Garmin, Tom Tom in Trouble as Navigation Tools Become Smartphone Add-Ons

| About: Garmin Ltd. (GRMN)
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We have been observing personal navigation device (PND) makers for some time now and one has to admit that they are coming under increasing pressure. The portable navigation market includes arch rivals Garmin (NASDAQ:GRMN) and TomTom, as well as other smaller players, such MiTAC Digital and Navigon.

Since navigation products are given to commoditization, there has always been significant pressure on prices. However, the more immediate threat is Google (NASDAQ:GOOG), which intends to add free turn-by-turn directions to the Google Maps app for smartphones using its Android operating system.

The concept of adding navigation to phones is not new—Nokia (NYSE:NOK) made its intentions clear last year, when the company acquired Navteq for a lofty $8.1 billion. Navigation is increasingly becoming a part of all smartphones, adding to the competition for the standalone portable device makers.

In fact, iSuppli expects GPS navigation in all smartphones by 2011. It is clear that both companies perceive the threat, because holiday season prices have been slashed significantly. According to iSuppli analyst Danny Kim, Garmin offered 40-42% discount on all its products in the Black Friday shopping weekend. TomTom also offered significant discounts. While a certain amount of discounts are normal for the season, the rate this year is more significant than in prior years.

Garmin and TomTom have also made their plays in the smartphone market. Garmin has brought out its own smartphone, which it is shipping through AT&T (NYSE:T). TomTom has introduced a navigation application for Apple’s (NASDAQ:AAPL) popular smartphone. However, revenues from these efforts are trending lower than anticipated.

The Garmin phone was initially expected to generate $100-200 million this year, but management recently stated that it would be lower. The TomTom app is selling at a significant discount, which would result in lower revenue for the company. We believe the revenue decline will be gradual for Garmin and the company’s other solutions for aviation and marine markets could break the fall to an extent.

However, with PND applications for the auto market growing at an exponential rate over the last few years, aviation and marine segments have together dropped to less than 20% of total revenue. Aviation sales have also been impacted by the recession, so a recovery would be beneficial for the company.

Management has announced many new products in the marine segment, which should help growth. Prices of both companies have been on a decline, as investors are unable to identify a clear growth strategy.