HTC and Its Stark Future in Virtual Reality

HTC was one of the giants in the smartphone world. At its peak, the company commanded a global smartphone market share of more than 10% and over $30 billion of market value. However, the golden days did not last for the company, as its sales and market share began to decline in 2012. Now, company is worth only about $2 bllion, a +90% decline in value. 

Despite its trouble, the Taiwanese tech giant never gave up. Even after its failed attempt in smart watches, it has been making a comeback by innovating and venturing into the next hot thing: virtual reality. In partnership with Valve, HTC launched one of the most popular virtual reality headsets: HTC Vive. The company has been making efforts to return its glory days by staying ahead of the trend. So far, their hard seems to be working. HTC stock has almost doubled from its lows of TWD 44.6 in August 2015 to TWD 84.1 today.

However, there are good reasons why their success will not only be short-lived, but its tragic history in smartphone is about to repeat itself. 

What happened with smartphones?

What happened was actually quite simple. For high-end phones, two things mattered most: 1) control of software and 2) brand. Apple had both, as its control of iOS and the Apple App Store allowed it to set itself apart well ahead of the crowd. Samsung, while it did not have any software advantage, had a massive marketing budget that was multiple times bigger than HTC’s entire revenue. HTC simply could not compete in the high-end market.

In the low-end market, however, HTC also was not able to compete against the likes of Xiaomi and Huawei, who were either selling at razor thin margins or had immense scale to compete on price. In the end, HTC got stuck in an awkward middle and eventually failed to “survive” in the incredibly competitive market of smartphones.

Analogy of VR and Smartphones

HTC Vive retails for $799, which is certainly more expensive than Occulus Rift which retails for $600. PlayStation VR is coming out later this year at $400. Most reviews online claim that HTC Vive certainly has a better quality. This difference in quality, however, is already failing to keep HTC at the top. Valve's Steam survey of hardwares show that HTC Vive's market share has declined by 6% from May to August this year. Though HTC continues to have a 60% market share according to Steam, I would bet that HTC Vive’s superiority will not last for long. 

Steam VR market share

Source: Steam Hardware & Software Survey

In the world of VR, Facebook and Sony resemble Apple. They both have big brand names (Oculus, PlayStation) and control both the hardware and software. In new technology like these, controlling both aspects of the device is crucial in creating superior performance. Hence, these two companies are likely going to be successful in the high end.

Valve, the famous creator of the game engine Steam, resembles Google. Just as Google provide its Android to smartphone OEMs, Valve has partnered with HTC. While HTC has claimed that its partnership with Valve is a unique strength, it is hard to believe that Valve will continue to partner with HTC exclusively. Just as Google wanted Android to be omnipresent (and increase usage of Google Search & Maps), Valve has every incentive to partner with any legitimate hardware manufacturer.  In other words, this partnership will not likely be a differentiating feature for anyone.

Samsung is Samsung. For some time, this giant will likely continue a similar pattern of dominating the high end with its manufacturing prowess and huge marketing budget, until its competitors’ devices get good enough.

A quick search on Amazon or Google already shows a variety of VR headsets with great reviews. While most of these are not compatible for VR games, if history is any indicator, Moore’s Law will help all these manufacturers to evolve and improve their products over time.

Amazon search VR headsets

Bad News for HTC

Despite its initial success in VR, HTC continues to bleed money at a rapid pace. Its gross margin has been declining even after the launch of HTC Vive, and it continues to lose money. While this situation may improve temporarily, if the scenario described above plays itself out, HTC will likely find itself in the same position that it was in only last year.

(mn TWD) 2011 2012 2013 2014 2015 2016 LTM
Gross Margin 28% 25% 21% 22% 18% 14%
Revenue          465,795          289,020          203,403          187,911          121,684          80,833
Free Cash Flow            80,096            16,951          (44,788)            (1,713)          (14,040)       (13,187)
Duckju Kang

Duckju (DJ) is the founder and CEO of ValueChampion. He covers the financial services industry, consumer finance products, budgeting and investing. He previously worked at hedge funds such as Tiger Asia and Cadian Capital. He graduated from Yale University with a Bachelor of Arts degree in Economics with honors, Magna Cum Laude. His work has been featured on major international media such as CNBC, Bloomberg, CNN, the Straits Times, Today and more.