Interscope Chairman Jimmy Iovine wants to get the iPod generation hooked on high-quality sound. Photo: Beats by Dr. Dre.

The camera crew is setting up for our interview, and Jimmy Iovine wants me to listen to something on his iPod.

The chairman of Universal Music Group’s Interscope Geffen A&M Records is holding forth about how great his Beats Solo headphones sound; and as the overlord of a music empire that includes Black Eyed Peas, Lady Gaga, Eminem, and U2, he should know. He hands them to me and nudges the volume higher. The music thumps through, all rich bass and clear vocals.

“These sound pretty amazing,” I tell him, which is a bit like telling Frank Lloyd Wright he has decent taste in houses. Iovine takes this personally; he developed them alongside legendary hip-hop producer Dr. Dre.

The headphones are just one part of an audiophile movement Iovine and Dre are trying to spark in the under-30 crowd, the core music-buying audience. The Internet and digital revolution have greatly increased music’s availability — you can download it, stream it, and take it practically anywhere — but at the expense of quality. Says Iovine: “The sound has been degraded to such an extent that it’s, at times, not even representative of what went on in the recording studio.” He points out that the youngest music buyers, many of whom have never heard an LP, don't know what they're missing.

He’s right, of course. We compress digital files enough to shoot them across the Internet and squeeze them into iPods, then listen to them on cheap earbuds. By the time the sound meets our eardrums, the richness is gone; cymbals sound like plastic rattles, and bass like cardboard thunder. It’s like taking a photograph shot with a Hasselblad and smooshing it down into a website thumbnail. The original art is recognizable, but barely.

The Beats by Dr. Dre headphones, the first project from Beats Electronics, retail for $350. Photo: Beats by Dr. Dre.

The way Iovine tells it, that inspired him and Dre to start Beats Electronics, a licensing company dedicated to making music sound better. They don’t license technology, exactly; they license their discriminating ears. Dre first lent his talents to Monster Cable for the development of the stylish and critically acclaimed “Beats by Dr. Dre” noise-canceling headphones — those will set you back a hefty $350 ($260 if you bargain shop). The Beats Solo headphones I listened to, a slimmed down version without the noise-canceling, will begin selling in a few weeks for just over $200.

But I’ve come down to Santa Monica to see a different Beats product: a laptop. Beats Electronics has linked up with Hewlett-Packard (HPQ) to offer the limited-edition Beats Envy 15, a sleek black number. It’ll set you back $2,299 when it goes on sale next week, bundled with the headphones and audio-mixing gear. For the price, you get a laptop with a top-of-the-line Intel (INTC) processor, a specially tuned chip that handles sound, and other touches that enhance the music output.

HP says its engineers worked for months to tweak the laptop to fit an exacting audio profile Dr. Dre provided. Before you start rolling your eyes at the thought of engineers taking orders from a rapper, remember that Dre is more than another pop artist; he’s a perfectionist producer known in the industry for his exacting standards. Dre likes to use studio musicians instead of samples, and legend has it that he once made a rapper lay down a track more than 100 times to get it right.

The Beats Envy is what brings me to this interview in one of the back rooms at Iovine’s Thom Thom Club, an exclusive Santa Monica den where A-listers kick back after the Grammys. Normally there would be a large guy at the front door to keep people like me from getting into a place like this.

The HP Envy 15 Beats limited edition has the look, and price, of a piece of high-end audio equipment; it will cost $2,299 bundled with high-end headphones and basic audio gear. Photo: HP

For HP, the collaboration with Iovine and Dre exemplifies a new chapter in its marketing strategy. The old “Computer Is Personal Again” campaign highlighted how celebrities use PCs. In this next phase, HP is working with celebrity tastemakers to actually design new machines.

The hope is that projects, like mini laptops designed with Vivienne Tam and Tord Boontje, will inspire discriminating consumers to pay a little more to make a statement. (The Beats Envy tests whether audiophiles will pay a lot more.)

Will it work?

The Beats Envy has a few things working against it. First there’s the price: $2,299 is a lot to pay in a rough economy. Perhaps more important, though, is the subjectivity factor.

With visual technology, judging quality is easier: We can tell the difference between a YouTube video and a high-definition movie playing on a 60-inch screen. It’s harder for most consumers to judge the improvement in sound coming out of the Beats Envy.

Iovine unintentionally illustrates that point when he has me listen to his iPod through the Beats Solo headphones. After I compliment him on the sound quality, I ask what kind of file he just played for me. “It’s an MP3,” he says — a decent-quality file at 256 kbps, but still an MP3.

Therein lies the challenge: If he can impress this much with just the audiophile headphones hooked up to plain-old iPod circuitry, it might be hard to convince youngsters to shell out for an audiophile laptop to match. (AAPL) (DELL)

The standout new feature in iTunes 8 is Genius, which builds music playlists based on the listening habits of the iTunes community. Image: Apple

It took me a while to get around to it, but I've finally downloaded the iTunes 8 update, and played around a bit with the Genius song recommendation feature. After a test drive, I've decided it's the best thing Apple has (AAPL) added to its music management suite in quite a while.

Genius solves my "iTunes laziness" problem. I've got 4,000 items in my library, I listen to genres as diverse as gospel, alternative and hip-hop, to and I'm too lazy to make good playlists out of it all. I used to count on the Party Shuffle feature to save me, but got tired of how it would end up throwing in random Christmas carols at the wrong times of year.

It works by tapping into the wisdom of crowds. After I click on a favorite song from when I was dating my wife – "Ordinary" by Train, from the "Spider-Man 2" soundtrack – and click the Genius button, Apple suggests a playlist based on the scanned libraries and listening habits of other iTunes users. (Among the good picks: "Dare You To Move" by Switchfoot, "I Alone" by Live, "The Freshmen" by The Verve Pipe, and "Send Me On My Way" by Rusted Root. Mostly angsty alternative songs from the '90s. Cool.)

A couple of reasons Genius is a good move for Apple, business-wise:

One, it encourages people with decent-sized iTunes libraries to listen more. I suspect that these folks are the most likely candidates to upgrade to newer iPods, and if they're rediscovering their music collections they're more likely to do that.

Two, it increases the "stickiness" of iTunes, and decreases the likelihood that I'll switch to some other service. It's like a moat around iTunes and the iPod, keeping would-be invaders out.

That said, the Genius isn't perfect. Some of its picks are a little weird – like the Billy Joel song it squeezed between Augustana and The Verve Pipe. And while I'm glad Apple allows you to save Genius playlists, I think it's annoying that it saves them as a new type of list that doesn't sync to older iPods. (I can easily copy and paste the songs by hand into an old-school sync-able playlist, but I shouldn't have to.)

But overall, Apple is making great use of the computing power in its data centers to unobtrusively provide a feature that any music lover will understand. If Steve Jobs and the rest of the crew can figure out how to tap their 65 million iTunes account holders and provide more features like this, they'll probably have my business for a long time..FT)

Dell's first "iPod killer," the Dell Digital Jukebox, was discontinued in 2006 …

… while Apple's iPods continue to dominate the MP3 player market with a 70 percent share. Photos: Dell, Jon Fortt

From: Jon Fortt

To: Michael Dell

Subject: Taking down the iPod

Dear Michael,

You might remember our recent chat at Fortune's Brainstorm Tech conference, when you shared with me a theme you've sounded before: "I think the sign of a great company is that it can kind of learn from its mistakes," you said, "and go on to greater heights."

You were talking about Dell's (DELL) PC business, where you've tweaked the direct sales strategy in response to a changing market. But you could just as easily have been referring to your company's tentative plans to release another MP3 player this fall to compete with Apple's (AAPL) iPod. I think if you follow your own observation, you'll delay the product launch. Dell's not ready to make this mistake again.

Let's think back on your first effort at dethroning Apple. It crashed and burned. The Dell Digital Jukebox, which resembled nothing more than an electric razor when it launched in 2003, tried to use commodity components and licensed software to beat the iPod on price, and thus win market share. But the DJ fell short in physique (bigger and heavier than the iPod), originality (it was based on another company's design) and music management software. Dell used Musicmatch Jukebox, which was, well, no musical match for Apple's iTunes.

To your credit, this time around Dell executives seem to be considering a slightly different tack. Not only have you gotten better at designing devices, you see the folly in just making a gadget that depends on someone else's software to operate. Dell now has its own: You last year purchased Zing Systems, a company that uses Wi-Fi to beam songs – and potentially video – to various devices. The new plan would be to blend this improved software with snazzier hardware.

But I'll argue there's a better route for you to take, if you really want to K.O. the iPod: Hold off on the gadget. First, just launch the software.

I know this is a little counter-intuitive. People love gadgets! But hear me out.

Click above for Jon Fortt's interview with Michael Dell.

If you want to compete with Apple in digital music, your biggest obstacle isn't the iPod. It's iTunes. Most of your target market already has iTunes installed on their PCs, and it's going to take a lot more than a shiny gadget to get them to ditch the way they've been managing their favorite songs. Of course, improving on iTunes is a tall order – it's the best thing out there for keeping track of digital media – but that's the game you're saying you want to play. If you can't figure out how to improve on iTunes, there's really no point in trying to beat Apple on the hardware front. Can't be done.

That's why I say you should just focus on releasing the best free music app you can (on Windows, Mac and Linux). Software is hard, so if you're going to give iTunes a run for its money, the project will require your full attention. You're going to need hardware partners like SanDisk (SNDK) and Sirius Satellite Radio (SIRI) to embrace your approach. You're going to need time to make mistakes. You're going to need customer feedback. But if in the end you've gotten enough people hooked on a new system that includes your wireless transmission technology, you'll have created a loyal base of users who trust you enough to ditch their iPods for your next great MP3 player.

Of course, you can ignore this, and maybe you'll manage to launch both a sweet music service and an iPod killer that both start grabbing serious share from Apple right off the bat. But the odds are pretty long on that. Microsoft (MSFT), Sony (SNE) and an army of other well-heeled competitors have been trying to eat Apple's lunch for years now, without success.

Their mistake, in my opinion: they tried too hard to match Apple in hardware design (which is hard enough), and they launched everything at once. In the process, they failed to focus on Apple's real soft spot: iTunes. Think about it: Even Apple didn't launch iTunes and the iPod at the same time. I was in the audience when Steve Jobs gave us iTunes in January 2001; he didn't call us to the Apple campus to show off the first iPod until nine months later. And Apple waited until April 2003 to open the iTunes Music Store. You've got to let these things stew for a while.

So anyway, Michael, thanks for sitting down for the chat. It was cool to see some of the new stuff you guys have coming out this year. And as a gadget guy, I do hope you eventually come out with some innovative music hardware that pushes the market forward. But just my opinion: That's a big job, so first things first. And the first thing is getting the software right.

By Jon Fortt and Michal Lev-Ram

Will Apple give up some control over the iPhone in order to court corporate customers?

That’s one of the juiciest questions surrounding a gathering on Apple's (AAPL) campus Thursday, where CEO Steve Jobs has promised to open up the iPhone's software secrets to the world for the first time. Apple’s invitation to the event also hinted at new business-friendly features for the device, and Silicon Valley is abuzz about what that could mean. Will the BlackBerry-toting masses be able to trade in the company smartphone for an iPhone?

After all, Apple just isn't overtly business-like. (When was the last you saw Steve Jobs in a suit?) Sure, its products work well in office environments, but the company doesn't go out of its way to satisfy the needs of corporate buyers. While Hewlett-Packard (HPQ) and Dell (DELL) design some of their computers to look like office equipment, Apple always aims for more of a trendy, consumer look. The implied message: Take Apple gear to the office if you like, but expect to stand out.

So, many onlookers are wondering how far the Apple will go to make the iPhone business-ready — and whether the company will go far enough.

At a bare minimum, several analysts agreed, Apple will have to offer better corporate e-mail connectivity on the iPhone. That will mean working with the likes of Microsoft (MSFT), which through its Exchange platform already has influence over the way businesses handle messaging. If Apple can link the iPhone into Microsoft's system, workers with iPhones will have just as much control over e-mail and contacts as they would from their desks.

"I believe they're actually working with Microsoft to make e-mail sync work," said Rob Enderle, principal at Enderle Group. "By connecting natively to Exchange, Apple would be able to get over the biggest hurdle that’s now keeping companies from buying iPhones."

Jim Swartz, chief information officer at database company Sybase, said that the e-mail and corporate directories in Exchange are not the only concern for corporate customers. At $399, the iPhone remains expensive. Plus, companies like Sybase want the freedom to put their homegrown software on a smartphone. Nonetheless, he said, "Here we're seeing a lot of interest and desire for the iPhone."

Apple will also face pressure to let outside companies make their mark on the phone. That will mean forging partnerships with heavyweights including Oracle (ORCL), SAP (SAP) and IBM (IBM), to make sure their business software runs smoothly on the iPhone.

"The individual companies who create software for the enterprise will have to adopt the [software developer's kit] and begin innovating," said Tim Bajarin, president of the Creative Strategies consulting firm. "My personal sense from talking to these guys is that they're going to jump on the iPhone bandwagon."

Not everyone is convinced.

Michael Disabato, vice president and service director at the Burton Group, said that for big businesses to truly embrace the iPhone, Apple will have to give them the freedom to load tailored software onto it, and to remotely erase data from iPhones that are lost or stolen. That's a level of control that Research in Motion (RIMM) and Microsoft provide with their software, but that Apple almost never does.

"For Apple to make this an enterprise device, they have to accept that the enterprise will want to manage this thing lock, stock and barrel," Disabato said. "And they're not going to do it."

Or they might. Believe it or not, in the early days of the iPod, when the device worked only with the company's Mac computers, Apple executives argued about whether to make the device compatible with Windows PCs. The old Apple would have said no — that all products should feed the Mac ecosystem. But the company eventually decided to let the iPod stand alone, and work with either type of computer. Because of that decision, the iPod became a hit, not just an also-ran mp3 player.

Will Steve Jobs be just as pragmatic about the iPhone on Thursday? A lot of companies are eager to find out.

Image: Apple

Can Apple regain its status as a Wall Street darling?

So far 2008 has not been kind to the technology trendsetter. With U.S. iPod sales slowing and iPhone hype fading, investors have been seized by worries that the crew in Cupertino isn’t much of a growth story anymore. The stock has fallen 40 percent from its recent highs, losing some $50 billion in market value –and it isn’t clear what could turn things around.

It does seem certain that major relief won’t come from Apple’s (AAPL) newest products. This week's update of the MacBook laptop line adds speed and memory, but no breathtaking design touches. The super-slim but pricey MacBook Air laptop that CEO Steve Jobs unveiled in January has met with mixed reviews, and won’t provide enough of a boost to make up for the iPod slowdown. And Apple TV, the second incarnation of Apple’s failed attempt to bring digital downloads to the television, doesn’t seem to be attracting an iPod-like following either; on Amazon (AMZN), it’s about as popular as a niche backup hard drive.

So where will Apple go for a sales boost to lift its stock? Perhaps overseas.

Even as U.S. tech spending slows, the market for high-tech gear and the opportunity for Apple to grow, is rapidly expanding in Europe and Asia. To wit: Hewlett-Packard (HPQ) CEO Mark Hurd noted last week that emerging markets accounted for nearly half of the industry’s PC shipments at the end of 2007, and well over half of the growth.

Those stats should be particularly encouraging to Apple because they suggest there’s opportunity that the company hasn’t yet tapped. While the Mac maker had an impressive holiday season in the U.S., ranking third in overall PC shipments behind Dell (DELL) and HP according to IDC, Apple came in seventh in the global rankings. That suggests the company has plenty of room for improvement in Europe and Asia.

IDC analyst Richard Shim points out that Apple must increasingly look to Europe and Asia in an uncertain year for U.S. consumer spending. “A lot of their growth is coming from these other regions,” he says “If the consumer market starts to back up as a result of the dour economic scene right now, they could face some serious challenges.”

International expansion has long been part of Apple’s plan. The company plans to open its first retail store in China this year, and to open one in Australia as well. Apple might also have its eye on Europe, where retail remains a largely untapped possibility; while Apple has 13 stores in the United Kingdom and one in Italy, the company lacks a company-owned retail presence anywhere else on the continent. With a higher profile there, Apple might drive even more sales; in the quarter that ended 2007, Apple reported that net sales in Europe grew twice as fast as in the United States.

Indeed, when I caught up to Apple vice president Greg Joswiak during the holiday season, he had international markets on the brain. On the phone from a Paris hotel, the iPod and iPhone marketing chief stressed the strategic importance of consumers outside the U.S. He seemed particularly interested in countries where Apple’s share of the MP3 player market was less than 30 percent.

“That’s a significant opportunity because not only can we grow share, but we don’t have, in any of these markets, an incumbent to beat,” Joswiak said. “We’re actually competing against ‘Other’ – the off-brands that somebody’s trying to sell only on price, and not establishing any value in the market.”

It’s a good thing, too, because it’s those overseas consumers who are still buying. In Apple’s most recent conference call with analysts, Chief Operating Officer Tim Cook said U.S. iPod unit sales were flat year-over-year during the holidays, and it took strong international sales to help Apple meet its targets. In an apparent attempt to stoke volume in 2008, Apple introduced a pink iPod nano in time for Valentine’s Day, and dropped the price of the iPod nano.

And Apple’s computers are selling, too. According to IDC, worldwide Mac shipments jumped 37.8 percent in 2007, outpacing the industry.

Apple executives are fond of talking about seven years ago, the last time Wall Street seriously underestimated the company. Faced with an economic slowdown that saw his tech industry peers slashing staff and cutting projects, CEO Steve Jobs proclaimed that he and the rest of Apple would instead “innovate our way” out of the slump.

Jobs made good on that promise. Soon after, Apple (AAPL) unveiled the iTunes Store, the iPod took off, and … well, the rest is history.

This week, you can bet the true believers around Apple’s Cupertino headquarters are thinking back to 2001, while loading up on some suddenly discounted shares. Talk about an after-Christmas bargain: Apple stock is trading at about $140, 30 percent off its December 28 high of $202.96. That’s about the same place where Wall Street valued the stock six months ago, before it became clear that the new iPhone would sell nearly 4 million units in 200 days.

Apple executives have begun touting the iPod touch as a wireless handheld computer rather than a simple media player. If consumers and developers embrace that concept, it could lead to innovation and sales for Apple in 2008. Photo: Jon Fortt

Apple was a stock market darling in 2007, but economic jitters in 2008 have some investors doubting its growth prospects.

More from Big Tech

Apple's new iPod lineup (Photos 1-5) Flash storage and more in HP’s redesigned laptops (Photos 1/6) Seagate's slick storage for Mac and PC (Photos 1/9)

The most recent ding to Apple stock came Wednesday, after the company turned in the best quarter in its history. The stock dropped nearly 11 percent. Depending on whom you ask, the stock got hammered because of soft iPod growth, tepid revenue guidance, or plain old investor fear.

Honestly, there’s plenty to be afraid of; with the U.S. subprime mess threatening to become a global financial crisis, 2008 looks less investor-friendly than 2007. Last year Apple shares more than doubled, starting at $85 and ending at $198. In between Apple became possibly the most talked about stock on the planet, fueled by rising Mac sales, iPhone hype and digital tussles with Hollywood.

Apple has taken a less cocksure stance in 2008, possibly to fix relations with Tinseltown. Last year Jobs tried to muscle the major studios when he launched Apple's iTunes movie download store, expecting that Hollywood bosses would give in and let Apple sell their movies and TV shows on Apple's terms. (Jobs predicted, wrongly, that many studios would eventually come on board during 2007.)

In the end Jobs failed to win their cooperation, his effort to create the "DVD player of the future" with Apple TV failed, and he even lost NBC as a partner for TV downloads. (The lack of high-quality video options might have been one reason U.S. iPod sales were flat in the holiday period.) This month Jobs is showing a new willingness to compromise, giving Hollywood bosses the iTunes video rental option they had been clamoring for — but it's still not clear whether Apple and the studios can get along.

Meanwhile, the 2007 run-up in Apple’s value wasn’t always based on real numbers. The stock began shooting higher on iPhone anticipation before analysts knew how many Apple could realistically sell, or how Apple would account for iPhone sales on its balance sheet. (Revenues are spread over two years.) Price movements could be wild. In the space of a couple of hours in May, the stock dropped more than $4 billion in value on a rumor that the iPhone launch would be delayed four months, and quickly recovered. (Distraught Apple investors, take note: If the stock’s rise wasn’t always based on numbers, why should we expect its fall would be?)

But there’s also plenty of reason to believe Apple can innovate through this downturn like it did the last.

First is stability. Apple has stockpiled more than $18 billion in cash, giving it more than enough cushion to think big, take risks, and make mistakes (like Apple TV). Apple’s PC market share gains also help to add a source of recurring revenue. If this year plays out as usual, this summer the company will announce updated Mac software packages for tasks like video and audio editing, word processing and spreadsheets. If Apple adds attractive new features to those bundles, it will bring even more profit to the company.

Second is the iPhone. Like the iPod before, it’s a hit — even though it is solely distributed through AT&T (T) in the U.S. and through other exclusive carrier arrangements abroad, it seems to be gaining traction. During his Macworld keynote a week ago, Jobs announced that Apple has sold 4 million iPhones; and within those numbers was a gem of a detail. On the earnings call, Apple said it sold 2.3 million iPhones during the quarter — do the math, and it seems Apple sold about 300,000 iPhones in just the first two weeks of 2008. If that pace keeps up — and it easily could as Apple expands the iPhone's availability in Europe and Asia — then Apple could sell as many iPhones this quarter as it did during the holidays, an impressive feat.

Last is the iPod touch. Largely glossed over in Apple’s earnings announcement was the executive team’s emphasis on the fact that the company doesn't view this thing as just an iPod — it’s a wireless computer. And the iPod touch will fully come into its own at the end of February, when Apple opens the door for outside developers to build software for it. What the iPod touch becomes then is an open question. Will Apple invent a way for it to become a viable gaming platform? Will clever engineers come up with cooking programs, GPS attachments, video recorders, or other ideas to spark demand for the gadget?

If so, watch out. Sales of the iPod touch and iPhone might just push the stock price higher again — and if so, Apple executives will relish the chance to tell the story of how investors, once again, underestimated Apple.

Apple reported earnings that beat analyst estimates on strong sales of iMacs, laptops and iPhones. But its cautious outlook led investors to slam the stock Wednesday morning, and take much of the Nasdaq down with it.

Why?

Apple stock took a deep dive in early trading Wednesday.

Among the troubling signs in Apple's earnings were indications that U.S. iPod sales slowed an unusual amount in December. Courtesy: Apple

More from Big Tech

Apple's new iPod lineup (Photos 1-5) Flash storage and more in HP’s redesigned laptops (Photos 1/6) Seagate's slick storage for Mac and PC (Photos 1/9)

To some extent, it’s a case of one bad Apple (AAPL) spoiling the bunch. Steve Jobs & Co. is seen as the most innovative, growth-producing group in tech. And if the U.S. consumer’s economic troubles are starting to rattle mighty Apple, high fliers like Research In Motion (RIMM) and Google (GOOG) might not be immune, either.

Indeed, Apple’s holiday performance showed signs that the company’s not unstoppable in 2008. In particular, Apple’s cautious outlook, weakness in U.S. iPod growth and the unpredictability of iPhone sales left Wall Street’s pessimists plenty of reason to doubt. And in this jittery market, those pessimists have a lot of power.

First, a recap of Apple’s good news — and there was plenty of it. Apple turned in revenue of $9.6 billion and profit of $1.6 billion for the holiday quarter, blowing past the average analyst estimate. The company shipped a record 2.3 million Intel (INTC)-based Macs during the period, and actually sold as many iPhones as computers. In the process Apple generated $2.7 billion in cash, bringing its war chest to $18.4 billion.

But there was troubling news, too. On the conference call with analysts, Chief Financial Officer Peter Oppenheimer admitted that iPod sales merely met the company’s expectations, rather than exceeding them. Part of the reason, he said, was that U.S. iPod sales weakened in December — it took overseas sales to make up the difference. “In the U.S., in the gift-buying season, we saw a slightly different curve,” he said. “That was made up for in our very, very good growth internationally.”

There was more. It was clear that Apple executives weren’t sure what to make of the iPod slowdown. Maybe it’s the U.S. economy. Maybe the presence of the higher-priced iPod touch convinced people to save up and buy one iPod instead of two, they suggested. And then there’s the possibility that the iPhone is starting to eat into iPod sales. “In the U.S., where iPod unit sales were flat year over year, it could have been one of the factors, but other factors played into that as well, so it is very difficult to say with any precision whether there was cannibalization or not,” said Chief Operating Officer Tim Cook. Cannibalization would be a bad thing. It would mean that iPhone growth doesn't purely add to Apple's results — it also takes away from the iPod.

Add in the fact that iPhone sales are so hard to predict (this is Apple’s first time selling them in a March quarter), and Apple’s outlook made Wall Street nervous. For this current quarter that will end in March, executives promised revenue of $6.8 billion and earnings of about $850 million. And while ordinarily analysts would take that number with a wink and expect Apple to easily beat it, this year they’re not so sure Apple can.

So what does this mean for the rest of the tech industry?

It means Thursday will be a particularly important day, as number-one phonemaker Nokia (NOK) and software giant Microsoft (MSFT) report earnings. Unlike Apple, Nokia’s phone empire is weak in the United States and strong in Europe and Asia; so an encouraging report and a solid outlook from Nokia could reassure investors that Apple’s international iPhone plans can work. Microsoft meanwhile can give an overview of consumer and business spending patterns. If businesses continue their trend of planning to upgrade to Windows Vista in large numbers, it may signal that the economic environment isn’t horribly bad.

But until then, tech stocks seem likely to be driven by the sour news from Apple and Motorola (MOT), and whatever signals come out of eBay (EBAY), Qualcomm (QCOM) and Symantec (SYMC).

It’s a little ugly out there.

Last year's iPhone introduction was an A+, with a beyond-cool gadget, new software and new services. So how did Apple (AAPL) score this year with its Macworld presentations? A slim laptop with Intel (INTC) inside won bonus points, but aside from that, CEO Steve Jobs had to rely on his top-notch presentation skills. This is how we graded his keynote announcements:

MacBook Air MacBook Air. Courtesy: Apple Apple’s gorgeous ultra-slim laptop was the star of Macworld 2008, and its dimensions are truly amazing. When I picked one up, it felt like half of a laptop, yet its solid, curved design assuaged my fears about whether it’s sturdily built. But Steve Jobs stretched reality a bit when he said it brings portability without compromises. (The biggest two are that it lacks a DVD drive and a removable battery, so you can’t pack extra juice.) Still, at $1,799 with an 80-gigabyte hard drive, this pixie is well priced for the category, and puts Microsoft (MSFT)-based offerings to shame. GRADE: A

Time Capsule Time Capsule. Photo: Jon Fortt The only other new piece of hardware Jobs unveiled looks just like an AirPort Extreme wireless base station, only it’s packing a 500-gigabyte or 1 terabyte hard drive. Time Capsule uses a speedy 802.11n connection to wirelessly back up all of the files on your network (provided your computers all run Mac OS X Leopard). It’s a great idea, but it appeals to a narrow audience: Owners of multiple Leopard Macs who care enough to back them up centrally. Bottom line, Apple won’t sell boatloads of these. GRADE: B

iTunes Movie Rentals Steve Jobs demonstrates iTunes Movie Rentals. Photo: Jon Fortt It had to happen, but Jobs can’t be thrilled about it. If he had really wanted to offer rentals, Apple could have tried that approach a year ago, when instead Jobs announced an iTunes movie download store. But movie executives mostly boycotted the iTunes download-to-own model in 2007, forcing Jobs into this compromise. The problem with Apple’s latest rental plan? If you rent a DVD from Netflix, you can take it on a trip, bring it home for the kids to watch, and keep it as long as you want. But with iTunes, once you start watching the first time, you lose access after 24 hours. Ick. Digital downloads should be more convenient than DVDs, not less. GRADE: B-

Apple TV Do-over Apple TV 2.0. Courtesy: Apple After calling its first effort with Apple TV “the DVD player for the 21st Century” and then referring to it as “a hobby,” Steve Jobs finally called it what it is: A failure. But Apple’s not giving up. Thanks to a software update, the new Apple TV no longer requires a computer to pull content off of the Internet, and it now offers movies in high definition. Will Apple TV 2.0 fare much better, at its new $229 price? I doubt it. Why? While this is an improvement on Apple's first effort, you’ll have a better movie-watching experience buying a $200 upscaling DVD player and subscribing to Netflix (NFLX). GRADE: C

New apps for iPod Touch Macworld attendees check out new iPod Touch apps. Photo: Jon Fortt The iPod touch got a bit more iPhone-like, inheriting a set of programs: Mail, Maps, Stocks, Notes and Weather. With this move, Apple nudged the touch closer to being a little wireless handheld Mac. Apple didn’t have much choice: since the company is set to give software developers tools to build their own programs for the touch in about a month, someone else would have created their own versions of these nifty programs if Apple hadn’t made them available. Moving the old iPhone apps to the touch is a fine decision. But offering no innovative new programs for the Macworld crowd? Sort of a letdown. GRADE: B-

iPhone features iPhone maps now display your location automatically. Courtesy: Apple Though the iPhone still doesn’t have GPS, Apple has begun using Google’s location service that relies on cell towers, and Skyhook Wireless’s service that uses WiFi base stations. The advantage here is that unlike GPS, this service will work indoors – which can't be said for location services in Research in Motion's (RIMM) BlackBerry. The disadvantage is that iPhone location is likely to work better in urban settings than it will in rural areas or on highways. (It’s no replacement for in-car GPS.) Another great new iPhone feature: Web Clips, which have been carried over from Leopard. It should speed the process of visiting your favorite websites. The new software is free for iPhone owners; iPod touch owners will have to pay $20. GRADE: B+

Flash-based laptops? Suped-up iPhones? The wait is over for Apple's biggest announcements of the year.

The crowd at Macworld 2008 settles in for the Steve Jobs keynote. Photo: Jon Fortt

SAN FRANCISCO — The keynote has begun. There's a Mac vs. PC commercial showing. PC is talking about what a bad year 2007 was, with all of Apple's announcements including the iPhone. PC says 2008, though, will be a great year. "What are you going to do?" Mac asks. "I'm just going to copy everything you did in 2007."

Steve Jobs walks onstage from the left.

Welcome to Macworld 2008. We've got some great stuff for you, there's clearly something in the air today, he says.

Jobs says he wants to look back at 2007, and says thank you to the crowd.

He's got four things he wants to talk about today. More than 5 million copies of Mac OS X Leopard have been delivered, making it the most successful release ever. Almost 20 percent of the Mac OS X installed base has upgraded, he says. He's going through the reviews, including raves from the Wall Street Journal and New York Times.

Microsoft Office 2008 is here. "This is the last big app to go native on Intel."

First Thing: Time Capsule

He's talking about Time Machine in Leopard. (Jobs calls it Tiger, the previous version, by mistake.) Today Apple is announcing a companion product to Time Machine, called Time Capsule. I has WiFi and a hard drive in it (802.11n) and together it lets you wirelessly sync your stuff. "You can back up your notebook wirelessly to Time Capsule." In fact, you can back up all the Macs in your house. Time Capsule will be sold in a 500 gigabyte drive and a terabyte drive. The 500 will be $299, and the terabyte will be $499.

He's playing the ad about Time Machine. There are a lot of Macs explaining that Time Machine automatically makes copies of him so that nothing ever gets lost. That's the first thing Jobs wanted to share.

Second Thing: iPhone

The second thing is about the iPhone. Today is the 200th day since the iPhone went on sale, he says. Apple has sold 4 million. That's 20,000 iPhones a day on average. In terms of the overall market, according to Gartner's Q3 data, RIM had 39 percent with the Blackberry, Apple had 19.5 percent with the iPhone, Palm had 9.8 percent, and Motorola had 7.4 percent.

What's equally interesting, Jobs says, is that Apple equally Palm, Motorola and Nokia in Q3. In the December quarter, Jobs says, he thinks Apple did even better.

What everyone's excited about is the software development kit in late February, Jobs says. But Apple wanted to roll out new features, including maps with location. Also, you can now make web clips on your home screen — up to 9. You can SMS multiple people at once, and have chapters and subtitles in videos. You can also show song lyrics.

Now he's going to demonstrate.

Google Maps. Push a pin, and it pinpoints the phone's location on the map. This makes directions easy; he just taps in "Apple," and it gives directions back to the headquarters. He cans also quickly get directions to a nearby Apple Store. Then he can move the pin and easily get directions. "We develop our Maps application in collaboration with Google," Jobs says. "We write the front end" and we really like working with those guys. (Interesting. I think this is the first time we've heard that Apple writes the front end of Google Maps for the iPhone.)

Now he's demonstrating sending SMS to more than one person. It's pretty straightforward.

He goes to Google, and goes to a plus button at the bottom. He can "Add to home screen," and he says add. Now the Google icon is added to his home screen. Now he goes to the New York Times. Web clips can remember where he zoomed and panned to, he says. He zooms up to the technology section, and says add to home screen. Now he has the zoomed-in technology section of the Times technology section as a web clip. When he's going to change things, the icons start wiggling, signaling that they're movable. He can rearrange them, and when he's done he presses home and they stop wiggling. (This is a really clever interface to show that the icons are editable.)

"There's no GPS inside the iPhone," Jobs says. So how do they do location? Apple's working with Skyhook Wireless and Google. Skyhook has 23 million WiFi hotspots in its database. Apple uses WiFi to pinpoint location, and Google uses cell towers to triangulate location. Apple is using both, Jobs says, "And it works pretty darn well."

Now he's demonstrating navigating through video by chapters, and easily turning subtitles off and on, and displaying lyrics to a song. "All of this is available today as a software update for every iPhone," he says.

"What can we do for the iPod Touch? … We've decided to add five apps," Jobs said. Mail, Maps, Stocks, Notes and Weather. The iPod Touch will even find location with Skyhook's system. Starting today, the apps will be built in to iPod Touch. For existing iPod Touch users, the new software is available as a $20 software update. "That was the second thing I wanted to talk about today."

Third Thing: iTunes and Apple TV

"Number three is about iTunes. I'm really pleased to report that last week we sold our 4 billionth song." On Christmas Day, we set a new record — we sold 20 million songs in one day.

Apple has also sold 125 million TV shows, he says.

And 7 million movies. "That's more than everyone else put together, but it did not meet our expectations …. Today we're announcing iTunes Movie Rentals," he says.

We've never offered a rental model in music because we don't think people want to rent their music, Jobs says. Movies are different. He shows the new section of the iTunes Store.

The majors are represented: Touchstone, Miramax, MGM, Lions Gate, New Line Cinema. But Apple also has Fox, WB, Disney, Paramount, Universal, and Sony Pictures. "We have every major studio supporting up with iTunes Movie Rentals. We're going to have all the great first-run films."

"Here's the deal. We're going to launch with more than 1,000 films in February, available 30 days after DVD release. You can watch on Macs, PC, iPod and iPhone. You can watch in less than 30 seconds after you rent. Once you start watching, you have 24 hours to finish watching it. You can move the film to another device while watching. Renting an old title will be $2.99. A new release will be $3.99.

He's demonstrating it. He rents by putting them in his lineup. He has days to start watching, and you can click a "move" button to put it on another device. "It rolls out in the U.S. starting today, international later this year. We're dying to get this rolled out international."

"What about this? What about this flat-screen TV I just bought? I'd like to watch them there, too. … All of us have tried. … And you know what? We've all missed."

He's admitting that Apple TV failed. "It's not what people wanted," he says. "We learned that what people wanted was movies, movies, movies." No computer will be required to use it.

"Here's what you can do." You can rent movies directly on a widescreen TV. You can rent them in DVD quality, and HD with Dolby 5.1. You can also get audio and video podcasts, and get photos both from your computer, and from Flickr and .Mac. And you can get YouTube. (This is a good move, particularly photos — I suggested a while back that photos are a great proposition.)

You can buy TV shows and movies, and play iTunes content and photos. He's focusing in on the HD movies. In HD, movies cost a dollar more than the prices he quoted for rentals earlier.

"All of these features in an entirely new user interface," he says.

He's showing it. One menu in the center. You can see what other people who have seen a movies have also watched. "I just go over here and push one button to rent this movie." He shows that it's ready to watch in just a few seconds. (This is impressive for a download, but he's probably on a very fast connection. We'll have to see how fast this is on a standard DSL line or cable modem — and it's not HD.) Now he's showing an HD movie that he's already downloaded, Live Free or Die Hard. It looks good, of course.

He's showing how to search, and says there are now more than 6 million songs available on Apple TV. He's looking for a Linkin Park music video, and he plays it. "So, music, music videos, the whole iTunes catalog at your fingertips, on your widescreen TV."

Now he's showing podcasts. One is called "Teton: Gravity research." A lot of them are now in HD, Jobs says. He shows one about what looks like extreme skiing. A guy skis off a cliff and opens up a parachute.

Now he goes to photos in .Mac. The albums are viewable. He goes to one album, and it's playing music and showing the photos, which of course fill the screen. (Apple's .Mac service requires a subscription though.)

He's now showing a video from .Mac. It's the same one he showed at the launch of the new iMovie.

Now he's going to Flickr. He's going to lovetohike78, and sees that person's photos, and also that person's friend's photos. He's trying to show photos from this person, and the music starts playing, but no photos. First big screwup of the keynote. "I'm afraid Flickr's not throwing up the photos on that one. That's what I wanted to show you today. Isn't that incredible?" The crowd claps nonetheless.

He says Apple TV's new software is a free upgrade.

Given the fact that we've got all new software … we want to make Apple TV even more accessible. "The new price of Apple TV, starting today, is just $229. We are shipping the new software upgrade to existing owners and the new $229 Apple TV in just two weeks."

He's going back to talk about movie rentals. You can watch them on your computer, iPod, iPhone, or TV. Apple has support from every major studio.

"The first studio to sign up with us for iTunes Movie Rentals was 21st Century Fox," he says. Jim Gianopulos, Chairman and CEO of 20th Century Fox comes out. He's talking about new business models. He says the key, despite all the changes is to make great movies and give them to as many people as possible. Steve Jobs leaves the stage. Interesting that he's putting a Fox guy up on stage by himself. Could this signal the beginning of a more Hollywood-friendly Apple?

Gianopulos happens to mention that the next-generation format "will be Blu-ray, looks like." That's sure to rile up the HD DVD fans. He says that the new Family Guy DVD will contain a digital copy that you can easily move to iTunes and the iPod, which is an interesting development. "We're really excited about our partnership, and we look forward to bringing you lots of exciting entertainment in years to come."

Fourth Thing: MacBook Air

Now, on to the fourth thing Jobs wanted to talk about today. "That brings us to number 4. There's something in the air."

"As you know, Apple makes the best notebooks on the planet. The Macbook and the Macbook Pro. Today we're announcing a third kind of notebook. It's called the MacBook Air. What s the MacBook Air? In a sentence, it's the world's thinnest notebook."

He shows the Sony TZ series. "They generally weigh about 3 pounds, and they generally are about .8 inches to 1.2 inches." They also compromise, he says, because their displays are 11 or 12 inches, the keyboard is miniature, and the processor is slower than standard.

He says there's too much compromise on everything but weight.

He shows a profile of the MacBook Air, which is .76 inches down to .16 inches. "The thickest part of the MacBook Air is still thinner than the thinnest part of the TZ series." He says it fits inside an inter-office envelope. So he grabs an envelope off of the lectern.

It has a 13.3-inch widescreen, an LED backlit display, a built-in iSight camera, and a full-size keyboard. "This is perhaps the best notebook keyboard we've ever shipped." The keyboard is also backlit, as it is in some other Apple laptops. It has a trackpad, and multi-touch gesture support. It looks like the gestures work with the trackpad. You can pan and move windows with two fingers on the trackpad, and rotate photos the same way. You can use three fingers to pan between fingers. And you can zoom by pinching in and out.

(This laptop is really darn thin.)

"How did we fit a Mac in here? How did we do it?" It has a 1.8-inch hard drive in it. (Interesting … not flash.) There's an option for a 64-gigabyte flash drive. This uses the Intel Core 2 Duo, so, Jobs says, Apple didn't compromise on performance.

"We've got a great relationship with Intel. Both companies are engineering-driven, and they both like to challenge each other." Jobs said they wanted the Core 2 Duo chip on a smaller package. Jobs welcomes Otellini to the stage. (This is impressive because Intel has an earnings announcement today, and those usually take all-day preparation from CEOs. This is the second time Jobs has had him on stage. Last time, he gave Otellini a plaque to thank him.)

Jobs is going over the rest of the features. Wireless networking, and all the ports you'd expect. The one thing he hasn't mentioned yet is an optical drive. "No matter how hard you look, one thing you're not going to find in a MacBook Air is an optical drive." There's an external one for $99, he says. Jobs says he doesn't think most people will need one. Wireless movie rentals, iPods and other things take the place of optical drives.

What about software? There's a new feature called "Remote Disk" that shows Macs or PCs in your vicinity, and you can pick a machine and ask to borrow its optical drive. Special software asks to borrow the drive, and it wirelessly installs software from either a Mac or a PC. (This sounds pretty complicated for a lot of users. Lots of people will want the external drive.)

The MacBook Air will get 5 hours of battery life, he says. (That is really extraordinary.) Features, he's going over again: 3 pounds, .16-.76 inches thick, 13.3-inch display, full size keyboard, multi-touch gestures, iSight camera, 1.6 GHz Core 2 Duo, 2 gigabytes of memory, 80 GB hard drive (with a flash drive option), 802.11, more. It will be $1,799, he says. It ships in two weeks.

He's showing an ad. Someone takes it out of an interoffice mail envelope, and opens it. "MacBook Air. The world's thinnest notebook," the on-screen text says.

Now he's talking about progress toward environmental initiatives. He says Apple is going to talk about this with major product announcements from now on. It's mercury-free and has arsenic-free glass. Circuit boards are BFR-free, PVC-free. The packaging has 56 percent less volume than the previously smallest Mac product packaging, which was the MacBook Pro.

"That is the fourth thing that I wanted to talk about with you today."

He goes over what has been presented.

"We have a special treat today. I wanted someone who could help us bridge the gap between iTunes Movie Rentals and music," he says, and the best person to do that agreed: Randy Newman. Newman is going to perform.

(Clearly, there's not going to be "One More Thing" or "One Last Thing" this time around, which sort of breaks a Macworld tradition.)

The Wallet MP3 is only slightly thicker than a credit card, and it plugs directly into a PC. Image: Jon Fortt

LAS VEGAS – At the Consumer Electronics Show, you often find those geeky product gems tucked away in a little booth away from the action. That’s where I spotted the Wallet MP3.

It’s an MP3 player the size of a credit card, complete with a USB connector that plugs into a computer. (It actually works; I tried it.) Walletex, the Israeli company that makes them, says the card gets five hours of battery life and charges via USB in 90 minutes. It holds 2 gigabytes worth of music, twice as much as Apple's (AAPL) iPod shuffle.

Why would you want an MP3 player the size of a credit card? If you have to ask, you lack geek cred. It’s cool because it’s weird. Good luck getting your hands on one, though; Walletex doesn’t do retail. They sell these, and identical card-size storage drives, to businesses that want to offer snazzy giveaways to their clients.