Never Mind the Lawsuits, HTC Is on a Buying Spree

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Taiwanese smartphone maker HTC has been on a buying spree to reshape its business and help defend against lawsuits, though it remains to be seen if the strategy will help it gain ground on rivals such as Apple, Samsung and Research In Motion.

HTC has bought or invested in at least six companies this year, many of which provide technologies to improve how users consume and share content on its devices. It's a big change for the Taiwanese manufacturer, which focused for much of its existence on hardware, leaving software and content to its partners.

Times have changed, however, with rivals like Apple and Nokia building whole ecosystems around their products, including app stores and content delivery systems. HTC has shifted its focus before, moving from contract manufacturer for Microsoft's smartphones to selling its own HTC-branded devices. It must now evolve once more.

"It is no longer enough to focus only on hardware innovations," said Ryan Lee, an analyst with Taipei-based Topology Research Institute. HTC's acquisitions, which include both technology and patents, "pave the way for HTC's greater competitiveness," he said.

HTC ranked fifth in worldwide smartphone sales during the second quarter, behind Apple, Samsung, Nokia and RIM, according to IDC. But HTC was among the fastest-growing vendors, more than doubling its shipments to reach 11 percent of the market, up from 7 percent a year earlier.

HTC's latest investment came Aug. 11, when it said it would pay US$309 million to acquire 51 percent of Beats Electronics, the maker of headphones endorsed by rap producer Dr. Dre. HTC said the deal would enable it to put "recording-studio sound quality" into its smartphones and reach a younger audience of users. It also put it directly into the market for phone accessories.

Just a week earlier, HTC said it would spend $18.5 million to buy Dashwire, which sells a technology that lets users back up photos, contacts, text messages and other smartphone data in the cloud, and to access that data from a PC Web browser. HTC said it will integrate the service with HTC Sense, its user interface for Android phones.

HTC's competitors are also building cloud services -- notably Apple's iCloud storage service, unveiled in June. They are also using other weapons, including technology patents. In March last year, Apple sued HTC for alleged infringement of 20 patents related to the iPhone's user interface, hardware and "underlying architecture."

HTC seemed caught off-guard by the lawsuit, which some analysts have said could eventually require it to pay royalties to Apple. But HTC has shot back with lawsuits of its own, and this year it turned to another acquisition for help.

In July HTC said it would buy graphics chip maker S3 Graphics from Via Technologies for US$300 million. HTC will get S3's portfolio of 235 patents and pending applications, including many related to graphics.

It was perhaps no coincidence that a few days before the deal was announced, an ITC judge ruled that Apple had infringed some of S3's patents.

HTC partners well with telcos to incorporate their content services into its phones, said Jeff Pu, an analyst with Taipei-based Fubon Financial Holding. A growing awareness of its brand and good hardware designs should help it stay competitive, he said.

"HTC is establishing long-term differentiators," according to Pu.

In March it spent US$10 million for an 11 percent stake in KKbox, a fast-growing online music service that operates in Taiwan, Hong Kong and Japan, and is eyeing the huge China market.

The Taiwan firm has also been trying to build a unique user experience at, via investments in Saffron Digital, OnLive and KKbox.

It spent $48.5 million to buy Saffron Digital, which offers encoding, DRM (digital rights management) and other technologies for delivering online video. And it invested $40 million in on-demand games provider OnLive.

HTC is making a good show of not being distracted by its legal problems. In a July teleconference, CEO Peter Chou dismissed its disputes with Apple as "side effects" and "little disturbances" that affect any growing company.

The global electronics market has become more turbulent and Taiwan companies need to be "physically fit" to compete, Stan Shih, founder of Acer Group, said in a recent interview.

"You can't foresee the tactics your rivals will use to crush you," he said. Taiwanese companies are relative newcomers to the patent game but have been upping their investments in this area, he added.

HTC is spreading its bets. A big Android supporter in recent years, last week it became one of the first vendors to launch phones based on Microsoft's Windows Phone 7 Mango software.

Mango has tighter integration with Microsoft's online Office applications. But not surprisingly, the HTC phones, called Titan and Radar, also include some of HTC's own applications, such as HTC Watch, which allows users to watch film trailers and rent or download films to their devices.

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