HTC suffers after losing Apple patent ruling

Shares in HTC fell by as much as 6.5 per cent on Monday as the Taiwanese smartphone company struggled to limit the damage caused by losing a preliminary patent infringement ruling to Apple.

The International Trade Commission, a US court that has the power to ban import and sales of infringing goods, ruled in an early judgment on Friday that HTC had breached two patents held by Apple. The decision still needs the support of the agency’s commissioners but fears of HTC losing the case had already sent its shares down sharply last week ahead of the ruling.

HTC, which has said it would appeal against the decision, announced over the weekend that it would spend between T$18bn-T$22bn ($622.3m-$760.6m) to buy back as much as 2.44 per cent of its outstanding shares at between T$900 and T$1100 per share.

The attempt to prop up HTC’s share price, however, appeared to have little effect as the stock fell below HTC’s minimum purchase price of T$900 to close down 3.9 per cent at T$871.

The sell-off highlights investor fears that the legal battle could have wider implications for the competitive balance between Apple and Google Android-based phonemakers such as HTC, Samsung and Motorola.

Analysts at Taiwan’s SinoPac Securities said the patents HTC was judged to have infringed upon “were quite broad and already implicates the core of the Android operating system. This shows Apple is aiming this attack at the fast-growing Android camp.”

Jasmine Lu, analyst at Morgan Stanley, said that while it is yet unclear whether the alleged infringement is an HTC-specific problem or would affect other Android phonemakers as well, the former scenario is a much more worrying one for HTC.

“If Apple views HTC as one of its major competitors in 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 makers, and could adversely affect HTC’s share opportunity if other Android makers are not required to pay the same royalties as HTC in the near future,” Ms Lu wrote in a note to clients.

Smartphones based on Google’s Android platform overtook the iPhone by sales last August, but the industry landscape could yet change as there is still a lot of room for the global smartphone market to grow. Competition is expected to be particularly intense in the second half of this year when Apple and Nokia both launch key new models.

Most analysts expect HTC and Apple to settle before the final ITC ruling is delivered. Pierre Ferragu, analyst at Bernstein Research, argues that HTC’s recent acquisition of S3 Graphics, which has won two initial patent infringement rulings against Apple, meant that the Taiwanese company would not be disadvantaged when it came to royalty negotiations despite ITC’s initial ruling on Friday.

“Both Apple and HTC understand that getting an unbalanced settlement is unlikely and would be time consuming to reach,” Mr Ferragu said.

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