HTC's first net loss in a decade could spell its collapse in two years

HTC's first net loss in a decade could spell its collapse in two years

HTC's net loss of $101 million for the third quarter as reported Thursday might not sound all that traumatic, but in today's fiercely competitive smartphone market it could signal the beginning of the end for the phone maker.

Despite producing a fleet of superior smartphones such as the HTC One launched in April, the Taiwanese handset maker has suffered from marketing and brand recognition woes. Even the stylish and powerful HTC One hasn't sold as well as expected, partly because its rollout was delayed earlier in the year due to technical problems.

The $101 million loss for the quarter ending Sept. 30 marked the first such loss since HTC went public in 2002. That low-water mark could spell disaster.

"Once a company begins to generate negative operating margins from phone sales, that phone business never recovers," said Horace Dediu, an analyst at Asymco in a blog on Friday.

Dediu's perspective is not just his opinion, but is based on tracking the decline of other smartphone makers, including Nokia and BlackBerry. Both companies are in the process of being sold: Nokia to Microsoft and BlackBerry to Fairfax Financial Holdings.

After a smartphone maker hits a rough spot with a negative quarter, Dediu said it becomes a question of how long it will suffer in a "post-traumatic" period before being sold, dissolved or merged. Both Nokia and BlackBerry had about two years in "post-trauma" before their sales to other companies were initiated, while the trauma clock has recently started for HTC.

"The implication [is] that HTC will change ownership or control no later than mid-2015," Dediu said. LG Electronics could be considered an exception to the pattern, having suffered a loss four years ago and yet it still remains in the phone business and seems to be recovering.

But LG benefits by offsetting phone losses with cash from other businesses it holds, while BlackBerry and Nokia (and others) have derived most of their sales from phones.

The decline of a smartphone company after a financial quarter with a loss is unusual, when compared with traditional industries, because the smartphone industry is so dynamic and cutthroat. Samsung dominates in sales, followed closely by Apple. For sure, in some traditional industries like automobiles, a company can regain success, even after a bankruptcy.

Not so in smartphones.

"The end is closing in on [wireless handset] vendors that don't have other high-revenue generating businesses that can help them persevere over the long term in handsets," said Kevin Burden, an analyst at Strategy Analytics. As with other technology segments, "having the best technology or the best product has rarely been a guarantee for success," he said.

To add insult to injury, as HTC was reporting its third-quarter loss, Samsung said Thursday it expected record profits of $9.3 billion for the third quarter partly because of an increase in sales of its chips amid a contraction in smartphone sales.

Samsung is widely regarded as superior in marketing when compared to other smartphone makers, except perhaps Apple.

HTC's problems really started in 2012, when it shipped 31 million smartphones, according to IDC. That number was down 27% from 2011, making 2012 the first year-over-year decline for HTC.

In a year when HTC produced great Android smartphones including the One X and One S, HTC also launched two Windows Phone smartphones in September 2012, the Windows Phone 8X and 8S.

At the launch, Microsoft CEO Steve Ballmer called the 8X "truly a Windows Phone hero product," but neither appears to have sold well. The Windows Phone platform still makes up less than 4% of the smartphone market globally.

On Friday, a Bloomberg report citing unnamed sources indicated Microsoft is talking to HTC about adding the Windows Phone OS to HTC's Android smartphones at little or no cost. If true, perhaps both Microsoft and HTC will benefit, as the odds are already working against both in today's crowded market where successful product fixes can be elusive.

Putting a free Windows Phone OS atop an Android phone is also another reminder of Android's supremacy in the global market.

What started happening at HTC in 2012 with its high-quality Android phones, such as the One X and the One S, was that HTC faced Android competition from not only Samsung, but also Huawei, Lenovo, LG, Sony and ZTE.

The competition facing the HTC One hit a crucial point earlier this year when an HTC executive admitted in March that there was a shortage of camera components for the device, since the phone's camera was designed specifically for the One and production couldn't be ramped up quickly.

Delayed April sales for the HTC One then put it on a collision course with Samsung's Galaxy S4, announced in March and put on sale in April in the U.S. (It also didn't hurt Samsung that rumors of the Galaxy S4's release began eight months before it shipped.)

HTC needed more of a head start to market and sell its HTC One with its metal case that many reviewers said felt superior to the plastic case of the S4.

Having a head start of a month or two, or three over a competing product seems like it wouldn't matter in the smartphone race, but it clearly does. The point Dediu and other analysts make is that shipment delays are among a variety of crucial factors in the dynamic smartphone sales realm.

Every detail involved in selling a new smartphone needed to line up for HTC, and so far that's not happened.

Even if HTC survives beyond two more years, investors and customers will wonder if financial losses will require HTC to cut research and development budgets that could limit HTC's ability to build stylish new smartphones with features that are clearly distinct from a hoard of competitors.

Analyst Patrick Moorhead of Moor Insights & Strategy warned against drawing conclusions about HTC's demise from a single bad quarter, but said HTC will probably need a cash infusion to stay in the game. "They're not dead yet," he said.

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