Has HTC peaked?

The Taiwanese smartphone manufacturer sees revenue fall by nearly 20 percent in November as it struggles to regain some of its swagger.

Inside the HTC Rezound
HTC and Verizon Wireless drummed up some attention for the Rezound launch, but the Motorola Razr is Verizon's flagship phone. Sara Tew/CNET

HTC may be showing cracks.

The Taiwanese smartphone manufacturer said today that it saw November sales fall nearly 30 percent to NT$30.9 billion (roughly $1 billion) from a year ago. That follows its warning from last month that it wouldn't see any sales growth in the fourth quarter .

Those are just the latest cracks in a company that over the past year has seen its Android crown seized by a rival as support from its carrier partners receded, all while suffering several legal setbacks in its patent battle against Apple. While HTC still enjoyed strong performance for much of the year, the sudden turn for the worse was troubling to say the least.

So what's going on here? HTC has made huge strides building a brand and successfully capitalizing on the increasing popularity of Android. It has managed to set itself apart with its Sense user interface, which adds a splash of consumer-friendly usability on top of the stock Android operating system. By being especially accommodating to the carriers--moving quickly on new technology, adding new features, and tweaking design specs as requested--it has enjoyed more of their support over the years.

But for all of that, HTC is discovering that competition among Android handset makers is rough and consumer tastes are fickle. Samsung Electronics, propped up by the massive global success of its Galaxy S franchise, overtook HTC as the preeminent Android partner, both in sales and in perception. When discussing smartphone leaders, Apple and Samsung dominate the conversation.

"HTC can still remain strong in the smartphone space but that is going to be more difficult for them as they don't have as strong of a brand or as big of a checkbook to fund key operator promotions as some of their competitors," said Gartner analyst Hugues de la Vergne.

Certainly, HTC isn't in a financial jam, and given the number of products it churns out, volume and sales should continue to be healthy. But the rapid ascent that HTC has enjoyed over the past few years may already be starting to slow, and its unlikely that the company will take back its leadership role from Samsung.

The company is focusing on launching more flagship smartphones next year , and Verizon Wireless told CNET last week that it plans to provide further support to HTC .

"We will focus on the product next year, better and more competitive," Chief Financial Officer Winston Yung told Reuters. "Other than new LTE phones for the U.S. market, we also have phones for the global market. We will launch some worldwide flagship products. We're confident in them."

Limited resources Over the past few years, HTC has spent a majority of its marketing budget building out its brand and establishing an identity. But in the meantime, better-known smartphone manufacturers have used their resources to market specific products.

Take Samsung. The company was much slower than HTC in adopting Android, and its first wave of smartphones didn't stand out from the pack. But two generations of smartphones--and a lot of marketing and carrier support--later, and the Galaxy S is an established franchise enough to excite consumers in markets around the world. With the Galaxy S II, you know you're getting Samsung's best shot at a smartphone.

Motorola Mobility had the luxury of utilizing its well-known brand--as well as a lot of help from Verizon--to market specific products. The Droid RAZR, for instance, calls back to a time when Motorola was a dominant player in the cell phone business.

That's less the case with HTC. The company has a wide number of products in the market, and collectively they stand out with the Sense software. But individually? Few of its devices will stand out in the consumer's mind. That's because its marketing dollars have been spent building the HTC name, and not any of the specific products. It's no coincidence that LG is struggling with the same problem, as it has few noteworthy smartphones to promote individually.

HTC has also used jumping into new technology as a way to distinguish itself. It worked with the T-Mobile G1, which was the first Android smartphone. The company saw more success with the Evo 4G, which was the first WiMax phone. But this year, the company's adoption of new technology didn't fare as well.

HTC rushed out with the Thunderbolt, the first 4G LTE phone for Verizon. It suffered from horrible battery life and problems maintaining its high-speed connection, somewhat hurting the company's reputation. The Evo 3D's 3D capability, meanwhile, turned out to be a non-starter.

Legal woes On the litigation front, HTC has had a rough few months. The U.S. International Trade Commission had made an initial ruling that HTC had violated two of Apple's patents, and is scheduled to make a final judgment next week, which potentially could ban its phones from being imported into the U.S.

HTC did obtain patents from Google in its defense against Apple . The company has amended its various complaints against Apple to reflect the additional patents.

While HTC's executives deny that it's a distraction, the constant legal squabbles have to be a drain on the company's resources.

HTC has also made a few puzzling acquisitions. It opted to acquire S3 Graphics-- which is partly owned by Chairwoman Cher Wang --to obtain patents that Apple had allegedly been violating. But the ITC dismissed the allegation, negating the value of the $300 million takeover. The company is attempting to back out of the deal .

HTC also acquired a majority stake in Dr. Dre's Beats headphone company in another head-scratching move . In the U.S., the first major fruit from that deal comes in the form of the Rezound, a smartphone packed with Beats-branded earbuds.

Carrier support waning? HTC's declining prominence can be seen in how the carriers position its products. While HTC and Verizon Wireless held a splashy event in New York to promote the Rezound, Verizon has said it favors the Motorola Droid RAZR as its flagship device. At AT&T, it has no new products aside from a Windows Phone, which haven't exactly been hot items. At T-Mobile USA, its Amaze has to share flagship status with the Samsung Galaxy S II. At Sprint Nextel, the Evo 3D's flagship status has since been relinquished to the newly obtained iPhone 4S, which is likely eating into HTC's share at Verizon and AT&T as well.

Compare that to a year ago, when HTC was riding high with flagship phones at three of the major carriers; the Droid Incredible at Verizon, the Evo 4G at Sprint and the HD2 and myTouch franchise at T-Mobile.

Even Google has noticed; while Google's early flagship Nexus One was made in partnership with HTC, Samsung has built the last two, including the upcoming Galaxy Nexus. While the Nexus One was Google's failed experiment to sell directly to customers, the Nexus S has been a commercial success, and the Galaxy Nexus is expected to sell well too.

Some critics have noted that HTC's current phones lack the flourish of past designs. That may be due to the loss of Horace Luke, the company's chief innovation officer, who quietly left in April. Luke was credited with nurturing a "culture of innovation" there.

For now, many are left wondering how HTC can get its swagger back. It's unclear whether that will ever happen.

"I do think that HTC has more challenges than opportunities ahead," said Gartner analyst Ken Dulaney.

 

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