Once a consumer electronics curiosity, the business of navigation devices is starting to look like a swimming pool on a hot summer day—everyone's jumping in all at once.
The latest to dive into the market is consumer electronics giant Philips Electronics (PHG). The Dutch company follows the lead of consumer electronics behemoth Sony (SNE), which entered the business early in the year.
The entrance of Sony and Philips underscores the evolution of the GPS (global positioning system) market from a niche product popular with hunters, hikers, and boaters into a thriving consumer business. In the last several years, companies like $1 billion (2005 sales) Garmin (GRMN) and Lowrance Electronics in the U.S., Dutch producer TomTom, and Magellan GPS, a unit of French defense contractor Thales, have become a staple of motorists, and are particularly popular as an aftermarket purchase.
Using a free signal available from a constellation of satellites operated by the U.S. government, the devices tell you where you are, and how far away you are from where you're going. There's no secret sauce in building a GPS device, as basic technology for how they work is an open standard. From a certain standpoint, GPS receivers might be destined for commodity status like FM radios or cordless phones. And yet that hasn't happened. Not yet, at least.
ESTABLISHED RIVALS. But commodity pricing is what scares investors in GPS companies. The entry of Philips, coming on the heels of Sony, spooked investors in TomTom, which traded down more than 6% on the AEX exchange in Amsterdam. NASDAQ-traded shares in Garmin plunged by more than $3 initially, but recovered somewhat, closing down $1.14 from $93.22.
Still, the GPS market is growing. Analyst Ron Stearns of Frost and Sullivan in San Antonio pegged the automotive portion of the consumer GPS business at $922 million and reckons consumers will buy more than 1.2 million units this year. Add in outdoor units aimed at hikers and boaters and you hit more than 4 million units and $1.8 billion in sales. And both market segments are growing. By 2010, Stearns expects combined unit sales (both automotive and outdoor markets) of 8.3 million and $2.7 billion in revenue.
But it's a fluid market. Garmin, launched in 1989, was once an upstart seen invading the turf of Magellan, first in the recreational segments that it dominated and later in the automotive portion of the business. Garmin is now the dominant player in the U.S. market with share just shy of 50%. But it has been fending off a new kid on the block, TomTom, whose name in Europe is practically synonymous with GPS receivers. TomTom controls more than half the market in Europe, and Garmin struggles with share of about 10% over there.
"I will confess I was among those concerned about this turning into a commodity business, especially when Sony came in," says Rich Valera, analyst with Needham and Co. in New York. "But Sony's product is really mediocre, and there's nothing to really differentiate it from Garmin or TomTom or Magellan." Sony's Nav-u bears a resemblance to Garmin's Nuvi and sells for about $549.
"BIG MARKET." But having a good product is only part of the battle, Valera says. Getting it on store shelves and sold through many channels—on the Web, through car dealerships, and so on—is where the battle is raging now, he says. "Garmin and TomTom waged an all-out marketing battle last year, and TomTom showed itself extremely effective at getting share. They got about 25% (of the market), which is a huge improvement over low single digits the year before that, and most of that was at Magellan's expense. Garmin was mostly flat."
Philips says its device will be both thin and light—about 1 inch thick and a feather-light 5 ounces. It will use its existing consumer distribution channel to get the devices into European retailers. Mapping data will come from Navteq (NVT), a company in which it took an investment stake in 1991. Philips will unveil the products starting in September focusing on Germany, France, and Belgium. The devices will go for about 400 euros, or about $500. That would make them competitive with Garmin and TomTom, whose products sell in the U.S. market in a price range running from less than $400 to as high as $800 depending on options and features.
"It's going to be a big market, and I'm not surprised to see companies other than Garmin and TomTom wanting to get into it," says Jon Braatz, analyst with Kansas City Capital. "But I haven't seen anything yet to indicate that there's anything disruptive here. The market is big enough to support a few more players with prices staying firm."
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