Google (GOOG +0.15%) (GOOGL +0.22%) recently chose HTC (NASDAQOTH: HTCCY) to manufacture its new Nexus 9 tablet, according to The Wall Street Journal. Google's previous two tablets, the Nexus 7 and the Nexus 10, were respectively made by Asus and Samsung (NASDAQOTH: SSNLF).
The Nexus 7 (L) and Nexus 10 (R).
HTC hasn't sold a tablet since 2011, after its Flyer and Jetstream devices flopped in a market dominated by Apple's (AAPL +0.64%) iPad. Not much is known about the Nexus 9, except that it will have a 9-inch screen, possibly run Android L (5.0), and could arrive as early as mid-October. Will HTC's return to tablets help the company offset its woes in the smartphone market, or will this just lead to a repeat of 2011 and a second retreat from tablets?
Why a new tablet could help HTC
To understand how a new tablet could help HTC, we need to understand the key differences between the smartphone and tablet markets.
The global smartphone market is firmly dominated by Apple and Samsung, which respectively controlled 12% and 25% of the market in the second quarter of 2014, according to IDC. Every other competitor was stuck in the mid to low single-digits. Back in 2011, HTC looked like a worthy challenger with a 9% market share. Unfortunately, rising competition from Samsung and other rivals, marketing blunders, delayed product launches, and a series of executive departures caused its market share to slide to 2.5% by 2013, according to research firm Gartner. That pushed HTC's annual revenue down by 56% between 2011 and 2013. Today, HTC is throwing darts at all other promising markets, such as action cameras, smartwatches, and even a possible rival to Google Glass.
Apple and Samsung respectively control 27% and 17% of the tablet market, according to IDC. But the key difference is that Apple is losing control of the tablet market at a much faster rate than the smartphone sector. Between the second quarters of 2013 and 2014, Apple's smartphone share only slipped 1 percentage point, but its share of the tablets market fell 5 percentage points. That drop was caused by an increased fragmentation of the market, which let PC makers like Asus, Acer, and Lenovo gain market share.
Thanks to a boost from Nexus 7 sales, Asus now controls 4.6% of the tablet market, up from 3.3% a year ago. In 2012, Asus reported that its profits soared by double-digits thanks to sales of the first Nexus 7.
The HTC Flyer. Source: HTC.
There's not much for HTC to lose in making a new Nexus tablet, but it has plenty to gain. It gets an instant market with the Nexus branding, a possible new stream of revenue, and a toehold in the tablet market. Although HTC will probably only claim a tiny sliver of the market, it's a good place to be -- Gartner expects global shipments of tablets to rise 25% year over year in 2015, to 321 million.
Why Google keeps launching Nexus tablets
Google controls the design, development, marketing, and support for Nexus devices, while its hardware partners handle some of the development and all of the manufacturing. The line also includes five smartphones, which were manufactured by HTC, Samsung, and LG.
Therefore, Google spends a lot less money than Apple, which must handle agreements with suppliers and contract manufacturers to produce its tablets. In return, Google enhances underdogs such as HTC and Asus with the distinction of launching first-party "Google tablets" or "Google phones." That distinction makes it easier to win over consumers who might want something other than an iPad but are confused by the fragmented market of Android devices. Google keeps things easy -- a simple name, Nexus, followed by a number designating the device's screen size.
But Google's real intention isn't to have Nexus tablets challenge the iPad. Instead, it rotates the Nexus brand between partners to prevent one company from dominating the Android space. Samsung is one such company. Samsung has installed its own OS, Tizen, on several smartwatches and a delayed smartphone. It also launched its own app store for Android devices to challenge Google Play, disrupting Google's 30% cut of app revenue on its devices. If Samsung suddenly replaced Android on all of its smartphones and tablets with Tizen, it would immediately own the third-largest mobile OS in the world.
Simply put, Google needs HTC, Asus, LG, and other companies to keep Samsung's growth in check.
A Foolish final word
The Nexus 9 partnership is a positive development for HTC. However, investors should remember that it's likely a limited time deal, and the brand will probably rotate to another manufacturer within a few years.
HTC investors should also remember that Google is likely less interested in saving HTC than it is in preventing Samsung from becoming a major competitor.
