Another sad turn of events for Nokia (NOK), whose dominance of the smartphone market is being steadily eroded by competition from the likes of Apple (AAPL) and Research In Motion (RIMM). In its latest quarter, the company’s smartphone market share declined to 35 percent from 41 percent. This slide is likely to continue unless Nokia is able to inspire a major revival in its smartphone volumes with a worthy iPhone rival.

If you find this metric as astonishing as I do, consider this: The increase in Bay Area data traffic is actually below the national average–significantly below. According to AT&T (T) CTO John Donovan, 3G data traffic on the company’s wireless network has risen nearly 5,000 percent in the past 12 quarters nationally (see chart below; click to enlarge).

“Today, we’re seeing unprecedented growth in mobile broadband traffic,” Donovan said during his keynote at the Open Mobile Conference on Nov. 5. “This growth has required extensive rethinking of wireless networks as we know them, as well as significant advances in the supporting IP backbone and other infrastructure.”

A 5,000 percent increase in 3G data traffic: That’s an astonishing figure. Seems to me it’s entirely likely that any carrier that had been first with the iPhone–including catcalling rival Verizon (VZ)–would have suffered network troubles similar to those that plague AT&T today.

No other U.S. carrier offers a super-smartphone that has sold as well as the iPhone and that people use much like a laptop. Sure, Android and Palm (PALM) webOS devices are used in this way as well, but there are far fewer of them and they have significantly fewer data-hungry apps.

Research in Motion (RIMM) offers some BlackBerries that are used this way, but only some, and there are only 3,000 or so apps available for them. iPhone owners have 100,000 apps from which to choose. And while it’s obvious that there are more BlackBerries in use than iPhones, some of these rely on AT&T’s network, which only compounds the carrier’s problems.

So, really, any carrier that had been first to market with the iPhone would have seen its network overtaxed, especially after Apple (AAPL) launched the iPhone 3G and the iTunes App Store. Those events effectively upended traditional planning models for network capacity in a way that no one was prepared for.

Perhaps other carriers would have fared a bit better. Verizon’s 3G network, even back in 2007, was much deeper and broader than AT&T’s. But could it really have supported a 5,000 percent increase in data traffic without incident? I’m not so sure.

Which is not to say that AT&T is blameless. Its network has lagged and continues to do so, and the iPhone and the massive surge in data traffic it brought with it are not entirely responsible for that.

But they are obviously a big factor. It will be interesting, then, to see how Verizon’s network holds up in comparison if and when the carrier gets the iPhone.

[Image Credit: Morgan Stanley Managing Director Mary Meeker]

According to new data released this week by Gartner, Apple shipped some 7.04 million iPhones in the third quarter–up from just 4.72 million phones in the same period a year ago–for a 17.1 percent share of the market (see table below; click to enlarge).

That’s a 49.2 percent year-over-year increase in sales and it puts Apple (AAPL) in spitting distance of Research in Motion (RIMM), which also posted close to a 50 percent year-over-year gain to claim 21 percent of smartphone sales during the period.

With 39 percent of smartphone sales, Nokia (NOK) was the top seller during the period, and it’s clearly not ceding its spot any time soon. But RIM might, given the small gap between its market share and Apple’s.

In any case, RIM clearly has a fight on its hands as we head in the holidays, especially if Apple brings an 8GB iPhone 3GS to market in the next few weeks.

UPDATE: According to Apple’s last earnings announcement, the company said it shipped 7.4 million iPhones during the quarter. Why there’s a discrepancy between the company’s numbers and Gartner’s isn’t clear.

“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.”

“Demand for converged mobile devices has remained strong all year,” said IDC analyst Ramon Llamas. Driving that demand: Nokia (NOK), which maintained its position as the overall leader in the converged mobile device market, Research In Motion (RIMM), whose BlackBerry made some significant share gains internationally, and Apple (AAPL) and the iPhone, whose share of the smart-phone market rose to 17.1 percent from 16.6 percent in the previous quarter (see table below; click to enlarge).

“Apple reached its highest volume yet in a single quarter,” Llamas said. “The nearly global availability of the iPhone 3GS sparked another round of annual replacements for Apple loyalists, while the lower price on the iPhone 3G put the device well within reach of customers wary of the price. Although the iPhone has struggled within emerging markets, its arrival at China Unicom this year could foreshadow greater shipment volumes.”

[Image credit: AMUSEMENT]

Consensus seems to be that the Droid is the device that will get Motorola back into the game. Indeed, Technology Business Research’s Ken Hyers says the Droid is likely a “serious challenger to the iPhone.”

Over at RBC Capital Markets, Mark Sue says good things as well. “The Droids are coming and Motorola will be an important part of Verizon’s push for smartphone differentiation,” he wrote in a note to clients Wednesday. “In addition to compelling products, Motorola seems to have gotten back into the good graces of the North American carrier federation, which should aggressively push the new devices.”

Of course, these endorsements don’t necessarily mean that Motorola is poised to return to its past glory. And they certainly don’t guarantee the Christmas turnaround the company is clearly hoping for. After all, the smart-phone market is far more competitive now than it was when Motorola last dominated it back in 2004.

Said Morningstar analyst Joseph Beaulieu: “[I’m not sure the Droid] will be good enough to cut through the noise that you’re getting from Apple iPhone, HTC’s Hero, Research In Motion’s BlackBerry and even Palm’s Pre and upcoming Pixi.”

This according to a new survey from ChangeWave Research (see chart below; click to enlarge), which found that the iPhone now accounts for 30 percent of the smart-phone market. That’s almost double the share it held a year ago. Remarkable considering that the device is currently available from just a single carrier.

“Apple’s share keeps skyrocketing,” said ChangeWave research director Paul Carton. “Their last earnings report points that out. But these numbers show that their momentum is continuing. They’re firing on all cylinders.”

Indeed. Of consumers who plan to buy a smart phone in the next 90 days, 36 percent plan to purchase an iPhone. Meanwhile, 27 percent are considering a BlackBerry and eight percent a Palm (PALM) device.

Said Carton: “In the horserace among manufacturers, the release of the iPhone 3GS has led to a big jump in smart phone market share for Apple and has placed them within striking distance of Research In Motion–whose slew of models are still number one but have fallen to their lowest level in two years.”

[Image Credit: GadgetPhix]

Among the upgrades: A slimmer design, a 3.2-megapixel camera, sharper 360-by-480 display, 802.11b/g Wi-Fi support and an optical trackpad similar to that of the BlackBerry Curve 8520. The new handset is also outfitted with a 624MHz processor and 256 MB of flash memory.

Paired with BlackBerry OS 5.0, this should mean some decent performance gains. So an incremental update, but little more. Said RIM co-CEO Mike Lazaridis: “This is the Bold for those that wanted it just a little smaller, but still wanted the Bold look, feel, performance and materials.”

That’s the argument put forth by Piper Jaffray analyst Chris Larsen in a research note to investors Monday. Larsen feels that the cost to Apple (AAPL) of developing a CDMA version of the iPhone for Verizon’s (VZ) network and the subsidies the company might lose by ending its exclusivity deal with AT&T (T) would be a small price to pay for the spike in iPhone sales they would create.

“Although the iPhone is a strong player in the smartphone market, expanding its multi-vendor strategy could allow it to dominate the industry, as it does with the iPod,” Larsen writes. “The U.S. market is the world’s largest smartphone market, but we believe there is a land grab in the U.S. for smartphone share.”

Expanding his argument, Larson adds, “Apple’s exclusivity with AT&T has left the door open for strong competition from competitors, such as Research In Motion’s Blackberries, Palm’s webOS smartphones and Google’s Android operating system on multiple smartphones from OEMs such as Motorola, HTC, Samsung, LG, and others. Making the iPhone available to the other 150+ million subscribers (~2/3s of subscribers) not on AT&T’s network could result in iPod like adoption.”

Keeping the iPhone exclusive–while it might enable Apple to do more innovative things, as COO Tim Cook noted yesterday during the company’s quarterly earnings call–would also give those rival devices and platforms more time to catch up. If Apple really hopes to keep its lead in the U.S. market, it must do away with exclusivity deals, the same way it’s doing away with them abroad.

That’s bad news for AT&T. Because, as I’ve noted here before, a move to nonexclusivity in the U.S. would brutalize the carrier’s subscriber base. Analysts have long said that a material number of AT&T iPhone users would flock to Verizon’s superior network given the chance.

Larsen agrees. “A move to non-exclusivity in the U.S. could have a material impact on the U.S. wireless carriers,” he writes. “AT&T could lose meaningful smartphone share, while we think all the other carriers would gain share. We believe Verizon would be the largest beneficiary of non-exclusivity and the development of a CDMA iPhone.”

Continuing, Larson explains, “With 35% of AT&T’s iPhone sales coming from new customers, we feel it is reasonable to assume the company’s total iPhone sales could decline by 30% or more and that Verizon could pick up the bulk of this lost share (why switch to AT&T for iPhone if you haven’t left by now and the device is now available through your carrier; Verizon’s network quality could be a reason to switch from AT&T).”

This morning the Finnish mobile phone giant tapped Rick Simonson, currently its chief financial officer, as head of its handset division. And the company named Timo Ihamuotila, currently global head of sales, CFO.

While Simonson’s move from CFO to head of Nokia’s mobile phone business might seem a bit odd, analysts say it could be just what the company needs. “Simonson has been in the business for years,” Swedbank Securities analyst Jan Ihrfelt told Forbes. “He knows the company quite well, has the financial skills and the skills of a good communicator to make people in the company excited about new goals.”

And that’s clearly something Nokia (NOK) needs. For while the company is holding its ground in the broader mobile phone business, it’s losing it in smart phones, the fastest-growing segment of the market. As I noted yesterday, Nokia’s share of the smart-phone market slipped to 35 percent from 41 percent in its latest quarter, a grim reminder of just how poorly the company’s flagship smart phones are faring in their battle with iPhone maker Apple (AAPL) and BlackBerry manufacturer Research In Motion (RIMM).

Said Ihrfelt: “Nokia hasn’t been as quick as others in catching up with trends in the market and in bringing phones to consumers. One would expect a player the size of Nokia to have a product that competes with the iPhone, but that hasn’t been the case.”

Not yet, anyway. But that may soon change. A few weeks back, Nokia hired John Martin, former vice president of iPhone and Mac Internet Services at Apple to oversee development of new devices based on its Maemo platform.

Dragging the company down: A 908 million euro goodwill write-off in the Nokia Siemens Networks venture it co-owns with Siemens (SI). Revenue was 9.8 billion euros, or about $14.6 billion, which was down about 20 percent compared to last year. Worse, smart-phone market share declined to 35 percent from 41 percent in the previous quarter.

Six points gone in three months? That’s a brutal loss and one that demonstrates just how much pressure the company is seeing from Apple (AAPL) and Research in Motion (RIMM), among others.

“Nokia is launching plenty of new high-end smartphone models, such as the N900 and N97 mini,” Strategy Analytics analyst Neil Mawston told Reuters. “But as yet there is no iPhone killer to drive a major revival in its smartphone volumes. Nokia 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.”

Still, Nokia (NOK) did have some good news to report. It expects mobile device volumes to increase in the fourth quarter of 2009 and it sees the global handset market shrinking less this year than analysts had feared–seven percent instead of 10 percent.

“It is encouraging to see some signs of recovery in our markets,” Kallasvuo said during a conference call. “But let’s be clear, uncertainty in end-consumer demand remains.”

In the consumer market, Apple (AAPL) scored 811 points out of a possible 1000, exceeding the industry average of 765. Its closest rival, LG–the only other company to beat that average, scored 776.

Apple’s performance in the enterprise market was equally impressive. The company scored 803 points out of a possible 1000. That was 79 points more than RIM, whose BlackBerry took second place with a score of 724 points, the industry average.

And what of Palm (PALM) devices and smart phones running Microsoft’s (MSFT) Windows Mobile OS? Neither had a particularly remarkable showing. Among consumer smart phone users, Palm devices scored 731, while WinMo devices from Samsung and HTC both scored 739. And among business users, Palm devices scored 688, while WinMo devices from Samsung and HTC scored 697 and 692, respectively. The study, it should be noted, was fielded between January and June 2009, so it does not account for Palm’s new Pre handset. (See charts below; click to enlarge.)

Clearly, the iPhone has gained a fair bit of traction in enterprise in a relatively short time. Who was it again who said the iPhone “doesn’t appeal to business because it doesn’t have a keyboard”?

[Image credits: MacDailyNews, J.D. Power and Associates ]

“Throughout this report we have focused on the main ‘branded’ smartphones like iPhone, Android, Pre, BlackBerry, and Treo,” the market researcher explained. “And yet there are many more smartphones in use today, manufactured by the likes of LG, Samsung, Motorola, and Nokia, running either the Windows Mobile or Symbian operating system. What’s going on with these smartphones? For one thing, many users can’t identify their operating system. While Android users know they have a phone on the Android platform, most Windows Mobile or Symbian users have no idea what operating system is running their phone.”

That’s bad news for Microsoft (MSFT) and Nokia (NOK) because not only do these “other” smart phones tend to perform the most poorly in customer satisfaction, most of their owners would like to abandon them for Apple’s (AAPL) iPhone, Research in Motion’s (RIMM) BlackBerry or the Palm (PALM) Pre.

“The ‘generic’ smartphone is unloved, unappreciated, and unlikely to encourage any devotion among its users,” CFI concludes. “Its main role appears to be as a stepping stone to a ‘branded’ smartphone….Our data indicates there is little future for the ‘generic’ smartphone. Or, to be exact, the first generation of ‘generic’ smartphones. The iPhone has clearly raised the bar, but given the performance of the initial versions of the Pre and Android, the gap is narrowing. It’s clear from our data that the Android and Pre are worthy competitors to the iPhone, and more recent versions of the BlackBerry pose a bigger threat.”

PREVIOUSLY:

• Windows Mobile 6.5 “an Amazing Engineering Feat,” All Right…
• Perhaps if They Think of Their Win Mobile Devices as Broken iPhones…
• Ballmer on iPhone: Mr. Mojo Risin’

Earnings slipped by four percent, with RIM (RIMM) making $475.6 million, or 83 cents per share. Excluding one-time items, however, RIM earned $1.03 per share on sales of $3.53 billion, compared with 86 cents per share on sales of $2.58 billion in the same period last year. The Street had expected the company to turn in a profit of $1 per share on sales of $3.62 billion, according to a consensus from Thomson Reuters. RIM also shipped slightly fewer devices than analysts had hoped. The company said it sold about 8.3 million BlackBerry devices during the quarter, adding about 3.8 million new subscribers. Analysts had expected the company to add about 4 million new subscribers on shipments between 8.5 million and 8.6 million.

Looking ahead, RIM gave a per-share earnings outlook of between $1 and $1.08 for its third quarter, compared with a $1.05-per-share average expected by analysts.

Suffice it to say, investors are not pleased. RIM’s shares are down about 10 percent in extended trading as I write this.

“There’s room for three to five players in this space. We don’t have to beat each other to prosper.”

– Palm CEO Jon Rubinstein

Palm CEO Jon Rubinstein likes to say smart-phone makers “don’t have to beat each other to prosper,” but it’s beginning to look like they–or, rather, Palm–might have to. Because while the Pre may have put Palm (PALM) back in the game, it’s not clear how long it can keep it there. With competition in the emerging smart-phone market ratcheting up as we head into the holidays, some analysts are predicting that Palm’s quarterly sales may decline–sharply.

“[Palm’s] guidance of a sequential decline in revenues in the second quarter implies that Pre sales are not off to the races,” Needham & Co. analyst Charlie Wolf wrote in a research note today. “Although Palm did not say what Pre sales were in the quarter, they appear to have been around 600,000 units, about 100,000 above our estimate. Palm indicated that revenues could fall to $240 million to $270 million in the second quarter, a number that implies that Pre sales could fall to 500,000 units vs. our previous estimate of 750,000 units.”

Interesting that Wolf pegs Pre sales as being above his estimate, since Palm hasn’t yet broken that number out. Indeed, in a conference call with analysts yesterday the company was so quick to dodge questions about Pre sales that I assumed it’s not an impressive number. But if the company really did ship 600,000 units as Wolf contends, that would suggest it’s doing pretty well at market, though certainly not as well as the Apple (AAPL) iPhone or Research in Motion’s (RIMM) BlackBerry. Odd then, that Palm wouldn’t disclose a hard sales number.

“The Pre and its siblings running on Palm’s WebOS software platform appear to be a serious contender in the smartphone market,” Wolf concludes. “But it would be premature at this point to declare it a winner in view of the fact that the smartphone market will shortly be overrun with new phones from Motorola and others running on the Android platform as well as new BlackBerry models in time for the holiday selling season.”

Sure, there might be room for three to five players in the smart-phone space, as Rubinstein claims. But that space is currently occupied at least seven players–Apple, RIM, Nokia (NOK), Motorola (MOT), Samsung, Sony Ericsson and Palm. Which means somebody’s got to go. So while Palm might not have to beat anyone to prosper, it may have to, to survive.