CUPERTINO BUSINESS REPORT
Senate Probes, China Inroads and a Smartphone Surge

Though the market in general has suffered this week, Apple's (Nasdaq: AAPL) shares have stayed relatively stable. At market close Tuesday, they stood at US$136.35, up 26 cents for the day.

However, that's a loss over last week -- last Tuesday, they closed at $143.05, down by $1.13 from the previous day's close. Apple share prices have lost almost $7 in a week, meaning predictions from analysts at Needham & Co., which last week pegged their 12-month target price at $200, are off to a slow start.

Competition could be a factor -- the Palm (Nasdaq: PALM) Pre is going great guns, and Samsung, Nokia (NYSE: NOK) and Research In Motion (Nasdaq: RIMM) have announced new smartphones.

However, another factor could be an announcement that four senators have asked the Federal Communications Commission (FCC) to look into the exclusive deals wireless carriers have with mobile phone vendors.

Also, while Apple's attempt to penetrate the China market appears set to go ahead, cultural differences may see the iPhone pipped in Asia by competitors' new smartphones.

Calling on the FCC

In a move that could shake up the entire cellphone world, senators John Kerry, Roger Wicker, Byron Dorgan and Amy Klobuchar on Monday asked FCC Commissioner Michael Copps to review wireless carriers' exclusivity arrangements with cellphone manufacturers.

Later in the week, the Senate Committee on Commerce, Science and Transportation will hold a hearing to examine issues confronting wireless consumers. One of its focal points will be exclusivity arrangements in the mobile marketplace, wherein a particular model of cellphone is only available through select wireless carriers -- or just one carrier.

The news came as no surprise to Julien Blin, CEO and principal analyst at JBBResearch. "Carriers want hot devices like the iPhone and Palm's Pre and are ready to do whatever it takes to get these devices exclusively because it could mean more revenue, better earnings per share and so on," he told MacNewsWorld.

These exclusivity deals often mean consumers have to pay hefty termination fees so they can switch carriers if they want to get a hot new device like the new iPhone 3G S or the Palm Pre, Blin said.

An FCC investigation and a Senate hearing could negatively impact the market in general if a ruling is made; at the very least, it might introduce uncertainty and doubt for carriers like AT&T (NYSE: T), which has heavily benefited from its exclusive U.S. arrangement with Apple's iPhone.

Palm Plows Ahead

Palm's shares closed on Tuesday at $14.35, up 23 cents from the previous day's figure. This figure is almost triple the $5.39 Palm shares were worth a year ago, before it went public with its Pre and webOS platform.

More than 21.8 million shares of Palm traded hands Tuesday; almost triple the three-month average volume of just over 8.4 million shares.

This is all due to the Pre, launched June 6 -- Pacific Crest analyst James Faucette said the Pre sold better than expected. He raised Palm's per-share expectations and price target.

Palm sold between 90,000 and 100,000 Palm Pres in its first week, and the firm is on track to ship more than his prior estimate of 500,000 units by end August, Faucette wrote to investors.

Tough Slogging in The East

The Palm Pre is not the only strong competitor to the iPhone. This week, Samsung is unveiling new Omnia smartphones at CommunicAsia in Singapore.

Samsung will market its Omnia devices in Asia first, where the iPhone is relatively weak. Since it was introduced in Asia three quarters ago, the iPhone has not sold more than 500,000 units per quarter there, excluding Japan, according to research firm IDC's figures. In Japan, it sells about 300,000 units per quarter.

That poor showing -- compared to the millions of units it's sold in the U.S., at least -- is due in part to cultural differences, IDC analyst Ryan Reith told MacNewsWorld. "The iPhone has a capacitor touchscreen, but most of the devices announced in Asia use resistive touchscreens instead because of the need for handwriting recognition there," he explained. "China, Japan and Korea all use character-based alphabets."

Another problem is that the applications so popular on the iPhone in the U.S. typically don't impress users in Asia as much, Reith said.

A Little Trouble in Big China?

Disagreement over iPhone apps was one of the factors reported to have scuttled a deal between Apple and China Mobile, which is China's -- and the world's -- largest wireless carrier, with 477 million subscribers.

Apple is reportedly working out a deal with China's No. 2 wireless carrier, China Unicom, which has 138 million subscribers.

There are indications that Apple may be trying to smoothen the way for its entry into China. It has posted an ad on its Web site for a Beijing-based job overseeing iPhone training for channel partners across Asia.

Then there's Chinese blogger Cui Mengsuo's statement that the State Wireless Inspection Center of China has approved an Apple device. Cui's blog carries a snapshot of the approval page that indicates the device at the top of the page is from Apple.

However, Cui quotes a report on Sina News (Nasdaq: NWS)' Chinese language site stating that China Unicom may be balking at Apple's demands now, so everything's still up in the air.

Other Competitors

Later this year, a slew of Android phones will hit the shelves, and they could spell trouble for the iPhone.

"About 30 different mobile phone manufacturers will use Android by the end of the year, so competition will heat up," IDC's Reith said.

Smartphone manufacturers have learned from the first iPhone and are incorporating many of its features into their new products, said Carl Howe, an analyst at the Yankee Group.

Looking At The Future

However, despite all the competition, Apple remains in a relatively strong position.

Its iPhone 3G S is flying off the shelves before even hitting them, due to preorder demand. It's cut prices on the iPhone 3G to $99, and AT&T desperately wants to continue to maintain carrier exclusivity. [*correction]

If the Senate hearing on wireless carrier exclusivity rules that the market should be opened up, things could get exciting, but there's a one-word solution for that: Lobbying. It's quite likely that lobbyists from the wireless carriers and mobile phone vendors are flocking to Washington right now with open-ended expense accounts for full and frank discussions with various senators and their advisers.

As for the China market, who can tell? We are in a recession now, and it Apple may have to wait for a while longer before entering China.