HTC Patent Tweak Seen as Too Little in Phone War

By Tim Culpan - Dec 21, 2011 7:20 AM GMT+0700

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Dec. 20 (Bloomberg) -- Greg Harper, president and founder of Harpervision Associates Inc., talks about Apple Inc. winning a patent-infringement case against HTC Corp. in its efforts to prove that devices running Google Inc.'s Android operating system copy the iPhone. Harper, speaking with Scarlet Fu on Bloomberg Television's "InsideTrack," also discusses the challenges facing Research In Motion Ltd. (Source: Bloomberg)

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Dec. 20 (Bloomberg) –- Christopher Nicholson, director and lead equity analyst at Oraca Ltd., discusses Apple Inc.'s patent ruling against HTC Corp. and the implications for the U.S. smartphone market. He speaks with Owen Thomas on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

HTC Corp. (2498) Asia’s second-biggest maker of smartphones, can tweak the technology in its handsets to avoid a U.S. trade agency ban. Dealing with the threat from Apple Inc. (AAPL)’s and Samsung Electronics Co. (005930)’s new devices may prove tougher.

The U.S. International Trade Commission said on Dec. 19 that beginning in April it would ban the sale of HTC phones that infringed an Apple patent on so-called data-detection, such as touching a phone number or an address in an e-mail to dial or find the address on a map. HTC responded by saying it will remove the offending features from its phones.

Keeping the handsets on the market solves HTC’s immediate challenge after becoming the top selling vendor in the U.S. Samsung’s Galaxy Nexus and Apple’s faster, ‘Siri’-enabled iPhone hit the market within the last quarter, posing a new threat to HTC’s place in the $262 billion global mobile-phone market. The Taoyuan, Taiwan-based company is forecast to post its slowest annual sales-growth and first profit decline since the 2009 economic crisis.

“Things were going great at HTC two years ago, their products were so successful and they were the hottest company in mobile phones,” said Will Stofega, an analyst at researcher IDC in Framingham, Massachusetts. “They didn’t keep the momentum going, and now we’re seeing products that haven’t wowed audiences as much.”

HTC’s revenue will climb 11 percent next year and profit will drop 6.7 percent, according to analysts’ estimates compiled by Bloomberg, marking its worst financial performance since the 2009 global economic crisis. HTC’s revenue climbed 50-fold from 2000 to 2010, according to Bloomberg data.

Sales Guidance

Stiff competition prompted HTC to cut its sales guidance for this quarter by 20 percent, last month. That announcement, on Nov. 23, prompted the stock to drop by its daily 7 percent limit in Taipei for two consecutive days, worsening the year-to- date loss to 45 percent.

At least six brokers downgraded HTC since the revised guidance, with more analysts now recommending investors sell HTC than buy for the first time in at least two years.

HTC Chief Financial Officer Winston Yung didn’t immediately return calls yesterday.

The ITC, the agency empowered to block imports of products that infringe the patents, found in Apple’s favor for one of four patents the Cupertino, California-based company alleged HTC breached. Apple’s so-called ‘647 patent covered a feature in which the phone recognizes a telephone number so it can be stored in directories or called without dialing.

Ripping Off IPhone

The result, while less than Apple sought, marks its first victory in patent cases and strengthens the argument that Google’s Android “ripped off the iPhone,” as the company’s late founder, Steve Jobs, once claimed. The ruling is the first definitive decision in the dozens of patent cases that began to proliferate last year as smartphone makers battle over a market that Strategy Analytics Inc. said increased 44 percent last quarter from a year earlier to 117 million phones worldwide.

Apple also has civil patent infringement cases against HTC and Samsung. Both Asian rivals have also filed their own retaliatory actions to the ITC and in U.S courts. The Android operating system has led the global market since last year, climbing to 48 percent of all smart phones in the second quarter of this year and ahead of 19 percent for Apple’s iOS platform, according to U.K. researcher Canalys.

Siri

Founded in 1997, HTC used its partnership with Google (GOOG) to help transform itself from a contract manufacturer of Compaq Computer Corp.’s iPaq personal digital assistant to the biggest U.S. smartphone seller for the first time last quarter. The company is chaired by Taiwan’s richest woman, Cher Wang.

Since HTC became the leader in the U.S., Apple and Samsung have replied with newer and more functional devices. Apple sold a record 4 million units of the iPhone 4S in the product’s first weekend beginning Oct. 14. The model features ‘Siri,’ a software that allows users to ask questions or issue commands by voice.

In October, Samsung unveiled the new Galaxy Nexus that runs Google’s latest Ice Cream Sandwich software, featuring face- detection technology.

HTC’s relative success in the ITC ruling -- Apple had alleged four patents were infringed, with ITC agreeing on only one --spurred the stock up its daily 7 percent limit in Taipei yesterday. Still, analysts say the company needs to change if it’s to gain on Apple and Samsung.

“They need to improve their products and the design which hasn’t changed in two years,” said Roxy Wong, who rates HTC “reduce” at Mirae Asset Securities Co. (037620) in Hong Kong. “I’d turn more positive if they became more competitive in their price-performance and design.”

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net.