Navigating the GPS Price War
Technology December 12, 2006, 12:00AM EST
With rebates and discounts as steep as 50%, navigation device makers' fierce fight for market share is challenging established players Garmin and TomTom
by Arik Hesseldahl
Sometimes the race goes not to the swift, but to those who can slash prices the most.
That might explain some of the recent price cuts in the personal navigation device market by the likes of Garmin (GRMN), TomTom (TMOAF), and Magellan.
Consider moves by Olathe (Kan.)-based Garmin, which broke $1 billion in sales last year selling navigation devices for motorists, hikers, boaters, and pilots. In-car navigation devices are among the must-have devices this holiday season, and Garmin is locked in a share battle with Dutch upstart TomTom.
Enter the Wild Card
Garmin has slashed retail prices across its automotive line by $50 to $100 and boosted rebates for existing inventory, according to a Dec. 1 research note issued by Jim Duffy, an analyst with Thomas Weisel Partners in San Francisco. Duffy based that conclusion on checks with 40 retail chains. The response from TomTom? A doubling of its own rebate from $50 to $100 and an extension of its eligible rebate period into early January, 2007.
But a third player has given Garmin and TomTom headaches—and it may be one you've never heard of: Mitac. It's a Taiwanese contract electronics manufacturer, which makes, among other things, personal navigation devices (PNDs) for other companies.
On Black Friday, the day after Thanksgiving, a Mitac-made device called the Mio DigiWalker was priced as low as $150, down from the $300 to $400 range, says analyst Rich Valera of Needham & Co. in New York (see BusinessWeek.com, 11/29/06, "Find Yourself with Mio's Mighty DigiWalker"). "It was a one-time thing, but they sold a ton of them," Valera says. "It subsequently went back up in price, but I think it was meant to boost some name recognition."
Commodity Conundrum
Stunts like that are the stuff of nightmares for Garmin, Magellan, and TomTom. Navigation devices aren't hard to make. The globe-covering navigation signals from the U.S.-made and taxpayer-funded Global Positioning System constellation of satellites are free for the taking, and GPS chips from companies such as SiRF Technology (SIRF) aren't exactly expensive (see BusinessWeek.com, 11/29/06, "GPS Navigates Onto Holiday Wish Lists"). Nor are the services of a low-cost manufacturing partner, like those found in Taiwan and China in such great numbers.
If the devices are so easy to make, the thinking goes, what's to keep personal navigation gadgets from becoming a commodity whose features and functions are inherently equal but whose price is the main differentiator—following the same path as PCs and wireless phones?
"I did talk to Garmin about it," Valera says. "They didn't think the sell-through on that product was all that strong. Even so, this is the kind of competitor you worry about."
A Garmin spokeswoman, asked about the recent price adjustments, said the changes were in line with already established plans for the holiday season. Calls to executives at TomTom were not immediately returned.
Too Hot for Philips
But it's clear that the market for PNDs is suddenly very hot, particularly for retailers. The U.S. market leader, at least so far as units used in cars are concerned, is TomTom, which sold 1.2 million units in its third quarter, according to a report issued Oct. 26. The company said it expects to finish the year with sales of 4.4 million to 4.7 million units.
In the same quarter, Garmin sold 1.23 million units—though not all of those were to be used in cars. Garmin also caters to boaters, hikers, and joggers and derives about 65% of its revenue from sales of in-car units.
Valera says Mitac came in with sales of about 960,000 units for the same period. "It is turning out to be a very big player, and it has shown itself willing to take much thinner profit margins than what Garmin and TomTom are used to," Valera says. Gross margins for PNDs at Garmin and TomTom tend to run about 40%, he says.
Rivalry is getting so fierce that at least one Johnny-come-lately opted not to come at all. Royal Philips Electronics (PHG) of the Netherlands on Dec. 5 scrapped its plans to get into the business after having announced its intentions in June (see BusinessWeek.com, 6/21/06, "One GPS Giant Too Many?"). The market for the devices was too saturated and the prospect for healthy profits too low, said Rudy Provoost, head of Philips' consumer electronics group at a meeting with analysts on Dec. 5.
Wireless Wave
Helping drive that saturation are upstarts Sony (SNE), which recently got into the navigation business and has three PNDs on the market, and Nokia (NOK), the Finnish wireless phone giant. Nokia plans to expand the navigation features on future versions of its wireless phones, beginning next year. In August, Nokia acquired a German startup, gate5, which specializes in making navigation software for wireless devices.
Navigation on wireless phones is beginning to gain traction. Networks in Motion, an Irvine (Calif.) startup, has a deal with Verizon Wireless, a joint venture of Verizon (VZ) and Vodafone (VOD), to offer its navigation services on certain phones from Motorola (MOT) and other vendors on the Verizon Wireless network. The service offering is relatively new and has only a few hundred thousand customers using it, says an executive familiar with the matter.
Nokia and other cell-phone makers are hoping to improve on past attempts to put navigation capabilities on handheld devices. Garmin, for instance, launched a GPS-enabled line of PDAs in 2003, with only muted success, in part because the prices were high. Compared with other PDAs on the market, the navigation features didn't prove sufficiently compelling to engage consumers on a mass-market scale. "I think the whole idea of multifunction converged devices seemed like a good idea, but in reality, they tended not to be so great," says Needham's Valera.
But they're getting better, and as more customers opt for navigation features on cell phones, pressure on Garmin and TomTom will only increase.
Hesseldahl is a reporter for BusinessWeek.com |
