Synopsis - On 10th July 2008, Nokia's CEO Olli-Pekka Kallasvuo announced the takeover of NAVTEQ, then one of the two main providers of digital map information, for $8.1bn; the other being TeleAtlas, which was acquired by TomTom on 30th July 2008, for $4.3bn, beating Garmin to the game. As of January 2013, Nokia's Location & Commerce division is run under a new name: HERE. NAVTEQ was an unsound investment from the start, which has not generated shareholder value and, in my view, is not properly monetised.
Olli-Pekka Kallasvuo's rationale behind Nokia's (NOK) largest ever acquisition was: "The addition of NAVTEQ comes at the right time for Nokia's business, allowing us to create the leading location platform just as context-aware and location-based Internet services expand rapidly into mobile communications devices."
At the height of the digital map information provider wars, this seemed a good strategy - viewed through the lens of Nokia then seeing itself as the unassailable force in mobile space. Unfortunately, Nokia's management did, at that time, neither take into account Apple's (AAPL) touchscreen device revolution, nor did it fully understand Google's (GOOG) central role in consumers lives - missing many opportunities as they unfolded.
Investors should realise that Nokia has, in five years, not found measures to turn HERE into a mind-share and profit generator. Will it ever?
1. Numbing numbers: waiting for Godot
Net Sales m€
Operating Profit m€
Operating Margin %
Q4 2008 NAVTEQ
Q4 2011 L. & C.
Q1 2013 HERE
2. Market momentum: converging towards the vanishing point
The smartphone is the Swiss army knife for the dematerialising world. It offers a "good enough" consumer experience as: music player, video player, camera, video camera, PND, game console, remote control, newspaper, magazine, book - and, yes, telephone - all rolled into one.
The main advantages of PNDs - responsiveness, screen size and offline use - are all but gone; their remaining advantage being sustained outdoor or professional use, when recharging a smartphone battery is not feasible and device robustness is paramount.
Over the last five years, most PND vendors have vanished or were taken over. Various are concentrating to win more in-dash automotive OEM contracts. Some are diversifying into niche markets. Others are supplementing or replacing their hardware with smartphone apps. One thing is common to all: they are shrinking.
Digital map information data
Magellan (purchased by MiTAC 2008)
Licensed from NAVTEQ until 2010, then TeleAtlas
PNDs, free apps (sync only) for iOS and Android, includes yelp and foursquare via app sync
Consumers, automotive (OEM), transport (fleet management)
NAVIGON (purchased by Garmin 2011)
Licensed from NAVTEQ (HERE)
PNDs (discontinued), commercial apps for iOS, Android and WP, includes Google Maps POI
Consumers, automotive (OEM)
Licensed from NAVTEQ until 2015, with four-year renewal option, after agreeing with NAVTEQ not to pursue the TeleAtlas purchase, which was then completed by TomTom
PNDs, commercial apps for iOS and WP, includes Google Maps POI, GARMIN Connect based on Bing, then Google Maps added due to customer pressure, later OpenStreetMap usage added
Consumers, automotive (OEM), transport (fleet management, telematics), specialty (marine, aviation)
Proprietary (TeleAtlas), purchased 2008 after Garmin stepped down, powers Apple Maps solution since 2012
Data, PNDs, desktop, mobile, free app for iOS and freemium/paid apps for iOS and Android, Google Maps POI discontinued 2013, now foursquare POI, Facebook and Twitter integration
Consumers, automotive (OEM), transport (fleet management, telematics), GIS (esri partner), maps API for businesses
proprietary (NAVTEQ), purchased 2008
Data, desktop, mobile, free app for iOS and freemium/paid app for WP OS, powers Firefox OS maps
Consumers, automotive (OEM, data only), transport (fleet management, telematics), GIS (esri partner), maps API for businesses
Data, desktop, mobile, free apps for Android and iOS
Advertising within Google nexus, map serve quota, maps API for businesses
In theory, as proprietary collectors, refactors and vendors of digital map information data and POI information, HERE (and its rival TomTom) should be in possession of winning formulas to long-term relevance and profit generation; apparently, they are not.
3. Advertising age: HERE is not there
To understand HERE's dilemma, one should look at the forces that move the market: free and freemium services (empowered through data-mining) and consumer retention (empowered through ecosystems). HERE's biggest threat to monetisation is therefore not TomTom; it is Google.
Google is not selling information - Google is selling attention. Here is how Google monetises its nexus:
- The World Wide Web is an abundance of data
- Google mines that data
- Google designs services based on that data
- Google offers these services for free
- Consumers like to use free services
- Using such services, consumers mine and improve Google's data
- Google's services are actually not services, they are data mining tools
- Using these captures consumers' attention
- Captured consumer attention is sold to businesses
- The Google nexus generates profits
From that, it follows why Google is spending a considerable effort to lobby and market itself as the number one companionable guardian of a free World Wide Web: if data were to become locked in or only partially accessible for its algorithms, Google's business model would suffer. This is why developments at rivalling ecosystems (cf. Apple, Facebook, Baidu, Yandex, et al.) are closely monitored.
Pushing further in its quest to enlist consumers as happy unpaid data-miners, Google recently acquired Waze, the Israeli social mapping start-up, for $1.1bn. With that, Google adds approximately 50m users (read gang of data-miners) and a pending U.S. patent for real-time social information exchange related to traffic and road routes.
In comparison to Google, Nokia's HERE division does not have to sell itself short. It is undoubtedly technologically most advanced and owns data from which innovative high-quality solutions are constantly derived:
- HERE is found in four out of five car dashboards
- HERE is WP8's augmented reality app driver
- HERE is present in Amazons' Kindles
- HERE is powering Bing Maps
- HERE is available for desktop and mobile
- HERE is available to businesses via an API
- HERE is present in GIS
This is an impressive list. Unfortunately, for the vast majority of consumers, such facts won't get in the way of the narrative of Google Maps' supposedly unassailable superiority.
This month, Nokia extended availability of HERE Transit, Drive and Drive+, its voice-guided turn-by-turn navigation with offline maps: HERE Drive comes free of charge for Lumia 720, 520/521 and competitors' WP OS devices in selected countries, all upgradeable to global navigation @ €15,50. HERE Drive + comes free of charge for Lumia 928, 925, 920, 822, 820, 810 and 620 (excluding Nokia's most popular Lumia 520/521) and at €34,99 for competitors' WP OS devices.
However, according to IDC, Nokia shipped 79% of all 7m WP OS devices in Q1 2013, which means HERE could be further popularised via 1.5m devices only - of all 216.2m smartphones shipped that quarter - not a figure that will move the worldwide consumer mindshare needle much.
When Apple replaced Google Maps with a TomTom powered solution that instantly became laughing stock for its various shortcomings, HERE could have been there with a quality offering; after all, the iOS platform with its vast user base would have opened new inroads to device brand conversion, monetisation and plain popularisation. Instead, a sub-par app, free of charge, was hastily released, allowing Google to step back in by way of a much acclaimed app that David Pogue rates amongst the best ever written.
"We are basically the world's largest maps company," Nokia's Reija Sihlman claimed in November 2012. While that is probably true, no profits are generated off that fact.
For the majority, Google is the ocean; HERE, sadly, is a beautiful lake.
The gravitational pull - the customer retention force - of planet Google is too high in my view, escape velocity cannot be reached, the competition can hope, at best, to muster enough thrust to remain in low orbit for a little longer - ecosystemic entrenchment beats engineering excellence.
Notwithstanding multiple attempts at renaming, restructuring and refocusing, HERE sales remain low and range-bound. When considering the financial situation of Nokia, expect no miracle from its HERE division.
Despite recent low-margin device popularity and flagship device buzz, Nokia is still at the crossroads.
Disclaimer: This is no recommendation to buy or sell securities as that carries with it very high risks. The information contained in this article is for informational purposes only and subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decision.
Additional disclosure: I might continue to occasionally purchase and sell NOK for short-term trading purposes.