HTC Corp. in 2012 4. 5.
HISTORY
HTC‘s initial business plan to manufacture notebook computers had a rocky start. One problem led to another, involving high production costs, technical glitches, and a lack l ack of brand recognition. Wang to convince Cho to focus instead on handheld, computerlike devices.
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Wang discovered that the software giant (Microsoft) had developed Windows CE, a new platform that could run on smaller PC devices. A year later in 1998, Chou‘s team proudly created the world‘s first Microsoft pocket-size PC.
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A major breakthrough then came in 2000 with the iPAQ, a PDA that HTC engineered and designed for Compaq Computer. The success of the device enabled HTC to post its first profit in 2000 and go public two years later on the Taiwanese stock exchange.
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The company subsequently pursued partnerships with chip suppliers like Qualcomm and Texas Instruments (new product development efforts started to shift towards the mobile telecom market) A valuable opportunity to learn about software came through Handspring, which recruited HTC to help design and make the popular Treo smartphone.
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CONTRACT MANUFACTURING BUSINES
HTC‘s contract manufacturing business in the early 2000s was largely categorized into two main segments: o One was the original design manufacturer (ODM) business for branded handset companies o The other segment was producing phones for wireless network operators. Company focused on customization to really set HTC apart from other contract manufacturers
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Carriers embraced HTC as they gained a greater sense of control over their product portfolio. ―Because HTC were bending over backwards to deliver, you wanted to make your relationship with HTC work w ork and help the underdog become successful.‖ Operators wanted low churn rates and HTC provided that
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Expansion to multiple major operators ; BRITISH TELECOM, ORANGE, VODAFONE, T-MOBILR, SPRINT, VERIZON. Profits margins rose as high as 20% compared to the industry‘s average of around 5% in the mid-2000s. m id-2000s. The early commitment to Windows had paid off with HTC shipping over 70% of the world‘s Windows Mobile smartphones by 2006. Yet the landscape of the mobile phone industry was rapidly shifting, prompting a change in HTC‘s overall business strategy. NEW CEO AND THE ROAD TO BRAND
“If you really want to capture the value of innovation, you must have a brand identity.” –Peter Chou, new CEO Taiwanese competitors were rapidly catching up in the ODM market (original designer manufacturer); Palm and HP, two of
HTC‘s biggest non-operator customers. Peter Chou took over as CEO. He was ambitious, energetic and extremely tech-savvy.
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Engineers were encouraged to openly question and to collaborate with each other, breaking away from a more bureaucratic, hierarchical research structure. Andy Rubin, Google‘s senior vice president of mobile, recalled complaining that a new handset model needed a better physical keyboard to type. Five days later, Chou handed Rubin a modified model with a new backlight and grooves between the keys. ―I just couldn‘t believe it,‖ said Rubin. ―The speed at which he can move—I‘ve never experienced it anywhere else.‖
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Perhaps more importantly, Chou set out a new, bold initiative for HTC—to brand and sell handsets under the company‘s own name o ―without some sort of brand, our business, b usiness, international growth will be limited.‖ Marketing was a major concern, as HTC lacked the scale and budget to launch an aggressive worldwide publicity blitz like the ones Samsung and LG had pursued to gain greater brand recognition.
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HTC‘s official brand strategy kicked off in 2007 with HTC branded phones available for sale in Europe and Asia. Through the $15 million acquisition of Dopod, a wellestablished brand name in Taiwan with wi th a strong presence in Asia, HTC also started selling branded products in i n China.
Product Innovation
While HTC ramped up its marketing expenditures, Chou and Wang believed that the key to creating a powerful brand was w as to produce cutting-edge smartphones. New product designers were recruited and an internal research center called ―Magic Labs‖ was set up to drive innovation, especially in terms of software and product design. In fact, Magic Labs had come up with an exciting new technology—a touch-screen interface. A smartphone featuring this innovation, the HTC Touch, was targeted to launch by mid-2007.
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Then the unthinkable happened. In January 2007, Apple unveiled the iPhone—equipped with its own touch-screen technology.
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Positive market responses to the Touch series phone gave HTC confidence to completely exit the traditional contract manufacturing business and keep pursuing its own brand strategy. Unveiled the HTC Touch Diamond providing a more solid mobile internet experience with a quicker proce ssing speed… Reaching Out to Google
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Amid praise for the Touch Diamond, product reviews inevitably addressed the shortcomings of the Windows Mobile platform. HTC and Google were to make the world‘s first handset to run on Android. THE MOBILE DEVICE INDUSTRY
Mobile devices had experienced explosive growth over the
previous decade While mobile phones represented the most popular mobile device product, the category had extended into different areas as well, including media players, e-readers, and tablets.
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Verizon Wireless and AT&T —collectively owned 66% of the $160 billion market as of Q1, 2011 While many operators around the world would sell consumers a SIM card, which could be used in any compatible phone, U.S. wireless networks were ―locked‖; o in essence, a Verizon customer could only use a phone approved by Verizon on Verizon‘s network.
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In contrast, about half of the European market was ―unlocked‖;; a mobile phone could be used on multiple carrier networks. Smartphones
While market saturation and price wars had led to weaker profit margins across the industry, smartphones became the most profitable and fastest growing segment within the mobile device industry.
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Worldwide, demand was anticipated to surpass one billion units and represent half of the entire mobile phone market by 20152 In the United States, smartphone usage had already picked up more quickly than other regions in the world with 40% of all mobile phone users owning a smartphone as of July 2011.
The smartphone market was largely defined by two business approaches: Vertical and Horizontal o Vertical a company exerted control over both the hardware and the software. This approach was taken in various degrees by Apple and RIM o Horizontal similar to the PC market; different companies specialized at each level of the value chain. HTC and Motorola
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Smartphone Operating Systems and their Ecosystems
In 2012, most smartphones were associated with two dominant platforms: Google‘s Android and Apple‘s iOS
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Apple’s iOS Competitors‘ smartphones were gauged by how their functions and ease of use measured up to the iPhone, which became the benchmark for the industry. As of Q3, 2011, iOS owned 15% of the worldwide smartphone OS market iOS‘s growth had also strongly benefitted from Apple‘s decision to switch from exclusive to multiple carrier arrangements in most countries. Sprint, for example, agreed to pay Apple $15.5 billion billi on over four years for the iPhone; ; Sprint‘s CEO Dan Hesse noted that the deal was ―... worth every penny.‖
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Google’s Android Free, and open to customization. As the number of Android phones exploded, developers saw a market potentially larger than Apple with fewer restrictions. The combination of such factors powered the platform to
become the most popular smartphone OS, securing 52% of the worldwide market as of Q3, 2011. 33.
Several versions of the OS simultaneously sim ultaneously floated around the market. Market research in October 2011 indicated that at least 16 out of 18 Android phones in the U.S. would never get the current version of Android It was ultimately up to handset manufacturers and carriers to pass along the updates to the end-users, but bu t they lacked the incentive to do so once a smartphone was sold. Fragmentation ignited problems for developers who frequently ended up releasing apps that ran on outdated software
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Microsoft’s Windows Phone Windows Mobile, the predecessor to Windows Phone, existed in the market for years before iOS or Android came along. But Microsoft‘s platform faltered as smartphone users actively sought platforms that provided easy web access, and functionality as both a work and a personal entertainment device. The UI was criticized for being clunky, difficult to use, and slow to evolve. The OS also came with a licensing fee — estimated at $8 to $15 per phone.
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Windows Phone debuted in 2010. Reviewers praised the vastly improved UI and tight integration with Microsoft Office, but the platform did not take-off. Industry observers commented that ―No matter how good Windows Phone 7 gets, it doesn‘t stand a chance unless it can
get more app developers on board.‖
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Smartphone Handset Manufacturers
Nokia Finland-based Nokia was the world‘s biggest handset manufacturer by volume with a strong international customer base. Business in the next decade told a different story as the company found itself caught in a downward spiral for missing the initial smartphone revolution The first Nokia smartphone to run on Microsoft appeared in Q4 2011. While Microsoft and Nokia proclaimed their satisfaction with early sales, Nokia‘s market share continued to fall rapidly.
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Samsung Electronics Within the smartphone segment, despite its late entry in the market, Samsung propelled forward worldwide with slick new designs on the Android platform. In 2011, Samsung hit a homerun with its flagship Android phone, the Galaxy S2; it broke Samsung‘s own sales record by reaching ten million units within five months. Analyst reports estimated that smartphones were generating as much as 80% of the mobile division‘s operating profits
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Others New competition emerged from Chinese companies like Huawei and ZTE. They were producing cheap but relatively capable Android phones (below $100) that were selling well in China and other emerging markets. Other companies mentioned in paragraph…
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THE PATENT WARS
By 2012, intellectual property had become the newest battlefront for smartphones Apple, in particular, triggered an aggressive round of litigations against makers of Android devices, starting with HTC and then Samsung Most of the patents in question related to the iPhone‘s interface and hardware. Then in December 2011, the U.S. International Trade Commission (ITC) ruled that HTC was violating one out of the ten Apple patents in question. An import ban on the affected products would go into effect in April 2012, unless HTC removed the intellectual property from its phones.
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Microsoft entered into negotiations with both Samsung and HTC, claiming that they infringed on its patents related to mobile phones.
STRATEGIC CHALLENGES
HTC had grabbed significant market share in smartphones by offering a unique UI, different products for every carrier with a wide range of form factors (with or without keyboards, different sizes, etc.), moving early in 3G and 4G phones, and most significantly, being first out of the block with Android. But by 2012, many competitors were offering Android phones with the latest technologies. Samsung surpassed HTC to become the number nu mber one vendor of Android phones in the world.
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Financial results indicated that HTC‘s sales volume was still robust, yet operating margin had slipped to around 15%, nearly a ten percentage point drop from 2007 ASP was being affected as well…operating marg ins were being
affected by an increase in HTC‘s marketing expense.
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Even so, intense competition meant that HTC had to somehow differentiate itself to stay ahead, leading the company to address multiple strategic challenges going forward. Product Portfolio
HTC executives re-examined the product portfolio and searched for ways to drive down costs. One obvious target was to streamline the number of products it sold. HTC had nearly 50 different models across the globe with an average product cycle of nine months. m onths. o The company‘s highly customized approach created additional costs, such as reducing the number of common components that could be used among HTC devices. o ―We are a very customer centric company. But we have to strike a better balance between producing dedicated specific products for customers vs. having a few iconic products of our own.‖ Costello estimated that fewer handset models would ultimately lead to an extra 10% in savings through bill of materials.
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Ideally, HTC wanted ―hero‖ phones that could drive volume to create greater scale. For instance, Samsung took one major base model, the Galaxy, and drove it across the board, making only slight modifications for different markets.
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Nonetheless, HTC took the first step to rationalize its product portfolio with the introduction of the One series – its intended
hero product – in Spring 2012 o ―HTC One X brings so many firsts for both company and industry, that a climb to the top of the food chain may be a walk in the park‖
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Differentiation
HTC had taken a number of distinct paths to drive differentiation for its products but stood out the most from other Android manufacturers with HTC Sense o ―Sense is all about a bout making our phones more personal,‖ claimed CMO Wang. 42 For example, Sense allowed a user‘s home screen to be customized—an email-focused interface for the work week, and then configured to a social network-oriented screen for the weekend
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HTC was second to Apple in terms of users‘ overall satisfaction rate in several categories with more than 62% of its consumers willing to re-purchase an HTC phone o ―HTC Sense has clearly offered not only a differentiated experience; but an experience that is remarkably more capable and sophisticated than Android.‖43
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HTC president for global sales and marketing, claimed that, o ―In the future, it‘s all about building a ‗wow‘ user experience around the whole ecosystem, such as how we are integrated with third party apps, content, and the cloud. To build a more unique experience, HTC had spent more than $700m on acquisitions in 2010 and 2011. o (See article for examples of M&A‘s)
Although HTC was pushing forward with new products, Samsung was making significant strides, showing the biggest increase in consumers‘ re-purchase intent More alarmingly, another market survey indicated that a small but growing number of HTC owners also planned to switch to Samsung, lured by the popularity of the Galaxy phone and the power of the Samsung brand.4
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HTC had made significant process in growing its brand, breaking into the ranks of the top 100 global brands in 2011. o Yet competitors are still enjoying higher global brand awareness… o HTC saw that an increase in its brand awareness from the first half of 2011 was not translating into greater brand ownership for an HTC phone o See paragraph for examples…
OS Strategy
As of 2012, HTC had become one of the few top smartphone manufacturers that was not forming an alliance or exploring its own OS.
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Within the Android ecosystem, HTC was no longer Google‘s
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most preferred partner. Major new iterations for Android were introduced into the market through a ―lead device,‖ known as the Google Nexus smartphone series. HTC had manufactured the first Nexus phone, but Samsung had been selected to make the next two. Tablets
The iPad‘s smashing success sent more than 20 major manufacturers of mobile devices, PCs, and eReaders all rushing to make their own tablet. HTC was no exception and entered the race with the HTC Flyer in 2011, a seven inch, Androidbased tablet, initially priced at $499. o After tepid sales results, Best Buy cut the price to $299 to move inventory. o
As one analyst observed, Android tablets‘ appeal was hurt by ―. . . high prices, weak user u ser interface and limited tablet applications.‖51
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Although tablets had created a dent in laptop sales, they were not expected to affect mobile phone sales in the future. 56 Still, some HTC executives viewed tablets as a natural extension of the smartphone business and believed that it should be an important product category for the company o ―HTC has to be in tablets,― Mackenzie argued, ―Young consumers, especially those in developed markets, are more likely to buy a tablet before a smartphone given that they don‘t have to pay for data plans.‖ Media tablet sales were expected to experience stellar growth through 2015 to reach sales of 326 million units, more than a five-fold increase from 2011.
