HTC Investments Show Need to Differentiate

HTC’s move to buy mobile video platform provider Saffron Digital for $48.6 million and invest $40 million in streaming gaming service Onlive show that in the cut-throat smartphone market, manufacturers can’t be content to just deliver great handsets. Content such as video and games are increasingly necessary to stand out in a market full of Android (s goog) devices.

HTC has enjoyed a lot of success lately especially with Android helping profits surge 160 percent to $500 million in the latest quarter. But with competition in that market intensifying, especially from Samsung, the largest Android manufacturer, HTC realizes it needs to offer more if it’s going to compete. As HTC CEO Peter Chou reportedly said late last year, the company needs to move beyond skinned interfaces: “It is not enough to be skin-deep. We need to go bone-deep.” That’s where Saffron Digital and Onlive come in.

Saffron distributes video for handset manufacturers and carriers including Nokia (s nok), Samsung, Sony Ericsson (s sny) (s eric), LG and Vodafone. HTC said it will allow Saffron to continue to do business with its existing customers. But the deal allows HTC to be right in the thick of things and it wouldn’t be surprising if it flexed its muscles over time to get better access to content over competitors.

Meanwhile, the Onlive investment shows that mobile gaming is also a critical piece for manufacturers. Onlive delivers streaming video games to a PC or TV and is poised to branch out to HDTVs, Blu-ray players, smartphones, and tablets. Sony Ericsson recently showed off its PlayStation phone the Experia Play, which will provide an enhanced PlayStation Portable experience. It may not be a big success overall, but it’s a unique selling point that elevates Sony Ericsson over its rivals. This is a key point. Manufacturers can wait for Android Market to ramp up with games or they can start to create better gaming experiences themselves in order to stand out and participate in the booming mobile gaming market. HTC is also reportedly pursuing its own app store, according to report from the Financial Times in November, another sign that it is looking for more differentiation against competitors.

The Kyocera Echo, the new dual-screen Android phone for Sprint (s s), is also trying to win over developers with an SDK that lets them build more robust games that take advantage of its two screens. In talking to John Chier, ?director of corporate communication Kyocera, he said for Android manufacturers like Kyocera, it’s important to provide a unique experience to grow their brand.

The lesson here is that smart manufacturers can’t just build their own interfaces like HTC has done prior with its Sense UI. They need to be actively involved in the content side too. If equipment makers wait for the platform maker to build out the media offerings, they have few ways to differentiate and avoid becoming commodity players. HTC, emboldened by a rising Taiwan currency, is showing that it understands this more and more. Last fall it also inked a deal with Kobo to add an e-book store to Sense. Manufacturers have benefited from the free cost of Android but they’re realizing that they have to open up their pocketbooks if they want to compete in this market.

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