Apple shipped 21.6 percent more smart phones than Nokia in calendar Q2 2011, bumping the Finnish phonemaker to second, or possibly third place.  (Source: Venture Beat)

Samsung is also expected to have passed Nokia in sales.  (Source: Flickr)

The fall from #1 in global smart phone sales raises tough questions for Nokia CEO and ex-Microsofter, Stephen Elop.  (Source: Mark Vlander/Getty Images)
Apple is either #1 or #2 in the world in smart phones, depending on Samsung's sales, Nokia in second or third

As Finland's Nokia Oyj. (HEL:NOK1V) continues its downward slide in smartphone sales, the question partner Microsoft Corp. (MSFT) is likely wondering is exactly how much market share the company will have left when it finally puts out a Windows Phone 7 handset in October.

While Nokia in the U.S. has been shadowed by other handset manufacturers in the smartphone war, internationally it was one of the proponents of the "smart" phone and the top seller of the rich-media, internet-connected cellular devices.  But ever since Apple, Inc. (AAPL) and Google Inc.'s (GOOG) Android operating system exploded onto the market, Nokia hasn't seemed quite the same, delivering increasingly anemic hardware and software progress.  

Nokia's answer was to embrace the cutting edge Windows Phone 7 UI, but the problem was that it wasn't announcing immediately available product -- it was offering a product that would be available in about a year.  So rather than signaling the rebirth of Nokia's smartphones, the move seems to have been perceived by the public as a signal of the death of the current lineup -- and cause to switch to a rival phone maker.

Apple has now become the first to officially pass Nokia in smartphone sales.  Apple surpassed analyst expectations, moving 20.3 million iPhones in the second calendar quarter, while Nokia moved only [press release] 16.7 million.

Ex-Microsoft executive and now Nokia chief executive, Stephen Elop, tried to put a cheerful spin on the news commenting that the changes put in place had already "started to have a positive impact" on Nokia, and that, "We are making better-than-expected progress towards our strategic goals."

Despite the optimism, Nokia appears in very bad shape.  For the quarter revenue dropped 7 percent to €9.3B ($13.2B USD), while a net loss of €368M ($523.4M USD).  Smartphone sales dropped 34 percent, while overall phone sales (including non smartphones) dropped 20 percent, to 88.5 million units.

The latter figure is particularly disturbing for Nokia, as it indicates smartphones aren't the only arena it's falling short in.  And consider that Nokia's basic phones are still more profitable than its smartphones, that's very bad news for the bottom line.

Samsung Electronics Comp., Ltd. (SEO:005930) has not disclosed its quarterly smartphone shipments yet, but it looks likely to pass Nokia, as well.  The only remaining question will be who was first in smartphones globally -- Samsung or Apple.

For Nokia, likely to be bumped to third place, tough questions await.  Sure, Nokia, with its vast global market share, seems like a somewhat appropriate candidate to push the slick, Windows Phone 7 OS.  But will Nokia be able to appeal to Microsoft's biggest handset market -- the U.S. -- a market Nokia has traditionally struggled in?  

And with only one handset apparently set for release in October, will that be enough to generate any sort of momentum in the face of Apple's strong brand and Android handset makers broad selection of affordable handsets?

"We don't know how to make a $500 computer that's not a piece of junk." -- Apple CEO Steve Jobs

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