It’s too early for HTC to put all its eggs in one virtual basket

This year’s Consumer Electronics Show in Las Vegas served as a stage for the latest version of HTC’s ambitious virtual reality headset, the HTC Vive. While the company received largely positive coverage for the room-scale VR implementation, it had one conspicuous absence from the show: smartphones.

A company whose very history has mirrored the explosive growth and subsequent saturation of the phone market neglected to show off even a single new handset at the world’s largest tech trade show. At CES 2015, HTC launched the Desire 826; the prior year, it had two new phones to unveil, the Desire 610 and Desire 816. Back at CES 2011, it helped AT&T introduce one of the first 4G phones in America, the HTC Inspire 4G.

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Risky messaging

But this year was different, and in a recent interview with The Telegraph, HTC CEO Cher Wang seemed to imply the reason. When it came to the future of its embattled smartphone division, Wang replied:

Now we are more realistic. We feel that we should apply our best design to different type of sectors. Yes, smartphones are important, but to create a natural extension to other connected devices like wearables and virtual reality is more important.

It’s easy to see the implication here: Wang likely views VR as a potential savior for a company that has been bleeding market share for nearly five years. In fact, a fresh report out of Taiwan suggests that she is poised to spin off a startup from HTC wholly dedicated to VR development.

Taken more cynically, HTC seems to be putting its only significant revenue-producing product in the backseat as it wagers on the success of a not-yet-proven category — one that will initially be priced (including compliant PC) beyond the means of the mass market consumer.

To be clear, expanding outside a traditional area of expertise is far from a foolhardy initiative — in fact, public companies that fail to innovate can easily find themselves struggling if they continue clinging to what has worked in the past. HTC’s push into VR is a positive step for a firm that has been in free fall since 2011, having seen its share of the market plummet from 10 percent to just 1 percent.

So the issue here is not HTC’s expansion into new verticals, but rather, its messaging during this transitional period. I suspect that the vast majority of its customers don’t care much about its VR ambitions yet. So how productive is it to suggest that the best designers have been tasked with working on other products? Admitting that phones are no longer the focus doesn’t inspire much excitement, or confidence, in purchasing them.

VR isn’t mainstream yet

By all accounts, Vive delivers a fantastic VR experience — even better than the Oculus Rift, according to some reports, due to an enhanced capability to explore virtual environments. But the market for VR is still in its infancy, and while it’s expected to grow significantly over the next several years, one analysis puts it at just $2.8 billion by 2020. Comparatively, smartphones are already nearly a $400 billion global market.

Even if HTC has a breakout hit on its hands in Vive and captures a large percentage of the market, à la Android or Windows, VR alone will never bring about a return to the glory days of earlier this decade. In fact, HTC’s revenue of $4.3 billion in just a single quarter in 2011 was more than the entire annual projected VR market into the foreseeable future.

Thus, VR in and of itself is not the cure for HTC. The company is also getting in on nearly the ground floor with wearables, although so far there has only been one product to hit the market, as part of the UA Healthbox collaboration with the Under Armour sports clothing and accessories brand.

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Don’t forget the phones

HTC is still a smartphone company, but it’s starting to sound like a company not all that interested in making smartphones anymore.

If HTC isn’t as passionate about its phones as it is about its VR and connected device aspirations (including the Re action camera), why should you, or I, or anyone else get excited about buying them?

We’re already starting to see some erosion of interest at the margins — every day, a few people ask me for news about the company’s next rumored flagship phone, codenamed Perfume, because speculation has been unusually quiet. Both Samsung’s and LG’s next flagships have already gotten plenty of press prior to their Mobile World Congress launches in late February, which has historically been home to HTC’s yearly flagship unveiling as well.

And, of course, nothing signals a lack of interest more than declining sales, which have plagued HTC during almost every quarter over the past four years. While those results have the company wisely looking for other revenue streams, it would be a mistake to cheer for VR at the expense of the phones — or even worse, downplay their internal significance as Wang seems to be doing.

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The CEO also claimed recently that “HTC will never disappear” — that it will always exist as a consumer-facing brand. But unless that brand is stamped on phones that feel like more than an afterthought to a transitional HTC, they many not be able to prop up the company long enough to see that transition through.