HTC: Hard to Compete

HTC is the world’s fourth largest smartphone company. It ships 80% of all Windows Mobile and probably a similar proportion of Android devices. Like Microsoft in 2003, Google turned to HTC for its first smartphone, the G1 and its latest, the co-branded Nexus One. The company shipped a total of 11.7 million mobile phones in 2009.

It would appear that HTC is very well positioned in what amounts to be the best industry in technology.

However, not all is well. A few days ago HTC issued revenue guidance below analyst estimates and its stock price is at 2005 levels, 70% off its peak (see graph–source: Google finance).

Part of this could be explained by its continuing reliance on Windows Mobile which is fading fast, but also it’s because, as management acknowledged, there is significant price pressure.

HTC prides itself with having a “premier” product with typically high-end feature sets and positioning. HTC invested in its own UI to differentiate its products and has mounted a branding campaign to move away from being a white-label ODM.

It seems all for nought. The rules of the smartphone market do not favor modular component players. As HTC does not front its own OS, it still struggles to stand out in the eyes of the consumer.

Looking at the list of top 3 vendors: Nokia, RIM and Apple, we see hardware companies that field an integrated OS/service bundle.

It’s hard to compete against this.

That River in Egypt


Windows Mobile 7: we so dropped the ball in our early phone OS presence that now it seems like it’s a losing battle to have a dog in this fight. But WinMo7 is out there. To me, I can imagine this becoming like the Zune HD: well praised and all, but not making a dent in the market because everyone has already moved on to the iPhone platform.
David Worthington interviews Brandon Watson, “director of product management in the developer platform at Microsoft”:
Watson claimed that many developers of applications for the iPhone OS–which the iPad uses–are not making money. Developing applications for the iPhone and iPad is expensive, he said, because iPhone OS uses the Objective-C language rather than Microsoft’s more pervasive .NET platform. And Apple’s control over the platform has alienated some people that make software for its products, he said.

Now if we can get the Grand Poobah of Ovi to chime in, we’ll be all set.

Windows Marketplace for Mobile

One observer has posted that WMM (Microsoft’s answer to iTunes App Store) has 520 apps in it now. The store launched in Nov 1 with 281 apps. That means there will be about 300 apps added in the first two months. The growth rate is therefore about 150/mo.

This has to be the slowest growing app store among all the contenders, though Palm may also be similar.

By way of comparison, iTunes App Store is growing at about 10k apps/mo. with Android about 3 to 5k/mo.

How does this make sense coming from the company that is known for “developers, developers, developers” and is the largest software company in the world?

Smartphone Penetration in the US

This is active users in the US only.

iPhone now tops WinMo and is second only to RIM. The only line that is going down is the dumbphone category which lost 10 million users.

Those users were mostly switched to RIM and Apple. RIM gained about 4.3 million users and Apple gained about 3.5 million.

Android user base still lowest of all platforms and increased by about 0.6 million. They are likely to beat Palm however next few quarters. At this rate however it’s very hard to see an installed base that is going to challenge Apple for a long time.

Palm gained 0.44 million. Symbian gained 0.41 million. WinMo gained 0.3 million.

With a 1.4 multiplier for iPod Touch, the platform would have 12.5 million users, pretty near RIM’s base. We might see that tipping over next quarter.

Version Arithmetic

Remember when I laid out the timeline for Nokia’s response to the iPhone? Still checking off the milestones:

Let’s also do some version arithmetic:

Nokia is already on the 5th version of Maemo, a platform which by any measure is non-functional but already 5 years in the making. After this investment, only one product is shipping and it’s something of a science experiment–a pre-beta product. Nokia is also on the 9th version of Symbian, a functional but outdated platform stuck in the 90s. Promising big things in the 10th version to be re-branded Symbian ^2–I guess double digit version numbers are not confidence inspiring.

Microsoft meanwhile is working hard on the 7th major version of Windows Mobile. World waiting with bated breath.

The Pocket PC Paradox

Recent data from admob shows that Android OS share is highly dependent on a single vendor (HTC). ( page 7)

There is an implied message in Android advocacy that once more licensees join in, volumes will be distributed among a broad set of companies benefiting from a healthy rivalry. This broad licensing will be a boon for volumes and for user choice and the platform itself will prosper.

I’m going to argue here that there will be no healthy distribution of volumes or profits in the Android platform.

History shows that volumes for an openly licensed mobile platform concentrate in the hands of a single vendor. To illustrate, I attached a list of all the devices which shipped (to date) with a flavor of Windows Mobile. The list includes 911 different phone models (search on your own on under the pdamaster tab–search criteria are on the last page of the PDF).

The Windows Mobile platform “took off” and had hundreds of concurrent licensees in the middle of this decade. In spite of this wide adoption, one vendor captured 80% of the volumes for all instances of the platforms: HTC. Having started with the iPaq as a PDA and followed by being the first to market with a WinMo device, HTC dominated Windows Mobile volumes even when faced with literally hundreds of competitors. These competitors included all the big names: from PC vendors like HP, Dell and Toshiba, to cellular incumbents like Motorola, Sony Ericsson, Samsung, LG and every ODM and OEM in between. The reason HTC won is mundane: they have the experience and the distribution to make an impact and they iterate rapidly and are intimate with the details of making a tough-to-integrate product work. They basically worked their way up the value chain from a contract design shop to a branded top tier vendor.

But if you exclude HTC, dividing the number of units of WinMo shipping at any given time by the number of licensed products in the market at that time, one gets about 50,000 units/licensee. Think about that: except for HTC, an average licensee could hope to ship 50k units for any phone they engineer and market. And they also need to prepay Microsoft the minimum license fee of $10/unit (approx) for a minimum order of 50k units or half a million dollars.

This is actually a paradox. Put yourself in the shoes of a business manager at one of the potential licensees. Consider the situation where there are 200 competitors in a market all shipping undifferentiated products, and one competitor has 80% share. Would you want to be the 201st? Saying yes implies hoping to split the remaining 20% 200 ways or obtaining, on average, 0.1% share? But this is not a share of all phones, it’s a share of that platform, which itself is, at best 10% of all smartphones which make up maybe 20% of all phones. So you are committing a few million dollars to pursue (.2*.1*.001=) .00002 of a market. That target is 3 orders of magnitude less than what Apple obtained in 2 years (without the margins). It never adds up unless you expect your entry to blow out of the 20% ghetto and take on the incumbents.

As it turned out there were dozens upon dozens of business managers who opted to be the 201st (or 301st). Unsurprisingly, the result was that every Windows Mobile business plan failed (except that of HTC). Every decision to join this ecosystem on the device side was a value destroying decision, repeated 900 times.


I don’t have an answer as to why so many are taken in by this. I have a hypothesis that it has to do with excess R&D capacity (e.g. idle engineers) that compels small companies to build product with no hope of market penetration, but I cannot prove it. They may also couple the low barrier to entry to the premise from the platform vendor that a no-name licensee could be the next Dell/Acer/HTC if the platform “takes off”.

Regardless of the cause, the proliferation of WinMo SKUs did nothing for the success of the platform overall. For consumer products, it does not matter what jockeying for position happens within the value chain if the end user/developer experience is painful and uncompetitive.

Android will win or lose on the user/developer experience. It will not win or lose on the proliferation of licensees.

Windows Immobile

John Herrman reviews the new Windows Mobile 6.5 for Gizmodo:

To put it another way, handset manufacturers have done more in the last two years to improve Windows Mobile than Microsoft has, which borders on pathetic. In the time since Windows Mobile 6.0 came out in February of 2007, Apple has released the iPhone — three times. Palm has created the Pre, with its totally new webOS. Android has come into being, and grown into something wonderful. RIM has created a touch phone and a revamped BlackBerry OS. For these companies, the world has changed.

And Microsoft? They eked out some performance enhancements and a new homescreen in 6.1, and executed a gaudy facelift for 6.5. This is what they’ve done to Windows Mobile.

The review from Gizmodo concludes:

I’d like to think that 6.5’s stunning failure to innovate is a symptom of a neglected project—maybe Microsoft just needed something, anything to hold people over until the mythical Windows Mobile 7 comes out, whatever it is. But as Steve Ballmer himself has plainly admitted, it’s worse: Microsoft has simply lumbered in the wrong direction for two years, letting everyone, save maybe Nokia, fly right past them.

John Gruber adds:

Microsoft’s irrelevance in today’s mobile space is nothing short of a spectacular failure. Worse than the mere fact that Windows Mobile 6.5 is a total turd is that no one is surprised, and no one cares.

I’ve said it before and I’ll say it again: Microsoft will take 4 to 6 years to respond to the iPhone. Nearly 3 years have already passed and indications are that Windows 7 will ship in devices by end of 2010. I expect another 2 years hence will be needed to polish it.

Nokia will take at least as long, though probably longer.

Neither response will be sufficient or effective. Curiously perhaps, throughout this time both Nokia and Microsoft will use each other as benchmarks of competitiveness.