Reeling HTC didn't need any more bad news.
After a meteoric rise which placed it briefly atop the U.S. smartphone sales charts, it closed out 2011 with a deep decline in units sold. Determined to avoid the fate looming over other troubled rivals like Research in Motion, HTC saw a big revitalization push, championed by a slew of impressive flagship phones, such as the HTC One X and the refreshed Evo 4G LTE. The bid might have succeeded.
It might have suceeded had HTC not run afoul of punitive legal juggernaut Apple that is. HTC didn't need more bad news, but that is precisely what it received.
I. Data Tapping Ban Comes to Fruition
While HTC One X carrier AT&T and Evo 4G LTE Sprint Nextel Corp. (S) have some stock of the new Android smartphones, hopes of strong sustained sales may have been crushed this week. U.S. Customs officials announced that they were freezing imports of the Taiwanese designed devices, on the grounds of Apple's successful infringement case against HTC where it scored a preliminary injunction via the U.S. International Trade Commission (ITC).
The U.S. is the second largest smartphone market in the world, and by far the largest market for HTC, whose market share in China -- the world's largest market -- is minimal. That makes the import ban in the U.S. all the more painful.
The ban, which was confirmed by HTC this week, took effect on April 19, following a successful ITC claim by Apple last fall, which is running parallel to Apple's multiple infringement lawsuits against HTC in U.S. Federal Court.
Specifically, Apple's import ban focuses on U.S. Patent No. 5,946,647. The patent claims the invention of a process that converts phone numbers or addresses found inside apps into queryable objects. Called "data tapping" for short, the feature allows you to tap a number on a webpage within the web browser or from an email inside the email client app and be redirected to the phone app to make a call to that number.
Ironically a similar feature, which recognized web and file system urls and converted them to actionable links existed in versions of Microsoft Office Suite dating back to the 1990s. Further, other companies implemented custom software to parse office documents and create specialized actionable marked up versions in the early 2000s [example]. In short, Apple's "invention" hardly is new or novel.
However, the fact that it was granted a (re)patent on the idea of actionable text on a smartphone has enabled its legal team to successfully attack Android phonemakers. Apple has not sued Microsoft -- another rival phonemaker -- both because Microsoft likely owns patents on similar technology that predate its patents, and because Microsoft and Apple have a broad cross-licensing agreement in place that basically prevents the companies from suing each other. Apple and Google -- maker of Android OS -- have no such agreement.
II. HTC Already Removed the Feature, ITC Bans Imports Anyways
Ironically, HTC claims that the data tapping feature which is responsible for the ban has already been removed from its handsets.
HTC has shipped modified versions of Android, which have specialized browser app and email client app bills that prevent phone-numbers from being converted to actionable links.
Despite complying with the ruling, U.S. Customs (enforcing the ITC order) appears to be blocking imports "indefinitely" anyways, while it "inspects" the handsets to determine if the feature has been fully removed. In short, HTC has tried to play by the rules, but it may lose weeks to months of sales -- millions of dollars in revenue -- due to Apple's successful litigation and the Custom department's sluggish pace and determining whether the ban should be lifted.
HTC's tone was grim in a statement it released this week, commenting:
The US availability of the HTC One X and HTC EVO 4G LTE has been delayed due to a standard U.S. Customs review of shipments that is required after an ITC exclusion order. We believe we are in compliance with the ruling and HTC is working closely with Customs to secure approval. The HTC One X and HTC Evo 4G LTE have been received enthusiastically by customers and we appreciate their patience as we work to get these products into their hands as soon as possible.
Bonnie Chang, an analyst of Yuanta Securities says there's no telling how long it might be before the ITC/Customs might lift the ban, given that they thus far have appeared to refuse to spend what would seem to be an afternoon's worth of work to verify that the feature is gone.
States Ms. Chang to Reuters, "It's really hard to tell how much longer the phones will be held up at the customs because the review has already taken a month."
HTC, like Apple, manufactures its handsets in China. Thus an import ban is tantamout to a sales ban, once existing stock is exhausted.
III. Surprise Ban Could Spell Doom for the Troubled Android Phonemaker
Shares in the smartphone maker have plunged 10 percent this week on the bad news.
The ban on brand new handsets came as somewhat of a shock to HTC, as it had made it clear that it had removed data tapping from all new models. Despite that, the ITC/Customs seems to have implemented a draconian import ban on the new handsets "just to check". Previously it was thought that only older handsets, which were targeted in the case would be banned from import, pending inspection.
A Goldman Sachs Group, Inc. (GS) investors note comments, "Previously, it was expected that general exclusion order from the patent infringement referred to only old models from HTC. However, the latest news suggest otherwise with all models (new and old) potentially at risk."
The lost revenue could be a potentially game ending development for HTC, who was already struggling. In that regard HTC may become a martyr of sorts for Apple's critics and patent reform advocates in the United States.
After all, larger Android phonemakers Motorola and Samsung have escaped similar import bans, thanks to their large patent portfolios. By contrast, while HTC's phones have the exact same features as Motorola and Samsung (such as data tapping), it alone has suffered a U.S. ban, thanks in part to its smaller patent portfolio and much smaller legal team.
In that regard Apple has been accused of "picking on the little guy". But if Apple is indeed legally "bullying" HTC, it may turn out to be quite the lucrative move. While technophiles will likely bitterly oppose the move, most of Apple's critics were already Android buyers, and they overall represent a minority of smartphone users.
If Apple can succeed in putting HTC under such a crushing financial hardship that it collapses, the average non-technophile user stands a strong chance of converting to an iPhone, which is now on most of America's networks. For all the frustration from the technophile and pro-Android community, there's little they can do to prevent that, as Apple's brilliant marketing machine and polished legal team roll along.