All Things Digital

Was he inebriated? Do you even know anyone who owns a Zune?”

–-Apple CEO Steve Jobs on Microsoft’s claim that the Zune is now a worthy alternative to the iPod.

Despite its feature differentiations and, er, “distinctive” color palette, Microsoft’s (MSFT) Zune has yet to prove itself the iPod killer it was once touted as. Since its launch in November of 2006, the Zune has sold 2 million units. In comparison, Apple (AAPL) in its last quarter sold 10.6 million iPods–quintuple Microsoft’s cumulative sales to date. Zune’s market share in this space during the first quarter: 4%. Apple’s share: 71%.

Clearly, the only thing being killed by Microsoft’s iPod killer are Microsoft’s chances for unseating Apple in a market that would seem–according to relatively flat year-over-year iPod sales–to have peaked without it.

Vonage’s slow death is … well, it’s slowing.The financially struggling Internet-phone company reported today a smaller first-quarter loss thanks largely to prudent cost cuts.

Great news for Vonage (VG), which has been tormented by a barrage of costly legal battles and set upon by new and powerful rivals. The company’s net loss shrank to $8.96 million, or 6 cents a share, from a loss of $72.3 million, or 47 cents, in the year-earlier quarter.

Sadly for Vonage, the company’s Q1 loss isn’t the only thing that shrank. Subscriber growth did as well. The company signed up just 30,000 new subscribers in the quarter, a big decline from a year earlier when it added nearly 166,000 subscribers. Worse, turnover rate increased to 3.3% from 3% in the fourth quarter.

Still, Vonage is a bit healthier than it’s been for some time now. So while it may not exactly be on the road to recovery, it’s at least crawling in its general direction. To that end, the company’s inked a deal to resell Covad’s DSL service under the Vonage Broadband name. An interesting idea, in that it will allow Vonage to bundle a broadband offering with its Internet telephony services like most other phone and cable companies on the planet. But DSL? Really? At a time when Verizon (VZ) is expanding its FiOS fiber-optic service and Comcast (CMCSA) is boosting the speed of its high-tier cable broadband?

Time Warner’s AOL division posted financial results today, and while its revenue did not, as some investors worried, “fall off a cliff,” it’s clearly hanging on to one for dear life.

Revenue at the AOL unit slid 23% to $1.1 billion, with much of that decline stemming from a steep 28% drop-off in dial-up subscribers. Ad-revenue growth slowed markedly, rising just 1%. Disappointing news for Time Warner (TWX), which has been mulling the possible sale of AOL. With the MicroHoo merger on the horizon, the field of suitors for the division could narrow by two very quickly.

That said, today brought with it good news for Time Warner as well. The company reported first-quarter earnings that were largely in line with analyst expectations and announced plans to spin off its cable operation. “We’ve decided that a complete structural separation of Time Warner Cable, under the right circumstances, is in the best interests of both companies’ shareholders,” Time Warner CEO Jeff Bewkes said today in a statement. “We’re working hard on an agreement with Time Warner Cable, which we expect to finalize soon.”

The economy may be slowing, the traditional wireline phone business deterioriating, but Verizon (VZ), as director Michael Bay says in one of the company’s new commercials (see below), is doing “awesome.”

The company’s first-quarter earnings met Wall Street expectations today thanks to strong growth in its wireless and FIOS home fiber-optic services businesses. With a 10% increase in first-quarter profit, and revenues that rose 5.5% to $23.83 billion, Verizon’s business would appear to be more recession-proof than others. “We’re really not seeing a change in trends,” Chief Financial Officer Doreen Toben said in an interview. “How many people are really going to drop their wireless phone?”

Not very many. Verizon added 1.5 million subscribers to its mobile business during the quarter. That said, there are plenty of folks willing to drop their landlines. Verizon wire-line subscribers declined 8.2% to 40.52 million from 44.15 million in the first quarter of 2007.

Microsoft may have fallen short of expectations for third-quarter sales, but it met and exceeded them for color commentary on the Yahoo deal.

On a post-earnings conference call this afternoon, Microsoft (MSFT) CFO Chris Liddell said Yahoo (YHOO), which insists Microsoft’s $31-per-share hostile offer “massively undervalues” it, has “unrealistic expectations” about its worth. “Our initial offer was extremely generous, more than a 100% premium for Yahoo’s core business, and our view on value is shaped by the long-term value of the company, and we intend to remain disciplined in our approach,” Liddell said. “The strongest argument that I’ve heard on why we should increase our bid–simply that we can afford to–is not one that I favor. We’ve yet to see tangible evidence that our bid substantially undervalues the company. In fact, we see the opposite. Yahoo continues to lose search share, and profitablity continues to decline year-on-year.”

It sure does. Yahoo’s operating income for the first quarter of 2008 was $121 million–a 28% decrease compared to $169 million for the same period of 2007. But then, Microsoft doesn’t want Yahoo for its profits; it wants it to make its own advertising platform more successful. Is that worth more than $31-per-share? Liddell clearly doesn’t seem to think so. “Unless we make progress with Yahoo toward an agreement by this weekend, we will reconsider our alternatives,” he said. “We will provide updates as appropriate next week. These alternatives clearly include taking an offer to Yahoo shareholders or to withdraw our proposal and focus on other opportunities, both organic and inorganic.”

Motorola added another dancer to its conga line of disappointing quarters today, posting an ugly first-quarter loss. The ongoing collapse of its post-Razr phone business continued to weigh heavily on the company, which lost $194 million in the quarter ended March 31. That’s significantly worse than its year-ago loss of $181 million. Sales fell about 21% to $7.45 billion, from $9.43 billion a year ago. Mobile-devices losses were $418 million on sales of $3.3 billion, down 39% from the year-earlier quarter.

Suffice to say, the gruesome performance fell short of Wall Street expectations. Motorola (MOT) shares slipped into the mud following the news. They’re trading around $9 right now, down some 4%.

Not to worry, though, says CEO Greg Brown. Motorola, which plans to shed its money-losing handset division in 2009, is well positioned for recovery. “Motorola is still a huge business and an iconic company,” he told USA Today. “I see a vibrant, very successful mobile-device business with a fresh portfolio that is aggressive and competing effectively [in the global market]. These elements, I think, will allow it to compete ferociously in the future.”

If there’s been a slowdown in U.S. consumer spending, nobody told Apple. This afternoon, the company reported second-quarter revenue of $7.5 billion on net income of $1.1 billion, or $1.16 per diluted share, pretty much blowing the doors off Wall Street expectations.

Apple (AAPL) shipped 2,289,000 Macs (up 51%), 10,644,000 iPods (up 1%) and 1,703,000 iPhones during the quarter.

“We’re delighted to report … the strongest March quarter revenue and earnings in Apple’s history,” said CEO Steve Jobs, recycling the soundbyte CFO Peter Oppenheimer used to describe the company’s 2007 March quarter.

Clearly, business is good in Cupertino. That said, Apple says it expects fiscal third-quarter earnings of $1 a share on revenue of $7.2 billion–a bit below analyst expectations. And the Street, which by now should be familiar with Apple’s under-promise-and-over-deliver earnings highjinks, isn’t at all happy with that forecast. The company’s shares slipped a bit in after-hours trading.

Yahoo (YHOO) just announced first-quarter earnings and–by sheer stroke of coincidence, I’m sure–they’re about as uninspiring as the mediocre earnings that inspired Microsoft’s (MSFT) hostile takeover bid. The company posted an adjusted profit of 11 cents per share, flat from a year ago, but a bit above the top end of the street’s lowered forecasts.

That’s a nice story on the face of things–one certain to give Yahoo CEO Jerry Yang and Co. the material they need to blather out more justifications for continued independence. But it doesn’t exactly prove Yahoo’s significantly accelerating its revenue growth as the company claimed in a recent investor presentation.

For one thing, operating income for the first quarter of 2008 was $121 million–a 28% decrease compared to $169 million for the same period of 2007. For another, the company’s forecast of total revenues between $1.73 billion and $1.93 billion for the current quarter ending in June doesn’t reflect traffic acquisition costs of roughly 26% of total revenue. Taking that into account, Marketwatch figures Yahoo is actually forecasting revenue minus acquisition costs of about $1.35 billion. Analysts are expecting $1.37 billion.

So the truth of the matter is this: Yahoo continues to struggle with profitability, and though the company’s strategy and investments are perhaps beginning to pay off, as Yang said during a conference call today, they’re clearly not paying off enough to thwart Microsoft’s takeover bid. Said Cantor Fitzgerald analyst Derek Brown: “The likelihood that Yahoo will be able to fend off Microsoft seems very low, mainly because in essence [Yahoo] is a company that’s in a multi-year slide. Even though the quarter was better than expected, there is uncertainty if it will be a trend.”

Turns out BoomTown was right: Microsoft (MSFT) did pooh-pooh Yahoo’s (YHOO) first quarter performance. And it did it before the company even posted earnings.

In remarks today at the launch of Microsoft’s Web portal for North Africa, MSN Maghreb, Microsoft CEO Steve Ballmer said Yahoo’s first-quarter performance has no bearing on its value to Microsoft. “We think we can accelerate our strategy by buying Yahoo and will pay what makes sense for our shareholders,” Ballmer said. “I wish Yahoo all the success with its results, but it doesn’t affect the value of Yahoo to Microsoft.”

Of course, the real question is does it affect the value of Microsoft’s $31-a-share offer for Yahoo, an offer that some observers say Redmond will be forced to raise if it ever wants to acquire the company.