Smart phones are growing up, and that's bad news for Palm.

The Sunnyvale, Calif.-based phone maker on Monday unveiled the 800w, a faster, slimmer upgrade of its popular Treo, but the industry shrugged. "It will still take a backseat to a lot of other [smart phone] news," says Avian Securities analyst Matt Thornton.

So it goes in the cutthroat world of smart phones. These handsets with advanced, PC-like features have quickly become the fastest-growing, most-competitive segment of the wireless industry. Buzzy newcomers, such as Apple (nasdaq: AAPL - news - people ) with its iPhone, are stealing attention and sales from stalwarts like Palm (nasdaq: PALM - news - people ).

The heady growth in smart phone sales--which in the U.S. has increased more than 100% year-over-year, according to research firm Gartner--has created niche categories in the sector. There are different smart phones for business people, teens and consumers who can afford to spend $400 on a feature-packed handset.

Companies that can serve these niches will succeed, analysts say. These days, the winner is Canada's Research in Motion (nasdaq: RIMM - news - people ), maker of the ubiquitous BlackBerry. RIM rules the U.S. smart phone market with 42% market share, according to Gartner. Apple's one-year-old iPhone is No. 2 with 19%; Palm is No. 3 with 13%; and No. 4 Samsung is close behind with 9%.

RIM not only has strong products in each smart phone niche--the entry-level Pearl, mid-level Curve and enterprise-focused 8800 series--but it is also creating subniches and is expected to launch new products later this year.

The company's latest model, the BlackBerry Bold, neatly bridges the high-end consumer and enterprise categories with its faster data connectivity and advanced Web browser. RIM also has at least three more devices rumored to be on their way, including its first touchscreen phone, a slightly cheaper version of the Bold and an ultra-cheap flip phone.

In contrast, Palm has narrowed its focus to business-oriented Treos and lower-priced Centros, and it has reduced the number of new phones released to about one a year. "We had too many initiatives for a company of our size," Brodie Keast, Palm's senior vice president of marketing, told Forbes.com earlier this year.

Pricing is another area where RIM reigns supreme. Though carriers sell the popular Centro for as little as $69.99, Sprint (nyse: S - news - people ) has priced the 800w at $250. That's $120 more than the BlackBerry Pearl, $100 more than the BlackBerry Curve and $50 more than the iPhone.

What's more, RIM makes more money from its phones. Thornton estimates the Pearl has a gross profit margin around 40% while the Centro's is between 22% and 24%. And, thanks to their strong brands, RIM and Apple boast stronger international sales than Palm. Globally, RIM ranks No. 2 in smart phones, behind behemoth Nokia (nyse: NOK - news - people ). Apple is No. 4. Palm is No. 6, according to Gartner.

The iPhone has changed the game, as well, with its style and marketing savvy. "A year ago, smart phones were one category," Avian's Thornton says. "Now it's all about form factor, brand and having something shocking and new." The hundreds of third-party applications now available to iPhone users through Apple's App Store are also encroaching on Palm's traditional strength in organizational software. And Google's (nasdaq: GOOG - news - people ) Android mobile platform is set to debut later this year with its own collection of productivity applications.

But don't count Palm out yet. Analysts are closely watching the company's revamp under private equity firm Elevation Partners, which has brought in outside talent, including former Apple executive Jon Rubinstein. (Elevation Partners also owns a stake in Forbes Media, publisher of Forbes.com.) Rubinstein, who runs Palm's board and is revered in tech circles for helping to conceptualize the iPod, is the "X" factor in Palm's future.

Analysts believe Rubinstein, along with managers and designers poached from Apple, HP and Microsoft (nasdaq: MSFT - news - people ), will push sleeker designs at Palm. They point to the hip Centro, which Rubinstein is said to have made last-minute design improvements on, and the 800w, which looks like a Treo mated with a Centro, as evidence.

The real proof will come early next year, when Palm's new Linux-based operating system--the first product to truly reflect Rubinstein's influence--will be released. The technology is expected to perk up the Centro and may generate a third product line of higher-end consumer phones. If Palm makes a big splash with what some fans are already calling an "rphone" (for Rubinstein), it could win back the mindshare it has lost over the past year-and-a-half, Thornton says.

That matters because the real opportunity in the smart phone market lies in luring customers away from traditional feature phones. "Growth will come from consumers--it's a bigger market and has less penetration," Thornton says. The flip side of that opportunity? More competition. Nokia, Motorola (nyse: MOT - news - people ) and Samsung all have been rolling out their own smart phones.

In the meantime, analysts expect the Centro to continue to sell well during the back-to-school season and through the holidays. And they say the new Treo will help Palm tread water until next year. Says Thornton: "Even if Palm only sells a couple hundred thousand units, it will buy them time and pull them in the right direction."

Source:forbes.com