Tue, Jul 19, 2011 - Page 12 News List

Ruling puts HTC in hot water: analysts

BARGAIN HUNTING:Despite the ITC’s ruling against the Taiwanese company, HTC is hopeful Apple’s patent infringements of a company it bought will help settlement talks

By Jason Tan  /  Staff Reporter

Market watchers said HTC Corp (宏達電), the world’s fifth-largest smartphone maker, is in hot water, with such challenges as royalty payments and an injunction on phone sales, after the US International Trade Commission (ITC) initially ruled on Saturday that it had infringed two patents belonging to Apple Inc.

Shares of HTC closed down 3.97 percent to NT$871 on the Taiwan Stock Exchange yesterday, despite the company’s effort to buy back as many as 20 million of its own shares between yesterday and Aug. 17 and between Aug. 18 and Sept. 17, according to exchange filings made on Saturday.

“If Apple views HTC as one of its major competitors in the US market for high-end smartphones and leverages these legal tactics to seek royalty payments, this could raise HTC’s cost structure relative to Apple and other Android-phone makers,” Morgan Stanley said in a report yesterday.

There could be potential downside to earnings from next year onwards if HTC has to settle with royalty payments, it said.

The move could adversely affect HTC in its pursuit of a greater market share if other Android makers are not required to pay the same royalties as HTC, the report said.

The ITC will make its final ruling in December — with Citigroup saying on Sunday that the ITC’s initial verdicts have seldom been overthrown at the final rulings in the past, and HTC is expected to reach a settlement with Apple by then, or — in the worst case -scenario — face a US sales ban of its phones.

About half of HTC smartphones are shipped to the US — its anchor market.

Morgan Stanley said US operators’ attitudes would also be key to HTC’s legal battle.

HTC, the world’s largest maker of smartphones running on Windows and Android platforms, has a good rapport with long-term US partners, including Verizon and AT&T.

“[It will depend] whether these operators are content to have limited choices on smartphone selection; if not, eventually this is also a question as to whether HTC and other Android device makers could pass on higher costs to customers to mitigate the impact on margins,” Morgan Stanley said.

HTC may have to increase phones’ selling prices if it is paying Apple royalties.

On Saturday, HTC maintained that it was confident about its ownership of patents and was appealing against the ruling. Earlier this month, the company announced it was purchasing S3 Graphics Co, a graphic chip designer in the US, for US$300 million in a bid to obtain all of S3’s patents, including two which the ITC recently ruled that Apple had infringed upon.

HTC is expected to utilize S3’s patents to bargain with Apple in the legal battle, analysts said.

“We do believe that it will be very difficult for Apple to block HTC in the US unless Apple can work around S3 Graphics’ patents, which seems unlikely based on the information we have,” Citigroup analyst Kevin Chang (張凱偉) said in a report on Sunday.

Citigroup believe Apple would try to avoid using HTC’s S3 Graphic patents in its new A6 processors and take advantage of new patent lawsuits — which it lodged against HTC early this month — to further block HTC sales in the future.

This new round of suits may take the ITC another 12 months to settle, Chang added. The ITC’s ruling on Saturday was based on complaints Apple filed in March last year.

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