Palm, Motorola seen most hurt by iPhone price cut

By Sinead Carew

NEW YORK (Reuters) - Apple Inc's (AAPL.O) hefty iPhone price cut pits it in direct competition with handsets from Motorola Inc (MOT.N) and Palm Inc (PALM.O), which are struggling to convince Wall Street they can turn around their aging brands.

With the music-playing iPhone now selling at $399 instead of $599, its price tag is much closer to other smartphones in the U.S. market, including Palm's Treo and Motorola's Razr2.

"This is Palm's main market," said Deutsche Bank analyst Brian Modoff, who does not see Apple's move as having as big an impact on Nokia Oyj (NOK1V.HE) and other handset makers.

Palm, which is entirely dependent on the smartphone market, sold 2.7 million phones in its last fiscal year ended in June.

The Treo, often used by business clients for e-mail and Web surfing, sells for up to $399 at Verizon Wireless, or $199 at Sprint Nextel Corp (S.N) to customers who sign a contract.

Palm said in June it expected the touch-screen iPhone to temporarily slow Treo demand, and Oppenheimer analyst Lawrence Harris said Apple's price cut could exacerbate this.

"It has the potential to take away from Treo sales," Harris said, adding that the move could make the low end of the handset market increasingly important for Palm.

"I think that's why you're going to see additional emphasis on cheaper models like the Centro," he said, referring to a phone Palm is expected to release in coming weeks for $99.

Some analysts said iPhone, which has only been in the market for two months, would not sell in enough volume to noticeably hurt bigger handset makers. Apple has forecast 1 million units sold by the end of September and 10 million by the end of 2008.

But other analysts said the iPhone, while still pricier than the latest Razr, carries a lot more brand cachet with consumers than Motorola's tired line-up.

Even before Apple's move into the mobile market, Motorola has been struggling to regain market share amid criticism for not coming up with a strong follow-up to the Razr.

It recently launched an advanced model of its flagship phone, the Razr2, in the United States for $249 to $299.

"The iPhone will still sell at a premium to the Razr2 but the difference has narrowed," Harris said.

"It does put pressure on Motorola to show some new products or discuss their product strategy on Friday," he said, referring to Motorola's scheduled analyst day, where investors will be looking for any plans for new handset models.

Investors will want to know Motorola's U.S. plans for touch-screen phones, which users control by moving their fingers across the screen, for example. The touch-sensitive iPhone screen was one of the device's most touted features.