Garmin vs. Tom-Tom – Or is it really TomTom vs Nokia?
October 31st, 2007 by adminToday Garmin offered $3.3 billion for Tele Atlas, one of the two players in the mapping field. The other player is Navteq, which is in the process of being purchased for $8.1 billion by Nokia. Garmin and TomTom are the major players in the PND (portable navigation device aka GPS unit) field. TomTom gets its maps from Tele Atlas, Garmin from Navteq.
Last month investors beat up Garmin’s stock when Nokia bid on Navteq. Presumably they were concerned that somehow Garmin might lose their map provider. Today, despite beating income expectations, Garmin’s stock got beaten down again, presumably out of fear that Garmin will be locked in a bidding war with TomTom.
As usual, Mr. Market is missing the boat (as they usually do when it comes to Garmin). They fail to take into account one key factor – Garmin isn’t just a customer for mapping data – it is THE customer for mapping data.
To find out what this means, you actually have to look at two SEC filings, that of Garmin and that of Navteq. The numbers that follow are very, very rough, but should be in the ballpark.
Last quarter Navteq sold maps for 3.9 million PND devices for cars. Based on other information in the report we can actually estimate that the cost of the maps for a single PND is about $35.
Garmin sold somewhere between 2 and 2.5 million PND units last quarter (the exact breakdown was not included in their report), which means they spent about $75 million on maps last quarter. Or in other words, and their current run rate Garmin is spending over $300 million a year on maps. And that number is only going to increase.
One of the funniest comments I read was an analyst observing that Navteq’s higher price is justified because it is profitable and Garmin’s bid is questionable because Tele Atlas is not. If Garmin switches to Tele Atlas the situation reverses instantly (even if TomTom shifts to Navteq) – Navteq will be negative and Tele Atlas profitable virtually overnight.
The idea that Garmin would not have a source of maps is patently absurd. Companies don’t turn away what will soon be >billion plus revenue out of spite. Also, $3.3 billion is not a ridiculous amount to spend on a mapping company when considered in context.
Garmin’s bid on Tele Atlas has one other implication that nobody has considered yet. If the bid succeeds, what happens to Navteq? By my estimates, Navteq’s revenue will drop by about 50% if they lose Garmin. Nokia’s offer suddenly becomes very expensive. Navteq’s price has not yet dropped (it’s being supported by Nokia’s offer), but I’ll bet Nokia’s execs are sweating.
The question is: how will this play out? Let’s consider the strategies:
Nokia: Either Garmin or TomTom is going to win Tele Atlas. If you’re lucky, TomTom will win and Garmin will stay with you. You’ll have leverage to maintain a high price (since Garmin will be reluctant to go back begging to TomTom or create their own maps). If Garmin wins you’ll get TomTom back, but your revenue and growth won’t be as strong making your purchase more expensive than you’d like.
Garmin: This is the ultimate vertical integration. You can afford it and being 4x TomTom’s size, you will likely win. Hopefully the price won’t be too high, but in the long run that won’t matter. Guaranteeing map availability to all is a brilliant move.
TomTom: This was not a good day. You can’t beat Garmin in a bidding war, though you shouldn’t cave too quickly – you want the price to be steep. Get on the phone with Nokia and try to set up a long term deal now if you can. It probably won’t do any good because they know they’ll have you over a barrel. One possibility that you might consider: instead of raising your bid on Tele Atlas, cut a long term guaranteed deal for maps from them at a huge discount, then drop your bid. Garmin won’t care – the loss of revenue will be offset by not having to raise their bid. Your margins will improve and you won’t have to worry about unfair treatment by Garmin on maps. You win and Garmin wins – but Nokia and Navteq are totally screwed.
Bottom line? Garmin wins.
- If they win Tele Atlas they get the benefits of virtual integration and both Garmin and Tele Atlas become profitable (at Navteq’s expense).
- If they lose Tele Atlas they may pay more for maps from Navteq, but their main competitor, TomTom, gets saddled by significant debt (harder for them to carry being the smaller company).
The real issue here isn’t what happens to Garmin – it’s what happens to TomTom and Nokia. One of them is going to be hurt.
June 17th, 2008 at 12:37 am
Interesting take and similar to mine. I do not think that Garmin ever cared about its bid, as it is not very likely that they were surprised by Tom Tom.
But the market discounts far into the future, and so the price action was reaonable if you think 3-5 years out. It is ironic that the more short term action in this case was from thinking to far ahead.
But also consider this— the market fears falling margins on GRMN products and wories that the presence of GPS enabled phones will hurt martket share. I think that this is not likely, but it may decrease the total size of the market for high end devices. However the market is not allowing for the fact that GRMN has Marine, areospace,and outdoors markets as well. This is where the market is truly missing the value of GRMN. But you must not overpay. The run up in stock price was way to fast, and could not be sustained in the event of any bad news at all.
Buy low or you will reget it.