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.

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.

Shares in the handset maker fell some 23 percent last week amid concerns about increased competition from Google’s (GOOG) Android operating system, which is being rolled out on a number of devices at a variety of carriers, including Palm partner Sprint (S).

This morning, analysts at Citigroup (C) cut their recommendations to sell from hold on Palm (PALM) while simultaneously raising their rating on Motorola (MOT) because of its “compelling” new Android handset, Droid.

“Motorola is launching of one of the most compelling offerings at [a] time when many investors have given up on the company’s handsets,” Citigroup analyst Jim Suva wrote in a research note.

“The revolution of product and application service offerings,” Suva added, “is going to start to crack open the enterprise door and could pose a risk for BlackBerry. Major shifts in promotion support creating a promotion commotion in the months ahead favor Motorola and post a challenge for RIMM and PALM.”

Over at CL King, analyst Lawrence Harris is similarly dubious of Palm’s prospects in the months ahead. Noting that Sprint executive David Owens said last week that the carrier plans to peddle a number of new Android devices from HTC next year, Harris sees unfavorable implications for Palm.

“Historically, Sprint has been Palm’s largest customer. Indeed, in the August quarter Sprint accounted for 85 percent of Palm’s revenues,” Harris wrote in a note to investors. “In FY09 (May) Sprint represented 43 percent of total Palm sales. Sprint has a U.S. exclusive on both the Pre and the Pixi through calendar year end. The Pixi will be launched at Sprint on November 15 for $99.99. The Pixi is fairly similar to the $149.99 Pre. Verizon has stated that it will begin offering the Pre in early CY10.”

Expounding on his analysis, Harris notes that “According to a report on Mobile Today, a U.K.-based publication, initial sales of the Pre through Telefonica’s O2 unit in the U.K. have been slow. If this report is correct, than the bulk of Palm’s sales over the next few months will probably continue to be generated through Sprint.”

That Sprint will soon add some slick new Android handsets to its lineup is worrisome, then, indeed. For Palm, it seems, driving conditions on the road to recovery are looking increasingly hazardous.

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.”

Kara and the Boomtown blog were in New York this week and started the party early with Bob Pittman–well known media and Web exec. Kara wasn’t dancing on the tables, but did admit that Pittman’s new venture, a top-shelf tequila, was plenty tasty. BoomTown went straight from the sauce to the nose candy in a short interview with Ford’s (F) social media guru, Scott Monty. While Monty might have been using cocaine as a metaphor for a new kind of marketing that changes consumption of all other marketing, Weekend Update gets his subtext. As if BoomTown didn’t have enough hardcore “cred,” Kara headed off to fabulous Las Vegas for the annual meeting of the blogs at BlogWorld. Nothing that happens in Vegas this weekend will stay there–not with thousands of bloggers roaming the Strip in search of a new meme to latch on to.

Digital Daily trapped a Snow Leopard early in the week. John reported on Apple’s (APPL) admission that the Snow Leopard version of OS X occasionally overdelivers on its promise to free-up disk space. In certain circumstances, the furry filcher can sneak in and make off with all your user data. If it was data loss you were looking for though, no one beats the good folks at Danger who, up until recently, housed all kinds of personal data associated with the Sidekick line of smart phones. The Microsoft (MSFT) subsidiary permanently lost contact, calendar and other personal data associated with many accounts. Weekend Update thinks that Sidekick users were given fair warning, though; the company name is, after all, Danger. John rounded out the week with something unusual–good economic news from the tech sector: Intel (INTC), Google (GOOG), IBM (IBM) and AMD (AMD) were all feeling a little more flush than their prognosticators had predicted, each beating their admittedly dismal forecasts by at least a little.

MediaMemo followed up on some important stories, beginning the week with Twitter’s spam problem. Peter reported that the Web’s biggest microblogging pipeline updated its tools for trapping the flotsam and jetsam. Twitter is reportedly in talks with several leading search engines that want to feed on all that delicious real-time data. Peter also updated the readers on the tough times over at Condé Nast. This round of cuts was a little closer to the magazine publisher’s crown jewels than last week’s cuts and closings, with the layoff of at least six staffers from Vogue. Peter closed out the week with a cheeky little open letter to the Federal Trade Commission. He asked some important questions regarding the FTC’s recent obsession with bloggers and disclosure. He seems to think that most serious bloggers don’t like to sell their credibility for tiny discounts to obscure events.

Walt and Katie were all over Windows 7 this week, with help on all fronts for those making “the switch.” Before he got to that, though, Walt spent some personal tech time with some supersmart phones. He elevated Motorola’s (MOT) CLIQ and RIM’s (RIMM) BlackBerry Storm2 to the level of potential iPhone killer and praised their updated features and power as mobile computers rather than simply phones. Mossberg’s Mailbox heralded the beginning of the Windows 7 flood and was chock full of questions about upgrading and replacing some of the functionality that was built into Vista. The Great One also offered thoughts on installing Windows 7 on a virtual machine running in OS X, but couldn’t speak to the boot camp option until Apple releases more info…and the proper drivers.

Katie tested PC Mover from LapLink as an all-in-one option for moving precious data to Windows 7. While she praised the $15 program’s efficiency, she thought it was a little sleazy that it also tried to get her to purchase other programs while it had her data in its clutches. All went well, and the moral of the story is that this one-trick pony upgrade assistant was worth the minimal price tag.

Breaking News: Weekend Update is getting intermittent reports that Kara may have been kidnapped from BlogWorld by a roving band of mommybloggers in white robes, all slowly chanting “mon-eh-tize” as they piled into their Honda minivans. They may or may not have sealed her into a 30 foot-wide, saucer-shaped balloon, which could be floating westward toward the Bay Area.

If we get her back, you can look forward to another fully staffed, fully loaded week at AllThingsD.

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 ]

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.

“Palm is still a turnaround story with its financial success reliant on the newly released webOS operating system and new devices in an increasingly competitive smartphone market,” Fidicaro said in a note to clients Wednesday. “While we anticipate Palm to expand its carrier partners both in the U.S. and internationally, and expect sell-in unit shipment growth to ramp accordingly, we believe the current valuation reflects an optimistic adoption rate of webOS devices.”

Fidicaro went on to say that while he feels webOS is a decent enough platform, its success might be limited–in the near term, at least–because of Palm’s (PALM) exclusive distribution deal with Sprint (S).

“We view the recent price decrease for the Pre to $149 (from $199 at launch) with caution as it may signal that it needed to be repositioned in order to achieve the price elasticity required to reinvigorate unit sales,” he said. “Longer term, we are cautious regarding the webOS platform’s sustainable competitive advantage, especially compared to RIM in enterprise and Apple in retail with more than 75,000 applications in its App Store.”

“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.

Never mind that it faces some particularly long, historic odds. That it has launched a new bet-the-company product in the worst economy we’ve seen in 50 years, for example. That with the Pre, it is challenging Apple’s (AAPL) iPhone, one of the most successful mobile phones in history. That it’s competing in a market crowded by the likes of Research in Motion (RIMM) and Nokia (NOK), which shipped an astonishing 468 million phones in calendar 2008.

Never mind all that. Because, according to RBC Capital Markets analyst Mike Abramsky, Palm (PALM) has the “special sauce”–the means of orchestrating a second act, perhaps even one of Jobsian proportions.

“Following a period of decline and facing oblivion, we believe Palm has the potential for a remarkable smartphone turnaround,” Abramsky writes in a lengthy research note on the wireless industry that I mentioned here yesterday as well. “With its new strategy, WebOS product line and under the direction of a new management team headed by ex-Apple executive Jon Rubinstein, Palm (like RIM and Apple) is, in our opinion, well-positioned for smartphone leadership.”

Abramsky sees a promising future: “Our outlook calls for Palm to quickly recover, growing from an estimated 1.3 percent data-centric smartphone shipment market share (0.2 percent TAM) or 2.2 million units in calendar 2009 to 3.6 percent share (1.3 percent of TAM) or 18.2 million units in calendar 2012. Targeting the PIM-centric segment of the Palm legacy, Palm in our view faces near-term risks, but has the ’special sauce.’” (Click on table below to enlarge.)

And what, exactly, is that? The stuff that goes between the two all-beef patties and the lettuce and cheese?

Not quite. Abramsky’s idea of special sauce includes vertical integration, “controlling the end-to-end smartphone software and hardware platform, a ground-up developed smartphone OS platform with unique innovations like multitasking, Synergy (user data integration), developer-friendly SDK, and compelling and clever hardware/software designs [that] all combine to offer a unique, iconic smartphone experience, differentiated from incumbent vendors.”

A hell of an ingredient list. But it’s one that the Pre and Palm’s webOS largely deliver on–despite some drawbacks. And if Palm can improve on that list, the company should have little trouble wooing back disenfranchised users and winning new ones.

Abramsky, again: “The huge positive reception to the launch of Palm’s Pre, its first WebOS device–despite the already broad awareness of iPhone–illustrates pent-up demand for innovative, non-intimidating smartphone user experiences. The accolades for Pre also show Palm has the potential to provide that rare iconic smartphone experience, above competitors, some incumbents and in the company of RIM and Apple.”

Which is pretty much what Palm has set out to do, as CEO Jon Rubinstein noted in the company’s last earnings call. “There is room for three to five players in this space,” he said. “We don’t have to beat one another to prosper.”

You do have to execute, though. And execution hasn’t historically been one of Palm’s strong suits. Perhaps it will improve with the addition of that special sauce Abramsky’s talking about.

PREVIOUSLY:

• Palm: The Turnaround Story of the Year
• Pre Makes Palm a New Man in Only Minutes a Day
• Palm: Execution Is Everything

This according to RBC Capital Markets analyst Mike Abramsky, who in a research note today says all three are positioned for leadership in the “huge, nascent and underpenetrated” smartphone market. The smartphone, says Abramsky, is a uniquely transformational innovation in that it represents the convergence of four iconic technology markets–PC and computing, Internet, consumer electronics and wireless phones.

As interest in mobile email, mobile browsing and mobile applications grows, as handsets become more powerful and the networks on which they run improve, consumers will begin to bypassing PCs and the tethered Internet for the iPhone, the BlackBerry, the Pre and the mobile computing experience they offer. And that transition will create an enormous market opportunity for smartphone vendors like Apple (AAPL), RIM (RIMM) and Palm (PALM).

“Because of their convergence capabilities,” writes Abramsky, “we believe that smartphones possess the ability to capture users, revenues, market share and profits from not only the 1 billion unit+ per year handset market–but also from the PC market (300 million units per year), TVs (200 million units per year), personal media players (230 million units per year), digital cameras (125 million units per year), personal gaming devices (37 million units per year), portable navigation devices (32 million units per year) and other formerly discrete market segments.”

Bolstering his case, Abramsky adds, “At the end of calendar 2008, only 2.5% of the ~7 billion people in the world had smartphones and 24% had Internet access (only 8% are Internet subscribers, the difference being multi-user households and Internet cafes). A huge market opportunity for smartphones exists, given that globally there are 3.7 billion mobile phone subscribers, 2.5 billion consumer electronics users, 1.6 billion Internet users, and 1.1 billion PC users.” (Click on chart below to enlarge.)

Great news for Apple, RIM and Palm, which Abramsky sees as the market’s emerging leaders. And, as I noted earlier, great news for investor holding their shares. Says Abramsky: “We are raising our price targets on RIM from $100 to $150, on Apple from $190 to $250, and on Palm from $18 to $25, justified by increased market shares which, as visibility improves to the huge smartphone opportunity, offer upside to financials and potential multiple expansion.”

That’s the word from agency Chairman Julius Genachowski, who says he’s concerned not just with the competitive ramifications of carrier-exclusivity deals, but with their tendency to limit customer access to top smartphones. “There are markets in the country where if you wanted an iPhone, if you wanted a Pre, you just couldn’t get it–from anyone,” Genachowski told Bloomberg. “So one question is, is that consistent with broad consumer interests?”

Vermont residents and those living in the rural areas of other states who can’t use the iPhone because AT&T (T) offers only roaming coverage there would likely say the answer to that question is no. But AT&T, Verizon (VZ) and other Tier 1 wireless carriers disagree. They claim exclusive handset deals are beneficial.

“The popularity of the iPhone and its innovative features and applications…has provoked an unprecedented competitive reaction,” James Cicconi, AT&T’s senior vice president of external and legislative affairs, wrote in a letter to the Senate Judiciary antitrust subcommittee. “Exclusive handsets have provided U.S. consumers the most advanced devices in the world at distinctly affordable rates. By allowing a carrier and a manufacturer to share the enormous risks and costs of bringing an inventive but unproven new device to market, exclusive arrangements both quicken the pace of technological advancement and incentivize the carrier to offer even greater handset subsidies to its customers.”

Verizon argued that point as well in a recent letter to Congress’s Telecommunications Subcommittee. “Exclusivity arrangements promote competition and innovation in device development and design,” the company said. “We work closely with our vendors to develop new and exciting devices that will attract customers. When we procure exclusive handsets from our vendors we typically buy hundreds of thousands or even millions of each device. Otherwise manufacturers may be reluctant to make the investments of time, money and production capacity to support a particular device.”

In some cases, perhaps. Though I doubt Apple (AAPL) and Research in Motion (RIMM), maker of the BlackBerry, feel that way these days. If there’s reluctance anywhere, it’s reluctance on the part of carriers like AT&T, which can’t bear the thought of losing its exclusive on the iPhone, without which it will face defections and slowing growth.

Nortel Networks has rejected Research In Motion’s bid for the wireless infrastructure assets Nortel is unloading as part of bankruptcy proceedings. RIM said Monday night that it intended to offer $1.1 billion for Nortel’s CDMA and LTE businesses, but was told it could do so only if it agreed not to bid on other Nortel assets, something it had intended to do.

In a blistering statement, RIM (RIMM) accused Nortel (NT) of imposing unfair conditions on the court-supervised auction of its assets and of jeopardizing their continued Canadian ownership.

“RIM is extremely disappointed that Nortel’s world leading technology, the development of which has been funded in part by Canadian taxpayers, seems destined to leave Canada,” said co-CEO Jim Balsillie. “RIM remains extremely interested in acquiring Nortel assets through a Canadian ownership solution that would serve the dual purpose of keeping key wireless technologies in Canada and extending RIM’s leadership in the research, development and distribution of leading edge wireless solutions, but RIM has found itself blocked at every turn.”

Why? Nortel says RIM was late to the game and hasn’t followed proper auction procedure.

“Other parties moved expeditiously to comply with the court approved procedures to become a qualified bidder,” the company said in a statement. “It was not until July 15, 2009, that RIM submitted a letter to Nortel asking to be a qualified bidder and since that time, Nortel has diligently attempted to work with RIM on acceptable confidentiality terms relating to Nortel’s valuable intellectual property assets, but RIM refused to comply with the court approved procedures.”

What’s really going on here? It’s hard to say, though clearly there’s more to the story. After all, RIM’s $1.1 billion bid is far, far more than Nokia Siemens’s stalking horse bid of $650 million. And what does RIM want with the CDMA business, anyway?

But in the end, the maker of the BlackBerry line of smart phones ended up licensing them anyway.

This morning, RIM said it will pay Visto $267.5 million to resolve the long-running patent dispute and purchase a license for the intellectual property at issue. The deal, expected to close next week, will end all lawsuits still in court, resolving an issue that, had it turned truly ugly, could have shut down RIM’s BlackBerry email service.