HTC Isn't Dead Yet - But It Is Feeling Mighty Ill

By many accounts, HTC is the third best smartphone manufacturer in the world. It creates quality devices that consumers like and can go toe-to-toe with anything that rivals Samsung, Apple, Motorola or Nokia throw at it. Yet HTC is slowly dying. As the company's profits are whittled away, the likes of Apple and Samsung are building an impenetrable duopoly at the to of the market. 

Sure, the HTC One series sits at the very top of the smartphone market and HTC's Windows Phone 8 devices rival the quality of those from Microsoft's preferreed partner Nokia. But HTC is struggling to sell those devices and continues to lose money quarter after quarter - even as Apple and Samsung just grow stronger.

Headed For A DeathWatch?

The question is whether or not the decline is irreversible. Is HTC one strong quarter away from being a major player again? Or is it a couple more poor quarters away from earning a dreaded spot on the ReadWrite Deathwatch list?

HTC's margin for error continues to shrink. For the third quarter, HTC’s revenue fell 23% from the second quarter and 48% from Q3 2011. Its operating profits were just $167 million, down 76% from the same quarter a year ago. (At least it wasn;t a loss, though.)

HTC’s profits have taken a hit due to failed investments, such as Beats Audio and ImageSense, that have failed to entice users away from competitors. HTC also has not released a major device since the HTC One X on AT&T and the EVO 4G LTE on Sprint in May/June. The release of the One X was held up by a patent injunction from Apple, which significantly reduced sales and the company’s second-quarter profit. By the third quarter, consumers were beeing wooed by the Samsung Galaxy S 3 and then the iPhone 5 - and HTC didn't have anything new to offer as we approach the critical Holiday shopping season.

HTC's Strengths & Weaknesses

The HTC One series are high-quality devices. The company has spent significant marketing dollars in the U.S. (if not quite as much as Samsung and Apple). The company shipped 7.3 million smartphones last quarter, according to IDC, good for fifth behind Samsung, Apple, RIM and ZTE.

But HTC's profit margins are dangerously low. In the third quarter, its margins were 7% and its margins are expected to be around 1% for the holiday season. That makes it difficult for HTC to mount effective marketing campaigns around new devices or spend big bucks on meaningful partnerships able to cut into Samsung and Apple’s lead. HTC’s measly profits come down to three factors:

  1. Poor investments that have not acquired new users.
  2. Lack of an aggressive deployment strategy for its high-end smartphones.
  3. The fact that Apple and Samsung eat the lion’s share of global smartphone revenue.

The first two problems can be remedied if HTC is smart with how it develops its next series of phones and pushes them out to cellular carriers. And that will help with the third problem, too.

A Dangerous Situation

The Apple and Samsung duopoly at the top of the smartphone market is not just dangerous for HTC, it spells trouble for every other smartphone maker. Nokia and RIM – two companies that have fully earned their Deathwatch positions – have already felt the pain of competing with the iPhone and Galaxy devices.

This is no longer an Android versus iOS issue. This is about whether or not there will be room for any smartphone makers apart from Apple and Samsung. Consumers like choice, especially when it comes to top-of-the-market devices. Competition creates diversity and diversity begets creativity and innovation. If the entire mobile ecosystem comes down to a profit race between Samsung and Apple, the whole market will likely suffer.

So, does HTC have a chance to turn things around? The Apple and Samsung duopoly looks strong for the short term. So as of today, HTC is on notice: Find a way to become relevant again or the Deathwatch awaits.