Bill Gates has a secret weapon -- a little-known Taiwanese company with the bland name of High Tech Computer Corp. Microsoft Corp. (MSFT) has long wanted to extend Windows territory to include smartphones, those souped-up handsets that can duplicate many of a desktop's functions. But Microsoft needs partners to make the gadgets, and a key one is HTC. Microsoft collects a royalty on every Windows-operated smartphone and PDA phone HTC sells to cellular operators like Cingular, T-Mobile, and Vodafone, who in turn slap their own brands on its devices. The collaboration between Microsoft and HTC is intense. "There's shared DNA across both companies," says Scott Horn, general manager of Microsoft's Mobile & Embedded Div.
What keeps Microsoft loyal to this obscure operation? Peter Chou, HTC's demanding boss. While many Taiwanese companies have a reputation for cutting costs to the bone, HTC's president often takes the expensive step of forcing his engineers back to the drawing board to get things exactly the way he wants them. For instance, Chou sent a new handset model code-named "Star Trek" back to the lab repeatedly because he wasn't satisfied with its sound and video features. "This is the fourth generation, but the first one we'll ship," he says. "I killed the first three."
Chou has declared the latest Star Trek a winner. The phone is loaded with features, including an MP3 player, camera, and e-mail, all running on a slimmed-down version of Microsoft's Windows. His Seattle partner is wowed. "You almost never know what Peter is going to show up with in terms of new designs," says Horn. Chou is especially proud of Star Trek's sleek clamshell silhouette, which he says makes it the thinnest smartphone on the market. Customers, he says, might have been disappointed by the previous versions. "If you ship mediocre [products], that cools all the passion," he says.
Passion is good for profits. While many Taiwanese rivals have been suffering from shrinking margins and stiff competition, HTC is enjoying Google (GOOG)-like growth. On Mar. 30, the company announced that last year's sales had doubled, to $2.2 billion, with profits tripling, to $356 million. That has pushed its stock up by more than 1,000% since 2003.
Most industry analysts see no sign of a slowdown, either. Although they represent just 6% of cellular handset sales today, by 2009 smartphones will rise to 26%, researcher Gartner estimates. That should help push HTC's revenues to $5.3 billion next year, with profits of $988 million, JPMorgan Chase & Co. (JPM) predicts. First-quarter 2006 sales were up 81%, thanks in part to sales of cool-looking gadgets like the Universal, a PDA phone with a swivel screen.
HTC's relationship with Microsoft began in 1997, when a team of engineers left the Taiwanese subsidiary of Digital Equipment Corp. to launch HTC. They quickly decided to concentrate on portable gadgets that operate on Windows. The Taiwanese engineers came out with one of the first Windows handhelds, which became Compaq Computer's popular iPAQ.
Then in 2002, HTC developed the first Windows smartphone. "We didn't want to go back to [making] servers or notebooks -- it was too boring," recalls David Chen, the No. 2 employee at HTC, who now oversees research and development. Over the years, engineers from HTC have worked closely with their Microsoft counterparts, and Chou himself still takes the Taipei-Seattle nonstop four times a year to meet Gates, Microsoft Chief Executive Officer Steve Ballmer, and other top Microsoft executives.
Now HTC is working that Seattle advantage more than ever. Until recently, HTC had plenty of engineers working with Microsoft but almost nobody on the ground trying to sell to American operators. So last June, Chou hired Todd B. Achilles, who had headed T-Mobile International's (DT) handset purchases in the U.S., "to really kick things off," as Achilles describes it. Today, HTC has 20 people at its U.S. headquarters, located -- of course -- in Seattle, and Achilles expects to double that number by yearend.
CENSUS BUREAU CONTRACT
While HTC doesn't reveal the size of its U.S. sales, the new push seems to be working. In January, Cingular Wireless announced plans to offer a version of the Star Trek phone. On Mar. 30, Harris Corp. of Melbourne, Fla., won a $600 million contract to provide 500,000 Windows smartphones to the U.S. Census Bureau. The gadgets, to be used by workers in the 2010 census, will be supplied by HTC. On Apr. 5, Modeo LLC, a U.S. company planning to offer TV on cell phones, announced it will be using HTC handsets for its service.
Back in Taiwan, HTC stands out from the pack in other ways. Rivals have diversified away from their original business, branching out into liquid-crystal-display panels and consumer electronics, but HTC still just does wireless devices. Other companies are trying to get into the business, but HTC's early commitment to Windows gives it a big edge. "There continues to be little competition for HTC on Microsoft smart devices," Joey Cheng, an analyst with Goldman Sachs Group Inc. (GS), wrote in a Mar. 13 report. Well, there's some: Last year, Motorola Inc. (MOT) unveiled plans for a sleek Windows smartphone called Q. The phone, expected to be available by early April through Verizon Wireless, has been delayed until later in the spring.
That leaves two big challenges for the Taiwanese company. While HTC dominates in Windows devices, smartphones using software from Symbian Ltd., the British consortium backed by Nokia Corp. (NOK), now command three-quarters of the worldwide market, vs. 8% for Windows, researcher Canalys estimates. HTC's ties with Microsoft make it difficult to develop phones using Symbian software or other alternatives such as Linux. Another threat comes from Research in Motion Ltd.'s (RIMM) BlackBerry, the gold standard for mobile e-mail. HTC is working with Microsoft to launch an alternative called Direct Push that may be cheaper for operators. HTC plans to promote its own Direct Push phones soon.
Meanwhile, Chou is looking ahead. Last year he established a new research and development division called Magic Labs. Asked to come up with ideas for completely new products, the Magic Labs engineers choose their own whimsical titles such as mechanical wizard or software magician. "We give people the freedom to do whatever they want, even on their business card," says John C. Wang, the lab's self-proclaimed "chief innovation wizard."
"We are looking at totally new categories," says Wang, who won't offer any details. But no matter what Wang and his magicians come up with, chances are that Grand Wizard Chou will send them back to the drawing board more than once.
By Bruce Einhorn, with Jay Greene in Seattle