HTC's patent problems
Using Google’s Android software has given HTC a boost, but it may now make the Taiwanese handset-maker vulnerable to costly lawsuits
Jul 21st 2011 | TAOYUAN, TAIWAN | from The Economist print edition
UNTIL a few years ago HTC was pretty small and relatively obscure. But the Taiwanese company’s recent growth has been remarkable. In the second quarter it sold 11m smartphones, more than doubling its revenues in the same period last year. HTC’s main rivals, Nokia, Samsung and Apple, still sell around twice as many smartphones. But its rapid growth, especially on Apple’s American home turf, has made it a competitor to reckon with.
One reason for HTC’s surging sales is the relentless pace of its innovation: in the past quarter, in which Apple had no new iPhone to launch, HTC introduced ten new models. Another is Google’s Android operating system, on which most of HTC’s smartphones are now based, which has proved a hit among consumers.
Apple has not taken the challenge from HTC lightly. On July 15th the US International Trade Commission upheld two claims in a larger patent suit Apple had filed against its rival. Earlier in the month, Apple had filed additional claims and MOSAID, a Canadian company, said it would also sue HTC, and Sony Ericsson, for patent infringement. The outcome of these cases will be of keen interest not just for HTC but for other handset-makers using Android: promoted as a free, open-source system, it is proving surprisingly expensive. This is because it relies on a host of basic features that may be subject to patents: how a screen is swiped with a finger, how a phone number embedded in an e-mail can be called by tapping it, and so on.
Last year HTC resolved another claim over Android, with Microsoft, agreeing to pay it hefty royalties. More such suits may yet emerge, and prove costly. HTC’s shares, having hitherto outperformed its peers’, have dropped by a third since early June. HTC will appeal against the trade commission’s ruling; but it will fight back in other ways, too. This month it spent $300m buying a loss-making software firm, S3, which recently won a patent case against Apple and may have other patents that will be useful in fending off Apple’s legal forays.
Founded in 1997, HTC started out mostly doing contract manufacturing for other gadget-sellers. But as it has gained confidence in making smartphones under its own brand, it has steadily risen up mobile operators’ lists of the handsets they promote to subscribers. By April this year it had a bigger market capitalisation than troubled Nokia. The firm’s success has pushed Cher Wang, its chairwoman and largest shareholder, to the top of Forbes’s Taiwan rich list, passing Terry Gou, the boss of Hon Hai. HTC has kept much of its production in Taiwan whereas Hon Hai (also known as Foxconn) has shifted it to mainland China and stuck with contract manufacturing—a business that emphasises cost-trimming and low value-added.
HTC has shown remarkable speed in building new products, adapting to changing telecoms standards and developing its own applications software. And its manufacturing quality has been remarkably high. Unlike rivals HTC has not suffered unpleasant headlines about shoddy products or suicides at its factories. It has made progress in building a brand that reflects innovation and trust, allowing it to escape from the low-cost treadmill on which some of its peers remain stuck.
But there is a risk that Android, a key element in this successful strategy, is turning into a vulnerability. Apple sees its patents as a weapon to undermine Android’s cost advantage. The more time HTC has to spend fighting lawsuits, and the greater the share of its revenues it has to pay out in software royalties, the harder it will be to keep up its remarkable run of success.