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HTC: How They Compare

In the last mobile market update series I wrote of  the evolution of market share, the shift in where dollars are spent, the tale of ASP erosionprofitability ratios over time and EBIT share over time.

I did not include all vendors for various good reasons. The first survey (market share) did include an “others” category that made the volume data complete, but in the financial data sets, I chose to include the top 7 vendors that make up 80% of device volumes.

One noteworthy vendor that was not included was HTC. HTC is an important vendor for several reasons:

  • it’s a pioneer in smartphones having made the first Windows Mobile devices and the first Android devices
  • at one point it sold 80% of all Windows Mobile devices
  • even if it did not brand its devices, it was the name behind many re-branded or white-label operator branded phones
  • it has a brand of its own today and is expanding its reach

HTC has been around building devices since 2001 and so it would be a pity to exclude them from any analysis of the effect of iPhone on the market or any discussion on the effect of smartphone disruption on feature phones.

The challenge with HTC was that historically their branded devices and white label devices were not reported by the company separately. This matters because white label devices are valued differently. Typically these devices are not marketed by the original manufacturer so SG&A is not applied to their cost base. Operating margins, ASPs and hence profitability is not directly comparable with other OEMs.

But HTC has recently changed its reporting. Thanks to a reader I discovered that, since 2008, HTC has been listing its ASP and Operating Margin making direct comparisons possible. I still don’t have all the data, but enough to add HTC to the analysis.

So, here are the 5 industry performance criteria, now with eight vendors listed.

Volumes

Note that HTC volumes start in 2008.

The volume of units HTC sold has been increasing at about the rate of market growth.

As a result, HTC’s share has not increased as dramatically as those of the other smartphone entrants.

Sales

A similar story in the sales picture. Although a consistent performer, the growth has not matched that of RIM and Apple.

ASP

The pricing story is also a mixed one. Although HTC lies between RIM and Apple in price, the erosion is more consistent with RIM and the rest of the industry.

Margin

The margin story is also not as positive as one might expect. The margins for HTC started out above Apple and RIM but have dropped to closer to industry average. This is not what one might expect from an exclusive smartphone vendor.

Earnings

The share of earnings has remained unchanged at 5% over the period of iPhone presence. It’s perhaps a credit to HTC that they did maintain their position in the market with the massive change that has come to pass.

However, here we also have to ask if HTC is riding a disruptive wave.

When I wrote the last series, my definition of “loser” was a company that had faced a long series of operating losses and has no viable software assets of its own, making it vulnerable to Android (and Windows Mobile). Motorola first, Sony Ericsson second and LG now coming into the picture. Nokia is not a loser in this sense since it has remained profitable and does maintain an investment in software. Same with RIM and Samsung (now with Bada). When/if they do have the near death experience, they might opt for the Android lifeline (flimsy as it is).

However HTC does not fit the mold of either “winner” or “loser”. It’s the Goldilocks company, not too hot, not too cold.

But I would add that HTC is not an example of a winner because of its adoption of Android. HTC’s dependence on Windows Mobile made their move to Android the most desperate of all. Unlike the larger OEMs, who had their low end devices to fall back on, they are completely dependent on a smartphone OS vendor. When WinMo was showing the first signs of crisis in 2007, they were the first to flee to Android (think of why they would risk the wrath of Microsoft for something so fragile as Android in 07). They are also trying hard to escape the dependence by building up their own UI (SenseUI) and I would not be surprised if they move to their own OS in the future. Being associated with Android does not confirm them as “winners” but in fact, shows their vulnerability.

What does this all say about Android?

Again here my thesis is that Google chose to sustain the industry rather than try to upend it. I don’t judge their motives, but the fact is that with Android, Google is not in a position to disrupt telecom. There were high hopes dashed with the Nexus One and hearts broken with net neutrality and now there are patent wars to be fought. Android, with its licensees, is still at the mercy of operators.

  • Narayanan

    Impeccable analysis as before. Your conclusions are undeniable.

    One striking take for me is that the ASP for Apple stayed nearly flat despite the crash and also multi carrier diversification outside the US unlike the other vendors. I wonder what the impending VZW expansion will be like?

    • http://www.asymco.com asymco

      Thanks,

      On the ASP, I've been trying to make this point but it's not really sticking (maybe I should write another post about it).

      Apple prices its product the same to all operators, exclusive or not.

      In the earnings conference call of October 2009 Tim Cook, Apple COO, was asked about the difference in pricing between exclusive and non-exclusive.

      When asked more pointedly, “So when you go from exclusive to multiple, you don’t change the charge to the carrier?” Cook answered, “Correct.”

      • Inder

        If my understanding on this is correct, previously they were charging some part of the service revenue from the operators for the exclusivity, …if you look at their 10Q the revenue recognition policy you can find "iPhone revenue includes handset revenue recognized and revenue from sales of iPhone accessories and carrier agreements." which points that they have some revenue included from the carrier arrangement in iPhone revenue keeping the ASP higher, which may decline if the exclusivity end in the near future…I may be completely wrong here..correct me…
        thanks

      • http://www.asymco.com asymco

        They only collected direct service revenues during the first year of sales with the first gen product and only from AT&T. You see that reflected in the ASP.

      • kevin

        The service revenue applied to the original iPhone and its data plan contracts for 24-months (or termination if earlier). It may have only applied to AT&T and not O2 or any of the European countries. So Apple did collect for about 33 months. Very few iPhones were sold in Apr-June 2008, so Apple collected on iPhones sold in Mar 2008 all the way through Mar 2010 if the contracts weren't terminated earlier.

        Those carrier agreements could also include sign-up fees for new sign-ups made at the Apple Stores. These are like those paid to other retailers (Best Buy, Wirefly, Amazon.com, etc).

  • marcy

    Very good work and most helpful. I would like to point out that for the first couple years, Apple deferred revenue recognition on its iPhone sales pending delivery of future software upgrades. Correct me if I'm wrong, but I do believe your early-year ASP is derived from iPhone sales divided by units. Since large portions of the revenue associated with iPhone sales was not recognized, that calculation severely understates the ASP in the early years. The ASP for an iPhone has never been anywhere near the $437-$522 range. You will recall that AT&T had to materially reduce margin guidance and earnings simply due to the impact of the subsidies they were providing on the iPhone. It was calculated by many analysts that the subsidy itself was in the order of approximately $400/unit. Combine that with the $200-$300 AT&T was getting at the gate from consumers and you get to $600-$700 with Apple getting the bulk of that. Anyways, I hope this is helpful. It doesn't change your message much with regards to HTC but it does mean Apple did not see a material rise in ASP over the period under review. Thx. Great work.

    • http://www.asymco.com asymco

      Thanks! I will say that all my Apple models use restated financials so that (hopefully) they reflect non-subscription accounting, but I'll check to confirm the early year's anomaly. I suspect the reason the ASP was low was because they received a service fee percent.

  • M

    I spoke with a Google employee here in the Bay Area and he acknowledged that Android/HTC phones are an (inferior) copy of the iPhone. I asked him why they would offer a copy of a (superior) product. He said that they wanted to offer consumers a choice. They did not want to see Apple become an unbeatable monopoly (like Microsoft for PCs).

    It sounds like an altruistic move. (Thus the free price). And to some extent they are right. Many consumers are benefiting (and business lifelines) from Android, where the IPhone/OS is not available to them.

    • http://www.asymco.com asymco

      That was the same logic I heard from Google's management in 2006 about their interest in mobility except then it was not iPhone but Microsoft's Windows Mobile that was seen as a threat to 'choice'. I thought they were a bit naive about the mobile market since there was little threat from Microsoft repeating their hegemony in mobile product then. They are also naive to think that iPhone has any chance at dominance today.

    • Narayanan

      Even if we were to accept that assertion, which I feel sounds a little hollow, it does imply that they wanted that crown of monopoly for themselves and thereby protect and expand their main business ie; search.
      I have no problems with their business ambitions, but their hypocrisy is pathetic.

    • StevenN

      I question that as well. As others have stated, it was more a fear of MS and WinMo that spurred Google to buy and pursue Android. While Google was a bit clueless on mobile in 2006, they did see it as a HUGE future revenu stream. The problem was, their #1 competitor at the time was MS and they also saw this. MS had search, advertising AND a popular mobile platform. Domination of MS in mobile would relegate Google to an also-ran in the Tech field.

      This was the birth of Android. It had NOTHING to do with an altruistic motives of allowing choice. It had everything to to do with saving and creating HUGE streams of revenu by serving mobile advertisements. By using location and historical data on its users, Google can target ads with such accuracy, they stand a chance to make 10's of billion off of Android every year.

      Did you every see "Minority Report"? That is Google's vision of advertising.

  • M

    Yet looking at the graph trends, how do you predict the future in terms of OS market share? Assuming that in 2-3 years most phones will be smartphones, why wouldn't an iPhone/Android combination lead the market?

    Granted we do not know what RIM, Nokia, Palm will come up with by then, but by projecting the existing trends Google may have copied the right OS.

    • http://www.asymco.com asymco

      I use two analytical tools: (1) history (2) value chain analysis.

      History shows that operators are very important and hence very powerful in this market. That makes sense on many levels. They control what phones you get to buy, they decide the pricing and they decide frequently how you can use the phone. This is because the networks are expensive to build and maintain and there is an implicit bargain struck that the user and device should conform to the operator.

      Value chain analysis tells me that as networks are not good enough, tight integration of the business models of the phone vendors and the operators is necessary to climb up the trajectory toward good enough as quickly as possible.

      Therefore, given the distribution of value/bargaining power in the chain, it's reasonable to assume that it's operators who will decide which platforms win/lose and to what degree.

      That simply means that no single platform can win a disproportionate share because it would threaten the balance of control the operators require. So talk of "dominance" of one platform or another is hyperbole. The most likely scenario is an even distribution of share between 4 or 5 competitors, so I expect iPhone to get 20% share.

      This is not "fair" or economical or efficient, but it's the way it's going to be for a long time.

      If you want to dream or hope for a more efficient outcome, you'll have to look outside the cellular network model. I.e. think how iPod/iPad and Android tablets will evolve into communications products.

  • John

    Horace, Just curious where do you get your Profit numbers from? Did you say the latest earnings report from HTC? http://www.dailytech.com/article.aspx?newsid=1981
    Comments?

  • http://twitter.com/dutchtender @dutchtender

    I am not sure how one could argue, given the immense growth of Android, that Google is not disrupting the industry. they are eating "somebody's" lunch, that's for sure.

    • asymco

      Android growth is at the expense of smartphone non-consumption. Two primary "lunches" are being eaten: Windows Mobile and feature phones. However, these are also being "eaten" by the other smartphone platforms so it's not a clear cut case of disruption by one platform.