No iPhone Boost for Apple's Chinese Partner

Apple’s in a bind in China. It has teamed up with China Unicom, the perennial also-ran in the country. Unicom has exclusive rights to the iPhone in the world’s biggest cellular market, but it wasn’t Apple’s first choice for a Chinese partner. The American company conducted long on-again, off-again talks with the powerhouse player, China Mobile. Those negotiations went nowhere. As the dominant carrier (with 554 million subscribers by the middle of this year) China Mobile is no AT&T and wasn’t about to agree to give Apple the kind of sweet deal that more desperate carriers gave Steve Jobs. So China Mobile went its own way, launching a bunch of Android smartphones, and Apple was left with a new challenge: Could the iPhone magic work at longtime doormat Unicom?

On Thursday, we got our answer. Unicom reported a 54 percent drop in profit for the second quarter, earning $205 million. “Terrible numbers,” HSBC analyst Tucker Grinnan told Bloomberg News. One big problem: Unicom suffered from high marketing costs to attract customers to the iPhone. Apple’s smartphone is popular with Chinese users - but many of them buy their iPhones on the gray market rather than from Unicom. Unicom sold 500,000 iPhones in the first half of 2010, and Chinese bought another 400,000 on the gray market, according to Beijing-based market research firm BDA China.

China Mobile, meanwhile, earlier this month reported a better-than-expected 6.8 percent increase in profit for the quarter, earning $4.7 billion. Who needs Apple? Not China Mobile.

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U.S. Stem Cell Ruling May Boost Asian Research

Asian countries are well-positioned to benefit from the latest setback for stem cell research in the U.S. During the Bush years, countries such as Singapore and China took advantage of the U.S. ban on embryonic stem-cell research by providing a more welcoming environment for scientists to work. See, for example, this story I did back in 2005 about Asian efforts to capitalize on the U.S. ban. Describing what he called the "astonishing" progress made in Asia, Robert A. Goldstein, chief scientific officer at New York-based Juvenile Diabetes Research Foundation International, told me then that many Asian governments were asking themselves: “Since the U.S. doesn’t seem to be taking a lead role, why don’t we?”

With Obama’s election and his easing of restrictions, that question became moot as the U.S. got back in the game. Now, though, the Aug. 23 ruling by U.S. District Judge Royce Lamberth halting U.S. funding for embryonic stem-cell research is a reminder of the uncertainty surrounding the issue in the States. Even if Judge Lambert’s ruling is overturned on appeal, what happens if Sarah Palin, Newt Gingrich, or some other conservative Republican defeats Obama in 2012? Count on a new executive order banning research before the Inauguration Day balls are even over. There’s almost zero chance of any such change in policy in Singapore, China, or other Asian countries aspiring to be centers of stem cell research.

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Nokia Profit Tops Estimate as Share Falls

The Finns aren’t gloating types, but they must be taking a certain amount of delight from Nokia’s third-quarter comeback. The world’s largest mobile phone maker on Oct. 21 reported revenues of €10.3 billion ($14.4 billion), up 5 percent from the same quarter in 2009 and higher than the €9.99 billion average estimate among analysts surveyed by Bloomberg. More importantly, net income of €529 million ($740 million) was nearly three times consensus. In last year’s third quarter, Nokia (NOK) lost €559 million.

Driving the turnaround was a huge jump in smartphone sales, which hit 26.5 million units in the quarter, up 61 percent from a year earlier and 10 percent from the second quarter. All told, the category of products that Nokia calls “converged mobile devices” contributed €3.61 billion to the top line, while sales of nearly 84 million conventional handsets in the quarter brought in just €3.56 billion. That makes this the third consecutive quarter in which smartphone revenues outpaced those from simpler, higher-volume phones.

Other metrics also showed positive movement. Operating margins for Nokia’s dominant Devices and Services unit, which accounts for 70 percent of total revenues, climbed one point from a year earlier, to 10.5 percent. And the company’s closely watched average selling price (ASP) crept up to €65, from €61 in the previous quarter and €64 a year earlier. This was due to the higher relative volume of pricier smartphones in the mix, though the ASP of those devices continues to sag—down a worrisome 28 percent during the past year, suggesting Nokia may have been forced to discount in order to move merchandise.

Still, there was enough good news in the quarterly report to drive Nokia’s shares up 6.3 percent in Helsinki trading, though the rise wasn’t matched later in New York, where shares rose 3.3 percent by late afternoon. It also helped that Nokia forecast flat to higher margins in the fourth quarter and raised its forecast for overall industry growth to “more than 10% in 2010,” compared with an earlier estimate calling for a rise of “approximately” 10 percent.

Unfortunately, that’s pretty much where the positive points run out. Nokia conceded in its earnings statement that it expects to “slightly” lose market share this year compared to last in both volume and revenue terms. To help keep costs in line, the company announced plans to lay off 1,800 people from corporate functions, R&D, and at Symbian, a Nokia-owned, London-based software firm that develops the operating system used in Nokia smartphones. It will also streamline operations by merging the development of the Symbian 3 and Symbian 4 operating systems.

Fixing Symbian is key to addressing Nokia’s slipping market share. Simply put, the King of Handsets is having a tough time delivering products that excite buyers the way Apple (AAPL) iPhones and models running the Google (GOOG)-backed Android operating system seem to. Reviewers and bloggers tend to pin the blame on the Symbian software, which though powerful and robust, is faulted for being less intuitive to use.

That point was made starkly clear when researcher Strategy Analytics released its third-quarter smartphone market share estimates later on Oct. 21. In a market that grew overall to 77 million units, up 78 percent from a year earlier, Nokia’s sales grew at less than the rate of the market, up 61.6 percent, while Apple’s grew 90.5 percent and the “other” category, which includes a lot of Android sellers such as Samsung, HTC, and Sony Ericsson, soared 117%.

To be sure, Nokia still has 34.4 percent market share to No. 2 Apple’s 18.3 percent, but that’s a historic low for Nokia—and Apple is closing the gap. At the same time, a crowded market is getting even more competitive: BlackBerry-maker Research in Motion (RIMM) slipped to No. 3 in the third quarter, according to Strategy Analytics, with unit sales up 45.9 percent, but retains its strong footing in corporate accounts, while giant Microsoft (MSFT) is trying one more to time to barge into the handset market with its new Windows Phone 7 software.

All these challenges raise the stakes for Nokia’s new CEO, Stephen Elop, who joined the company five weeks ago from Microsoft. He’s got a lot of work to do, especially addressing Nokia’s tiny market share and near irrelevance in the U.S. Having a decent set of quarterly numbers under his belt and a nice pop in the stock could help smooth the transition.

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