Apple's Smartphone Rivalry with HTC Heats Up

During last year's World Series, many U.S. baseball fans had their first introduction to HTC (2498:TT), a Taiwanese company that makes smartphones. After years as an outsourcing specialist that focused on producing handsets and other electronic devices for such customers as Palm (PALM), HTC was pushing aggressively to emerge from the shadow of its well-known clients and establish a name brand of its own. As part of the campaign, HTC bought prominent space on Yahoo! (YHOO) and YouTube (GOOG), as well as a spot during a Yankees-Phillies game. The tag line of the campaign: "Quietly Brilliant."

"We do great things in a humble way," explained Chief Executive Peter Chou in an October interview at HTC headquarters at an industrial park near Taiwan's international airport. "We let our actions speak louder than our words."

HTC will need to start speaking up now because the company is getting a very different sort of publicity. On Mar. 2, the top name in smartphones, Apple, launched an offensive against its Taiwanese rival, filing patent infringement lawsuits in U.S. federal court in Delaware and also with the U.S. International Trade Commission. HTC "manufactured, imported, and sold…without license, many technologies developed by Apple and protected by patents issued to and owned by Apple and its fully-owned subsidiaries," Apple alleged in its complaint to the ITC.

Windows Mobile association hurt HTC

HTC spokeswoman Maggie Cheng referred to a company statement that said HTC "has been very focused over the past 13 years on creating many of the most innovative smartphones." The company added that it "values U.S. and international patent rights and will work within the U.S. judicial system to protect its own innovations and rights." HTC also said that it "does not believe this lawsuit poses a short-term material impact to its business nor will it affect its Q1 2010 guidance." Investors weren't so sure: HTC's Taipei-traded shares fell over 3% in early trading on March 3. The stock recovered some ground and ended the day down 2%, its biggest drop in three weeks, while the benchmark index rose 0.4%.

Apple's lawsuit could signal that HTC is back on the right track, analysts say, as the company rolls out more phones using the popular Google-backed Android operating system. HTC struggled last year, with revenue falling 9%, to $4.4 billion, and earnings dropping 25%, to $685 million. The company suffered because of growing competition in the market and its product mix was heavily slanted toward phones using Microsoft's (MSFT) Windows Mobile operating system—software that often received negative reviews from critics and users.

Negative reviews are not much of a problem for Android phones from HTC and other companies. Last year, smartphones with the new Android OS had shipments of just 400,000, 1% of the global market, says Aloysius Choong, an analyst in Singapore with IDC. This year, Android shipments should grow to 3 million and in 2011 will top 6 million, he adds. Android "is a major platform for being competitive with the iPhone operating system," says Choong. As it sells more Android phones, "HTC is not just trying to build brand among the early adapters and smartphone enthusiasts but within the mass market as well."

"strong product-cycle momentum"

As HTC's sales of Android smartphones grow, the Taiwanese company is becoming a more significant rival to Apple and other first-tier players, analysts say. For instance, the new Desire handset that HTC launched last month at the Mobile World Congress has technology that "eclipse[s] the iPhone 3GS in terms of hardware specifications, while matching the iPhone in terms of user interface and smoothness of touch-control functionality," wrote Vincent Liao, an analyst in Taipei with KGI Securities, in a Mar. 3 report.

Given the positive reaction to HTC's new phones, it's no surprise that Apple CEO Steve Jobs' legal team is focusing on the Taiwanese company. Indeed, Apple's legal strategy makes sense as a bid to blunt HTC's rise, Goldman Sachs (GS) analysts Robert Chen and Iris Wu wrote in a report on Mar. 3. "HTC's strong product-cycle momentum and record operator support this year are bringing a competitive threat to every handset maker and we believe it makes sense for competitors to take steps to protect their own market share, especially since HTC this year is likely to expand its U.S. brand footprint and bring its smartphone market to a new level."

HTC has a lot to lose if Apple wins. The U.S. accounted for 51% of HTC's sales last year, according to Bloomberg data, and as the World Series commercial and the other advertisements demonstrated, the market is an important part of HTC's strategy this year. An injunction against the company is unlikely to come this year, however, according to a Mar. 3 report by Morgan Stanley (MS) analyst Jasmine Lu, because the ITC typically takes about 15 months to complete an investigation. One risk for Apple: A win for HTC could give the Taiwanese company a big boost in its most important market. "If Apple is unable to prove its case, HTC's profile in the U.S. market may rise," Lu wrote, "as the lawsuit implies the impact from other smartphone makers, like HTC, should not be underestimated."

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