Microsoft-HTC Draw Closer to Create Rally in Smartphones:

Microsoft Corp. (MSFT) Chief Executive Officer Steve Ballmer, on a swing through Taiwan this month, made time to meet with Peter Chou, his counterpart at HTC Corp. (2498)

On Chou’s agenda: the low screen resolution that prompted HTC to scrap plans for a bigger smartphone using Microsoft’s mobile software, a person familiar with the matter said this week.

Ballmer needs to stay on Chou’s good side. HTC could help his company vie with Apple Inc. (AAPL) and Google Inc. (GOOG) in the 718- million-unit smartphone market, where, according to researcher IDC, Microsoft has only a 2.6 percent share. After trying to gain ground for a decade without success, Microsoft needs HTC -- which has drawn praise for its current Windows devices -- to help it win over consumers with a hit product.

“HTC is important to Microsoft because they put together one beautiful smartphone and when you have that kind of DNA, you have a company that can boost general acceptance and market share,” said Ramon Llamas, an analyst at IDC. “If you want bigger market share, getting multiple vendors is the name of the game.”

Microsoft is also relying on Nokia, which became the lead Windows partner last year through a multibillion-dollar marketing agreement, to expand in smartphones.

To strengthen ties to HTC, Ballmer and Chou meet in person a few times a year and exchange phone calls and e-mails frequently, according to a person with knowledge of the matter. It helps that Taoyuan City, Taiwan-based HTC runs its U.S. operations out of Bellevue, Washington, a Seattle suburb next door to Redmond, where Microsoft is based.

HTC Struggles

In other evidence of the closer cooperation between HTC and Microsoft, the HTC 8X is shown in about 70 percent of Microsoft’s advertising highlighting a specific phone, said Jason Mackenzie, HTC’s president for global sales.

Both companies need a hit. Microsoft, two years after completely overhauling its mobile software, risks being shut out of the growing market by smartphones based on Google’s Android software and Apple’s iPhones.

HTC, which also makes Android phones, in October forecast its lowest sales in 11 quarters as it loses Android customers to Samsung Electronics Co. HTC had a 4.7 percent share of the global smartphone market in the third quarter, IDC said, down from a peak of 10.7 percent in the second quarter of 2011.

Samsung dominated the Android market with 41 percent share of those phones in the third quarter, IDC’s Llamas said. HTC, with 5.5 percent, is in a battle for the No. 2 spot with seven other vendors, he said.

Android Dependence

HTC can’t afford to lose further ground. Chou decided to scrap plans for a large-screen Windows smartphone because a low- resolution version wouldn’t have been competitive, a person familiar with the project said this week. That left HTC with only Android for phones measuring larger than 5 inches diagonally, and fewer products to claw back share from Samsung, which offers Galaxy Note devices with bigger screens.

“Windows Phone is very much a blue ocean -- there’s no dominant player,” Michael Gartenberg, an analyst at Gartner Inc., said in an interview. “The opportunity for HTC to become the flagship device would give them a chance to not be as dependent on Android.”

Still, since HTC released the new Windows-based phones last month, its monthly revenue has increased. Sales in November jumped 23 percent from October, ending a four-month revenue decline. HTC is on track to meet its fourth-quarter sales forecasts, in part because of demand for new models such as the Windows Phones, Jasmine Lu, an analyst at Morgan Stanley, wrote in a Dec. 10 note.

‘Go Big’

The relationship between Microsoft and HTC goes back at least a decade. HTC made the first-ever smartphone with Windows in 2002. It also made the first phone showcasing the Android operating system, and for the past several years, HTC has devoted almost all of its marketing and its best designs to the software made by Microsoft rival Google, said Mackenzie.

“We just weren’t promoting it,” Mackenzie said of Windows Phone. “We just didn’t see the opportunity to get massive sales. What changed is with Windows Phone 8, we saw a massive opportunity.”

Ties between the companies got a restart in February, when Mackenzie and Chou met in Barcelona with Ballmer and Microsoft Windows Phone chief Terry Myerson. Ballmer urged HTC to “go big” on using Windows Phone, Mackenzie said. HTC came prepared, walking into the meeting with prototypes that, for the first time in years, reflected high-quality design work.

‘Ballmer’s Phone’

“They were devices that were going to be unique to Windows Phone,” Myerson said. “I remember thinking they were beautiful devices.”

Engineers from both companies soon began meeting weekly if not more frequently, and officials jointly started pitching wireless carriers on selling the devices, Myerson said. HTC also opted to use the Windows Phone brand in the name of its products -- something Nokia (NOK1V) hasn’t done with its Lumia lineup.

Microsoft’s Myerson even found himself dragged up on stage by HTC’s Chou to sing karaoke at the W Hotel in Taipei in June, at a dinner celebrating the company’s 15th anniversary dinner.

HTC has been rewarded for its efforts. When Microsoft decided to show “Ballmer’s phone” at an October event to unveil Windows Phone 8, it was a red HTC 8X with tiles showing updates from Ballmer’s wife, Connie, as well as Microsoft Chairman Bill Gates.

Nokia Ties

As Microsoft and HTC forge closer ties, at least one company that stands to lose is Nokia. Through last year’s deal, Nokia switched its smartphones to Windows in exchange for marketing and development funds. That agreement was crafted by Nokia CEO Stephen Elop, a former Microsoft executive.

Nokia, which posted six straight quarterly losses totaling $6.3 billion since the move to Windows, said its relationship with Microsoft has enabled “Nokia to offer truly differentiated products.”

“We view Android and Apple as our primary competition,” said Doug Dawson, a spokesman for Nokia. “As such, we welcome the momentum behind the Windows Phone ecosystem.”

Still, Mackenzie says the bulk of Microsoft’s ads that focus on just one handset will feature the 8X, including a recent spot with musician Gwen Stefani showing her HTC phone. The smartphone has received several positive reviews.

“The 8X is a cutting-edge phone in virtually every way except maybe capacity,” said Gartner’s Gartenberg. “It’s a thin and light device. The Nokia 920 has a lot of high-end features but it’s a polarizing device. It’s huge and it’s heavy. It’s like the SUV of phones.”

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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