The palm pilot had been around and popular for 10 years when the iPhone came out, at a 300+ dollar price point.

That and most people don't actually pay anything for their phones, they get them on contract (in the us). As far as I know in Europe, smart phones are less common among poorer communities.

And an iPhone provides more reason utility over a palm pilot than a model three does over a used Toyota that costs 1/5 as much.