Taiwanese handset maker HTC (NASDAQOTH:HTCCY) recently reported that its May revenue slipped 20% from April, and plunged nearly 50% from the prior-year quarter. That's horrid news because it just launched its newest flagship, the HTC One M9, in April.
HTC also slashed its guidance for revenue for the current quarter, and expects both gross margins and earnings to come in lower than the prior-year quarter. HTC stock has plummeted nearly 50% during the past six months.
Unfortunately, things could get much worse for HTC. Let's take a look at three reasons why I believe the company could be in big trouble.
1. Late to diversify
Back in 2011, HTC controlled nearly 11% of the global smartphone market. Unfortunately, Samsung (NASDAQOTH:SSNLF) -- armed with a superior marketing strategy and deeper pockets -- steamrolled HTC in the premium Android segment with its popular Galaxy S devices.
By 2012, Samsung's popular Galaxy S3 overtook Apple's iPhone as the best-selling handset in the world. Meanwhile, Chinese companies like Xiaomi, Huawei, and Lenovo flooded the market with cheap devices sporting comparable hardware as HTC's pricier phones.
HTC, like Sony (NYSE:SNE), lost ground as customers looking for "premium" Android devices bought Samsung phones, while other customers were drawn toward cheaper Chinese rivals. Today, HTC and Sony each control less than 2% of the smartphone market. Samsung, which launched a dizzying array of low-end, mid-range, and premium devices, now controls 25% of that market, according to IDC.
HTC finally decided to launch more low- and mid-range handsets last year. But by then, plenty of companies were launching "emerging market" devices to escape the Apple/Samsung duopoly.
2. Lazy designs and terrible marketing
HTC's One devices were critically acclaimed for their stellar designs. Unfortunately, the man who designed those devices, head of design Scott Croyle, left the company last year. HTC acquired Croyle's One & Co. studio back in 2008 to improve its design aesthetics. Croyle's successor, fellow One & Co. designer Jonah Becker, quit just 11 months later.
As a result, the HTC One M9 looked nearly identical to the One M8, Croyle's final design, and critics and consumers noticed. Stuff reviewer Andrew Williams noted, "While the HTC One M9 body is a new design, you could be forgiven for thinking it's basically the same as the HTC One M8." It was the exact mistake that Samsung made with the Galaxy S5 -- fickle users and critics tore it apart for being too similar to the S4, and sales suffered.
HTC CEO Cher Wang recently blamed the company's "overly conservative marketing strategy" for the One M9's shortcomings, according to Taipei Times. But HTC's marketing strategy wasn't "conservative" -- it was simply terrible. In 2013, HTC paid Robert Downey Jr. $12 million to star in abstract ads that barely mentioned its phones. Earlier this year, HTC launched a cringe-inducing "Hold the Crown" rap ad and a bizarre pharmaceutical ad parody that failed to showcase its new devices.
3. Clueless leadership
In March, co-founder and chairwoman Cher Wang replaced Peter Chou as CEO. During his tenure as CEO, Chou made some pretty silly decisions. As HTC's market share declined, Chou had HTC launch gimmicky devices like a 3D phone, phones with dedicated Facebook buttons, and the world's first Facebook phone, the HTC First.
Prior to replacing Chou, Wang contributed to the development of non-smartphone devices like the Re Camera, Grip fitness band, and Vive VR headset. Yet none of those were original ideas. In fact, Samsung was pursuing a similar diversification strategy with wearables and VR headsets, and plenty of camera makers have been making action cams to catch up to GoPro.
Wang hopes that new ideas developed in HTC's Future Development Lab will steer the company in the right direction. Unfortunately, Wang inexplicably put Chou -- the man who believed 3D and Facebook phones would save HTC -- in charge of that division.
No turning back now
HTC is stuck between a rock and a hard place. The market for premium Android devices is dominated by Samsung, while the rest of the market is a commoditized and fragmented mess. Android handsets will only get cheaper due to the widespread availability of turnkey chipset solutions that help companies to launch new smartphones in just six to eight weeks.
Sony's plan is to try to sell fewer smartphones at premium prices, although mobile head Hiroki Totoki told investors that strategy might cause the unit's revenue to decline 20% to 30%. HTC obviously can't afford to do that, because it isn't a diversified conglomerate like Sony.
This means that HTC is headed straight off a cliff unless it can somehow diversify away from smartphones. I seriously doubt that will happen anytime soon.
Leo Sun owns shares of Apple and Facebook. The Motley Fool recommends Apple, Facebook, and GoPro. The Motley Fool owns shares of Apple, Facebook, and GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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