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The market for smart phones is changing rapidly, but some worry that industry pioneer Palm Inc. isn't adapting fast enough.

The maker of the Treo wireless device remains the company to beat, some analysts say, but Palm is already feeling the heat from competitors who have bigger budgets and cheaper products.

Palm's revenue grew 4 per cent last quarter from a year earlier, and profit dipped, as products such as Motorola Inc.'s Q device took a bite out of Treo sales.

“The big boys have arrived and created a whole new smart phone market segment,” said Charlie Wolf, an analyst with Needham & Co. LLC.

Bigger companies including Motorola and Nokia Corp. have not only brought sleek and powerful products to market recently, they are also selling them for significantly less than the Treo. Motorola's Q, Nokia's E62 and Research In Motion Ltd.'s BlackBerry Pearl are all selling in the U.S. for less than $200 (U.S.), about half the price of Palm's Treo.

The companies' share prices have jumped with the momentum of their products. Year to date, Motorola's stock is up 11 per cent, Nokia's 7 per cent and RIM's 33 per cent. In contrast, Palm shares are off 8 per cent. Palm shares closed Tuesday down 19 cents at $14.50 on the Nasdaq stock market.

But Palm is responding. It began offering a $100 mail-in rebate late last quarter and it plans to launch a lower-priced Treo later this year. The company is also launching the Treo 750v in Europe on Vodafone Group PLC's next-generation UMTS wireless network.

Palm cut its forecasts in August for the last quarter. It dropped another shoe during an investor conference call this month, lowering sales expectations for its fiscal second quarter ending Dec. 1.

Palm's new products could prove a success in the next few months, but that may not be enough in the long term, given rising expenses in R&D and marketing, said Jonathan Hoopes, an analyst with Think Equity Partners LLC.

“Unfortunately, Palm is competing in a marathon (not a sprint) and having dropped its shoes, we wonder if running the race shoeless will result in yet additional toe stubbings,” he said in a report last week.

Mr. Hoopes has an “accumulate” rating on the stock and reduced his target to $18 a share, down from $22.

Palm is trying to push competitors back by reducing prices of the Treo product line, sacrificing profit for market share. The effectiveness of the strategy will become more apparent at the end of this quarter, said Brian Modoff, an analyst with Deutsche Bank Securities Inc., who has a “hold” rating on the stock and a price target of $14.

“Regardless of the new products, we think the company's strategic outlook remains difficult,” he said in a research report. “Furthermore, the company conceded that its new products will carry lower margins. The best hope Palm has is its ability to differentiate through software, and R&D investment required for this will tax operating margins for some time.”

As the market for smart phones expands beyond business users to consumers, who pay for their own devices, pricing becomes much more of a selling factor.

But Needham's Mr. Wolf points to four positive developments for Palm. The Sunnyvale, Calif.-based company plans a marketing blitz later this year for the Treo 750v, which runs Microsoft's Windows Mobile 5.0 operating system.

In addition, the company's upcoming entry-level Treo could prove a worthy competitor given the innovative design that Palm has delivered in the past. The analyst also thinks Palm's Treo 700w will gain traction in the corporate market when trials end shortly.

Lastly, Mr. Wolf likes the fact that Palm is putting its R&D money into software development, which he says could produce some interesting new features for customers.

The moment of truth for the company should come next quarter, when companies begin placing their orders for the Treo 700w. “If we're wrong on the Palm story, it will be because the traction of the 700w in the corporate market is far less than we anticipate,” Mr. Wolf said.

He has a “buy” rating on the stock and a 12-month price target of $26.