November 11, 2009 10:42 AM PST

Apple overtakes Nokia in phone profits

In the race for mobile phone profits, Apple has overtaken Nokia, according to figures for the latest quarter.

Apple earned $1.6 billion in the third quarter from the iPhone, outpacing Nokia's $1.1 billion cell phone profit to grab the top spot among all mobile phone vendors, said research firm Strategy Analytics on Wednesday.

(Credit: Strategy Analytics)

This is the first quarter that Strategy Analytics has seen Apple surge past Nokia in mobile phone profits, according to Alex Spektor, the author of the research, who spoke with CNET News.

The contest between Apple and Nokia for top phone profits has been tight in recent months. In previous quarters, Apple's cell phone profits trailed those of Nokia by only $100 million, noted Spektor. For the second quarter of 2009, Nokia's earnings matched its third quarter results at $1.1 billion, while Apple's estimated earnings on the iPhone were $1 billion.

For Apple, which hit the cell phone market just over two years ago, its rank as the most profitable global mobile phone maker is impressive, said Spektor. In his report, he identified four key factors for the company's surge in cell phone profits.

One factor is the strong branding of the iPhone. "They created the iPhone as an easy-to-remember, sticks-in-your-mind type of brand," said Spektor. Each new iPhone is just one update on top of another, so the brand stays the same, and it's the same user experience.

Another factor driving profits is the high wholesale price that carriers like AT&T pay to Apple. By spending only $199 for a device like the 16GB iPhone 3GS, the consumer is shielded from the huge subsidies that Apple collects on the phone. "The consumer might not realize how much an operator really is paying behind the scenes for that $200 phone," noted Spektor.

The iPhone's wide distribution and availability is a third reason for its stellar profit growth. Apple started in 2007 with just AT&T in the U.S., then slowly spread into Europe. "And now they're popping up everywhere," said Spektor. "They're all over the world. Even in markets like the U.K. and France where they were previously with just one carrier, they're now with two or three carriers."

Finally, Apple's production costs are very tightly controlled, generating further profits. The iPhone's manufacturing is outsourced to the Chinese firm Foxconn. The specifications for the phone are kept very precise, and costs are kept very low, which delivers a higher gross margin to Apple.

The latest quarterly figures compiled by Strategy Analytics compared operating profits from Apple's iPhone 3GS and 3G with all of Nokia's mobile handsets, not just smartphones. And only profits were considered, explained Spektor. In overall shipments, Nokia still leads the mobile phone market, with 108.5 million cell phone models shipped in the third quarter, compared with 7.4 million iPhone 3GS and 3G units for Apple.

But overall, Nokia has faced a difficult year. Challenged by the global downturn, it's been forced to slash expenses, leading to a round of layoffs. The third quarter showed a net loss due to plummeting revenue.

Nokia has also grappled with the usual competition in the smartphone arena. Based in Finland, it's traditionally done best in Europe but has suffered in other markets, such as North America. The company has also failed to introduce a phone that can generate buzz like an iPhone, especially in the United States.

"The company has been slipping pretty steadily in North America," said Spektor. That's probably one of the reasons why their operating profits are a bit low. The U.S. smartphone market is very profitable...but Nokia has really failed to bring a compelling enough device to a U.S. carrier that would become a good enough hit to drive up their market share."

Nokia has debuted models in Western Europe that have proven very popular, though their high consumer costs and limited features have stifled some of their appeal. Nokia's first touch-screen phone, the 5800, has generated plenty of volume. "For a while, there was even talk about it being an iPhone competitor," said Spektor. "But at the end of the day, at wholesale levels, one (the 5800) is a $250 to $300 phone, and the other (the iPhone) is a $600 phone. So it (the 5800) is a cheaper phone and a less capable phone."

Some of Nokia's flagship phones, such as the N97, have done well in Europe, bringing in sales volumes in the millions. But Spektor said he feels they're still not compelling enough for the U.S. market.

Despite the competition and weak demand in the U.S., Nokia's market share is expected to stay steady or even rise. Due to its huge scale, the company is able to price its phones very competitively, especially in emerging markets. Nokia also enjoys distribution relationships around the world. "They're still the biggest player by far," added Spektor. "The competitors are chipping away at them, but Nokia is large enough to continue growing with the market as it continues to recover."

Updated at 12:35 p.m. PST to correct wholesale prices on the iPhone and Nokia 5800 and add information on Apple.

Lance Whitney wears a few different technology hats--journalist, Web developer, and software trainer. He's a contributing editor for Microsoft TechNet Magazine and writes for other computer publications and Web sites. You can follow Lance on Twitter at @lancewhit. Lance is a member of the CNET Blog Network, and he is not an employee of CNET.