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.