“We’ve learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They’re not going to just walk in.”

Palm CEO Ed Colligan, December 2006

“Five hundred dollars? Fully subsidized? With a plan? I said that’s the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good e-mail machine.”

– Microsoft CEO Steve Ballmer, January 2007

At 37.9 percent, Nokia’s share of the global handset market is the largest in the industry. Odd then to learn that it is not the most profitable. And odder still to learn that that honor belongs to Apple, which has been in the handset market for just two years.

According to Strategy Analytics, Apple’s third-quarter iPhone operating profit was $1.6 billion, while Nokia’s was $1.1 billion. Driving Apple’s profits: Strong sales, high wholesale prices and tight cost controls.

“We have identified at least 4 key factors underlying Apple’s success,” Strategy Analytics analyst Alexander Spektor explains. “First, Apple created a simple sub-brand–the iPhone–which was memorable and easy to remember. Second, the firm developed an attractive family of models with standout usability that enabled Apple to charge way-above-average prices to operators and consumers. Third, Apple distributed and co-marketed its handsets through top-tier carriers in numerous high-value countries. And fourth, the vendor has kept a solid grip on production costs by working with Foxconn, the world’s largest contract handset manufacturer.”

Quite an achievement for Apple (AAPL) and a major humiliation for Nokia (NOK), which has seen its dominance eroded by the likes of Apple and Research in Motion (RIMM), and not just in North America, but in Europe. Indeed, in its latest quarter Nokia’s smart-phone market share dropped by six points.

As Strategy Analytics analyst Neil Mawston noted at the time, “[Nokia has] no iPhone killer to drive a major revival in its smartphone volumes. [It] is still struggling in the U.S. smartphone market, and with competition intensifying in China as well, Nokia’s battles can only get tougher in 2010.”

“After Gateway’s 2004 merger with eMachines, AMD attempted to revive the relationship it had enjoyed with Gateway until 2001, but experienced extremely limited success. While Gateway built one AMD-powered desktop model at the request of Circuit City, AMD remains locked out entirely of Gateway’s direct internet sales, its commercial offerings and its server line. According to Gateway executives, their Company has paid a high price for even its limited AMD dealings. They claim that Intel has beaten them into ‘guacamole’ in retaliation.”

– Excerpt from AMD’s 2005 complaint against Intel

Looks like it’s going to be a very busy fall for Intel legal. This morning, New York Attorney General Andrew Cuomo filed a federal antitrust lawsuit against the company, alleging that it violated state and federal laws with a “systematic campaign” of illegal conduct to maintain its monopoly.

At issue here, once again, is Intel’s alleged practice of using bribery and coercion to maintain its monopoly, something rival AMD complained about in its own antitrust suit against Intel (INTC) in 2005.

AMD (AMD) alleged, for example, that in 2000, Michael Capellas, then chief executive of Compaq Computer, told AMD that because of Compaq’s relationship with AMD, Intel withheld the delivery of some microprocessors he needed for servers. Capellas told AMD he would stop buying from it, saying he “had a gun to his head.”

Further, in 2004, Gateway officials are alleged to have told AMD that Intel “beat them into guacamole” in retaliation for their limited dealings with its rival. These are but two incidents in a list that includes similar alleged acts of coercion by Intel involving 38 other computer makers, distributors and retailers.

Apparently, Cuomo has found evidence of similar behavior. “Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market,” Cuomo said in a statement. “Intel’s actions not only unfairly restricted potential competitors, but also hurt average consumers who were robbed of better products and lower prices.”

In any event, those higher prices and the device’s lack of built-in Wi-Fi don’t seem to be as much of a barrier as you might think. And if those issues do end up tempering sales a bit, well, perhaps China Unicom can make them up by poaching iPhone users from rival China Mobile. As iPhonAsia’s Dan Butterfield reported earlier this week, China Unicom is offering an amnesty to users of gray-market iPhones.

“This amnesty program is designed to entice some 1.5 million grey-market iPhone owners in China to sign a contract and pop in a Unicom 3G sim card to take advantage of WCDMA 3G speeds and a variety of new ‘Wo’ 3G services,” Butterfield writes. “The ‘upgrade to 3G’ program is no doubt aimed squarely at the approximate 1,000,000+ iPhones now running on China Mobile’s EDGE 2G network.”

[Image credit: CCID]

That’s what ngmoco co-founder and Electronic Arts (ERTS) alum Neil Young said of Apple’s iconic handset at the Game Developers Conference in San Francisco earlier this year, and it’s worth reflecting on a bit in light of a new report from Bernstein Research analyst Toni Sacconaghi that claims the iPhone OS will soon create pricing and customer migration pressure for traditional gaming platforms.

Noting that some 665-760 million games may have been downloaded from the Apple (AAPL) App Store during the last 12 months, Sacconaghi estimates that the installed base for the iPhone and iPod touch platform could amount to about one third of the total handheld gaming installed base by 2012.

“We believe that gaming embodies the power of Apple’s App store: it has dramatically lowered the entry barriers for both developers and gamers alike, resulting in an unparalleled number of available games at affordable prices, which is creating lock-in and enhanced interest in Apple’s high-margin iPhone (and iPod Touch) platforms,” Sacconaghi writes.

Continuing, the analyst adds: “By most measures, gaming has been the killer App Store category, accounting for an estimated 40% of all downloads. Most importantly, we believe that gaming is providing yet another incremental, differentiated reason for consumers to purchase iPhones and iPod Touches, and creates powerful lock-in to the App Store platform and Apple products on a go forward basis.”

The upshot of all this is bad news for traditional gaming console developers–particularly those who have dismissed it as a novelty. “Most gaming developers today view the iPhone and other smart phones as an incremental opportunity, which targets the casual gamer but not the dedicating gaming enthusiast,” Sacconaghi explains. “Over time, however, we believe that the combination of evolutionary improvements in iPhone/iPod gaming functionality, the convenience of the App Store download model, the App’s Store leading title selection and lower price points could cause some migration among gaming enthusiasts to the Apple platform and/or pressure traditional gaming incumbents’ hardware and software pricing.”

And this is clearly what Apple (AAPL) is aiming for. Consider these recent remarks from Phil Schiller, the company’s senior vice president of worldwide product marketing: “People are starting to see what a great gaming device this is. When you think about the companies that came before us…when you played those other systems, they seemed so cool, but now when you look at them, they don’t stack up against the iPod touch….No Multi-Touch user experience, Games are expensive, No App Store, No iPod, Expensive Games ($25-$40) and uncomfortable retail buying experience. [There are] 607 games for PSP and 3,680 games for Nintendo DS. [But there are ] 21,178 Game and Entertainment Titles at App Store.”

Bernstein Research analyst Toni Sacconaghi estimates that Apple (AAPL), though it is only the fifth-largest handset vendor, claimed nearly a third of handset industry profits in the first half of 2009 (see table below; click to enlarge).

“Our analysis indicates that Apple’s iPhone accounted for only 8% of handset industry revenues but 32% of industry operating profits in 1H09,” Sacconaghi wrote in a note to clients today. “Even if we exclude the operating losses generated by Motorola and Sony Ericsson, Apple still accounted for 25% of industry profits. iPhone’s success is akin to Apple’s position in the PC industry–where the company enjoys an estimated 25% of industry profits, despite capturing only 6% of industry revenues.”

Quite an achievement considering that the iPhone is just two years old. How did Apple manage it? According to Sacconaghi, Apple succeeded by claiming a first-mover advantage in an expanding high-end market.

“With the iPhone and its Apps Store, Apple has established a formidable smartphone ecosystem, which history suggests is very difficult to overcome,” the analyst explains. “In fact, Apple has the potential to become a de-facto standard of sorts in the consumer smartphone market, much like it became in the portable media player market with iPods, due in large part to its first mover advantage and tight software and hardware integration.

“We believe that over time,” Sacconaghi continues, “single function standalone handheld devices (portable music players, digital cameras, navigation systems, etc.) will become increasingly converged. Apple’s estimated installed base of 75+ million individual iPod and iTunes users provides customers with a seamless migration path to a fuller featured, higher-end integrated device.”

Though Sacconaghi believes Apple should be able to grow faster than the overall handset market without materially lowering prices, he suggests a lower price point might give a signifigant bump to its iPhone business. “We believe Apple will ultimately need to lower price (and margins over time) to expand its addressable market opportunity, including offering a lower-cost, non-data plan iPhone,” he concludes.

“The ‘PC Hunter’ ads, the ‘PC Rookie’ ads clearly have been winners in the marketplace,” Turner said. “And you know why I know they’re working? Because two weeks ago we got a call from the Apple legal department saying, ‘Hey’–this is a true story–saying, ‘Hey, you need to stop running those ads–we lowered our prices.’ They took like $100 off or something. I did cartwheels down the hallway. At first I said, ‘Is this a joke? Who are you?’ Not understanding what an opportunity. And so we’re just going to keep running them and running them and running them.”

But only after tweaking the ad in question to reflect Apple’s recently lowered prices, Ad Age reports.

Microsoft’s (MSFT) Laptop Hunters ad, which once depicted the supremely annoying “Lauren” opting for a $972 Dell (DELL) laptop over a $2,000 MacBook Pro now features no reference to that machine at all. Which is appropriate, since it was replaced with a new $1700 model in early June. And now, rather than harping on that $2000 price point, “Lauren” simply suggests that Mac users are “paying a lot for the brand.”

Not nearly as much as Microsoft is paying for these silly commercials. Anyway …

“We slightly adjusted the ads to reflect the updated pricing of the Mac laptop shown in the TV advertisement,” Microsoft told Ad Age. “This does not change the focus of the campaign, which is to showcase the value and choice of the PC.”

The new ad:

<br/><a href="http://video.msn.com/video.aspx?vid=6c7197c6-e6ac-4070-8aa0-e76ec5634ebe" target="_new" title="Laptop Hunters $1700 - Lauren and Sue get a Dell XPS 13">Video: Laptop Hunters $1700 &#8211; Lauren and Sue get a Dell XPS 13</a>

The old ad:

<a href="http://video.msn.com/?mkt=en-us&#038;playlist=videoByUuids:uuids:0170090f-53b2-40fc-89a4-c759cb088e0a&#038;showPlaylist=true" target="_new" title="Laptop Hunters $1700 – Lauren and Sue get a Dell XPS 13">Video: Laptop Hunters $1700 – Lauren and Sue get a Dell XPS 13</a>

And at this point, the company clearly has to do something. Its last financials were grotesque and the ones to come promise to be little different. The “transformation” Sony began four years ago is still a work in progress, arguably one that’s been stalled for some time now. Once an electronics powerhouse, Sony (SNE) is now a laggard in many of the markets it once dominated: videogame consoles, digital music players and TVs. “The prices of digital home appliances have been declining by 15% to 20% every year lately,” said Sony spokesperson Mami Imada. “Unless we cut costs we cannot hope to survive the price competition.”

At whom could that little gibe be directed, I wonder?

Windows Mobile Marketplace may not be as sexy as the App Store, but it won’t be as autocratic as the App Store, either. And that could be a big selling point with developers. As soon as Microsoft manages to bring the next version of Windows Mobile to market…

An ugly blow for Motorola (MOT). With the economy in a deadspin and stronger rivals like Nokia (NOK) lowering handset sale expectations, things are looking decidedly bleak for the company.