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Patent settlement a win for HTC, but company still needs better smartphones, analysts say

The patent cross-licensing deal HTC reached with Apple over the weekend will not be enough to get the company back on track, analysts say

Analysts say HTC still faces an uphill battle to rebuild its smartphone business amid heated competition, despite reaching a deal with Apple to settle their patent disputes.

On Sunday, HTC and Apple announced the dismissal of all pending patent litigation between the companies, and said they had reached a 10-year agreement to license current and future patents from each other. Terms of the settlement are confidential, but in a filing to the Taiwan Stock Exchange, HTC said the deal would have no "adverse impact" on its financial results.

For Taiwan-based HTC, the settlement frees the company from the costly legal battles that have threatened to block sales of its Android smartphone. Earlier this year, U.S. Customs delayed shipments of HTC's newest phones to the country in order to ensure the products had not infringed on Apple's patents. This forced HTC to lower its revenue projection for the second quarter.

"At least now, there will be no block of its shipments in the U.S.," said C.K. Lu, an analyst with research firm Gartner.

But the company's struggles in the smartphone market go beyond patent battles, according to experts, who point to the competition from Samsung Electronics and Apple. Just a year ago, HTC had over 10 percent of the world's smartphone market, according to research firm IDC. But in the third quarter this year, the company's market share stood at 4 percent. In contrast, Apple had a 15 percent share of the smartphone market, and Samsung 31.3 percent .

To try to revive its sales, HTC released a new line of Android smartphones this year, including the top-of-the-range HTC One X. So far, the phone has failed to match the popularity of Samsung's Galaxy S III, which outsold Apple's iPhone 4S in the third quarter.

Analysts noted that the patent settlement with Apple means HTC can spend more on marketing and research, which could help the company compete over time. For now, both Apple and Samsung are riding high from better brands and bigger marketing budgets.

"If you can't compete with Samsung for marketing, you have to figure out some way to outperform the product," Lu said. "I'm not saying (the HTC One X) is a bad product. It's just not outstanding."

To mount a comeback, HTC will have to focus more on releasing better products, experts added. The company's fortunes in the smartphone market began to decline when its former chief innovation officer Horace Luke resigned last year, said Dan Nystedt, vice president and head of research for TriOrient Investments in Taiwan.

"When he was there, they came out with some really beautiful phones," Nystedt said. "After he left, they haven't been able to replace him and put out the same caliber of designs, and it shows."

It's still unclear why Apple decided to settle with HTC, given that Apple's former CEO Steve Jobs famously said he would go "thermonuclear war" to eliminate Google's Android OS. In a joint statement, both Apple and HTC said they resolved their ongoing patent disputes in order to focus on innovation.

Apple, however, likely no longer views HTC as a key competitor, and was more willing to settle, even as its patent lawsuits were successfully undermining HTC's smartphone business, Nystedt said. He speculated Apple possibly made the deal in order to better pit HTC against Samsung, the company's major rival.

"There are a million reasons you might come to this agreement. It may be that HTC had some patents that Apple had to have," he added. "But Apple could have really put HTC on the ropes."

For Apple, the settlement with HTC could also embolden the company to target other Android smartphone vendors and make them pay patent licensing fees, said Teck Zhung Wong, an analyst with IDC. Those fees would then drive up the costs vendors have to pay to use Android.

"This could further nudge vendors to consider Android alternatives, such as Windows Phone OS," he said.


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