Drops in Q4 income and revenue suggest HTC needs to rethink its strategy

The era of unmitigated growth for HTC is over. The Taiwanese smartphone manufacturer posted its fourth quarter 2010 financials this morning and the results were not welcoming. Year-over-year the fourth quarter revenue shrank 2.5% to $3.35 billion (NT$ 101.42 billion) and HTC’s net income dove 26% to $364 million (NT$ 11.02 billion). The results don’t come as a complete surprise as HTC’s November results showed a 30% drop from October, a 20% year-over-year decline. The fourfold growth boom the company experienced between 2010 and early 2011 has come to a screeching halt, which has made investors question HTC’s availability to continue innovating. It certainly looks that way as Apple and Samsung post record numbers in the highly competitive smartphone market.

However, this doesn’t mean Peter Chou needs to sound the alarms company-wide. HTC is still a relatively new company and it is expanding at an incredible rate, but not all winnings streaks last forever. HTC needs to switch gears in order to stabilize its balance sheet for the upcoming year, but it needs to take a second look at some potential warning signs that led to the 2010 fourth quarter decline.

Bad Timing

Q4 2010 was supposed to be all about Beats. The partnership HTC penned in August was supposed to be the big driving reason for its new flagship devices for this holiday season. The Sensation XE (a slightly modified version being the HTC Rezound in the U.S.) and the Sensation XL took the front lines for HTC but they didn’t land in shelves until October and November respectively. So what’s the problem? HTC didn’t take into consideration that the rumor-mill was red hot with the next iPhone. Was an iPhone 5 going to be released? Would Apple release two iPhones? Was there a new teardrop form factor coming to the iPhone? You couldn’t pass a single day in September without Apple being in the headlines as everyone anticipated the next iPhone to be announced at any moment. The iPhone clamor and then the actual announcement of the iPhone 4S drowned out most of the noise that HTC was making with the Sensation XE and XL. It wasn’t only consumers who were focused on the iPhone 4S, it was carriers too.

It is extremely naïve to think that the iPhone does not carry the dominant weight in the smartphone market. It does not matter if your Android or Windows Phone device is superior to the iPhone in every way, and it doesn’t matter if your competing OS already had all of Apple’s new features, the harsh reality is that the Apple hype machine is very real and very dangerous. HTC tried to make its splash in turbulent waters, releasing its two flagship products during the hottest part of the iPhone hype and right after the iPhone 4S was released. The timing was not only terrible, but also a testament to how wet behind the ears HTC still is as a company.

There is no shame in scheduling your product around a competing product, even if you believe your product is better than the competition. The motion picture industry is notorious for dynamic scheduling, with move release dates changing all the time because of competition. You never put Transformers and Pirates of the Caribbean on the same opening day simply because the market cannot handle two blockbusters at the same time. Motion pictures are always released when the market favors them the most. After a slew of blockbuster action flicks, a romantic comedy is released to make up for the testosterone overdose. and that romantic comedy has a huge opening. Does that mean that it was as good, if not better than the previous action blockbusters? Perhaps yes, perhaps no, bu the important lesson is that companies must always have their ear close to the ground and listening to market conditions. If the Sensation XL and the Sensation XE were announced and released in late November or early December, HTC might have been able to ride the post-iPhone wave to a more successful fourth quarter.

No Holiday Blockbuster

Speaking of releasing their flagships during the holiday season, Santa HTC came down the chimney with empty bags this holiday season. Where Apple was still hot from its iPhone 4S release, Samsung tackled the season with Galaxy S refreshes and the latest Google flagship, the Galaxy Nexus. Even Motorola came out of the woodwork with the Droid RAZR. HTC was still trying to sail with the wind from Autumn when it revealed the Sensation XL and XE. By then the luster of those devices had faded to the shiny new products from competitors that were full of gimmicks like ultra thin form factors, high-definition displays (although the HTC Rezound had a 720p display), dual-core processors, and Ice Cream Sandwiches.

No wonder HTC has a disastrous holiday season. They had nothing in the pipeline planned and what they were betting on was already old news which featured no “gimmicks” with the exception of Beats Audio. Beats by Dr. Dre tripled their sales from 2009 to 2010 and 2011 is showing a “strong increase” in sales, but it turns out that although Beats can single-handedly drive the sales of headphones, it can’t single-handedly drive the sales of sell phones in unfavorable market conditions.

Lack of Product Brand Identity

HTC is just as much of a household name in smartphones as are Apple, Motorola, and Samsung. Consumers have no problem associating HTC with smartphones, so the HTC brand identity alone is quite strong. Where Apple, Motorola, and Samsung excel is their creation of separate brand identities for their products. Take for example the simple question of “what phone do you have?” Possible answers are:

“I have a Droid.”

“I have an iPhone.”

“I have a Galaxy S.”

“I have an Evo.”

The first three answers are universally associated with their respective brands among consumers. The Droid brand may be inherent to Motorola but it is a separate brand that most people associate with the company due to its lasting product line of Droid branded products. The same applies for the iPhone when it comes to Apple or the Galaxy branded devices when it comes to Samsung. HTC on the other hand has a different name for almost every phone it manufactures, meaning that most of the time consumers have to clarify “HTC” in front of their smartphone’s name. There’s a few exceptions like the Sensation or the Incredible, but neither of those are relatively deep in terms of product lines and they get diluted with all the other model names HTC floods the market with every year. The Incredible line has been cannibalized by the Droid brand which is a staple of Motorola and Verizon, and therefore the Incredible brand is further disassociated with HTC.

Radar, Amaze 4G, Evo Design 4G, Titan, Vivid, Rezound, Sensation XL, Sensation XE. Those are all the models HTC released in Q4 2010. How do you differentiate between all of them? Which one is high end? Which one is mid-range? Which one is newer or better than the other? The Samsung Galaxy S is obviously newer and better than the Samsung Galaxy, and the Galaxy S II is better and newer than both. The Droid 3 is clearly the newest and latest of the Motorola slider phones. The iPhone 4S is an obvious example of linearity for consumers. Even Google keeps some sort of linearity and familiarity for consumers with the Nexus line, going from Nexus One to Nexus S to Galaxy Nexus.

All these other manufacturers that are posting big numbers this past quarter have some sort of branding in place for their products that consumers can build upon. These brand act as a benchmark for consumers so they can differentiate between models from the same company. The names not only show newness, but they loosely identify specifications. Sony Ericsson was notorious for having a consumer friendly naming system back in its heyday. Mode numbers that began with C specifically informed the consumer that they were Cyber-shot phones, meaning their were camera-centric phones. The classification letter was then followed by three numbers, the first which identified whether it was a low-end or high-end product and then the last two were typically the version number. So the C905 was a high-end Cyber-shot phone and the W200 was a low-end Walkman phone.

Simple branding like this also can be the tipping point between making a purchase or not. When the HTC Droid Incredible 2 was announced, people immediately began comparing it to the original Droid Incredible by HTC due to the obvious linearity in model numbers and form factors. Consumers, having had positive experiences with the Droid Incredible, were quickly attuned to the news and reviews of the Droid Incredible 2, not because it was just a new phone by HTC, but because it was a “successor” model. What is the HTC Vivid a successor to? The HTC Rhyme? To make matters worse, there’s no differentiation between HTC’s Android models and its Windows Phone 7 models. HTC simply goes to the dictionary, snatches up a nice sounding word, and paints it on the model it is shipping. Whether it is Vivid, Amaze, Titan, Radar, or Rhyme, HTC’s only brand identity is that of its own, and that isn’t enough to help consumers easily identify and differentiate between its models.

Edge and Ville

All eyes are on the leaked secret projects at HTC codenamed Edge and Ville. Rumors of a quad-core Tegra 3 processors, ultra-thin form factors, high-definition displays, Ice Cream Sandwich, and Sense 4.0 are swirling with reports that HTC is scrambling to get the Edge ready for a reveal as early as Mobile World Congress this February. Samsung is rumored to be unveiling its Galaxy S II successor, the Galaxy S3, during that same time period and it is yet to be seen how HTC’s new flagship will stack up against the Korean manufacturer. The clear advantage that the Galaxy S3 has is that it is easily identified as a successor, a step forward from the Galaxy S II. Who will Edge and Ville act as successors to?

HTC needs to take a cold and hard look at 2012 if it wants to see its financials stabilize from the fall they just took. Simply tweaking Sense and releasing a bunch of phones with slightly different specs across all carriers at the same time is no longer a smart strategy. It needs to stop this dictionary version of Chatroulette it is playing with its model names. And most importantly, it needs to look at its competition and plan its releases accordingly, with the knowledge that its competition is looking at HTC and doing the same. It’s time to put on the big boy pants, Peter Chou, you’re no longer the new kid on the block.

Sources: BGR, VentureBeat, Reuters

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