By Scott Moritz

With clouds of economic gloom darkening the tech horizon, mobile phone sales – a former bright spot in the gadget world – look to be slowing.

Tech buyers went away early this fall, and as recession fears intensified, orders have continued to dry up.

There have been a number of ominous signs. First Cisco (CSCO) slashed its outlook and froze hiring. Then Wall Street analysts slashed Google’s (GOOG) search ad sales estimates, predicting the first ever drop off in the company’s growth rate.

Now, market analysts at Gartner have peered ahead into future and declared cell phone sales will likely slow from 2008 levels by 1% to 4%. This would be the first year-over-year slowdown since 2001.

“It is too early to say how long the economic climate will impact the devices market, but we expect market conditions to remain challenging through at least the first half of 2009,” Gartner analyst Carolina Milanesi said in a statement Tuesday.

A low single digit drop in sales certainly isn’t a steep fall and hardly a surprise in light of recent downward adjustments from wireless phone giants Nokia (NOK) and Samsung. But no growth in 2009 would be a major milepost given how newer markets like Brazil, Russia and Asia have been providing plenty of worldwide demand. And in mature markets like Europe and the U.S., smartphone sales are surging, fueled by touchscreens like Apple’s iPhone and Research in Motion’s new BlackBerry Storm.

Gartner now predicts mobile phone sales will hit a growth rate of 8% this year, down from the 15% level in 2007.

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 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 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.

By Scott Moritz

NEW YORK – A brief hands-on experience with the Google (GOOG) G1 phone gives the impression that after a slew of touchscreen duds from other telcos, Apple’s (AAPL) iPhone finally has a worthy rival.

The highly-anticipated HTC phone for T-Mobile (DT) was unveiled in New York Tuesday, and kiosks with technical experts were set up so media people could run the first Android-powered phone through some tricks. T-Mobile will start selling the phone Oct. 22 for $179 with a two-year contract.

The G1 has a large touchscreen, nearly the same size as the iPhone. But unlike the iPhone, there is a physical keyboard under the slide-open screen. People familiar with the iPhone will find the G1 a little lighter and thicker. The G1, for you ultra-thin fans, is about 3/4 of an inch thick, downright portly compared to the svelte half-inch iPhone.

Navigating the screen is fairly easy and there are several ways to move around. The touchscreen has a swipe capability that allows you to flick up and down or side to side. There is also a small trackball-type button at the bottom of the phone for scrolling.

The 3G network coverage at the show – only 16 cities currently have T-Mobile’s 3G networks – was fast. Google’s homepage loaded in five seconds and Google search results also popped up in five seconds. Sites like CNNMoney and Fortune took about 17 seconds to load. That is a fairly standard 3G speed.

Calls worked, and the sound was clear, for those considering the device as a phone primarily.

It is clear, however, that with Google’s support, Android and HTC have made a solid Internet device that combines web access with technology like GPS and software like Google Maps. Applications like Compass Mode, as Fortune’s Philip Elmer-Dewitt explains, gives you a 360-degree street view, a trick that has been limited to PCs until now.

The phone has so-called push e-mail through its Gmail service. As Fortune reported Monday, T-Mobile was considering a low-tier price plan that would give G1 users free e-mail without a data plan. T-Mobile technology chief Cole Brodman says the company looked at a few different pricing plans, but decided that the e-mail only data plan “doesn’t do the device justice.”

The G1 will have two monthly price options, $25 for data plan limited to 400 text messages or $35 for unlimited data. That’s compares with AT&T’s $30 and $45 data plans for the iPhone.

HTC’s touchscreen has some familiar features, like a shifting orientation if the user tips the phone on its side. It also has a zoom-in function that is done with plus and minus buttons on the screen rather than the two finger pinch or separate approach on the iPhone.

The G1 allows dragging and dropping of pictures and text, a feature the iPhone still lacks. The music player was easy to use and there is a direct link to Amazon’s music store.

Overall, and first impressions being what they are,  the G1 stands well above disappointing touchscreens like Verizon’s (VZ) LG Voyager or Sprint’s (S) Samsung Instinct. And until Research in Motion (RIMM) delivers its touchscreen Storm BlackBerry, T-Mobile’s G1 is the toughest competition yet to the iconic iPhone.

By Scott Moritz

Android lands at T-Mobile Tuesday, and as part of the effort to deliver the Google phone to the mobile market, T-Mobile is considering including free e-mail access.

The new Android-powered phone will have Google’s (GOOG) Gmail service built in, and T-Mobile executives are considering offering access to Gmail free, without the need for a data plan, says one person close to the discussions.

The HTC-manufactured T-Mobile phone will be the first of the hotly-anticipated Android-operated handsets, and one of several new challengers to Apple’s (AAPL) iPhone. The Android project was created by Google to cultivate an open application platform to operate next-generation mobile phones.  T-Mobile  – a unit of Deutshe Telekom (DT) - is expected to unveil the phone during a press conference at 10:30 ET Tuesday, and offer it for sale later this fall.

Analysts see the Google phone as the beginning of an important lead in mobile Internet advertising through ads appearing on Android powered phones. Sandeep Aggarwal, an analyst with Collins Stewart, estimates that the phone will generate $5 billion in incremental revenue for Google by 2011.

Should T-Mobile decide to offer free Gmail access, it would be seen as a big counter move to Research in Motion’s (RIMM) BlackBerry e-mail service, which costs $15 a month extra. And if telcos embrace Google’s ad-supported free e-mail, it could help drive Google’s ultimate aim to spread its successful desktop advertising business to mobile phones.

The move to provide free Gmail has risks, however.

T-Mobile could undercut its own data revenue stream from BlackBerry subscribers if users trade in their Curves and Pearls for the Android phone. But T-Mobile, the No.4 wireless shop, needs an attention-getting strategy like free e-mail to help set itself apart from bigger players like AT&T (T), Verizon (VZ) and Sprint (S).  

Google referred calls for comment to T-Mobile and a T-Mobile representative could not provide an immediate comment.

As for the HTC Android phone itself, one user who got an early trial described the slide out keyboard as a little awkward for some typing tasks. The browsing quality however was “better than BlackBerry and close to the iPhone.”

By Michal Lev-Ram

Long before it unveiled its Android operating platform, Google had its eye on the mobile market, an industry that reaches an estimated three billion people worldwide. The company’s main strategy? Pushing search, maps and e-mail onto cell phones in the hope of becoming the leading source of information — and ads — on the tiny screen.

Now Google (GOOG) says its efforts to make mobile services faster and easier to use are paying off. On Wednesday the company released new numbers showing mobile Internet activity on select devices recently surged, following its release of a software “shortcut” that reduces the time it takes to conduct a search on a cell phone.

“We’ve long known that fast is better than slow,” says Matt Waddell, project manager for Google’s mobile division. “But when it comes to mobile fast is much better than slow.”

Google says users of its recently released shortcut — a small piece of downloadable software that installs a search box directly on a cell phone’s home screen — conduct 20% more mobile Web searches than previous users. The shortcut allows people to type a keyword right on their phone’s home screen to initiate a query, rather than having to first find and open their mobile browser and type in the URL of their preferred search engine.

The shortcut was made available to BlackBerry (RIMM) and Symbian devices in recent months, but Google says it will also work on Windows Mobile phones like Motorola’s (MOT) Q and the Touch by HTC starting Wednesday. The company also credits “time-saving fixes” for a recent uptake in Gmail use on the Apple (AAPL) iPhone.

According to research firm M:Metrics, the iPhone, which offers several of Google’s mobile services, is the most popular device for accessing news and information on the go. Nearly 50% of iPhone users accessed a social networking site in January, about twelve times the market average. And about 31% watched online TV on their device.

“This data indicates that the iPhone’s widgets [small applications accessible from the phone's home screen] are an effective means to drive mobile content consumption,” Mark Donovan, senior analyst at M:Metrics said in a statement. “Beyond a doubt, this device is compelling consumers to interact with the mobile Web, delivering off-the-charts usage from everything to text messaging to mobile video.”

But M:Metrics also found that iPhone users are more likely to earn more than $100,000 than the average mobile subscriber. That means that, despite Google and Apple’s efforts to make the mobile Web simpler and faster to use, it will likely take a long time for it to reach mass appeal with average consumers — those who earn far less than $100,000 a year. According to a recent Jupiter Research report, 25% of U.S. cell phone owners currently browse the Internet from their devices, while just 16% say they do so frequently.

By Michal Lev-Ram

Microsoft’s Silicon Valley shopping spree continues with its purchase Monday of Danger, a Palo-Alto based company that makes the technology behind the youth-centric Sidekick phone, popularized by Paris Hilton and other celebrities.

Like its bid to buy Yahoo (YHOO) — which turned down the tech giant’s $44.6 billion buyout offer Monday — acquiring Danger is yet another move to compete against Google (GOOG), which is making a big push in the mobile industry with its Android operating system for cell phones. Ironically, Danger was founded by Andy Rubin, who went on to launch a little startup called Android, which was later snapped up by Google. Rubin now heads up the search giant’s mobile division.

Robbie Bach, president of Microsoft’s (MSFT) entertainment and devices division, announced the deal for Danger at the Mobile World Congress in Barcelona on Monday. Financial terms of the acquisition were not disclosed. “The addition of Danger serves as a perfect complement to our existing software and services, and also strengthens our dedication to improving mobile experiences centered around individuals and what they like,” Bach said in a statement.

In addition to making the technology behind T-Mobile’s (DT) Sidekick phones, Danger develops mobile services, including a MySpace application for cell phones. Unlike Microsoft, Danger has a young, cult-like following and Redmond hopes the acquisition can help extend its reach in the consumer market.

Microsoft says it plans to combine Danger’s services with its consumer-focused products, including MSN, Xbox, Zune, Windows Live and Windows Mobile, the company’s own operating system for cell phones. But it’s not clear exactly how Danger will fit into this vision, and whether the smaller company’s platform, which competes with Windows Mobile, will disappear.

“It will be really interesting to see how Microsoft integrates the technology, business model, and overall device cachet to a culture more at home to selling to enterprise CIOs than it is to selling rock stars,” Jupiter Resarch analyst Michael Gartenberg wrote in his blog.

By Josh Quittner

Er, what recession? Online retail giant Amazon beat the Street Wednesday reporting $207 million in net profit for the fourth quarter. That’s a 112 percent increase over the $98 million the company hauled in during last year’s holiday season. Amazon (AMZN) also reported revenue of $5.67 billion beating estimates that were generally in the $5.4 billion range.

The company reported record sales, record operating profits and its fastest annual growth rate since 2000. That news wasn’t altogether surprising. Last month, the company also reported the busiest day ever at Amazon and even bested eBay (EBAY), for the first time, claiming a record number of visits to its site in December. Nor was it surprising that the stock took a pounding after hours: Yet again, Amazon’s gross margins were closer to 6% than the 10% analysts wanted to see.

What is surprising — if you haven’t been paying attention, that is — is that, on a day when the Fed cut prime by another 50 basis points, Amazon is genuinely upbeat about the future. The Grand Plan is working. Indeed, Amazon anticipates 31% to 38% sales growth in the current quarter — the meltdown in the economy notwithstanding.

So what gives?

Amazon is a hit with consumers for the same reason it sometimes disappoints investors. Jeff Bezos famously refuses to manage quarter to quarter. His time horizon is more decade to decade. He wants to build a business that lasts, and the only way you do that is by thrilling your customers. He’s sung the same song since Day One of his long march: “Our focus has always been to be extremely competitive and to give customers the best prices and be very sharp at that,” he told analysts yet again yesterday.

“Focusing on the customer experience” is a mantra Amazonians chant endlessly, to an almost annoying degree. When reporters on Wednesday asked CFO Tom Szkutak questions about the world’s dire economic outlook and how that will affect consumer spending in the months ahead, he characteristically answered: “We’re focused on what’s best for the customer and improving the customer experience.” And: “We’re all about making sure we offer a great value proposition for customers.” And so on and on and on. It was effective: The press conference lasted 15 minutes because it was clear that nothing new would be divulged here.

It’s not that Szkutak was dodging the questions, exactly. The thing is, questions about the future don’t really compute to these guys. Amazon’s long-term game has always been about three things: Selection, price, and convenience. And when Bezos was laying down big bets (over the howls of Wall Street) in the late 1990s, building hugely expensive distribution centers around the country (and then the world) it was to ensure that the most logical, cost-effective logistics system would be in place when the customers finally arrived in number. That’s hell on margins for a while. But it brings in customers. And that — if it works long term — creates what Bezos Wednesday described as a “flywheel effect:” More customers means more sales and more sales means that Amazon gets to enjoy greater pricing power over its suppliers. Lower sales means more customers and the cycle begins anew.

Said Bezos: “Lowering prices is easy. Being able to afford lower prices is what’s difficult. We’ve been working on that for many many years now — and expect to be working on that for our entire corporate existence.” Today’s numbers show that Amazon’s customers, at least, have figured that out.

By Michal Lev-Ram

LAS VEGAS — Google executive Andy Rubin attended the Consumer Electronics Show last year, but he certainly wasn’t talking to the press then as the Android mobile operating system he created was still in stealth mode. Fortune sat down with the longtime wireless innovator in his Four Seasons Hotel suite Tuesday to chat about CES, Android and the wireless industry.

So what are you doing here at CES?

It’s a great place to have everybody in one place and have very efficient meetings. When we had our booth in 2006 we realized that the audience for CES is mostly buyers of consumer electronics, and that’s not the type of company that we are. But still it’s a great place to meet people in the industry. That’s what we’re here to do.

Do you plan to have a bigger, more public presence at upcoming wireless shows like CTIA and Mobile World Congress?

Our public presence is on the Web. When you go to Google.com you get Google (GOOG). We don’t need to market ourselves in the traditional way. You have consumer electronics companies competing for the press’ attention or competing for consumers’ attention. We’re fortunate that we don’t have to do that. But we do look for partnership opportunities at these kind of trade shows.

I know phonemaker HTC has said they would bring out the first Android-running phones in mid-2008. But where does Android’s software development kit stand now?

Well I’m not sure if we said they would be first, but second half of 2008 is what we’re targeting for phones. On November 5th we announced what we’re doing and on November 12th we announced the availability of the SDK. The purpose of that was to actually bring developers up to speed while our platform was still in development. We chose kind of a more open way to do this — we call it innovating in the open. So as we develop the SDK and the platform we’re constantly making releases — probably every two to three weeks we make an SDK release. The purpose of that is to try things out with the developers and get their feedback. If they don’t like it they can tell us and we’ll fix it. And hopefully in the end we’ll have a better product because of that.

I heard some developers were complaining that the SDK was buggy? Is that something that Google is fixing?

The complaint I read in the press was not that it’s buggy — they understood that it’s buggy because it’s an early release — but that there was no mechanism to report bugs. Normally what you would have is a publicly accessible database where developers could submit bugs. We weren’t ready with that, but the intention is to supply that and we stepped up those efforts when it became a priority to the press. In a couple of weeks we’ll have an online mechanism. We thought it was more important to get the SDK out there in developers hands first.

Why did Google feel the need to develop a mobile operating system?

There are a couple of reasons — there’s the more community-oriented one and the self-serving reason. It has become easier to build PCs and cell phones, but the part that is a big deal and that is becoming more expensive and complex is the software. If you plot hardware going down and software going up and becoming more complex, it’s kind of unnatural for the manufacturers to be software companies – that’s not what they are. They have to introduce a series of new cell phones every six months and users are demanding new features constantly.

Software takes a lot of time to develop, and the software cost of a cell phone is about 20 percent. That is impacting consumers and making cell phones more expensive. The trickle-down effect is that it’s actually making data plans more expensive. By building a complete stack and having it be more open where there’s not a single vendor that’s selling it – we’re actually giving it away for free – we feel that it opens up the market in a way that benefits the consumers. It will make cell phones and data plans cheaper. And on the Google self-interest side, we want to make sure consumers have the ability to access mobile services. The way we make money is advertising.

What do you say to the argument that adding another operating system only adds to the fragmentation in the industry?

I’ll say something very strong – they probably don’t understand the economics of how standards are created. If we’re worried about not fragmenting and not creating anything new then we’d still be using tubes in our radios and you’d have to warm up the TV. That argument makes no sense to me. The important thing is not to confuse developers and that’s why we chose the Java programming language. From a developer’s perspective they don’t have to learn anything new.

Was it hard keeping Android a secret over the past few years?

Well, even as a startup we were in stealth mode. There was actually not much of a mental shift when we joined in that respect. When we were doing Android, we just said we’re building software for cell phones. We didn’t go into the details of an operating system.

Android aside, what excites you most in the wireless industry?

I think there’s a lot of opportunity that hasn’t been tapped yet. I think location [GPS-based services] is completely untapped. We’re just at the cusp of having innovative applications built in on top of that. I also think that we haven’t tapped media on the cell phone yet, like sharing things and mobile social networks. Mobile is such a big market compared to the PC — you carry your phone with you eight to 10 hours a day.