Taiwan's HTC boosts patent bank; not worried over disputes

A man poses with a replica of the HTC smartphone inside a mobile phone shop in Taipei April 6, 2012.

Credit: Reuters/Shengfa Lin

By Clare Jim and Argin Chang

TAIPEI | Wed Jun 13, 2012 9:38pm EDT

TAIPEI (Reuters) - The head of Taiwanese smartphone maker HTC Corp, embroiled in patent battles with Apple Inc and others, said his company had completed the purchase of U.S. graphics chipmaker S3 Graphics, arming itself with more than 200 patents.

Patent spats with Apple forced HTC to delay the launch of one of its flagship devices in the United States, once its biggest market, and modify others to comply with a ruling by the International Trade Commission (ITC). Apple has since filed at least two other complaints, including one last week alleging HTC was still infringing the patent and demanding emergency action against 29 of its devices.

But HTC CEO Peter Chou dismissed concerns that such disputes have any long-term impact on the company, arguing that investors and analysts misunderstood the situation.

"Patent lawsuits haven't caused any actual damage to HTC," he said in an interview on Wednesday. "Only the Street is worried for us, we're not worried ourselves. We hope the disputes will get more reasonable in the future."

It's not been a good year for HTC, the world's No.5 smartphone vendor, which had been building strong brand value in high-end smartphones.

Battling to regain market share from Apple and Samsung Electronics, the former contract handphone maker suffered a rapid fall from grace in the second half of last year after its phones failed to keep pace with rival iPhones and the Galaxy range.

Last Wednesday, HTC warned of lower revenues for the current quarter, citing lower-than-anticipated sales to Europe and delayed product sales in the United States. The company cut revenue targets twice in the fourth quarter.

HTC shares have slumped 72 percent in the past 14 months, and this week touched their lowest in more than 26 months. The company's market value has dropped to below $10 billion. Over the same period, Apple shares have gained 65 percent and Samsung 42 percent.

HTC's decision to buy S3 Graphics, which has fought and lost its own complaint against Apple, was announced last July; analysts said HTC had either lost interest in the $300 million purchase after the ITC ruled against S3 in November, or it was employing a negotiating tactic.

While they agreed S3's payments would be useful to HTC, analysts said it would offer only limited respite. While Apple's main target is Google, which provides the operating system that powers most of the smartphones sold by HTC, Samsung and others, HTC was by no means safe.

"Buying S3 gives HTC a small improvement in the balance of power, but not nearly enough to be decisive," said Caroline Gabriel, research director at Rethink Technology Research.

Chou said the S3 purchase was now complete and was part of a strategy, with HTC considering similar investments. "HTC as a company needs to invest in patents, so this is a very good deal. Many companies spend a lot of money to buy patents. We'll stay open-minded for future similar purchases. If there's something right and there's a good opportunity then we'll consider it."

UNEVEN PLAYING FIELD

He did, however, acknowledge that as a smaller player HTC was facing an uneven playing field dominated by bigger players with deeper pockets. "We think this is not healthy to the industry, this is not good for innovation and this is not fair to smaller companies. If it's not going to stop, small companies will never be able to compete with big companies. So this has to be rationalized."

The patent dispute is only part of HTC's problems.

Although the launch of its high-end One series in February has won praise and some market share, this has a lot to do with its timing - a few weeks before Samsung's flagship Galaxy S3 and with no new iPhone models due until later in the year.

"While we believe S3 and One X are both well designed high-end smartphones, it's increasingly difficult to differentiate on the hardware front," said KGI Securities analyst Richard Ko, who last week cut HTC's stock rating to 'underperform'.

"More importantly, we believe HTC lags Samsung and Apple on brand, distribution channel, scale and cost. These disadvantages will stifle HTC's smartphone shipments in the second half, further diluting HTC's market share and competitiveness," Ko said.

Chou expressed frustration with analysts' negative views, and asked for time.

"There's no step we've taken that was particularly wrong," he said. "How many companies can produce a phone like the HTC One? We have a very good team and a lot of talent. We're a profitable company. All business is like this: sometimes good, sometimes bad. People should not harp on about it all the time."

(Additional reporting by Jonathan Gordon; Writing by Jeremy Wagstaff; Editing by Ian Geoghegan)

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