• by Mark Walsh  @markfwal, February 2, 2010

When Apple announced a blowout first quarter last week, with a 50% surge in profit on strong iPhone and Mac sales, there was only one small cloud diminishing the radiance of its earnings: iPhone sales had actually fallen shy of analysts' expectations, at 8.7 million versus 8.8 million. Some analysts had forecast as many as 10 million of Apple's signature device would be sold in the quarter.

News surroundings Apple's earnings was quickly drowned out by iPad launch two days later. But new data from ABI Research shows that the iPhone actually lost market share last quarter, falling to 16.6% from 18.1% worldwide. Even though Apple sold 18% more of the devices in the quarter, the overall smartphone market grew a whopping 26%.

Apple's share contracted as Motorola announced its comeback with the release of the Droid, its first Android-based phone that is estimated to have sold about 1 million units in the quarter. Heightened demand for smartphones has even lifted Nokia, whose Oyj phone sales alone increased 4.6 million.

The competition for Apple will only heat up in 2010. With the successful launch of the Droid, Motorola last month said it plans to introduce 20 to 30 Android phones this year globally. The gadget blogosphere has been buzzing the last couple of days about sightings of the Motorola Devour, a lower-end version of the Droid. That's not to mention Google's launch of the Nexus One and Android phones coming from other handset makers including HTC.

Rumors have also heated up that Microsoft is poised to introduce the long-awaited "Zune phone" and Windows Mobile 7 as a direct challenge to the iPhone at the Mobile World Congress in Barcelona later this month. With Apple CEO Steve Jobs already irritated by Google's entrance into the smartphone business, the arrival of old enemy Microsoft shouldn't do much to improve his mood.

One step that could help Apple expand its U.S. iPhone sales this year is if it finally ends its exclusive deal with AT&T and opens it up to Verizon Wireless or another carrier. Piper Jaffray analyst Gene Munster said last month a Verizon iPhone is likely coming in the third quarter of 2010. But Apple defied rumors it would add Verizon as a carrier when it unveiled the iPad, instead sticking again with AT&T.

And other analysts say Apple will likely wait until Verizon rolls out its 4G LTE network in 2011. But the company will be under greater pressure this year to shake up the smartphone world again with a dramatic iPhone upgrade or other move when its Worldwide Developer Conference rolls gain around in June.