HTC, the last of the old guard, has sold its phone team too — how did the first generation of smartphone brands die? | QDaily Business History

Almost every one of them was dragged down by the baggage of its own past.

Last Thursday, Google announced it would buy the engineering and design team behind HTC's phone business for $1.1 billion.

Some called it a talent buy: more than 2,000 engineers from HTC's phone team will join Google.

By that math, HTC's phone team did not fetch much — about $550,000 a head. When Facebook bought Instagram in 2014, it paid the equivalent of $77 million per employee.

HTC's high point was 2011, when its market value reached $33.8 billion, passing Nokia and BlackBerry to make it the third most valuable smartphone company in the world, behind only Apple and Samsung.

Others read the deal as Google buying the contract-manufacturing operation behind the Pixel. But HTC's market value today is only $2.1 billion, and Google spent half that sum on people alone, without taking HTC's factories. This was plainly about more than manufacturing.

The iPhone arrived in 2007, into a smartphone market that was already far from small. Every smartphone company of that era has now been wiped out.

Nokia and Sharp are today companies backed by Foxconn money; BlackBerry and Alcatel became TCL's phone brands; Palm sold itself to HP early and then disappeared; Motorola was sold twice, with 95% of its core team laid off…

HTC is the last of them, and it exits right on the iPhone's tenth anniversary.

How did its contemporaries fall, step by step?

When the iPhone launched in 2007, four mainstream smartphone operating systems shared the world

Today most smartphones look alike: a big screen on the front, the same rounded corners, the few surviving buttons pushed to the sides and the bottom. They run either iOS or Android.

Before the iPhone arrived in 2007, phones came in every shape imaginable. Some had a numeric keypad, others a computer-style QWERTY keyboard. Some hid the keyboard inside the body, to slide out from the bottom or the side.

Phone operating systems were far more varied than they are now: Symbian, led by Nokia; BlackBerry's own BB OS; Microsoft's Windows Mobile; and Palm OS, built by Palm.

A Hollywood hit of the period even had a scene in which the second male lead uses a Nokia 9300i to break through the firewall of a city power grid and drop the whole city into darkness.

That was a smartphone running Symbian S80. It had two forms in one. Held upright it was the candy-bar phone common at the time, with a numeric keypad and a 2-inch color display. Turned sideways and opened like a laptop, the 9300i revealed a 4-inch display and a full-size keyboard.

Nokia's smartphones took many shapes, but they had one thing in common: they were designed around a keyboard. In 2007 Nokia sold more than 40 million Symbian phones.

Microsoft, BlackBerry and Palm each had a phone operating system of their own in the same years, and each had its own character. BlackBerry's and Palm's systems, for instance, were known for their elaborate keyboard shortcuts. Microsoft's Windows Mobile had a touchscreen, but it was still built for a stylus — for poking and tapping at the glass.

You will find almost none of these ways of using a phone on a smartphone today.

The big change the iPhone brought was to put as large a screen as possible on the front of the phone: no keyboard, no stylus, everything done by touching the screen with a finger.

To make that work, Apple moved from a resistive touchscreen to a capacitive one with multi-touch. A capacitive screen is far more sensitive than a resistive one, so you could type quickly on a virtual keyboard. A physical keyboard was no longer essential.

In the fourth quarter of 2007 Apple sold 1.9 million iPhones, already half of what BlackBerry sold in the same three months.

The old guard answered the iPhone fast, but the only thing their products shared with it was a screen you could tap

After the iPhone launched, every rival said in public that it was unbothered. Inside, all of them went to work.

Nokia's executives took the shift to touchscreens seriously and released the N97 in 2009, with a full keyboard that slid out from the side. This was the Finnish giant's weapon against the iPhone.

One of BlackBerry's co-founders took an iPhone apart himself once it went on sale, then pushed through development of the all-touchscreen Storm series, BlackBerry's first phone without a keyboard.

But BlackBerry did not follow that road. It kept building both full-keyboard and touchscreen models, and even after it moved to Android it never gave up the full keyboard.

The hardware was bigger, thicker and slower than the iPhone's. The bigger problem was that the systems underneath were still built, at bottom, for keyboard control.

This was the new touchscreen system on the N97 mini. It was still designed for a keyboard. After touching a menu item, you still had to tap a confirm button in the lower left. Nothing about it was direct.

The BlackBerry Storm was the same: an all-touchscreen phone that still lit a button up the way a keyboard-driven system highlights the item you have selected.

Even HTC, which had no operating system of its own, tried to change. In June 2007, around the time the iPhone went on sale, HTC released the HTC Touch. It ran Windows Mobile, but for the first time it carried a brand-new interface made for fingers.

Because Microsoft would not tune the system for finger control itself, HTC built its own interface, TouchFLO, which later became Sense. In effect it was a shell wrapped around Windows.

Nearly every maker, in short, copied the iPhone by building a touch system. That was also the only place their products resembled it.

Apple, by contrast, knew exactly what system it wanted and what kind of interaction it wanted. Then it built the hardware, wrote the software, and delivered the iPhone.

By holding on to their own operating systems, the biggest phone makers of the day missed their chance to change

The first company to throw out its old system and start over was Palm.

This niche company, built on handheld computers and with a decent installed base in the US, brought in Jon Rubinstein as CEO — Apple's former head of iPod hardware and a core executive in the iPhone's design and development, who had by then left Apple.

Palm showed its new phone, the Palm Pre, at CES in 2009, along with the webOS operating system. The card-based multitasking view now found everywhere was webOS's idea first.

Nokia was two years behind. In June 2011 it launched the N9 and the MeeGo operating system.

The N9 was a breakthrough in industrial design, the first phone to curve the glass at the edges of the screen — the design later called a 2.5D screen, which Android phones and the iPhone would both adopt. (It also tucked the front camera into the bottom-right corner to save screen space, the way the Xiaomi Mi MIX later would.)

Slowest of all was BlackBerry, which bought the QNX operating system in 2010 and did not ship BB OS 10, built for all-touch phones, until 2013.

Two years, four years, six years: that is what it took each of them to produce a system that could stand against the first iPhone.

Apple did not stop and wait.

While these companies were still solving the most basic problems of finger control, Apple updated iOS every year and kept improving it:

Major iOS updates

2007

iPhoneOS: multi-touch

2008

iPhoneOS 2: the App Store, giving outside developers the standards and support they needed to design apps

2009

iPhoneOS 3: push notifications

2010

iOS 4: real multitasking, Game Center, FaceTime video calls, very high resolution

Had these phone companies switched to Android at once, some of them might still be alive.

But controlling the software was the only way to hold real power, and customizing software was a large part of building a brand. So Nokia, BlackBerry and Palm all refused to give up their own systems.

Every Android maker today does face the problem of sameness, and apart from Samsung, whose chip business is thriving, margins are thin all round.

But these companies had to keep selling the previous generation of phones while building a new system at the same time, and in the end none of them could produce a system fast enough to compete with the iPhone.

Palm was small. It burned through its money and sold itself to HP in 2010.

After the failure of 2008, BlackBerry went back to keyboard phones. Its new system slipped to 2013, by which point the company was essentially waiting to die.

Nokia was the richest of the three, with the most valuable brand and the most complete factories and sales channels. Through all of 2010 Nokia's profits stood at the highest point in its history; it and Apple took more than 80% of the profits in the entire phone market.

But Nokia's board lost faith in the CEO of the day. A new one took over in 2010, and in early 2011 he announced that the company's current products had no future and that Nokia would move to Windows Phone.

Within a year Nokia's smartphone sales collapsed. Two years later the whole phone business was sold to Microsoft.

Microsoft's phone system died of infighting, and of trying too hard to copy the iPhone

If building a system to chase the iPhone was a gamble for the other phone companies, for Microsoft it was compulsory. An operating-system company that did not build its own system had only one other option: leave the market.

Microsoft had far more software engineering strength and platform experience.

But infighting at the decisive moments turned both Microsoft and Nokia into tragedies.

After the iPhone came out, Microsoft already had a touch-based system inside the building, incubated by the Xbox team.

To keep it clear of Microsoft's own aging Windows Mobile, this project — tuned for multi-touch — was repositioned as a feature phone, and its launch slipped again and again. It did not go on sale until 2010.

Xbox could not beat the Windows Phone team inside the company. The Kin came to market carrying all that weight and died almost at once.

The first Windows Phone 7 with multi-touch arrived in the second half of 2010 and was received rather well.

But Microsoft was under an illusion about Windows Phone. It believed it could stay out of hardware and still keep a tight grip on the phone makers and carriers that used the system: carriers could not install their own software, phone makers could not customize the skin, and everyone paid a licensing fee on top.

Google, it later turned out, was fairly harsh about Android too — but only after it had taken most of the market. Microsoft did it while almost nobody was using Windows Phone.

Microsoft and Nokia finally began working together fully in early 2011. Then Windows Phone updates stopped dead. Held back by the system, Nokia could not produce its first dual-core Windows phone until the summer of 2012, more than a year after the dual-core iPhone 4S had gone on sale.

The delay had a cause: once mobile became the trend, the Windows division wanted in.

Microsoft split its divisions by product line, and each division ran its own marketing and sales and kept its own revenue and profit statements. Under that structure, whichever division made the most money had the loudest voice.

In this fight, the Windows division beat Windows Phone. Microsoft's priority for phones shifted from improving the product fast enough to catch Android and the iPhone to falling into step with the PC business — one unified Windows 8 covering phones and PCs alike.

In the nearly two years Nokia spent waiting for Windows Phone 8, iPhone sales tripled and Android sales grew more than sixfold.

Then Windows 8 failed badly and the head of the Windows division left. Microsoft stopped again to turn toward Windows 10, once more demanding that phones and PCs march in step.

What came next was acquisitions, layoffs, more turns. In the end Microsoft's new CEO, Satya Nadella, dropped the phone business and stopped making the whole company revolve around Windows.

The "second-tier" phone makers, carrying no baggage, caught the rise of Android

After Android 1.0 came out, Google improved the system quickly.

More important, it was free to any phone maker who wanted it. From 2010, smartphone makers previously counted as second tier — Samsung, Huawei and others — began eating fast into the share of the old-generation companies still guarding their own systems.

By then the world could see plainly that an all-touchscreen phone plus an app store was the future of the smartphone. Carriers, a crucial sales channel, needed products like that.

But Apple only sold expensive iPhones, and each time it entered a country it signed an exclusive deal with that country's second-largest carrier first, to secure the best subsidy and promotion terms in negotiation. AT&T in the US and China Unicom in China were both second at the time.

That is why Verizon, the largest US carrier, was preparing to make the Palm Pre Plus and Pixi Plus its lead products for 2010. Then, in November 2009, the Motorola Droid launched, with a bigger screen, more speed and Android 2.0. People who spoke to The Verge said Verizon had already decided to drop the Pre Plus for the Droid.

The Droid was a huge success, the first Android phone to sell more than a million units. Selling in the tens of millions is unremarkable for a smartphone today; back then it was not.

The marketing money Verizon had promised Palm never arrived. Without that backing, the Pre Plus became a niche product aimed at one age group. Verizon later ended its purchase agreement, and Palm had already built up a mountain of inventory. That finished the company. HP bought the nearly bankrupt Palm in 2010.

HTC caught the Android rocket too, and peaked in 2011. In the third quarter of that year it held 24% of the market and became the largest phone maker in the US, pushing past Apple and Samsung.

It could not hold on. HTC wanted to catch users as they moved from feature phones to smartphones, and decided to build only high-end devices. It gave up flooding the market with models and narrowed the line to a few high-quality products, still mostly mid-range and high-end phones.

In this period HTC launched two high-end series, the HTC Butterfly in 2012 and the HTC One in 2013, both priced above 4,000 yuan. HTC set premium prices on products that were not quite premium.

The company that truly grew on this wave was Samsung. It entered the Android market in June 2009 with the Samsung Galaxy.

In 2011 Samsung seized the roughly eight-month gap that opened after Nokia announced its partnership with Microsoft. For those eight months, all Nokia had to sell were phones running a system it had itself called obsolete, and no carrier wanted to push that.

Carriers could not wait a year; they abandoned Nokia before users did. In that market, a competent, unexceptional product was all Samsung needed to win.

Samsung was more than competent. Its reading of what consumers wanted was especially sharp: the Galaxy Note series it launched in 2011 led the trend toward ever-bigger phone screens.

Samsung and Huawei succeeded because the smartphone stopped being a simple product business

What mattered most in a hardware business used to be difference — a better software experience, a better brand, or the hardware itself.

That turned the smartphone into something other than a simple product business with a regular yearly update. It became a vast business reaching across chip design, industrial design, channel management, supply-chain management, marketing and brand building. Any company that stood out had a large advantage in at least two of those areas.

HTC could not do it. At its peak in 2011 its profit was $2.1 billion, half of what Samsung spent that year on marketing alone. It could not plant phones through films and television the way Samsung did, let alone buy an entire terminal at London Heathrow to advertise in.

HTC lived under the illusion that it could create value through product difference. In fact every phone maker but Apple ran Android, so there was no difference in software; and in hardware HTC never controlled its suppliers or its channels, so it could not build real hardware difference the way Samsung did by iterating on its own screens.

Samsung, Apple and Huawei are today the three largest smartphone companies in the world. What they share is that all three can design their own chips and control a piece of the semiconductor business. Their early bets have paid off.

HTC's future, they say, is VR.

Cover image/CBS Television City, snowpeak via Visual hunt / CC BY