Week in review: Reversal of fortunes

Ten years ago, Apple and Yahoo were in very different financial situations.

Apple had hit rock bottom and was trading for a few bucks a share, while Yahoo was the Internet darling at the height of the Internet boom. In the past couple of years, they quietly exchanged places, and their earnings calls this week bore that out clearly.

Apple's fourth-quarter profit soared past expectations on extremely strong sales of the iPhone, but revenue was a little light. iPhone sales were astonishing during the quarter: Apple sold 6.9 million iPhone 3Gs during the quarter, which was far more than analysts had been anticipating and more than the total number of original iPhones sold in a year.

Saying Apple's iPhone business "had become too big to ignore," Apple CEO Steve Jobs made a rare appearance on the company's earnings conference call to explain just how much money the iPhone is dumping into Apple's coffers. For the first time, the company used supplemental financial details to give some color on the contribution that the iPhone could be making to Apple's bottom line, if iPhone sales were handled like Mac sales, and the numbers are astonishing.

The iPhone now accounts for 39 percent of Apple's business, having generated $4.6 billion in revenue on sales of 6.9 million units during the quarter. Those numbers, however, are not included as part of Apple's official quarterly results because of the way the company chooses to account for the sale of each iPhone. If Apple treated the iPhone like it does the Mac, it would have recorded an additional $3.8 billion in revenue and an additional $1.3 billion in net income during the company's fourth fiscal quarter.

Meanwhile, the picture at Yahoo is not so rosy. The Internet search pioneer reported a 64 percent drop in net income for the third quarter, issued cautions about a weakening advertising market, and confirmed that the company plans to lay off at least 10 percent of its workforce. With 14,300 employed at the end of last quarter, that means at least 1,430 are losing their jobs in 2008. And CEO Jerry Yang indicated that there could be further cuts in 2009.

Part of Yahoo's core problem today is the weakening online advertising market--in particular, ads for autos, finance, real estate, and travel. Another part is that Yahoo is more exposed to that trouble than its top rival, Google, whose stronger results afford it some of the breathing room Yahoo lacks.

Any company has two ways to improve profitability: increase revenue or decrease expenses. With advertisers' purse strings tightening, the latter option rises to the fore. That 10 percent expense cut is significant, to be sure, and Yang said in an internal memo about the layoffs that "having layoffs is very difficult, particularly in light of all we've experienced this year."

Compounding all this, of course, is the specter of Microsoft's attempted acquisition. Yahoo rejection of Microsoft's $33-a-share offer now is more notable, given that Yahoo's stock has dropped to nearly $12.

Call of the smartphone
Apple wasn't the only company basking in the iPhone's glory. AT&T's profits were up 5.5 percent in the third quarter, thanks in large part to the popularity of the iPhone 3G.

It should come as little surprise that the iPhone 3G would help boost profits for AT&T. The phone company's decision to sell the phone for a subsidized price of $199 has likely helped boost sales. The previous version of the phone was not subsidized, initially costing AT&T customers $499.

But not everyone loves the iPhone. Intel executives have decided to start including the iPhone as one of their prime examples of smartphones that don't run "the full Internet" because they don't use an Intel chip. This specious argument--that ARM-based chips aren't man enough to run the Internet--is nothing new from Intel, but the decision to highlight the iPhone as part of that argument is.

However, in a blog posting, the head of Intel's low-power efforts threw his fellow executives under the bus in admitting that Intel's current low-power x86 processors don't even come close to matching the power consumption numbers--a vital design parameter in smartphones--of those made by ARM's partners, which are used in smartphones like the iPhone and more than 90 percent of all the mobile phones in the world.

While the Apple-Intel love-hate fest was going on, T-Mobile USA made the formal, nationwide launch of its G1, the first phone to run Google's Android operating system.

The G1 smartphone, also known as the HTC Dream, is now available to consumers at retail outlets in cities where T-Mobile's 3G service is available, including Boston, Chicago, Dallas, Los Angeles, Minneapolis, New York, and Seattle. The company made its first retail sale of the G1 Tuesday evening in San Francisco.

Security alert
Microsoft issued a rare out-of-cycle patch for a vulnerability in the Windows Server service that handles remote-procedure calls that allows programmers to run code either locally or remotely. In issuing the patch, Microsoft warned that "it is possible that this vulnerability could be used in the crafting of a wormable exploit." The vulnerability could result in a remote code execution, in which malicious attackers could take control of a user's computer to launch code.

Microsoft rates this patch as critical for Microsoft Windows 2000, Windows XP, Windows Server 2003, and as important for Windows Vista and Windows Server 2008. It also affects versions of Windows 7, prebeta in limited release.

There's more evidence of a direct correlation between the recent stock market declines and increases in targeted cyberattacks, according to a recent PandaLabs report.

For instance, while the U.S. stock market saw declines between September 1 and October 9, the volume of malware threats grew, doubling to more than 24,000 per day between September 8 and September 10 alone, and to more than 30,000 per day on September 16.

The recent malware spikes could be due to the fact that cybercriminals now have fewer possible targets with the consolidation in the banking industry, and the perception of instability in the financial community could be causing panic, even within the cyberunderground, PandaLabs said.

Also, a new report from security services provider ScanSafe finds that companies are at increasing risk of having employees inadvertently download backdoors and password stealers onto corporate computers from Web sites that have malicious software hidden on them. One company in ScanSafe's focus group faced a nearly 500 percent greater risk of exposure to those threats in September than in January of this year, according to the report.

Companies in the energy sector are at greater risk from Web-based malware than other industries, the report concludes. The energy sector, worldwide, faces a 189 percent higher risk of exposure from workers visiting sites with malware on them than other industries, followed by the pharmaceutical and chemicals industry, construction and engineering, and media and publishing.

Also of note
Sources at an Internet search company have spotted the tracks of an Apple device with a screen larger than an iPhone, but smaller than a MacBook, in their visitor logs...Microsoft said Office 2007 Service Pack 2 will come sometime between February and April of next year...Intel expects a crush of ultrathin laptops from PC makers in 2009 and unveiled cooling technology to make sure these svelte air-flow constrained designs stay cool.