News

A few days ago when hanging out with a friend, I got a chance to play around with HTC One, the newest and shiniest Android phone on the market (of course until it wasn’t when Sony launched its Xperia Z.) I was quite impressed by the build quality, the industrial design and the beauty of the device. Despite its supersize — I have normal people’s hands — it did feel like something I would want to buy, especially if I was picking amongst the ever increasing array of Android smartphones.

Maybe, I thought to myself, HTC was going to make a comeback. I mean, these were the guys who jumpstarted the Android smartphone ecosystem in partnership with Google and T-Mobile USA. These were the guys who innovated fast and even came up with their own skin for Android. They pushed the design and speed envelope. They had edgy marketing. They were the first movers and their early sales were red-hot.

And yet, when they spent $300 million on headphones maker Beats by Dre, it became obvious that this company was going to run into some stormy weather. Of course, it was an idea that didn’t go down well with many of its fans and its investors — HTC eventually sold back half its stake.

This (relatively) tiny Taiwanese company was going to get squeezed by cheaper Android phones on one end and Samsung on the other. In fact, as far back as 2010 we have argued that the real smartphone battle was going to be between Apple and Samsung. And when it comes to hardware, nothing really has changed. It is Apple vs Samsung.

According to Strategy Analytics, Samsung now accounts for about 95 percent of the total operating profits of the global Android business. During the first quarter of 2013, Samsung had an operating profit of $5.1 billion, while LG made $100 million and all other vendors (HTC, ZTE, Huawei, Sony and no-name brands) collectively made $100 million in operating (not net) profit.

It is hardly surprising to see that HTC is in trouble. A report in The Verge suggested that HTC’s chief product officer, Kouji Kodera, has left the company. The report also implied that other senior executives are leaving the company. The most recent high-profile bet — the HTC First, which was launched in partnership with Facebook — has been a flop and one wonders if the company really has the wherewithal, both intellectual and financial, to undertake such experiments.

I am not sure if people remember, but Motorola was another company that found itself on a Sysephian quest and eventually found a $12 billion bailout from Google. The trouble with the smaller Android players is that despite all the talk about a PC-like ecosystem of sourcing components and using others to assemble their products, it is fundamentally not true.

Apple has used all the billions in the bank to lock up supplies for processors, memory chips, radios, displays and other such components at favorable prices. It has worked out long term manufacturing arrangements with the likes of Foxconn. It has its own retail outlets. While most of us try and focus on Apple’s hardware and software integration, we forget that it is software, hardware and supply chain integration that allows the company to sell 37.5 million phones in the most recent quarter. It allows the company to make phones that meet the needs of different carriers.

Samsung too is an integration beast. It owns memory chip plants. It makes its own processors. It makes displays and it owns the factories. It has the unique ability to churn out new products faster than anyone else in the consumer electronics business and thus overwhelm the market with dozens of models. Just look at the many flavors on its latest Samsung S4 device and you start to see that this is a game only for big boys.

The only other company with Apple and Samsung-like manufacturing oomph was Nokia. I say was, because they are losing a grip on the phone business. However, their supply chain and manufacturing was legendary. It still is. I have yet to see a badly made Nokia smartphone — I just see smartphones with an OS that makes no sense. I bet if they entered the market with their own flavor of Android — something we suggested in 2010 — they would instantly become number three in the smartphone market, behind Samsung and Apple.

Sadly, smaller players like HTC can’t compete with the manufacturing and marketing capabilities of Samsung. The HTC One, which is an awesome looking device, was hit by manufacturing issues earlier this year. So it needs to rethink its strategies. HTC needs to become comfortable with the idea of being a one or two product company, and hope that it can keep comping up with winning products every single time. Even that is a long shot. The marketing budgets of Samsung and Apple are enough to finance some small nations.

HTC’s story is all too familiar to those who have studied the first mover phenomenon. A story in Economist points out that innovators captured seven percent of their market over time. THey point to various examples like White Castle who invented the idea of fast food burger joint but McDonalds is the big daddy now. Apple and Samsung are going through some of that as well. The lesson here for everyone — even tiny startups — is as Scott Anthony once perfectly said (and I paraphrase him): no one remembers who was leading the race midway through, and everyone remembers who finished first. And in order to finish first, a lot has to go right.

So where do companies like HTC go? And sad as it might be, perhaps nowhere. I am going to do my bit to give them some support — I will buy that HTC One, just because it is actually a great little device. It truly is.

Source