M A R K E T I N S I G H T

HTC: One Last Chance

By Lawrence Lundy - Consultant ICT

Frost & Sullivan | Market Insight

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HTC IN TROUBLE

In a smartphone market that grew over 40% last year, HTC’s total shipments fell. In October, HTC announced the first ever loss in the company’s history, and its market capital fell to $4 billion from $33 billion. Apple and Samsung dominate the high-end and developed markets, while Huawei, ZTE, andLenovo are winning in the low-end and growth markets. HTC is struggling to react.

What is particularly troubling about HTC’s decline is that it is not a product problem. Such a precipitousdecline can usually be attributed to a specific failure. Some instances include Blackberry (blinded by itsfocus on enterprise customers) failing to see the disruptive capabilities of the iPhone and the touch-interface and Nokia backing two losing operating systems. HTC, on the other hand, produced extremelyhigh-quality devices, with the HTC One being crowned Smartphone of the Year at the Mobile World Congress in 2013. The company was never locked into a failing operating system, having produced hand-sets that run Android, Windows Phones, and even Facebook Home. With some of the best handsetson the market, offering all of the apps a customer could want, what is going wrong at HTC?

Quite simply, HTC misread the market. The market commoditised quicker than the company anticipated, and there was a lack of brand differentiation at the high end. Apple has a portfolio of high-end products as well as a luxury brand, and at the low-end, Chinese competitors produced at scale andreduced price. HTC was left to compete with Samsung in the mid-to-high end with a non-differentiatedoperating system. Samsung was able to leverage other businesses to achieve supply chain and manufacturing scale, spend $14 billion on advertising in 2013, and pay huge commissions to its channelsales partners. Meanwhile, HTC has been unable to compete. There may be opportunity for HTC One(M8) to improve performance.

No retreat downmarket

There are only two sustainable positions/forms of product differentiation in the smartphone market—the high-end brand differentiation and the low-end cost leadership. When it comes to the low-end market, a successful smartphone business requires manufacturing and supply-chain scale to produce thehandsets and a huge channel or retail presence to sell the handsets. The only way to achieve sustainableprofitability is to scale and drive down unit cost. Unlike Samsung, Lenovo, Huawei, and ZTE, HTC doesnot have the internal capacity to retreat downmarket and beat the competition.

HTC’s value proposition of innovation, design and build quality is suited to compete in the premiumsegment. As the smartphone market matures, a differentiation strategy through functionality becomesmore difficult. Most smartphones have similar features and become good enough for most customers.Innovation around camera technology with Zoe and sound quality with BoomSound are not sufficientto get customers to switch smartphones. Differentiation by functionality is a successful strategy whena market is in a growth phase, but as the market matures and becomes saturated this is no longer effective. Brand differentiation is the more effective strategy during a saturation phase. HTC failed toadapt quickly enough.

#HTChange

Last year, HTC reportedly spent over $1 billion (USD) to launch a new “Here’s to Change” advertisingcampaign, featuring Robert Downey Jr. The campaign was designed to reinvent HTC and get peopletalking about the company as a brand rather than as a specific product.

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Frost & Sullivan | Market Insight

The concept was sound; unfortunately, the adverts were poorly received. It is clear that the companyis committed to building its brand, and the campaigning around the HTC One (M8) proves this. Themarketing campaign is focused around the design and feel of the device, rather than the functionality.Peter Frølund, the Vice President for the United Kingdom and Nordics, recently admitted that the company previously focused too much on features and functionality in marketing communications.

HTC needs to more effectively communicate to the market its unique value. Design and build qualityare simple and effective messages, which will differentiate the HTC One (M8) from the Samsung Galaxyrange. HTC has the opportunity to win those customers that want a high-end device and are not inthe Apple ecosystem. HTC should target Samsung in order to gain market share. At the lower ends ofthe market, HTC struggle to match the volumes that Samsung can achieve, but this is less of an issue atthe high-end. As this market matures in the future and Lenovo, ZTE, and Huawei move upmarket, theonly protection HTC will have will be its brand. Competitors will develop the capacity to produce premium devices and will catch up quickly; however, they too will face the challenge of developing abrand. Lenovo’s purchase of Motorola may be its solution to the challenge of brand building in theUnited States.

Extending the product line

Even if HTC is able to successfully win market share from Samsung with the HTC One (M8) and developa strong brand to protect them in the future, the simple fact remains that in many markets smartphonegrowth is slowing. With only one product line, HTC has experience with a slowdown in the market. Insuch a scenario, the company must extend the product line to tablets and wearable devices to ensurefuture growth. The most obvious device for HTC would be a premium-end tablet to compete with theiPad Air, Microsoft Surface, and Samsung Galaxy Tab. Aside from R&D costs, there is no reason thatHTC cannot extend the One brand into tablets much in the same way Samsung has with the Galaxyrange. There is still a lot of growth to come from the tablet market, as the market is in an early majoritystage. Beyond tablets, HTC should extend into is a wearable device, most likely a smartwatch. Thetrend towards intimate computing, from PC to laptop to smartphone to wearables, has slowly reducedthe importance of specifications to customers, and put design front and centre. This macro-level shiftin computing can help to explain Apple’s rise, with its design-centric products, and Dell or HP’s decline,with a focus on modularity and specifications. As devices become fashion items and jewellery, companiessuch as HTC and Apple that really focus on design will have the advantage.

The service play: BlinkFeed as a platform

With a strong brand and a broader portfolio, HTC can return to profitability and maintain a sustainableposition as a premium hardware maker. There is, however, another possible strategy that HTC shouldpursue to position itself as a leader in the smartphone+ era, and that is to build a content aggregationand delivery platform. As more devices become smart, with microprocessors and built-in connectivity,there will be a role for platforms that can aggregate, manage, and add value with the data and contentthat is collected. BlinkFeed, a product started as the HTC Home Screen for Android, is the place wherethe user’s social network data and customised news is collected and displayed. The latest iteration ofBlinkFeed allows third parties to use the standard developer kit (SDK) to plug their own content intoBlinkFeed. Launch partners include Foursquare and Fitbit, meaning location and health-based contentwill be displayed in the BlinkFeed screen.

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If HTC is able to persuade developers to use BlinkFeed, it will have an extremely rich and valuable content aggregation platform. HTC can add value by providing this content in a visually appealing wayand ensuring notifications are intelligent and anticipatory. This is the same space as Google is lookingto occupy with Google Now, Apple is extending with Siri, and Facebook is building with its products.The difficulty for HTC is that all of these companies have huge reach for their products, and their platforms will collect far more data, enabling these companies to build much more sophisticated products. The only way HTC can achieve the necessary reach is to unbundle BlinkFeed from HTC devices, offering it as a standalone download on all platforms. Much in the same way Kik and WeChatare building platforms on top of Android to add value, HTC should pursue the same strategy.

Premium brand for now, Blinkfeed for tomorrow

The HTC One (M8) launch suggested that HTC learned from its previous marketing mistakes and understands the need to build its brand around design, not features. The company must continue tofocus on the premium segment and resist the urge to retreat downmarket, where it does not have thecompetitive advantage. The device and a new marketing strategy may bring some short-term success,but for the company to grow in the medium term it will need to extend the product line into tabletsand wearables. These are markets in which HTC has the internal capabilities to be successful. In orderto truly compete in the long-term, HTC should pursue a services strategy developing BlinkFeed into a device and operating system-agnostic content aggregation and delivery platform.

For more information on Frost & Sullivan’s Mobile research, please contact the author:

Lawrence Lundy: lawrence.lundy@frost.com Join our LinkedIn group: Future Growth Opportunities in ICT Follow meon Twitter:@lawrencelundy Follow uso n slideshare: FrostandSullivan

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