HTC's nosedive blamed on scant smartphone innovation, fierce competition

The financial future of smartphone maker HTC appears dire, analysts say, even as the company has remained upbeat.

Some analysts want HTC, based in Taipei, to go private amid a crowded and competitive smartphone market so that it is easier to innovate.

Other analysts hope HTC can drastically boost its marketing dollars for its Android handsets like the HTC One M9+, released in May, to compete with top Android maker Samsung and a crowd of Chinese low-cost handset makers like Huawei, Lenovo and Xiaomi.

One analyst sees a degree of potential for HTC with an expected upcoming phone running Windows 10 Mobile, but that's hardly the majority consensus of seven analysts interviewed for this story.

"I suppose miracles can happen, but the best outcome for HTC would be an acquisition," said Horace Dediu, an analyst at Asymco, who had predicted HTC's demise nearly two years ago.

Given its recent downward market trend, "HTC's already considered hopeless," Dediu added in an email to Computerworld.

HTC basically worthless

HTC has seen a 60% drop in its stock this year, pushing its total market value to below the amount of its cash on hand, a situation that means investors view its brands and physical plant as basically worthless, Bloomberg reported late Sunday.

On Monday, HTC's total market capitalization (its stock price times outstanding shares) dropped to NT$47 billion (about US$1.5 billion), just under the NT$47.2 billion in cash that HTC last week reported it had for the end of the second quarter on June 30.

Recent trading on the Taipei Exchange has seen HTC's stock decline 4.5%.

Last week, in its second-quarter earnings report, HTC reported its revenues dropped by nearly half year over year to NT$33 billion, while operating profit fell to minus NT$5.1 billion. Earnings took a dive to a NT$8 billion (US$257 million) loss.

The company reported weaker than expected demand for high-end smartphones and weak sales in China. It also said it has begun to implement company-wide efficiency measures to reduce operating costs.

Cher Wang, HTC's chief executive, called the current market climate "challenging" in a statement. Still, she added, in a flurry of optimism that analysts found remarkable, "I am confident that our smartphone phone and connected devices strategy is the right one for HTC."

A dramatic decline in HTC revenues started at the beginning of the second quarter, when year-over-year revenues declined by 39% for April and then bottomed out at a decline of 60% in June.

HTC did not respond to a request to comment on recommendations to sell or go private.

Waiting on Windows 10 Mobile

"HTC has faced serious competition in the smartphone space, and its latest M9 smartphone didn't bring any particularly impressive improvements over the M8," said James Moar, an analyst for Juniper Research in an email. The M9, released in March, looked almost identical to the M8, other analysts noted.

Juniper expects HTC to continue to launch more smartphones in the third quarter, including at least one device (or a modified current device) to run Windows 10 Mobile. "Any decisions about the company as a whole should wait until Windows 10 Mobile comes out," which is expected this fall, Moar noted.

"If HTC can establish itself as the premier alternative to Lumia for Windows smartphones -- and it certainly as the design capability to do so -- we could see a reversal in fortunes, particularly as Windows OS can function as a differentiator in the market saturated with Android smartphones," Moar added.

Juniper estimated that HTC has just 1.2% share of the market for smartphones, placing them 10th in global vendor rankings. IDC had HTC ranked in the top 20 smartphone makers in the first quarter, with a 1.5% share.

HTC shouldn't fold up, has potential with VR Vive headset

Ramon Llamas, an analyst at IDC, argued that HTC "should not fold up and go away, even though a lot of people are predicting that," he said.

HTC's recovery will depend a lot on how nimble it can be in capitalizing on emerging markets, Llamas said.

Both Llamas and Moar said HTC's investments in virtual reality could be promising. "I'm eager to see what HTC does with its head-worn VR device," Llamas said.

"There has been quite a bit of excitement about the potential for the company's VR product, although no release date has been set for that yet," Moar added.

HTC, in its earnings release, noted that its HTC Vive VR product will launch at the end of 2015. More than 1,000 developers are working with HTC on content creation for gaming, entertainment and education apps for the Vive, HTC said.

The case for going private

Some market observers say HTC should put itself up for sale or go private to boost its chances for success.

HTC could be sold, but the main buyers in contention would be Asian-based smartphone companies, according to Jack Gold, an analyst at J. Gold Associates.

"What would the contenders gain by buying HTC, as opposed to pushing their own brand?" Gold asked.

"I think it would better for HTC to go private at his point," said Patrick Moorhead, an analyst at Moor Insights & Strategy. "Their investors obviously have no confidence in them in the future. They don't even trade above cash level, which is a bit ridiculous when you think about it."

When a publicly traded company goes private, it can avoid an involved process of courting of, and second-guessing, by investors and can operate more freely in innovating, analysts said.

"HTC is caught between Apple, Samsung and LG at the high end and the local [Asian] heroes at the low end," Moorhead said. "This is probably the worst place to be positioned. HTC should reconsider retrenching and focus on fewer geographies instead of going after everything, everywhere."

He urged HTC to partner with Qualcomm on basic smartphone designs and Sony on cameras "so they don't have to shoulder the R&D burden."

Better marketing, if there's cash

"For HTC to turn this situation around would take a lot of marketing funds and a prolonged campaign," Gold said. "But at this point, I'm not sure HTC has the resources, especially with new competition from resource-rich companies like LG, Huawei and Xiaomi."

He added, "With the profit margins of phones decreasing, it seems a downward spiral will continue for HTC."

HTC's decline "has a lot to do with the fact that the brand has lost some of its polish, and the offering is becoming incrementally better but nothing that different from the previous model," added Carolina Milanesi, chief of research at Kantar Worldpanel. "HTC would need a different design as well as a lot of marketing investment to be able to compete with the large marketing budgets that Samsung has or the strong presence Apple has."

Milanesi agreed that it would be difficult to find a buyer. "The HTC brand will not add value to an up-and-coming vendor," she said. "HTC just doesn't have anything that sets them apart from their competitors."

'No cards to play'

Dediu said when a phone maker loses its profitability, as HTC has, it can't make independent choices and provide innovations. He pointed to Siemens, Ericsson, Alcatel, Motorola, Palm, Nokia, BlackBerry, Toshiba, Panasonic, Kyocera and others that have fallen victim to this trend.

"HTC was teetering two years ago and it's surprising it's still around today," Dediu said. Minor players can win or lose based on the network operators that sell their devices. "Operators treat a declining brand as a toxic liability and shrink the available shelf space" where products are shown to customers.

"Failure has nothing to do with product quality or performance," he asserted. "The only protection from oblivion [imposed by operators] is when consumers demand a product. It's very difficult without either a clever marketing campaign or differentiation in the Android ecosystem. Since Android vendors can't create ecosytems of their own, they have to out-market the competition."

In the case of Samsung, it has deployed "tens of billions" of marketing dollars to gain its top place, Dediu added. "That approach is impossible for smaller companies."

Dediu was perhaps the most pessimistic about HTC of seven analysts.

"HTC has no cards to play," he said. "Android offers no differentiation; components are widely available to all hardware makers; it does not have billions to spend to create a brand...I don't see anything that HTC has that someone in China or India can't build on their own."