TomTom on the Go-Go

There's a joke about car navigation systems that links sales of the devices to saved marriages. It has to do with the inverse relationship between units sold and arguments between spouses over stopping for directions while driving.

If that's true, then the number of failed marriages—or at least spousal disagreements—should be plummeting. The number of portable car navigation systems sold last year doubled, to 1 million, according to one study. It may more than double again this year, according to research firm C.J. Driscoll & Associates. Meantime, many car manufacturers are including navigation systems as a factory-added option, and the number of companies hankering for a slice of the market is on the rise.

Initially the business was dominated by Magellan, once a unit of Orbital Sciences (ORB), and later a unit of the French defense contractor Thales. As of last month it was acquired by Shah Capital Partners, a Silicon Valley private-equity fund. The U.S. market is now dominated by Garmin (GRMN), an outfit founded in 1989 by two suburban Kansas City (Mo.) engineers. Garmin generated about $1 billion in sales in fiscal 2005 and owns about half the market.

AGGRESSIVE PRICING. But Garmin and others are getting challenged by an upstart Dutch company called TomTom, whose unusual but memorable name has essentially become synonymous with car navigation systems in Europe. Based in Amsterdam, TomTom managed to shake things up just as the growing market appeared to be settling into a comfortable equilibrium where two players, Garmin and Magellan, towered over everyone else.

The most recent attempt by TomTom to upset the balance came in August, with the TomTom One, a compact $499 device that does everything most drivers need from a navigation device, but at a price point not seen before.

With innovative designs, aggressive advertising and marketing, and a huge retail footprint, TomTom has in one year gone from nowhere to a solid No. 2 in the market behind Garmin. Its retail share in June, 2005, was less than 7%, according to research firm NPD. A year later it was north of 25%. One rival—Magellan—lost considerable ground over the same period, falling from 44% to 8%, while Garmin nudged its share above 55%. Magellan's dramatic loss of share was partly due to its own inner turmoil and lack of innovation, but some blame lies with TomTom.

HANDHELD ROOTS. TomTom's trajectory isn't bad for a company that only five years ago was focusing on developing software for a not-very-popular line of handheld computers. Launched in 1991 as Palmtop Software by a pair of Amsterdam University graduates, the company focused on building software for the Psion 3 line of handhelds, popular in Europe. Later came software development for other handhelds including the Palm (PALM) line of PDAs starting in 1996 and Microsoft's (MSFT) line of Pocket PCs and Windows Mobile devices.

Navigation software and related devices for PDAs started cropping up in 2000 and 2001. The hardware would pick up signals from the Global Positioning System constellation of satellites operated by the U.S. government, and software installed on the PDA would handle mapping and navigation directions. Palmtop produced maps for PDAs, then in 2002 debuted Navigator, a navigation software package for the Pocket PC.

By 2003 the company had changed its name to TomTom (potential partners and customers were confusing it with Palm) and teamed up with Palm on a hardware product that could connect with a PDA wirelessly via Bluetooth. TomTom followed that with a similar partnership with Dell (DELL) and then got its Axim line of PDAs off the ground.

CLEVER MARKETING. But in 2004, TomTom jumped into the market with its own standalone navigation device, the TomTom Go. Launched in March of that year, it sold 248,000 units, enough to make it the most popular brand in Europe. By the end of 2005, TomTom had sold nearly 1.7 million units, with 93% of sales in Europe.

Sales ballooned from $240 million in 2004 to $901 million in 2005, and are projected by the company to break $1.4 billion this year. European consumers embraced navigation right away, but it took U.S. consumers longer to warm to the idea. Clem Driscoll, head of C.J. Driscoll & Associates, says Europeans will buy 8 million to 9 million units this year, vs. 2 million to 3 million in the U.S.

That didn't deter TomTom from pursuing the market on this side of the Atlantic. It produced TV ads depicting a driver asking passengers "Sue Sue" and later "Scott Scott" for directions, and placed them in prime-time spots during highly rated shows like CSI. Marketing and advertising expenses went from €19 million ($14.9 million) in 2004 to more than €63 million last year.

BIG BOX CONVERSION. But getting TomTom devices onto the shelves of big U.S. retailers was a taller order. "When I did the first meetings with companies like Best Buy (BBY) and CompUSA and Circuit City (CC), they already had two incumbents on their shelves, Garmin and Magellan, and they were selling some devices, and they figured that was fine," says TomTom President Joceyln Vigreux. "They saw no real reason to bring someone else to the fray. Through 2003 and 2004, I had to go back over and over and show them the growth in the business."

But the devices also sold themselves. Rival products were the size of bricks and generally cost $900 to $1,500. TomTom devices were competitively priced, smaller, and often easier to install and use. Its navigation screens, which show a forward-looking view of the roadway ahead, rather than a flat moving map, caught competitors by surprise and were quickly copied. "There was no button on the device," Vigreux says. "The TomTom promise was one button for on-off. The rest is all handled through the software. Those are the kind of things that got the retailers to see the light. The buyer at CompUSA said it was the easiest device he had ever used and said he had to put it on his shelf." CompUSA was the first major U.S. retailer to put the TomTom Go on its shelves. Circuit City and Best Buy followed.

It didn't take long for Garmin to respond. The company signed a promotional deal with NBA star Yao Ming to star in commercials for its Streetpilot line of devices. The products shrank in size and price and began sporting a 3D map view similar to that of TomTom. Smaller and more inexpensive devices followed. By the end of 2005, Garmin had devices weighing 5 ounces with starting prices of $499, and in 2006 it introduced a new compact line called the nuvi.

FEEDING FRENZY. "There's no question that TomTom took Garmin by surprise," Driscoll says. "Its aggressive advertising made a difference among general consumers. Garmin is fundamentally an engineering company that commands great respect among people who have experience with GPS and navigation devices. But it hasn't done as well with mass marketing. It's held on to its market share despite TomTom coming onto the scene, but at least some of that has a lot to do with the fading of Magellan."

Others have been entering the market, too. Both the Japanese electronics giant Sony (SNE) and another Dutch concern Philips Electronics (PHG) have said they intend to enter the navigation market (see, 6/21/06, "One GPS Giant Too Many?"). And there are numerous smaller players that buy GPS chips from chipmaker Sirf (SIRF) and their software from outfits like Navigon of Germany and Arizona-based Destinator Technologies.

"There is a concern among a lot of companies in this space that the hardware is becoming commoditized," Driscoll says. "But a lot is going to hinge on the content that will differentiate the TomToms and the Garmins from the others. Being able to personalize with the types of places you go to, and bringing traffic and weather information will be a big factor as well."

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