Garmin, TomTom Slash Prices Amid Google Threat

The Google (GOOG) threat hit home on Black Friday for TomTom and Garmin. The two foremost makers of personal navigation devices slashed prices more aggressively than ever on the first shopping day of the 2009 holiday season, according to figures released Dec. 8 by market researcher iSuppli. In U.S. retail stores, TomTom (TOM2:NA) cut the price of its One 125-iSE to as low as $59 on Nov. 27. The device, available only at Wal-Mart (WMT), typically sells for $79, indicating a discount of about 25%, says iSuppli analyst Danny Kim. Garmin's (GRMN) cheapest model the day after Thanksgiving was priced at just below $70 at retailer Hhgregg (HGG). Kim says Garmin's Black Friday discounts averaged 40% to 42%. Its entry-level Nüvi 205 usually sells for $99. Steep Black Friday discounts have become an annual ritual in the market for personal navigation devices, or PNDs, which use Global Positioning System technology to provide mapping and other navigation data to users. But the price cuts were more pronounced than ever this year, reflecting accelerating competition from the Google-backed Android operating system and other software makers that are churning out low-priced or free navigation applications for smartphones. "These devices are quickly becoming a commodity," Kim says. On Oct. 28, Google announced plans to bring free turn-by-turn directions to the Google Maps application on smartphones running its Android operating system. The following day, Garmin stock dropped $6, or more than 16%, to 30.85. TomTom stock suffered more, dropping by nearly €3, or 29%, to 7.27 on the Euronext exchange. Neither stock has recovered. On Dec. 8, TomTom closed at 6.755, while Garmin closed at 30.03, down 17¢. Analyst AppraisalsGarmin gets about 66% of its sales from PNDs. It will struggle to compete in a market where consumers can get navigation software for next to nothing, says Ilya Grozovsky, an analyst at Morgan Joseph, a boutique investment bank in New York, who has had a sell rating on Garmin since initiating coverage in March. "Smartphones are going to change the dynamic of this entire industry," Grozovsky says. "Sure, there are people out there who don't have smartphones and who won't use them for navigation, but over the long term I think the writing is on the wall." The market's once-breakneck growth is slowing down. Plummeting prices aside, consumers may buy only 14.4 million PNDs in the U.S. this year, from 15.2 million in 2008, according to Kim at iSuppli. Around the world, unit sales may total 114 million in 2009, compared with 128 million last year, iSuppli estimates. Some see Google and the smartphone as less of an immediate threat. Oppenheimer (OPY) analyst Yair Renner wrote in a Dec. 2 research note that while Google's navigation application will "impact the PND business over time," it's far from perfect. The headwind for Garmin and TomTom will be gradual and not noticeable, he wrote, until mid-2010. In the meantime, he writes, sales are in line with expectations. He rates Garmin stock a market perform. To be sure, smartphone applications aren't always as reliable or user-friendly as the technology available on a dedicated device. Some users dislike having to interrupt navigation features to take a phone call or use other smartphone features. "Most consumers prefer a larger screen, usually bigger than four inches measured diagonally, and that's bigger than what can fit on any phone," says Tom Murray, TomTom's vice-president for market development. Some consumers also lament the sound quality of audio instructions delivered via smartphone, he says. Device Makers ReactIndeed, demand for PNDs may be "more resilient than the market expects," Morgan Stanley (MS) analyst Ashish Sinha wrote in a Dec. 7 research note. "TomTom's PND results could positively surprise over the next 12 to 18 months." Sinha rates TomTom overweight and has a price target of 8.30. Even so, he estimates that by 2015, PNDs will represent only 26% of devices used in cars for navigation, vs. 94% now, suggesting unit shipments may decline at a compound annual rate of 3%. Garmin and TomTom are also taking steps to respond to the threat. TomTom is selling a navigation application for Apple's (AAPL) iPhone that, when combined with a mounting kit, converts the iPhone into a PND. The software sells for $99, though it too has been discounted to $69 for the holidays. Garmin has responded by making its own smartphone, called the Nüvifone, which runs Garmin navigation software. Garmin didn't immediately provide an executive for comment, but Chief Operating Officer Clifton Pemble conceded during a Nov. 4 earnings call with analysts that sales of the phone are not meeting expectations. Having given prior guidance that the phone would contribute $100 million to $200 million in revenue in 2009, Pemble said "we would not expect that high of a number now." Kim of iSuppli says PND makers will have to improve their features and lower prices even more to fend off the coming threat. By 2011, he says, GPS navigation will be available in 100% of smartphones.

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