By Scott Moritz

Free. That’s Vodafone’s (VOD) recently-unveiled price for the hotly-anticipated touchscreen BlackBerry Storm from Research in Motion (RIM) in the United Kingdom.

In a sign of just how desperate phone companies are to lock customers in to lengthy contracts, Verizon’s (VZ) wireless partner is willing to subsidize the Storm – which sells for about $500 without a calling plan – in order to lure subscribers in England.

Though a final decision has yet to be made, Verizon is considering the same strategy for the Storm’s U.S. debut next month, according to an industry source familiar with the discussions. Another person close to the company says it’s unlikely the Storm will be free.

Verizon declined to comment on its pricing plan for the Storm.

The fact that Verizon is even considering a free phone highlights the competitive pressure created when AT&T (T) started selling a heavily-subsidized Apple (AAPL) iPhone for $199.

Most industry analysts expect the Storm, which has received favorable reviews, to be priced at or below the iPhone.

While Verizon would like to use its exclusive Storm deal to gain an edge in the smartphone market, selling it for free “would be breaking new ground for Verizon,” said Roger Entner, an analyst with Nielsen IAG’s . “It’s likely that they will put it at $150 and maybe $99 if they want to ship massive volumes during the holiday.” At either price, the Storm would be heavily discounted.

Verizon has come up short on blockbuster phones over the past year and a half as the iPhone has become the icon of the smartphone market. AT&T has been a driving force in the U.S. wireless market thanks to the iPhone, which pulls in an average $95 per month. But that drive has also come at a steep price to Ma Bell, which forks over $375 upfront for every iPhone sold. That cost the company $900 million in the third quarter.

For RIM, the Storm represents its biggest step yet into the consumer market as it tries to derail the success of the iPhone. One major challenge is to get devotees of BlackBerry’s physical keyboard to embrace the clickable touchscreen keypad on the Storm. The iPhone’s onscreen keyboard has presented some difficulties for many typists.

So far, Verizon hasn’t had much success with its touchscreen devices. But the Storm, if it’s a hit, could finally establish Verizon as a player in the red-hot touchscreen market. What’s more, it could not only entice new customers, but also convert old lower-paying customers to more expensive contracts. Each Storm subscriber will have to sign up for a BlackBerry e-mail and calling plan, which currently starts at $80 a month.

By Yi-Wyn Yen

Some new bad news for Yahoo. Ten days after the troubled web portal announced it will lay off 1,500 employees, the Wall Street Journal reported Thursday that Yahoo’s deal with Google is on shaky ground.

The Journal said that both Google (GOOG) and Yahoo (YHOO) may walk away from the ad search agreement next week because the Justice Department has been moving toward a suit to block the deal. That would be a big blow to Yahoo, which was banking on making as much as $800 million in annual revenues by outsourcing some search ads on its web properties to Google.

In a statement, Yahoo representative Adam Grossberg said the discussions with the feds are “on going.”

Google representative Adam Kovacevich said in a statement that the company is “continuing to have cooperative discussions with the Department of Justice about this arrangement, and agreed to a brief delay in implementing the agreement while those discussions continue.”

Confidence in the deal is waning. In mid-June, Google and Yahoo originally said they would give the feds 100 days to review the ad pact before moving forward with the agreement. But the pair have faced an uphill battle in Washington. In early August, Yahoo filed a heavily redacted version of the deal to the Securities and Exchange Commission. Then Google CEO Eric Schmidt told reporters that he planned to go ahead with the partnership in mid-October with or without approval from the Justice Department. So far, the feds have yet to give the Internet frenemies the green light.

Critics say the ad pact would give Google too much power and make search advertising less competitive. Google currently owns 62% of the U.S. search market, according to comScore’s monthly figures for September. Yahoo is second with a 20% share and has lost 20% of its search share to Google in the past 18 months.

A source familiar with Google’s thinking said no decision has been made. Some analysts have already moved on even if the feds haven’t.

On Wednesday, J.P. Morgan Internet analyst Imran Khan sent a note to clients on why Yahoo should forget about the Google deal and sell its search business to Microsoft (MSFT). Khan suggests that Yahoo can gain an additional $725 million in operating cash flow from outsourcing search to Microsoft. The software company had offered Yahoo a reported $2 billion to buy its search business after talks to acquire all of Yahoo failed.

Writes Khan, “We think that it is unlikely that the Google/Yahoo search partnership will pass DOJ review in its current form….Without its search business, Yahoo would be very clearly positioned as a content and display advertising entity, thereby clarifying and defining its purpose to advertisers and users.”

By Scott Moritz

Motorola on Thursday said its plan to break up into two companies is on hold, leading the head of its mobile phone business to outline a new plan for reviving the company’s ailing handset business.

Part of the restructuring plan includes the loss of 3,000 jobs, most from the mobile phone division, a company representative confirmed.

Motorola (MOT), which reported third quarter earnings that beat profit estimates but missed sales targets, said the split up called for by activist investor Carl Icahn will not happen in the third quarter next year as planned. Icahn wasn’t immediately available for comment.

Motorola was down 5% Thursday and has seen its stock fall 72% in the past year as the lack of a successor to its once-hot Razr phone wiped out its sales volume and profits amid a declining economy.

Sanjay Jha, who took over as head of the handset business in August, blamed the economy, the credit freeze and “changes underway” in the mobile phone unit for the breakup delay. Analysts have been critical of the costly breakup plan, seeing it as a distraction that failed to address the underlying problems at the world’s third-largest phone maker.

On a conference call with analysts after earnings were announced, Jha said the company would cut the total number of phones models it produces next year and focus less on its own mobile operating system in favor of systems developed by other companies, including Google’s (GOOG) Android and Microsoft’s (MSFT) Windows Mobile.

Some analysts who have been critical of the company welcomed the new plan.

“Sanjay nailed it,” said Ed Snyder, an analyst with Charter Equity Research. “It was a perfect description of the big problems facing the handset business and an intelligent plan for fixing them. Unfortunately it will be painful.”

By Yi-Wyn Yen

It’s hard to believe that just four months ago Microsoft dangled a nearly $48 billion bid in front of Yahoo.

A souring U.S. economy has changed all that. During Microsoft’s earnings call with investors Thursday, chief financial officer Chris Liddell made no mention of the Internet portal or any other potential big acquisitions. The company reported a solid first fiscal quarter, with revenues increasing 9% to $15.06 billion from the year-ago quarter. Profit rose 2% to $4.37 billion. But citing the “challenging economic environment,” Microsoft cut growth projections for 2009 and focused on ways to rein in costs.

When asked by an analyst what kind of acquisitions Microsoft (MSFT) will make, Liddell offered a modest spending outlook. “We will continue to buy small to medium businesses, our sweet spot,” Liddell said. “I don’t see us necessarily increasing our acquisition volume. To the extent that we do buy, it’ll cost us less.”

Microsoft has a lot of money, and could certainly afford to buy Yahoo (YHOO) if it wanted. On Sept. 30, Microsoft had $20.7 billion in cash. (That’s after the Redmond-based company spent $6 billion buying back its own stock last quarter.) With a current market cap of $17.5 billion, Yahoo is a bargain.

Microsoft certainly needs to do something to grow its online business. The company’s goal is to compete with Google (GOOG) for Internet dollars, and Microsoft is unlikely to get there on its own.

The company grew its online service revenue 15% to $770 million for the quarter. That was better than Microsoft’s projections of $718 million to $745 million for the online services unit, which generates revenue from Live search and MSN display ads. However, Microsoft has significantly cut its year-end projections to reflect the tough ad environment. For fiscal 2009, Microsoft expects its online business to grow just 10% to 13% compared to 18% to 20% from its last quarterly estimates.

The cost to run a third-place online advertising business is growing too. The company had an operating loss of $480 million for the first fiscal quarter, an 80% increase from the same period a year ago. Microsoft blamed the bulks of the costs on data centers and expenses related to its aQuantive advertising unit, which rose 47% to $183 million. Microsoft’s online business makes up a mere 5% of quarterly revenues.

The company  may rely on its Office suite and server and client businesses to get through an ailing economy, but the company has repeatedly stated that its future lies in its least profitable group, the online businesses. Perhaps that’s why Liddell didn’t close the door entirely on a big shopping spree within the next year.

“We’re still very cash rich, and that’s a good environment for us,” he said. “The limitation isn’t the capital, but if we have the product road map and ability to integrate [companies].”

By Yi-Wyn Yen

You know it’s a bad quarter when the most encouraging news you offer is job cuts.

During Yahoo’s third quarter earnings call Tuesday, chief executive Jerry Yang made an unconvincing argument that the company is “well positioned for future growth.” Yahoo reported net sales and earnings for the third quarter that fell well below the Street’s consensus.

And Yahoo (YHOO) is bracing itself for a bleak fourth quarter. The company adjusted its year-end gross revenues estimates to reflect worsening conditions. The company projected gross revenues of $1.77 billion to $1.97 billion. And for the second straight quarter, Yahoo reduced its year-end gross revenues estimates by $175 million to $475 million. To get through the “tough environment,” Yang said the company will lay off about 1,500 employees, or 10% of its workforce, before the end of the year. Yahoo’s shares jumped 7% in after-hours trading to $12.95, likely because of the cost-cutting, said one analyst.

But it’s hard to see how Yahoo can slash its way back to greatness, or what other path it could take to get there.  Yahoo’s management has been criticized for not taking Microsoft’s offer to buy the company at $31 a share earlier this year. The stock has fallen 54% since both parties ended negotiations in mid-June. And the alternative strategy for growth Yahoo proposed, a search advertising deal with Google, is now tied up by the feds.

Investors are losing patience for new board members like Carl Icahn to find ways to boost Yahoo’s sagging stock price. Icahn could not be reached for comment on Tuesday.

Wall Street analysts grilled Yang on whether cutting employees was an acceptable alternative to a Microsoft (MSFT) deal.

Yang said that “getting Yahoo more fit” was a way to boost Yahoo’s sagging stock price. “We think that taking aggressive actions on cost structures is one of the ways to unlock shareholder value,” he explained. “By streamlining activities…we hope to come out of this stronger and more nimble.”

Analysts say they are skeptical that cost cuts and Yahoo’s reliance on APT, its new display advertising platform launched last month, will be enough for the company to weather a stormy economy.

Yahoo’s executives were vague on merger talks with AOL (which is owned by Fortune’s parent company Time Warner) and its search agreement with Google (GOOG). Yang said the company is working with the Justice Department, which is reviewing the case for antitrust concerns, to outsource some search ads to Google “as soon as possible.”

“Clearly there is going to be increased pressure on Jerry Yang to take more drastic measures to make the stock work in the short term,” said Jefferies analyst Youssef Squali. “[Carl] Icahn and his two lieutenants and other independent board members should be displeased with the turn of events.”

Yahoo reported net sales of $1.33 billion for the third quarter, which were below Street estimates of $1.37 billion. Yahoo earned 4 cents a share, below the Street consensus of 9 cents.

“The Street’s not happy. Being in a middle of an ad recession and not putting up decent numbers isn’t going to help,” said Christa Quarles, Thomas Weisel’s Internet analyst.

An economic recession spells trouble for Yahoo, the bellwether for online display advertising. The growth rate for display advertising is expected to slow down in 2009. Analysts predict that marketers will spend more on search advertising than display next year because search is considered a more accountable way to directly reach consumers.

Yahoo’s share in search is steadily declining while Google’s continues to grow. Yahoo had 20% of the U.S. search market for September and Google had 63%. Yahoo has lost 15% of its share in search from the same period a year ago, according to comScore.

Yahoo President Sue Decker said internal statistics show that Yahoo is actually faring better than comScore suggests. Yahoo made more money from search than display for the first time. The company grew its search revenue by 17% for the third quarter to $438 million while earning $435 million, a 3% increase, from selling display ads.

However Decker admitted that Yahoo’s search revenues were not enough to compensate for the decline in display advertising. Decker said display advertising started souring by mid-August.

By Michal Lev-Ram

SANTA CLARA, Calif. – First Apple rolled out its App Store, a mobile storefront where consumers can download games, social networking services and other software programs for their smartphones.

Starting Wednesday, Google will offer similar services through its Android Market, which coincides with the launch of the first Google-powered mobile phone.

Now comes Research in Motion (RIMM). The BlackBerry maker announced Tuesday that it too will launch a mobile storefront – this one dubbed Application Center.

“This is a new channel to market,” RIM co-CEO Mike Lazaridis told some 700 mobile developers attending the BlackBerry developer conference here on Tuesday. “The opportunity is larger than ever, from enterprise to consumer.”

Mobile applications have been around for years, but never gained traction until Apple started offering consumers the user-friendly, one-stop shopping App Store in July. Almost overnight, the race for consumer dollars — not to mention the advertising dollars attached to mobile software — was on. Apple says its customers have downloaded more than 100 million applications to date. Now companies like RIM are scrambling to compete.

The three stores, while essentially similar, have some key differences. Unlike Apple (AAPL) and RIM, Google says its applications will be available for free. RIM will take a 20% cut of the revenue generated from download fees, while Apple pockets 30% of its developers’ revenues. Also, Apple and RIM must approve software applications before they can be sold — a level of control that critics say should be left to users, not the companies. Google, meanwhile, insists developers can sell any programs they want through Android Market.

This isn’t the first time RIM, the leader in the U.S. smartphone market, has gone after Apple. The two companies became rivals when the iPhone launched last year, but it didn’t get serious until Apple started courting BlackBerry’s business customers with the new high-speed iPhone 3G and App Store. RIM, for its part, is now chasing after Apple’s core customers – tech-savvy consumers - with flashier devices that emphasize multimedia and social networking features. The Canadian mobile device maker plans to launch an iPhone-like touchscreen device called the Storm later this fall.

But the iPhones assault and some unexpected product delays are worrying RIM investors as the crucial holiday season nears. ”We believe the next 30-45 days are a critical window for RIM,” Citigroup analyst Jim Suva wrote in a recent report.

And while Apple and Google’s (GOOG) application stores are already live, RIM’s Application Center won’t be up and running until March 2009.

Still, RIM’s 31% share of the U.S. smartphone market will be hard to crack. Apple trails in fourth place  — behind HTC and Palm (PALM) – with about 12%, according to Nielsen Mobile. But RIM isn’t alone in its pursuit of Apple. Samsung, Nokia (NOK) and just about every other handset maker is now looking to catch up too.

By Scott Moritz

Texas Instruments (TXN) on Monday slashed its sales forecast as demand slumps.

The Dallas microchip giant posted an adjusted profit of 43 cents a share, below the 52 cents reported in the year-ago period and a penny below analysts estimates. Sales for the third quarter ended last month were $3.39 billion, which is up from $3.66 billion last year and in line with estimates.

But feeling the pinch of a spending slowdown among wireless network builders,  TI says fourth quarter sales will likely fall 13% below third quarter levels to about $2.95 billion. Analysts had expected sales in the range of $3.34 billion.

“We entered the third quarter with a cautious view of the economy and its impact on our markets,” TI CEO Rich Templeton said in a press release. “Revenue was weak, as expected, because consumers and corporations reduced their spending in this uncertain economy.”

Shares fell 5% in after-hours trading.

The company outlined a few moves to adjust to the sales shortfall. TI says it plans to reduce its inventory and the supplies sitting with its distribution partners and the company will make cuts in its cellular baseband chip business for wireless devices and networks.

TI says it will take about $110 million in charges related to the restructuring in the coming three quarters.

By Yi-Wyn Yen

Meet Google 2.0. Gone are the search giant’s free-spending ways – at least for now. The prospect of a severe economic slowdown has forced Google to do something surprising: act fiscally responsible.

The company toned down costly expenses like data centers and new hires and reported profits Thursday of $1.35 billion for the third quarter, up 26% from a year ago. Earnings per share were $4.92, which crushed Street estimates of $4.75 a share.

Google (GOOG) shares rose nearly 11% in after-hours trading to $390. “This is very encouraging to hear that they’re reining in costs and not acting like the drunken sailors that they once were,” said Jefferies analyst Youssef Squali.

The company reported sales of $4.04 billion, a 34% spike from the year-ago quarter, and in line with the Street’s estimates of $4.05 billion.

CEO Eric Schmidt reassured investors that Google’s disciplined outlook would help the company weather an economic downturn. “There’s an awful lot of stuff going on in the world,” he said during an hour-long call with analysts Thursday. “We have a duty and responsibility to run Google well.”

The company scaled back spending on its biggest costs in the third quarter. The company’s capital expenditure for servers and networking equipment was $452 million, its lowest since the first quarter of 2006.

Google also has been trimming general and administrative costs. For the quarter, the company’s expenses grew 28% to $412 million from the same period a year ago. Google, which drew criticism last year for growing too quickly, added 519 employees for the quarter. Last year, the company averaged 1,500 new hires each quarter. “We’ll continue to hire in many areas, but we will do it responsibly,” said Patrick Pichette, Google’s new CFO.

Though many analysts and investors fear that advertisers will sharply scale back on online advertising for the current quarter, Google executives argue that the company could potentially benefit from a recession. Unlike Yahoo (YHOO), which relies heavily on banner-based advertising, Google makes 97% of its revenues from search-based advertising. Google’s chief economist Hal Varian noted that when consumers are “counting their pennies,” they’ll spend more time researching online. More bargain-hunting users will lead to more advertisers, thus creating a “Wal-Mart effect,” according to Varian.

Analysts say they are optimistic about Google’s growth during an uncertain economy. The number of clicks for Google’s paid search ads on third-party sites rose 18% in the third quarter from the same period a year ago. Said Squali: “They don’t seem to be experiencing the weakness you see with a lot of other online players.”

By Yi-Wyn Yen

Microsoft needs to get its story straight.

Microsoft CEO Steve Ballmer told attendees at a tech research conference in Orlando on Thursday that a deal with Yahoo (YHOO) “makes sense for their shareholders and ours.”

But within an hour of the news, Microsoft (MSFT)  spokesman Frank Shaw issued an statement to retract Ballmer’s comments. “Our position hasn’t changed. Microsoft has no interest in acquiring Yahoo!; there are no discussions between the companies,” Microsoft said.

Yahoo spokeswoman Kim Rubey said the company had no comment on Ballmer’s statement. Yahoo’s investors, meanwhile, are loving the idea that Microsoft is even considering returning to the negotiating table. After trading in the $11 range, Yahoo’s shares jumped 10% to $12.93 on Thursday.

By Scott Moritz

With touchscreen phones all the rage, and U.S. telcos following AT&T’s (T) lead of cutting the price of Apple’s (AAPL) iPhone, it would seem Nokia (NOK) will be left out of the smartphone party this year.

The Finnish phone giant won’t have its closely-watched 5800 phone – Nokia’s music-loaded take on the iPhone – available here until sometime in the first half of next year, according to people familiar with the phone. Nokia wasn’t immediately available for comment.

And even when it arrives, Nokia has lacked a big U.S. phone partner that would provide the subsidy necessary to put it under the $200 range. At full price, it will have a hard time making a big splash.

“You could look at it as having a 100% upside,” says Nielson IAG analyst Roger Entner, referring to Nokia’s measly share of the U.S. market. Make that a potential upside of 95.5% since Nokia’s slice of the U.S. market has now fallen a percentage point from year-ago levels to 4.5%.

These numbers were part of Nokia’s overall solid third-quarter performance reported Thursday. Nokia posted an adjusted profit of 44 cents a share, down from the 55 cents it netted last year, but in line with analysts estimates. Sales fell 5% to $16.4 billion from $17.3 billion in the year-ago quarter and below the $17.2 billion street estimate.

After hitting a new four-year low, Nokia shares rebounded a bit Thursday up 4% as investors took some confidence from the fact that it met estimates.

As Nokia predicted, its worldwide market share fell to 38% in the third quarter from 40% in the prior period. The decline, according to Nokia, reflects the company’s unwillingness to cut phone prices amid a heated price war in some regions.

Nokia has managed to grab and hold onto the No.1 phone supplier position by honing its skills at making low- and medium-priced phones for a global audience. This focus on the mainstream has caused Nokia to be consistently late to fashion trends like flip phones, ultrathin designs and now touchscreens.

After a strong start in the smartphone wars with over half the global market in 2007, Nokia has dropped to a 35% slice in the third quarter from 48% of the market in the second quarter, according to Morgan Stanley analyst Jim Dawson. The alarming sequential drop is a reflection of how strong rivals like Apple and Research in Motion (RIMM) have grown. The smartphone market will get a new challenger later this month with the arrival of Google’s (GOOG) Android-powered G1 phone at T-Mobile.

But while 2008 is not going to be a big year here for Nokia, the trends – aside from the slumping global economy – are promising overall.

Each player comes from with a different specialty to the smartphone market, says Entner. Apple and Google aim for a strong Internet experience and RIM’s BlackBerry Storm hopes to capitalizes on its successful e-mail background with a touchscreen design. “Nokia comes from a mobile phone approach,” says Entner.

“Nokia sees the phone as an integrated device.” says Entner. In the past three years, Nokia has acquired mobile e-mail shop Intellisync, GPS mapper Navteq and digital media delivery system Loudeye in an effort to control the delivery of services like e-mail, navigation, photography, music, videos, games and the Internet. 

Of course, all this will matter more in the U.S. when Nokia can deliver the device.