HTC Said to Be Shut Out of Next Version of Windows

By Ian King, Tim Culpan and Dina Bass - Jun 7, 2012 8:23 AM GMT+0700

HTC Corp. (2498) is being shut out of the introduction of Microsoft Corp. (MSFT)’s next Windows software, people with knowledge of the matter said, cutting off another source of revenue after HTC reduced its second-quarter sales forecast by 13 percent. The shares fell to the lowest in two years.

Microsoft locked out HTC from the development of products using the newest version of its operating system on concern that HTC doesn’t sell enough devices or have ample experience making tablets, said the people, who asked not to be named because negotiations between HTC and other companies are private.

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The HTC J smartphone in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

Microsoft’s decision will keep HTC, maker of the first Google Inc.-branded smartphone, from participating in the electronics industry’s latest attempt to erode Apple Inc. (AAPL)’s lead in tablets. The Taiwanese company, whose stock has dropped 68 percent in the past year, is also facing shortages from chipmaker Qualcomm Inc. (QCOM), highlighting the challenge of competing with Apple and Samsung Electronics Co. (005930) -- two companies whose dominance in manufacturing and software are increasingly marginalizing smaller rivals like HTC.

“Every consumer knows about Samsung’s Galaxy platform and the iPhone, and you are starting to see consumers coalesce around them,” said Matthew Thornton, an analyst at Avian Securities LLC, who yesterday cut his rating on HTC to negative. “Things just get worse from here. It’s a very bleak outlook.”

Windows RT

Microsoft plans to release its next Windows operating system, the first to run on chips with technology from ARM Holdings Plc (ARM), in time for the holiday shopping season. The ARM version of the new software, designed for tablets that compete with the iPad, is called Windows RT. Other tablets and computers will be made using chips based on Intel Corp. (INTC)’s technology. The software, also called Windows 8, will appear in devices from companies like Toshiba Corp. (6502) and Asustek Computer Inc. (2357) later this year.

HTC is a strong partner now and for the future, said Frank Shaw, a spokesman for Microsoft, in an e-mailed statement. He declined to discuss specifics. HTC intends to support future versions of Windows and isn’t commenting on the details of its product plans, said Sally Julien, a U.S.-based spokeswoman at HTC, in an e-mailed statement.

HTC has been unable to either develop its own software or hardware or sell enough devices to make it the first in line for its suppliers, said Ramon Llamas, an analyst at IDC.

“Controlling the supply chain or influencing the supply chain is one of the things that takes you to success,” said Llamas. “It can very quickly turn on you if you’re not controlling everything in-house.”

Product Delays

HTC said yesterday that second-quarter sales would be NT$91 billion ($3.05 billion), below a previous forecast of NT$105 billion because of product delays in the U.S. and lower-than- anticipated sales in Europe. Besides smartphones, HTC also makes tablets with Google (GOOG)’s Android operating system.

The company’s shares plunged 6.9 percent to NT$378, the lowest in two years, in Taipei trading today after the guidance.

Microsoft, which has tightly controlled the number of ARM- based devices it is supporting at first to ensure quality, opted not to work with HTC after initial discussions with the company, said the two people familiar with the matter. The world’s largest software maker decided to work with other vendors that had greater sales volume and more tablet experience for the first round of devices, the people said.

HTC engineers wanted to build a Windows device with a customized home screen that would be distinctive to its devices, as manufacturers are allowed to do with Android. Redmond, Washington-based Microsoft refused, said the people, and HTC was left off the list of companies the software maker provided with early versions of the software.

Sales Decline

HTC may release a Windows device later, in a second round of products to come next year, one of the people said.

After surging 90 percent in 2010 and 65 percent last year, HTC’s sales will decline 12 percent this year, according to the average of analysts’ estimates compiled by Bloomberg.

In the first quarter, HTC’s smartphone shipments dropped 23 percent as Samsung’s more than tripled and Apple’s increased 89 percent, according to IDC. Samsung and Apple account for 53 percent of the market. HTC has a 4.8 percent share, according to the market researcher, placing it fifth behind Nokia Oyj (NOK1V) and Research In Motion Ltd. (RIM)

Participating in the introduction of Windows RT tablets would be unlikely to solve all that ails HTC. The machines will be starting from a zero-market-share position, without the advantage of popular, older Windows applications that won’t run on ARM hardware.

Relationship Shift

The situation underlines the shift in the relationship between Microsoft and HTC, which once relied on each other to prop up early efforts in the mobile-phone market. The two companies started working together on Microsoft’s mobile phones early in the last decade and the first Windows-based phone was manufactured by HTC. At the time, Microsoft had virtually no experience in the area, and HTC was a maker of unbranded generic phones for other companies.

HTC recently has placed more emphasis on its better-selling Android phones, and Microsoft has forged a closer relationship with HTC competitor Nokia.

Still, HTC has seven Windows Phone models on sale globally. The operating system has about 2 percent share of the market, according to IDC.

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Tim Culpan in Taipei at tculpan1@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net