GPS market at turning point with sliding prices, demand off

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AMSTERDAM — Consumer navigation devices have gone from expensive gadgets to mainstream gear in just three years, but Europe's largest maker is struggling.

The experience of Netherlands-based TomTom NV — which saw earnings fall 83 percent in the first quarter — suggests the market for stand-alone global-positioning systems is at a turning point.

"What we saw for the first time is that selling prices fell, but volumes didn't improve enough to compensate," analyst Eric de Graaf of Petercam said after the results were reported Wednesday. "It's a signal the market is getting saturated."

Some analysts believe that as stand-alone versions are overtaken by cell phones and other devices with navigation technology built in, GPS devices will become low-margin commodity products, like pocket calculators. But others think a smart company could turn GPS devices into premium products the way Apple Inc. made its iPod music player stand out from a host of cheaper devices.

For now, TomTom's larger U.S. competitor, Cayman Islands-based Garmin Ltd., appears to be faring better by virtue of its greater range of products.

Including Taiwan's MiTAC International Corp. — owner of the Navman and Mio brands — the top three GPS makers hold around an 80 percent market share, giving them scale advantages over smaller players. But competition is coming from many directions, including big names like Nokia Corp., Sony Inc., Google Inc. and probably Apple.

"TomTom and Garmin are branded well," said Thilo Koslowski of Gartner Research. "But functionally there's not much difference" yet among GPS devices.

In 2007 alone, including strong holiday sales, 33.9 million units sold, almost triple the 11.9 million sold in 2006. Now, 10 percent of U.S. drivers and 20 percent of those in Europe own a navigation device. But prices for basic stand-alone devices have fallen below $200 from $500 or more.

TomTom reported a net profit of $12 million in the first quarter, which ended March 31, down from $70.3 million a year earlier. Sales revenue fell 22 percent to $147 million. Some analysts now fear TomTom's $4.63 billion bid to buy digital mapmaker Tele Atlas NV, also based in the Netherlands, could come undone.

MiTAC and Garmin have yet to report first quarter results. But sales figures posted on MiTAC's Web site show a 15 percent decline in the first quarter. Garmin, due to report on April 30, hasn't altered its guidance since February, when it said it expected strong sales growth in 2008 despite price declines.

Garmin benefits from offering high-end devices for aviation and marine navigation — and from reporting in dollars. Also, it plans to meet the cell phone threat with its own combination phone and navigation device later this year, and it has announced a partnership integrating AOL's MapQuest into its devices.

By 2010, Gartner estimates, 500 million cell phones capable of navigation will cell annually, compared to just 95 million pure navigation devices. Most cell phones can't yet match the easy touch interface of the devoted devices, but Apple's iPhone offers evidence that that may not be true for long.

Other competitors are getting smarter too: Both Google and Microsoft have introduced the option this spring of taking traffic conditions into account in their mapping instructions, using traffic data from vendors to calculate time to travel instead of distance. Some drivers may prefer to stick with that option, printing route maps before they set out in the car. Others buy built-in navigation systems that integrate with a car's design.

But analyst David Niederman of Pacific Crest Securities said many other drivers will still want stand-alone devices for their dashboards because they're more straightforward and easier to read.

TomTom Chief Executive Harold Goddijn said on a conference call he believed 50 percent of drivers will eventually own navigation devices, leaving plenty of room for growth in the coming three to five years. He predicted that prices will stabilize in the current quarter, now that retailers are done selling excess inventory.

Garmin may be broadening its offerings, but TomTom Chief Operating Officer Alexander Ribbink said his company's strategy is to focus on the in-car market, improving basic navigation and keeping the interface simple.

One upgrade TomTom recently introduced lets users share map corrections. Another embeds GPS chips in phones to collect and distribute real-time data about traffic conditions. Yet Ribbink was skeptical about the threat from phones themselves.

"Navigation on the phone is difficult for a number of reasons: it cuts into battery life and you have small screens," Ribbink said.

The large market share of Garmin, TomTom and MiTAC should help them fend off competition a while longer.

But De Graaf of Petercam said a bare-bones navigation device can now be produced for $80 to $110.

And that leaves plenty of room for more price cuts.

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