenue of NT$33 billion (US$1.02 billion) and forecasting another revenue fall -- NT$19-22 billion (US$590-683 million) -- for Q3.

Here are some more charts documenting HTC's recent history:

htc-revenue-by-quarter.jpg
Data source: HTC
htc-profit-by-quarter.jpg
Data source: HTC

A smartphone pioneer

Founded in 1997, HTC has a long pedigree in the smartphone market, not only building the first Windows phone, the Orange SPV (a.k.a. the HTC Canary) in 2002, but also releasing the first Android phone, the T-Mobile G1 (a.k.a. the HTC Dream) in 2008:

htc-spv-g1.jpg
Images: Wikipedia

In its 2011 heyday, HTC was, for a while, the number-one smartphone vendor in the US, shipping 5.7 million devices in Q3 under its own brand (and 70,000 T-Mobile-branded units), giving it a 24 percent share of the market. The company's top seller that year was the 4.3-inch EVO 4G, which was the first '4G' phone available in the US (it supported WiMAX).

What went wrong?

As the charts show, things went steadily downhill for HTC after 2011, although there were significant second-quarter profit boosts in 2013 and 2014 courtesy of the well-received One M7 and One M8 flagship handsets. Tellingly, although 2015's One M9 also received enthusiastic reviews, it has fared less well against the competition and so far done nothing to improve HTC's fortunes -- far from it, in fact.

One clue to HTC's plight is the shape of the smartphone market in 2015 compared to 2011 (see the chart at the start of this article):

smartphone-market-2015-v2.jpg
Data source: IDC

Although the market share of the top two players is roughly the same (42.9% in Q1 2015 versus 42.1% in 2011), the share taken by the next three has roughly halved (15.4% versus 33.8%), while the contribution from 'Others' has nearly doubled (41.7% versus 24.1%). There are now far more smaller smartphone vendors -- many of them Chinese manufacturers offering low-cost devices -- carving up the market left behind by Samsung and Apple.

Manufacturers like HTC are therefore being squeezed between the dominant incumbents (Samsung and Apple) and a growing number of smaller players that compete on price. Another significant statistic is the trend in the average selling price of iOS versus Android handsets in recent years:

smartphone-selling-gap-statista.jpg

It's clear that while Apple, thanks to its unique combination of branding and and all-premium product portfolio, has been able to keep ASP erosion to a low level (-6.4% between 2010 and 2014), and therefore maintain its traditionally high margins, this is far from the case for Android vendors, which have seen average selling prices fall by 42.4 percent over the same period.

Not only is there a large number of Android smartphone vendors, but most of them offer a wide range of models. HTC currently has eight handsets in its premium One family (in the UK), and 13 in its mid-range Desire family, for example, while Samsung currently has 39 smartphones on sale in the UK -- 17 of them in its premium Galaxy (S and Note) family. Making so many variants can only increase costs, further squeezing the already-shrinking margins in the saturated Android market.

HTC's response

Most leading smartphone vendors have diversified into the wearables space, releasing fitness bands, smartwatches and, in some cases, virtual reality headsets. HTC has a mixed record here, so far. A smartwatch announcement was widely expected at this year's Mobile World Congress, but nothing was forthcoming. HTC did announce a fitness band in partnership with Under Armour, the Grip, only to postpone the planned shipping date until a more extensive suite of 'connected lifestyle' products is ready. Another partnership, with entertainment software company Valve, produced the HTC Vive VR headset, which is set to ship by the end of the year.

HTC recently announced a reorganisation to reflect its new direction, creating business units focused on premium smartphones, connected lifestyle products and virtual reality. At the same time, to stem the financial bleeding, the company plans to cut operating expenses by 35 percent, including a 15 percent headcount reduction. In preparation for this realignment, back in March, long-time CEO Peter Chou moved to head up HTC's Future Development Lab, with chairman and co-founder Cher Wang taking over chief executive duties.

Outlook

HTC is by no means the only Android smartphone maker feeling the pinch in today's super-competitive market, but the company's long history and previous success have made its current difficulties more newsworthy. In many ways, HTC may be a harbinger of problems to come for other vendors -- a canary in the Android mine, if you like.

HTC's flagship smartphones are still high-quality -- if pricey -- devices, but the pace of innovation has slackened recently, and there are far too many mid-range models. Beyond smartphones, the diversification project needs to succeed, and quickly, because business-as-usual is not an option.

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