Google and Microsoft Have an HTC Problem

It's been a terrible year for HTC investors. The Taiwanese handset maker has seen its value more than cut in half following a string of disappointing results, including a recent first-quarter loss. Although it has made devices running Microsoft's (NASDAQ: MSFT  ) Windows Phone in the past, the vast majority of HTC's smartphones are powered by Google's (NASDAQ: GOOGL  ) Android, putting it in competition with deep-pocketed rivals like Samsung (NASDAQOTH: SSNLF  ) .

According to Bloomberg, Microsoft wants HTC to offer phones that can dual-boot -- devices that use both Windows Phone and Android. While it isn't clear if HTC will go down that route, it does highlight some interesting strategic problems that both Google and Microsoft face when it comes to their mobile strategies.

Despite making the best Android phone on the planet, HTC is in trouble
HTC's One is, according to some critics, the best Android smartphone on the market. Its chief rival, Samsung's Galaxy S4, lacks the front-facing speakers, proprietary interface and gorgeous design of HTC's flagship phone.

Still, Samsung has managed to be far more successful than HTC, due in large part to Samsung's enormous advertising budget. Last year, according to analyst Horace Dediu, Samsung spent over $4 billion advertising its mobile devices. For comparison, HTC's entire company is worth just $3.7 billion.

Google gives Android away for free, making it available to all would-be phone manufacturers, but with Samsung's unparalleled vertical integration, it has been able to dominate Google's operating system: about 60% of Android smartphones in the wild are Samsung-made.

Nokia saw this coming
This is precisely why Nokia (NYSE: NOK  ) decided to go with Windows Phone instead of Android. In an interview with The Guardian, Nokia's now-former CEO Stephen Elop explained that, back in 2010, he foresaw Samsung's dominance:

What we were worried about a couple of years ago was the very high risk that one hardware manufacturer could come to dominate Android. We had a suspicion of who it might be, because of the resources available, the vertical integration, and we were respectful of the fact that we were quite late in making that decision. ... Now fast forward to today and examine the Android ecosystem, and there's a lot of good devices from many different companies, but one company has essentially now become the dominant player.

Though he did not mention it by name, Elop was obviously talking about Samsung. But did he really make the right decision? Like HTC, Nokia's smartphone business has lost a lot money in recent years; still, at least Nokia shareholders were able to recoup some cash in the form of a Microsoft buyout -- HTC might not be so lucky.

Microsoft's operating system model has been ruined
If HTC does decide to offer a dual-booting phone, it will have a unique device -- probably the only such phone on the market. As part of Microsoft's push to get HTC to make that decision, Microsoft is allegedly offering to license its Windows Phone operating system at little or no cost.

Historically, Microsoft has embraced a licensing model for its operating systems -- PC OEMs pay Microsoft a fee to install Windows on their machines. Microsoft has attempted to extend that strategy into the mobile phone arena, but Google has more or less destroyed that model.

By giving Android away for free, smartphone makers have little incentive to buy an operating system from Microsoft. Android is just as capable, and in many respects better, than Windows Phone.

HTC remains strategically important
Although HTC itself may be of little importance to investors, its ongoing struggles highlight the challenges both Google and Microsoft are facing in the mobile space.

Google wants a variety of hardware manufacturers to use its operating system, but Samsung has totally dominated. With HTC on the ropes, Samsung's control could only intensify, making Google's concerns over Samsung even more valid.

For its part, Microsoft was hoping to collect licensing fees for Windows Phone, but that strategy doesn't appear to be viable anymore. Given that Android is free, Microsoft will have to make its phones in-house (which it will do now that it's purchased Nokia) or else follow Google and give Windows Phone away.

HTC's importance as a handset maker may have faded in recent years, but investors in the mobile space should definitely continue to keep an eye on the company.

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