Smart Phones Spell Doom for Garmin and TomTom

Garmin and TomTom have long ruled the market for personal navigation devices, but the proliferation of GPS-enabled smart phones like the Apple iPhone and the Palm Pre have sent them into panic mode. Find out why we think consumers and investors alike should be wary of their plans for the future.

The era of the personal navigation device has come to an end—and two of its major players have all but admitted it. Garmin (NASDAQ: GRMN) and TomTom (PINK: TMOAF) have both taken steps to protect themselves from the Apple iPhone and other GPS-enabled convergence devices, steps that reveal a lack of confidence in what has been their primary business: selling standalone GPS receivers. The two brands have taken different paths in their effort to remain viable, one risky and defiant, the other conservative and resigned. Both approaches, however, abandon standalone GPS receivers entirely, a tremendous shift that raises serious questions about the future of Garmin and TomTom. Consumers and investors alike should be wary.

In many ways, the personal navigation device, or PND, is reminiscent of another victim of convergence, the PDA. Once ubiquitous, PDAs were quickly made obsolete by smart phones that combined the device's core functionality with a cell phone, offering a more convenient, powerful, and integrated package for consumers. Now, smart phones like the Apple (NASDAQ:AAPL) iPhone, the Palm (NASDAQ:PALM) Pre, and RIM's (TSE:RIM) Blackberry Storm have begun to add GPS functionality into the mix, and people are beginning to wonder why they should bother with two separate devices. The truth is, they shouldn't, at Garmin and TomTom are well aware of this fact.

There is a steep cliff up ahead for personal navigation devices, and little confidence that Garmin will be able to stave off extinction with its great hope, the Garmin Nuviphone.

Announced back in January of 2008, the Garmin Nuviphone is supposedly the future of the brand. Created in partnership with Asus, the Nuviphone is a GPS-enabled cell phone that Garmin hopes will keep them relevant in the new world of convergence devices. Frequent delays in production have pushed its release further and further into the future, however, and eroded much of the anticipation that greeted its initial debut. Currently, Garmin anticipates that the Nuviphone will be available in the United States for the fourth quarter of 2009. It is a Hail Mary pass for Garmin, a major investment of time and energy that could be a major flop. Garmin has never produced a cell phone before, and though they have built up a solid reputation in PNDs, it's unclear whether that will translate in a much more competitive, crowded marketplace.

It's safe to say that whatever buzz the Nuviphone might have had when it was announced has dissipated in the two years between its announcement and its projected release. That buzz would have been crucial in seizing the momentum from the Apple iPhone and even the much-hyped Palm Pre. The major selling point of the Nuviphone was that it would have turn-by-turn GPS navigation. When it was announced, turn-by-turn GPS had yet to become a reality on smart phones. Now, it's easily attainable and not the exciting or novel concept it once was. The one thing the Nuviphone had going for it is now unimportant. If the Nuviphone is a bust (and it's more than likely that it will be), it's not clear what else Garmin can do to hang onto their dominance of GPS navigation.

TomTom's approach to the encroachment of smart phones has been far less resistant: if you can't beat them, join them. This August, TomTom released a GPS iPhone app, which takes the navigational software found on their standalone personal navigation devices and makes it usable on any GPS-enabled iPhone. The application, with maps of the U.S. and Canada, is priced at $99.99, slightly less than a brand-new PND. They've also released a special TomTom iPhone car kit, which includes a special dashboard/window mount for the iPhone, enhancing its microphone and speakers and providing a better line-of-sight to GPS satellites. TomTom isn't the first GPS manufacturer to move in this direction. Months after abandoning the North American market entirely, Navigon returned this summer with the MobileNavigator iPhone app, also priced at $99.99. Perhaps TomTom will follow Navigon's lead and abandon standalone devices altogether, at least in the U.S.

Though TomTom's strategy is less risky than Garmin's in the short term, there are long-term concerns. GPS-enabled smart phones have eliminated the biggest barrier to greater competition in personal navigation devices by providing the hardware up front. In order to compete with TomTom and Garmin, all one needs is the ability to create software. There's no need to worry about designing a gadget, having it mass produced, and distributing it widely. Apple, Palm, and RIM have taken care of that. The prime position that TomTom once had is owed mainly to their ability to overcome those obstacles. Now that those obstacles are gone, their software is left to fend for itself among what could potentially become a vast sea of nimble, low-budget competitors. That's great news for consumers, as competition should drive down prices and encourage innovation. It's terrible news for TomTom and Garmin.

For many years, Garmin and TomTom existed in a gated community in which a small pool of GPS manufacturers competed against one another. Now the walls are coming down, and it's not clear that either of these major players has what it takes to survive an all-out battle with larger, more diverse companies. Though their recognition of the peril they are in is a good sign, their solutions to their problems seem inadequate. The future for GPS is bright, as it evolves into another arrow in a smart phone's quiver. The future for the makers of personal navigation devices, however, is bleak, and getting bleaker.

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