Apple's Smartphone Rivalry with HTC Heats Up

Apple has filed a patent infringement lawsuit against Taiwan-based HTC, which is aggressively marketing its Android phones in the U.S. market.

By Bruce Einhorn

During last year's World Series, many U.S. baseball fans had their first introduction to HTC (2498:TT), a Taiwanese company that makes smartphones. After years as an outsourcing specialist that focused on producing handsets and other electronic devices for such customers as Palm (PALM), HTC was pushing aggressively to emerge from the shadow of its well-known clients and establish a name brand of its own. As part of the campaign, HTC bought prominent space on Yahoo! (YHOO) and YouTube (GOOG), as well as a spot during a Yankees-Phillies game. The tag line of the campaign: "Quietly Brilliant."

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"We do great things in a humble way," explained Chief Executive Peter Chou in an October interview at HTC headquarters at an industrial park near Taiwan's international airport. "We let our actions speak louder than our words."

HTC will need to start speaking up now because the company is getting a very different sort of publicity. On Mar. 2, the top name in smartphones, Apple, launched an offensive against its Taiwanese rival, filing patent infringement lawsuits in U.S. federal court in Delaware and also with the U.S. International Trade Commission. HTC "manufactured, imported, and sold…without license, many technologies developed by Apple and protected by patents issued to and owned by Apple and its fully-owned subsidiaries," Apple alleged in its complaint to the ITC.

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HTC spokeswoman Maggie Cheng referred to a company statement that said HTC "has been very focused over the past 13 years on creating many of the most innovative smartphones." The company added that it "values U.S. and international patent rights and will work within the U.S. judicial system to protect its own innovations and rights." HTC also said that it "does not believe this lawsuit poses a short-term material impact to its business nor will it affect its Q1 2010 guidance." Investors weren't so sure: HTC's Taipei-traded shares fell over 3% in early trading on March 3. The stock recovered some ground and ended the day down 2%, its biggest drop in three weeks, while the benchmark index rose 0.4%.

Apple's lawsuit could signal that HTC is back on the right track, analysts say, as the company rolls out more phones using the popular Google-backed Android operating system. HTC struggled last year, with revenue falling 9%, to $4.4 billion, and earnings dropping 25%, to $685 million. The company suffered because of growing competition in the market and its product mix was heavily slanted toward phones using Microsoft's (MSFT) Windows Mobile operating system—software that often received negative reviews from critics and users.

Negative reviews are not much of a problem for Android phones from HTC and other companies. Last year, smartphones with the new Android OS had shipments of just 400,000, 1% of the global market, says Aloysius Choong, an analyst in Singapore with IDC. This year, Android shipments should grow to 3 million and in 2011 will top 6 million, he adds. Android "is a major platform for being competitive with the iPhone operating system," says Choong. As it sells more Android phones, "HTC is not just trying to build brand among the early adapters and smartphone enthusiasts but within the mass market as well."

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