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Is HTC About To Go Bust?

That things have been bad financially for HTC hasn’t been news for some time. Things are getting downright dire this week, though — a Wall Street milestone of the very worst kind along with a security flaw of the very worst kind.

The setup jab came from the Black Hat Security Conference in Las Vegas, where a team of researchers revealed their general findings about the security of fingerprint scanners on Android phones (overall conclusions — not promising). While a number of brands came under scrutiny in the study, HTC was hit hardest by the revelation that their One Max smartphone stored fingerprint scans as simple, unencrypted, plaintext .bmp files that can be accessed by any program. In other words, if a hacker gets control of your phone through malware or malicious apps, they can see your fingerprint with no difficulty before setting about trying to find ways to spoof it. Whenever plaintext and sensitive information go hand-in-hand, it’s always bad news, and this certainly is no different — after all, fingerprints can’t just be changed like passwords.

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The knockout blow came from Wall Street, thanks to a eminently shareable piece of bad news — that HTC stock is now so low, the sum total of its shares is worth less than what the company has in the bank. Essentially, it’s the invisible hand of the free market becoming visible just long enough to give HTC the finger. The company is perceived to be worthless, and on Wall Street, perception is reality. As Business Insider points out, the main problems are price and profit — an increasingly viral statistic says that on average, each Android phone sold makes about a penny in profit. HTC is below average.

HTC is one of the few Android phone manufacturers still trying to compete in the high-end market, along with Samsung. The massive marketing budgets and expensive components needed to compete along with the Galaxy S series and the iPhone are considerable, and unlike the other two, the HTC One series hasn’t proven to be competitive — Apple and Samsung continue to dominate, with HTC picking up a much smaller share of the market.

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Another problem is that the shotgun approach to budget phones appears to be backfiring. The chart above is from OpenSignal, and is a visual aid telling you how many Android phones are on the market (and how well they’re selling). Note that this is as of August 2014, so now even more devices are available. Usually, I’d say more choice is never a bad thing, and maybe it still isn’t for the consumer, but it’s a disaster for some of these companies. There’s no way these companies can communicate the differences between all their phones to enough customers, especially not in a world where Apple is just cranking out the iPhone (note how quickly they dropped even the lone budget offering, the 5c). Just scroll down to the HTC Desire portion of HTC’s online store and your eyes are guaranteed to glaze over before you realize it used to be worse.

The prevailing strategy in Android has been to churn out as many mixes and matches of components as possible in the hope that there are little niches of customers that a particular configuration at a particular price will appeal to. The chances of those niches ever being fully aware of that their perfect phone exists has been slim, assuming those niches even exist. In the meantime, each of those disparate phones needs its own budget, and none of them are going to be pulling in much profit, if any.

It’s hard to tell how HTC can move forward. Even if they do simplify their offerings, their native Taiwan isn’t the most advantageous country to operate out of, economically — because of their longstanding political dispute with China, it’s been difficult to sign free trade agreements with regional trading partners, hurting the competitiveness of their exports versus companies based in China or South Korea. The cruelly ironic part is that HTC doesn’t make bad phones — the HTC One M9 is absolutely one of the best devices to hit the market this year. But, having a flagship phone is becoming as much of a luxury for manufacturers as it has been for consumers. HTC might need to hop out altogether and focus on competitively-priced budget offerings, but even that could amount to a stopgap measure.

Thing is, this a problem facing all Android manufacturers, save for the companies capable of operating at the thinnest of margins or capable of producing phones at the lowest cost. It feels like the entire industry needs a dramatic shift in strategy — and the answer might be modularity. Motorola has been successful with this to an extent with the customizability of the Moto series, but you can see the future in Project Ara, Google’s experiment with building a modular phone where consumers pick and choose the components they want. It’s not a replacement for phones as they are now, because there will always be people who (rightly) can’t be bothered with the technical details and just need something that works. What modularity can do is take advantage of a consumer base now hyper-aware of all those features — processor, display quality, camera — that manufacturers constantly crow about, making it easy for them to make their own perfect phones without having to wade through an ocean of Desires.

Then again, modularity could be the death knell for manufacturers as we know them, too. While Samsung has helped itself tremendously by starting to make its own processors, a shift to modularity will likely favor component manufacturers. After all, HTC’s plight becomes much clearer when you ask what, exactly, HTC is providing in terms of value. They make the HTC Sense Android overlay and they’re responsible for the shell that encases components made by other companies — and the former isn’t something to brag about in an Android market almost always clamoring for more stock Android options. Finding a way to fit all those components together into an attractive case takes considerable skill, but that goes out the window with modularity. In that world, HTC as we know it is rendered as worthless as Wall Street thinks it is today — and they won’t be alone.

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