Will Google Make Garmin Walk the Plank?

If you found yourself among the throngs of holiday shoppers being stampeded in Aisle 13 of your local Wal-Mart on Black Friday, there's a good chance a deeply discounted Garmin (Nasdaq: GRMN  ) or TomTom was the object of your affection. BusinessWeek detailed the unusually large discounts that GPS makers were offering this holiday season:

"Steep Black Friday discounts have become an annual ritual in the market for personal navigation devices, or PNDs [Personal Navigation Devices]. ... 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."

The PND boom years
In years past, surging demand for automotive GPS fueled an amazing growth phase for both Garmin and TomTom. In 2004, Garmin booked 27% of its revenue from this segment. By 2006 the total had reached 61%, and last year the company booked 66% of sales from automotive GPS products.

But that reliance on automotive products is slamming up again some stiff competitive headwinds, specifically smartphones with GPS capabilities. Although smartphones are an obvious long-term threat, it's unclear how quickly consumers will adopt smartphones as their navigation system of choice. PNDs still have their advantages. They offer larger screens, have proven routing software, and have become quite affordable.

Plus, smartphone penetration in the U.S. is still below 20%, and the price of data plans can offset price advantages of cheaper smartphone navigation software.

It's hard to beat free
So if Garmin and other PND makers have known about the competitive threat that smartphones posed for years and their adoption is still low, what's with the sudden drastic slashing of PND costs? As BusinessWeek noted, the answer may lie in Google's (Nasdaq: GOOG  ) free navigation software that comes with the newest edition of its Android operating system and was a key feature in launching the popular new Droid smartphone from Motorola (NYSE: MOT  ) .

Previously, most navigation software on app stores charged upfront and sometimes monthly rates that made their costs comparable to entry level PND devices, or came from small third-party developers that consumers might not trust to be accurate.

Google Navigation helps eliminate disadvantages that were previously holding smartphone navigation software back. It comes from a proven developer with experience in navigational software, and it eliminates costs for downloading that software.

Possibly worst of all, it also blocks PND makers from changing their business model from hardware to software and becoming the dominant navigation forces in app stores. TomTom had begun selling a popular app for Apple's (Nasdaq: AAPL  ) iPhone, and Garmin has apps for Research In Motion's (Nasdaq: RIMM  ) BlackBerry and several other devices that run Microsoft's (Nasdaq: MSFT  ) Windows Mobile. However, they all cost at least $70, which is a steep premium to Google's offer of free.

Risks aplenty
In the immediate future, Google Navigation's threat level is fairly minimal to Garmin. Android phones still have a low market share, and again, U.S. smartphone penetration remains low. In the longer term, Google has shown that it's more interested in enabling the spread of mobile connected devices than it is in directly profiting from its programming innovations. Expect the company to move Google Navigation to Apple and other smartphone makers in the not-too-distant future.

If you're an investor in Garmin, you're facing several risks. If the company is already slashing prices before the threat of smartphones with free navigation software floods the market, will demand for their phones hold up long enough to justify the company's current valuation?

Anyway, can you trust the company to effectively protect the money it earns while milking a declining product? Garmin already proved its shortsightedness with its drawn-out development of the nuvifone, which recently launched on AT&T (NYSE: T  ) . The phone took years to develop, suffered numerous setbacks, and has no real advantages over its competitors. The nuvifone looks to be a money losing misadventure for the company.

The bottom line
Even with the decline of its PND business, Garmin has a future. The company also boasts marine, aviation, and outdoor segments that are facing fewer threats and should perform well in the coming years.

However, buying into the company at current prices requires several unknowns to turn out favorably:

  • Demand for its PNDs would have to remain high for years.
  • Black Friday's steep discounts wouldn't foreshadow margin-crushing price wars in standalone PND devices.
  • Management would accept changing market dynamics and position its automotive segment for maximum profitability, instead of branching off into money-losing areas where it has few advantages, such as with the nuvifone.

I'm not buying that all those factors shake out for Garmin. When it comes to shopping in the clearance bin, there are better device manufacturers to be had.

Eric Bleeker owns shares of no companies listed above. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Microsoft and Wal-Mart are Motley Fool Inside Value picks. Motley Fool Options has recommended a diagonal call strategy on Microsoft. Try any of our Foolish newsletter services free for 30 days. The Motley Fool is investors writing for investors.

Read/Post Comments (5) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 10, 2009, at 4:47 PM, DefunctAcct wrote:

    While Google is pressuring Garmin and TomTom in urban and suburban navigations, Garmin has a branch that serves outdoor enthusiasts. If Garmin can adapt and strengthen that portion of its business, it can remain viable selling a high quality niche product to people who will pay to get what they need.

    For example, does Google show me trails in the Ansel Adams Wilderness? Stanislaus National Forest? The Rubies in Nevada? Can Google guide me from checkpoint to checkpoint in Death Valley? With near pinpoint accuracy using GPS? Until GOogle can do that, Garmin still has a special place in the minds of many who venture to a place where few would venture.

    Another example is does Google come on any device that lets me talk to my team traveling along the next ridge about 1 mile away? A trail distance of possibly 2 miles with elevation difference of 2000-ft? Can Google pinpoint all my teams as we travel along our paths so we know where each other is all the time? Until GOogle can do that in a place where there is no cell signals, Garmin devices will continue to hold my mindshare.

    When I want an outdoor capable device, I do not think Google, I think Garmin.

    The question is not what Google does, it is about what Garmin wants to be as it moves forward.

  • Report this Comment On December 10, 2009, at 5:39 PM, TMFRhino wrote:

    Hi Silivalley,

    I agree with you 100% that Garmin offers a superior product for outdoor enthusiasts. For that matter, its aviation and marine segments should also continue to perform well. The broader question is, even with its relatively low P/E of 11, without a future of growing PND devices for US cars, whether the company can grow enough to justify its current value. In my opinion, there's too many risks for me to look at Garmin as a stock on my buy list.

    Foolish best,


  • Report this Comment On December 10, 2009, at 7:33 PM, DefunctAcct wrote:

    Thanks TMFRhino, I totally agree with you assessment. I think Garmin almost has to do a "restructuring" and refocusing of its product strategy going forward. It has to emphasize its strength and not be distracted by making and trying to sell yet another "smart" phone.

    Dear InfoThatHelp, it is unclear if Google wants to collaborate. Apple collaborates because it has yet to dip its toes into the global positioning business. Google is neck deep in maps and it seems to want to own that entire space. The only thing missing is that Google does not make its own device.

    Garmin, on the other hand, makes its own hardware and makes its own software. Garmin needs to stop thinking "big" in terms of size of company but needs to think in terms of "innovation". There are many things Garmin can do today that it is not doing.

    As for Cloud Services, it is again limited to urban and suburban areas where there are cells and WiFi. Even then, bandwidth continues to be a problem.

    Once we are off the cell-grids, we only have satellites. No one has yet decided to utilize satellite services and no one since Iridium (MOT?) has done anything with satellites.

    I think Garmin has to refocus and rethink what it wants to be moving forward. If it tries to compete against cell phone companies and map companies like GOOG and ignore its strength in outdoor devices, Garmin will lose.

  • Report this Comment On December 10, 2009, at 10:21 PM, RLetton wrote:

    Having an in-dash Kenwood system with Garmin navigation system and a GXM-30 providing me with graphical weather and traffic so I can listen to the music from the Kenwood receiver instead of weather reports it is my opinion that Garmin is not going to be replaced by Google anytime soon. That doesn't mean Garmin can be complacent and it doesn't mean I am completely happy with my in-dash as Garmin actually dumbed down this system by disabling the ability to make phone calls directly from the nav screen and the ability to select multiple maps which are standard on other Garmin systems to which all I get is a polite apology w/o explanation from Garmin product support.

  • Report this Comment On January 05, 2010, at 8:07 PM, JWD26 wrote:

    as far as the automotive segment goes, doesn't garmin make systems that are built into cars? i agree that garmin will go head to head with google in terms of its portable units, but doesn't garmin also have contracts with many car manufacturers where it implements built in GPS devices into cars? I don't know how big or profitable this segment is - but if it makes up a significant chunk of that 66% of revenue, concerns over competition with smartphones could be overblown

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