HTC's comeback hinges on fickle consumers

April 16, 2013: 5:00 AM ET

Will the One save HTC, the Android manufacturer that once seemed most likely to succeed?

by Kevin Kelleher, contributor

htc-oneFORTUNE -- This is how quickly fortunes change in the smartphone industry. In 2006, Nokia (NOK) still controlled more than half of the share of the smartphone market. The iPhone wouldn't appear until the summer of 2007. And no one was making Android phones. Android Inc., bought by Google (GOOG) in 2005, wouldn't emerge as a player until HTC released the Dream smartphone in the fall of 2008.

Android, of course, would go on to dominate the global smartphone market, powering 70% of smartphones shipped in the last quarter of 2012. Five years ago, Android was an open-source mobile OS offered to device manufacturers that wanted to take on Nokia, Apple (AAPL), and BlackBerry (BBRY). It was the OS supporting the Open Handset Alliance, whose members included manufacturers like HTC, Samsung, and Motorola.

Early on, HTC emerged as the company most likely to succeed as the big maker of Android phones. Not only because of the Dream -- the inaugural Android smartphone -- but also the Nexus One, Google's first attempt to design its own smartphone. Android may have been an open OS, but it needed a leader. Early on, HTC looked to be that leader. Instead, it's Samsung that is ruling the Android empire in 2013.

And what of HTC? By recent numbers, it's ailing. According to comScore, its share of U.S. smartphone subscribers fell 1.3 percentage points to 9.3% in the three months through February, a bigger decline than Motorola (now owned by Google). Samsung saw its share grow by 1 percentage point and Apple by 4 points. Measured by global smartphone shipments, according to Barclays Research, HTC may drop to No. 10 this year.

MORE: Meet the HTC One 

Last week, HTC pre-announced its first-quarter earnings, and the news wasn't good. Net income declined 98% to NT$85 million ($2.8 million), well below analyst estimates of NT$600 million. Revenue fell 37% to NT$42.8 million. The quarter marked the sixth straight decline in profit for the Taiwan-based company.

For some, the disappointing news was another sign that HTC's ship is sinking. Most of the disappointing profit centered around the delayed release of the HTC One phone, an Android phone with an attractive display screen that had been winning largely positive reviews. A shortage of cameras reportedly forced the delay of the new phones. Smartphone makers don't just have to compete for consumers, they also often compete for components.

The HTC One was supposed to release in March, several weeks ahead of Samsung's new smartphone -- the Galaxy S4, which had also won strong early reviews and received a fair amount of attention now that Samsung has emerged as a rival to Apple. Having a head start of a month could help HTC steal thunder and show that it was making a big step forward with its smartphones. Instead, the HTC One was delayed until April, with shipment expected to begin this week.

HTC's stock closed down 2.2% on the day it announced those numbers. But it ended up rallying 8.5% over the next four days, closing the week at NT$261.50. That rally appeared to be sparked by the positive reception of Facebook Home, Facebook's (FB) effort to coopt Android's OS to create a front-end interface designed around its own social network. Another HTC phone, the First, was presented as the first Facebook Home phone, although Home will be dowloadable to other Android phones.

Still, the decline in its market share has brought HTC's stock down significantly from its levels in recent years, trading 80% below the high point of NT$1,300 in April 2011. The One is intended to turn that around, with its impressive display, a casing designed to rival that of the iPhone, and an image processor chip that HTC made in-house.

MORE: The second coming of Facebook

Wall Street analysts remain divided on HTC's outlook, but most feel the One would have a bigger impact on its fate than the First. J.P. Morgan, which described the One as HTC's "last chance for a turnaround," said in a report last week that "early signs of order rates are very strong" and could deliver 50% growth in revenue this quarter over the previous quarter. Others, like Goldman Sachs, were concerned that the supply-chain issues that delayed the One could continue to be a factor.

HTC's One is the company's best chance to win back market share. The company's new marketing chief recently promised a louder voice and bolder approach in reaching out to consumers in a market flooded with Android phones. Last week, to promote the HTC One, the company launched an ad campaign mocking reality TV shows on sites like Funny or Die.

In the smartphone market, consumer tastes are just fickle enough to make HTC a winner again. For now, the Android manufacturer that once seemed most likely to succeed is just fighting to stay in the game.

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