Short answer: Lots.

Piper Jaffray analyst Gene Munster estimates that 18.8 million iPhone 3GS users will likely upgrade to the iPhone 4S, accounting for about 18 percent of Apple’s fiscal 2012 iPhone sales.

“We believe the number of iPhone 3GS units sold before the launch of the iPhone 4 serves as a conservative proxy for iPhone users that will likely upgrade to the iPhone 4S,” says Munster. “Note that our Aug-11 survey shows that among existing iPhone users, 94 percent expect to buy another iPhone as their next phone; Apple has built an annuity of smartphone buyers.”

Indeed. And Munster’s estimate includes only 3GS upgraders. It doesn’t account for existing users of the original iPhone, iPhone 3G, or even the iPhone 4. In other words, it’s likely that upgrade sales will be even greater than Munster predicts.

We’ll see. Currently, Munster is calling for 25 million iPhone units to be shipped in calendar Q4 of this year, a number he has already conceded may be too low.

Companies are signaling they’re more comfortable spending money on technology now that sales and profits are expanding. “What drives tech spending are profits,” said Bill Whyman, head of tech strategy research at equity research broker dealer ISI Group Inc. Corporate profits have been surging the last few quarters and spending usually lags profits by three quarters, he said.

World-wide information technology spending is forecast to increase 5.1% to $3.6 trillion this year, according to market research firm Gartner Inc.

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DRAM is the ultimate commodity chip market, and its boom-or-bust cycles are legendary. When demand picks up, manufacturers like Samsung, Hynix and Micron always rush to add manufacturing capacity–prices pick up; chips become scarce.

Everything seemed to be going well for the chip companies until the third quarter of 2010. After five straight quarters where the average price for a DRAM chip increased, it suddenly turned south as demand for notebook PCs slacked. That’s in line with what Gartner and IDC reported yesterday about the PC market.

There’s good news for consumers, however. All that stacked-up inventory has to go somewhere. If you’re planning to buy a notebook this year, the base models will now start shipping with four gigabytes of memory instead of two. And for those who bought a machine with only two in the last year or so, upgrades will be more affordable.

The one bright spot for the memory companies? You got it: Smartphones and tablets. Memory content in phones is expected to increase by nearly two-thirds. And the 57 million tablets that iSuppli expects will ship this year will also need some DRAM. More details here from iSuppli.

Wall Street had high hopes for Microsoft’s latest financials, and the company did not disappoint. Fueled by a strong PC upgrade cycle, it turned in a record fourth quarter with sharp gains in both profit and sales.

Net income rose to $4.5 billion, or 51 cents a share, from $3 billion, and revenue to $16.04 billion from $13.1 billion. Analysts had been expecting earnings of 46 cents a share on $15.2 billion in revenue.

“We saw strong sales execution across all of our businesses,” Microsoft (MSFT) COO Kevin Turner said in a statement.

And indeed it did. Windows revenue rose to $4.5 billion from $3.2 billion in the same period last year. Profit for the company’s Windows division rose to $3 billion from $1.9 billion.

At Microsoft’s Business division, which includes its Office suite of software, revenue rose to $5.3 billion from $4.6 billion, and profits to $3.3 billion from $2.7 billion.

And the company’s Online Services division saw its revenue rise to $565 million from $501 million, though its loss grew as well–from $585 million to $696 million.

Below, the earnings release:

Microsoft Q4

For most folks, the device is a discretionary purchase.

“When we asked people why they were buying the iPhone 4, the vast majority indicated that their decision was driven by desire rather than need. Folks didn’t line up because their old phone was failing them in some way; they lined up because the iPhone tugged at them. Only 26 percent of the people we spoke with said that they needed a new phone. The remaining 74 percent were enticed into a discretionary purchase,” Reiner reports.

“Of respondents, 50 percent said that the iPhone 4’s new features pulled them in,” the analyst added. Of those surveyed, 11 percent said they had wanted to buy an iPhone for some time and were just waiting for the moment when they could buy the last version. Thirteen percent reported that they always buy the latest iPhone when it comes out.”

Of the 76 percent of respondents who already owned an iPhone, most were upgrading it after just 14.7 months–quite a bit faster than typical smartphone replacement cycle of 21 months. (Click on charts below to enlarge.)

Here’s a look at the upgrades:

• Youssef Squali, Jefferies: Upgrades to Buy from Hold, target to $65, from $52. “Q4 results show that Netflix’s momentum is stronger than ever, driven by excellent execution amid a very favorable competitive environment,” he writes. Squali says the company is seeing benefits from the popularity of its movie streaming service. He takes his 2010 EPS estimate up to $2.56, from $2.28.

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Evidently, AT&T (T) thought it best not to mention the iconic super-smartphone too much lest its executives be driven offstage by a mob of iPhone users complaining of dropped calls, lousy service, delayed text and voice messages and testudine download speeds.

Anyway, as I was saying, AT&T said it will add two so far undisclosed Palm (PALM) webOS phones to its lineup this year as well as five Android devices. Among the latter, a mysterious new HTC phone (hmm…wonder what that could be?) and Dell’s Mini 3, a device that shares the basic design as smartphones Dell (DELL) already sells in China.

Oh, and the company has adopted an “Apps for All” strategy that will see it supporting Apple’s iPhone App Store and Palm’s App Catalog, the Android, Windows Marketplace and Nokia’s (NOK) Ovi Store (is anyone even writing apps for that?).

So AT&T is adding five new data-guzzling “superphones” to its 2010 lineup along with four new app storefronts. How does the carrier propose to handle the resulting data demands considering the difficulties it’s had supporting the iPhone?

Said AT&T Mobility CEO Ralph de la Vega: “How is our network going to support this growth? We’re continuing to add thousands of new cell sites and back-haul connections and preparing for the move to LTE. We’re confident that our industry-leading investments and upgrades will help us maintain our position as the nation’s fastest 3G network.”

Whatever you say, Ralph. I’d call to question your wisdom, but I keep losing service.

Welcome news for long-suffering AT&T (T) subscribers, who recently ranked the carrier dead last in the annual Consumer Reports survey of wireless customer satisfaction. But the carrier’s improvements only apply to cities where additional back-haul connections have been added to support those higher speeds.

Sadly, for New York City and Bay Area residents, neither region qualifies. As AT&T head of operations John Stankey told attendees of a Citigroup (C) conference Tuesday, those cities present particularly challenging density and zoning issues.

“I thought by the time we’d closed 2009 we would be in a better place in New York City than we were,” Stankey said. “But New York City is a little bit of a different animal and it’s a good example of having to scale in this data environment, where not only do we have a lot of capacity issues to deal with but physically there is network equipment and network elements that are needed to be changed out.”

Elaborating, Stankey added, “They just flat-out have hit their capacity levels and we have to replace them with new ones. And as a result of that, those transitions and that work has taken us a little bit longer and it’s been a little dicier than what we had hoped it would be.”

And evidently, the situation is equally dicey in San Francisco.

“Our challenges [in San Francisco] are largely zoning-oriented,” Stankey explained. “It’s a little bit tougher in places in San Francisco to do adjustments to antennas that we need to do in areas like the Financial District, where we had antenna structures that worked really well in a 2G environment. They need to be replaced to support 3G services and it’s just taking time to get the zoning ordinances square to replace those antennas and clean up the portions of the city that we are dealing with.”

Okay. So New York City and San Francisco upgrades are tough going–that’s understandable. They’re both big, tech-savvy markets with high data demands. Still, it’s a travesty that a carrier like AT&T still can’t reliably connect calls in either of them when the company is raking in 80 percent more wireless data revenue than it did in 2007.

Now, that figure includes sales made abroad, so we don’t yet know how many were sold by AT&T (T), but it’s clear that the number was substantial. In its third quarter last year, AT&T activated 2.4 million iPhones and 40 percent of those were for subscribers who switched from other carriers. So the fact that Apple (AAPL) sold as many iPhones as it did in the company’s most recent quarter, bodes well for the carrier.

As Craig Moffett over at Bernstein Research notes, “It is entirely conceivable that AT&T’s iPhone alone will account for more than 100 percent of the entire industry’s post-paid subscriber growth in the third quarter.”

But therein lies the rub. For while sales of Apple’s handset remain strong, the heavy subsidies it requires have pushed AT&T’s wireless margins down. And the heavy data traffic associated with the handset have led to widespread complaints about AT&T’s network, forcing infrastructure upgrades. Worse, AT&T’s dependence on iPhone exclusivity at a time when Apple is clearly transitioning away from such a model leaves it quite vulnerable.

“While the strong sales of the iPhone are positive for AT&T in the near term, they increase the company’s reliance on a product for which we do not believe it will be able to maintain exclusivity,” Pali Research analyst Walter Piecyk wrote in a note to clients Tuesday. “We believe more than one third of AT&T’s post paid customer base is tied to an iPhone user and that mix is likely to rise significantly over the next few quarters.”

But not this quarter. This quarter, AT&T is expected to add 1.5 million to 1.7 million net wireless customers, driven by demand for the iPhone 3GS, which was released early on in the quarter. And while another drop in wireline customers is likely to weigh on results, it will be tempered once again by the iPhone. AT&T is expected to earn 50 cents a share, compared to 55 cents in the year-earlier third quarter, according to analysts polled by Thomson Reuters, who see revenue falling to $30.9 billion from $31.3 billion.

Now, that figure includes sales made abroad, so we don’t yet know how many were sold by AT&T (T), but it’s clear that the number was substantial. In its third quarter last year, AT&T activated 2.4 million iPhones and 40 percent of those were for subscribers who switched from other carriers. So the fact that Apple (AAPL) sold as many iPhones as it did in the company’s most recent quarter, bodes well for the carrier.

As Craig Moffett over at Bernstein Research notes, “It is entirely conceivable that AT&T’s iPhone alone will account for more than 100 percent of the entire industry’s post-paid subscriber growth in the third quarter.”

But therein lies the rub. For while sales of Apple’s handset remain strong, the heavy subsidies it requires have pushed AT&T’s wireless margins down. And the heavy data traffic associated with the handset have led to widespread complaints about AT&T’s network, forcing infrastructure upgrades. Worse, AT&T’s dependence on iPhone exclusivity at a time when Apple is clearly transitioning away from such a model leaves it quite vulnerable.

“While the strong sales of the iPhone are positive for AT&T in the near term, they increase the company’s reliance on a product for which we do not believe it will be able to maintain exclusivity,” Pali Research analyst Walter Piecyk wrote in a note to clients Tuesday. “We believe more than one third of AT&T’s post paid customer base is tied to an iPhone user and that mix is likely to rise significantly over the next few quarters.”

But not this quarter. This quarter, AT&T is expected to add 1.5 million to 1.7 million net wireless customers, driven by demand for the iPhone 3GS, which was released early on in the quarter. And while another drop in wireline customers is likely to weigh on results, it will be tempered once again by the iPhone. AT&T is expected to earn 50 cents a share, compared to 55 cents in the year-earlier third quarter, according to analysts polled by Thomson Reuters, who see revenue falling to $30.9 billion from $31.3 billion.

“We know you’ve been eager for this service so we wanted to offer a quick update on the launch plans for MMS on Friday, Sept. 25,” AT&T explained on its official Facebook page. “Late morning, Pacific Time, on Friday, the new carrier settings update enabling MMS should be live and ready to download through iTunes.”

Assuming everything goes as planned. And sources inside AT&T (T) tell DSL Reports that the carrier is “very nervous” that it might not. “AT&T and its MMS partners are already seeing ‘record traffic during peak hours of the night’ with just the users selected for testing,” the publication says. “That early testing has been a little rocky, with AT&T seeing a fairly significant test outage yesterday that has them rushing to beef up their MMSC messaging servers. Estimates among those working on the project are that traffic on AT&T’s wireless network will be about 40 percent higher all day on Friday as iPhone users fire pictures and video at one another.”

“We know you’ve been eager for this service so we wanted to offer a quick update on the launch plans for MMS on Friday, Sept. 25,” AT&T explained on its official Facebook page. “Late morning, Pacific Time, on Friday, the new carrier settings update enabling MMS should be live and ready to download through iTunes.”

Assuming everything goes as planned. And sources inside AT&T (T) tell DSL Reports that the carrier is “very nervous” that it might not. “AT&T and its MMS partners are already seeing ‘record traffic during peak hours of the night’ with just the users selected for testing,” the publication says. “That early testing has been a little rocky, with AT&T seeing a fairly significant test outage yesterday that has them rushing to beef up their MMSC messaging servers. Estimates among those working on the project are that traffic on AT&T’s wireless network will be about 40 percent higher all day on Friday as iPhone users fire pictures and video at one another.”

Digital Daily came bearing sad news on Monday: The Apple (AAPL) event scheduled for Sept. 9 will not have anything to do with a tablet computer. Just music. And from an organization vulnerable to Palm (PALM) poachers. Presumably, all managers present will be exercising caution and using peripheral vision. Netflix (NFLX) was the recent recipient of good news, as John reported this week: Analysts’ research shows that the DVD-by-mail business has a lot of life left in it. Now, if Google (GOOG) will just stay out of that business. The search giant, in any case, might be a bit preoccupied by the Open Book Alliance and that group’s opposition to its Google Book Search Settlement, the $125 million deal that will allow Google to digitize and monetize some 18 million books. Probably won’t be preoccupied for long, though.

MediaMemo returned this week with an explanation for why the relatively mediocre iPhone camera has become the favorite camera on Flickr: It’s already in your pocket, and no one wants to carry another gadget around. Which is likely to become a more common refrain as high-end handsets grab more marketshare than ever and the quality of secondary functions improves. Another common refrain: The one where media companies start charging for content, and people start paying. News Corp. (NWS) (which owns this Web site) is working on assembling the critical mass of publishers it believes is necessary for making this possible.

Over in Personal Technology, Walt Mossberg reviews a robotic investment adviser called Cake Premium and points out some of the reasons you may or may not want to follow its suggestions for what to do with your 401(k). From Mossberg’s Mailbox, Walt answers questions about Windows OS upgrades on the Mac, and some follow-up questions about DriveSharp. In The Mossberg Solution, Katie Boehret tests out Rosetta Stone’s (RST) Totale, a web-based language-learning system that might be the next best thing for immersing yourself in another culture.

Such a user would be able to upgrade to, and run, both new operating systems on the same Mac. Microsoft says Windows 7 will be licensed to work within a virtual machine on a Mac—a faux Windows computer—just like XP and Vista can. Apple also plans to offer Windows 7 drivers for its hardware after the new Microsoft system comes out on Oct. 22, so that users who wish to use its Boot Camp system for running Windows on a Mac can use the new Windows.

You can choose to keep running older versions of Windows on Macs equipped with Snow Leopard, or, presumably, run Windows 7 on Macs that still run Leopard. But note that if you do upgrade a copy of Windows to Windows 7 running on a Mac—even if it’s in a virtual machine—you must follow the same, sometimes painful, process that faces owners of standard Windows computers.

I am color blind and am wondering if the DriveSharp driving improvement software you reviewed last week involves identifying colors as part of the learning process.

Yes, it does. Both of the program’s training exercises, which hone users’ abilities to track multiple moving objects and to expand their fields of vision, do rely to some extent on distinguishing colors.

You can find Mossberg’s Mailbox, and my other columns, online for free at the All Things Digital web site, http://walt.allthingsd.com.

The event will be held in San Francisco–most likely at Yerba Buena Center for the Arts, where it has occurred in years past–and is expected to showcase upgrades to the iPod line and an update to iTunes that may involve some sort of social element. Our sources insist it will not involve any discussion whatsoever of the tablet Apple is reportedly developing.

Too bad. It’s looking more and more like we’ll have to wait until 2010 for that.

No word yet on who’s to preside over the event. There’s been speculation that it will mark the first public appearance by CEO Steve Jobs since returning from medical leave earlier this year. Our sources have no information on whether or not that will prove true.

PREVIOUSLY:

• Apple Tablet to Recreate “Heyday of the Album (With One Good Song)”
• $800 Apple Tablet Coming in October?
• New From Piper Jaffray Analyst Gene Munster: The Apple iPad
• Rumored Apple Netbook Actually an E-book?

“We believe Apple is likely gaining some iPhone traction in enterprise with 19 of top 100 Fortune 1000 companies having iPhones deployed,” Um wrote. “However, we do not think this is a displacement of solutions such as BlackBerry but, rather, believe it is likely at the expense of other Microsoft Exchange capable smartphones.”

Um sees great opportunity in this trend, as long as Apple is willing to step up its game a bit. “In order for Apple to gain greater traction in the enterprise market,” he writes, “the company must overcome some issues including providing 24×7 customer support, providing more future product roadmap details (to allow large enterprises to build ahead and prepare), provide alternatives to OS upgrades solely from iTunes desktop application.”

Ironic, isn’t it, to read such a note in light of all the smack Microsoft CEO Steve Ballmer once talked about the iPhone? “There’s no chance that the iPhone is going to get any significant market share,” Ballmer said in 2007. “No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.”

PREVIOUSLY:

• Windows Mobile 6.5 “an Amazing Engineering Feat,” All Right…
• Perhaps if They Think of Their Win Mobile Devices as Broken iPhones…

Ugly, even more so considering this is the company’s ninth consecutive quarterly loss since it was created in 2006.

“While expected, given seasonality and tough market conditions, we are not pleased with the operating loss incurred in the first quarter,” said CEO Ben Verwaayen. “Our guidance for the year remains unchanged and we are taking appropriate actions….There’s lots of work we still need to do.”