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Portable navigation device makers chart troubled waters

BANGALORE (Reuters) - Portable navigation device makers are battling fierce competition, slowing growth and shrinking margins, and analysts say the industry needs to quickly make strategic changes to sustain growth.

A model displays the new navigation device 'TOMTOM Go 930 T' during first public day at the CeBIT computer fair in the northern German town of Hanover March 4, 2008. REUTERS/Morris Mac Matzen/Files

The companies also have to contend with the rising threat from mobile phones equipped with global positioning systems, which are expected to grab more of the market.

While the companies continue to sell more PNDs, the growth rate is slowing and prices are much lower than a year ago, resulting in sluggish revenue growth and sliding margins.

“Portable navigation devices have started hitting commodity status as consumer demand and awareness have grown within the last two years,” IDC analyst Diana Hwang said.

Basic portable navigation devices provide route maps on touch screens using global positioning system technology, and they are mostly mounted on car dashboards. Advanced models offer additional features like a Bluetooth wireless device, an MP3 player and an FM transmitter to play music through a car stereo.

A smartphone like the Nokia N95 does all of this while remaining a phone, but customers looking for a car navigation device still tend to go for a PND because of its larger screen.

About 26.6 million PND units will be sold in 2008, according to estimates from market research firm Gartner.

But the market is getting saturated as more companies are offering a slew of products at lower prices.

Technology retailer Best Buy BBY.N offers on its website as many as 59 car navigation device models from 18 brands ranging from Liberty Media's LINTA.O Zoombak to Magellan, with several selling for less than $200. The N95 smartphone is priced at $699 on Nokia's U.S. website.

Market leaders TomTom AS TOM2.AS and Garmin Ltd GRMN.O are used to enjoying high profit margins, but the companies said recently they would not be able to maintain such levels this year.

TomTom’s gross margins are expected to drop to 40 percent in 2008 from 44 percent in 2007, and Garmin’s PND gross margins are expected to drop to 36 percent from 42 percent, Soleil Securities analyst Peter Friedland said.

Prolonged margin pressure will hurt the ability of the device makers to churn out new models regularly and invest heavily in marketing as they are currently doing.

“The question now is how to offset falling margins and gain incremental revenue,” IDC’s Hwang said.

Gartner analyst Thilo Koslowski said the companies need to change strategies right away.

“They’ll have to look dramatically quickly into coming up with new ideas to protect their profit margins,” he said.

BEYOND NAVIGATION

With the market maturing, it’s no longer just about PND sales, said Strategy Analytics analyst Joanne Blight. “It’s about getting customers to link in and find services they can download.”

The companies have two choices, Gartner’s Koslowski said. Either they make their applications available on devices other than PNDs, such as personal digital assistants or mobile phones, or they increase the functionality of their devices to provide value-added services such as searching the Web or finding empty parking spaces. “The device itself is not that relevant anymore,” Koslowski said. “It’s more about what value do you provide through a navigation application.”

Since the average PND user currently does not use the device on a daily basis, going beyond navigation is critical to give users more reasons to use the device, he said.

Koslowski expects to see mergers and acquisitions later this year and next year as the market may not be big enough to support all the companies that are out there today.

Industry analysts recommend a services-based model, one not embraced by the larger PND makers. They say a company like Dash Navigation Inc, which provides an Internet-connected navigation system and one that has a services-based model, offers a snapshot of the direction the industry should be taking.

Microsoft Corp MSFT.O earlier this month unveiled plans for a Web-based service for driving directions that uses software to help motorists avoid traffic jams.

GPS PHONE THREAT

GPS-enabled handsets are expected to make up 43 percent of global mobile phone sales in 2011, compared with less than 14 percent last year, Gartner mobile phone analyst Tuong Nguyen said.

Analysts also expect mobile phone giant Nokia Oyj NOK1V.HE to continue to push aggressively for GPS in phones. Nokia has agreed to buy U.S. digital maps firm Navteq Corp NVT.N for $8.1 billion.

Koslowski said Nokia might even be able to offer GPS for free by using an advertising-based model.

“Then it becomes extra hard for PND makers to justify why you have to pay a couple of hundred bucks extra for a device that does not do more than just navigation,” he said.

Editing by Mike Miller, Bernard Orr

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