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How Much is Location Technology Worth?

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Sunday, October 7th 2007
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Summary:

This past week, Nokia offered to buy NAVTEQ for $8.1 billion, nearly 14 times NAVTEQ’s 2006 earnings of $581 million. NAVTEQ acquired Traffic.com earlier in the year for $177 million. In July, TomTom offered $2.5 billion for Tele Atlas, a 32% premium over the stock price at the time. Pitney Bowes acquired MapInfo in March for $408 million, or approximately 2.5 times MapInfo’s 2006 fiscal revenues of $165.5 million. It is a scenario that is likely to be played out again in the future, as location technology is increasingly sought as a differentiator in a business war to connect people and things to places.

This past week, Nokia offered to buy NAVTEQ for $8.1 billion, nearly 14 times NAVTEQ's 2006 earnings of $581 million. NAVTEQ acquired Traffic.com earlier in the year for $177 million. In July, TomTom offered $2.5 billion for Tele Atlas, a 32% premium over the stock price at the time. Pitney Bowes acquired MapInfo in March for $408 million, or approximately 2.5 times MapInfo's 2006 fiscal revenues of $165.5 million. In August 2006, Intergraph was acquired by a private equity group for $1.3 billion, approximately 2.3 times 2005 revenue. In 2002, Microsoft acquired Vicinity for $96 million and in 2004, Google acquired Keyhole but the financial details were not disclosed. And, back in 1999, AOL bought MapQuest for $1.1 billion in stock.

During this year's spate of consolidation in the location technology sector, content is still king and software solution companies have been gobbled up by firms outside the tidy world of GIS. In either case, both have fetched nice premiums. It is a scenario that is likely to be played out again in the future, as location technology is increasingly sought as a differentiator in a business war to connect people and things to places.

There are two key factors at play.
  1. Until three months ago, digital street data had been controlled by only two companies that provided a value added service above the baseline database from government sources. Some government databases (where available) could not be used for navigation applications. Millions of dollars and many years were spent in developing data that could not be easily commoditized. It may be years before an endeavor like OpenStreetMap, a volunteer-created and free-to-use database, has a similar value.
  2. Mapping software is not developed in a day or two. Mapping technology took 30 years to mature and the software, with the exception of a few open source solutions, is still in the hands of a few providers. Internet companies like Google and Microsoft, that understood the value of the mapping software, acquired intellectual property rather then start from scratch to build their own mapping engines.
These factors are set to continue the disruption in the GIS/mapping software arena for the foreseeable future.

Business Opportunities
The business opportunities for location technology can be broadly grouped into two categories and their expected revenue sources.
  1. Search = Advertising
  2. Data modeling and management = Location intelligent software solutions
The "Holy Grail" for location technology is assumed to be local search and the advertising that comes with it. The goal is to reach an ever-narrowing target audience within a confined geography. Wild estimates of advertising dollars (1) (2) are predicted to be spent on local search. For mere pennies, "mom and pop" retailers will be able to reach their loyal and less-than-loyal customers more effectively. Those pennies will create billions of transactions, and therefore dollars, for Internet giants like Google, cellular carriers like Sprint, and their new friends in the mobile handset market like Nokia.

As appealing as the consumer segment is for local search, businesses, too, are beginning to understand the value of location. While business process improvement may be the goal, the specter of terrorism can sometimes drive the decision. Take, for example, the need by logistics companies to locate containers, being transported thousands of miles by sea, rail and road, in order to more efficiently route them to end-users. While ostensibly watching the bottom line, the good CEO is ever mindful that a terrorist attack could disrupt everything, including stock valuation. But a "location intelligent" system will mitigate such a scenario. From transportation modeling to the dispersion rates of radioactive material from "dirty bombs," location-based solutions need to be high on the list of business applications. Basic business systems offered by Sprint to locate field service representatives who carry GPS-equipped cell phones or more elaborate, highly integrated solutions developed for emergency management agencies, presently considered visionary, should be more commonplace.

The Media as Educator and Valuator
International media, as well as local TV stations, which use map-based graphics are drawing viewers. Mapping technology makes them look more sophisticated, current and more visually stimulating. It keeps "eyeballs on the screen" and may influence the cost of TV advertising. CNN and others are educating the public about the applications of location technology, a job that has, perhaps, been more difficult for those in the GIS business.

Valuation
Recent acquisitions and the impact of the use of the technology by the media are fueling valuations of "location," in both data products and software, as previously mentioned. Growth rates in the GIS software industry vary from 10% to 15%. Thus, the prices NAVTEQ and Tele Atlas commanded seem overvalued in the larger context of the overall industry. But location-based information and software are no longer just niche sectors. Location technology is a differentiator that now provides larger revenue opportunities in both the consumer and mainstream information technology industry. In a survey conducted by Business Week and Pitney Bowes MapInfo, results indicated a low penetration rate of location technology among businesses. Only 6% of businesses were using it; 7% were evaluating it. Similarly, the portable navigation device (PND) market is in the early stages, with penetration rates in the consumer sector under 10%. These factors offer evidence of continued high valuations for location technology that will spawn the next phase of industry growth.

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