In a deal announced October 1st 2007, Nokia declared its intention to acquire NAVTEQ for $8.1 billion. Most of the industry had been waiting for the other shoe to drop after PND-maker TomTom purchased Tele Atlas, but the majority had expected another of the PND makers (Garmin, Magellan), or the big Internet mapping portals (Google, Microsoft) to be the purchaser. Although the Nokia purchase is initially surprising, it makes good business sense; ABI Research was one of the industry-watchers who had Nokia on a short list of potential suitors. Nokia has been very clear that it is moving toward Internet-based services, and has been making acquisitions to support its strategy (Loudeye, Twango, Enpocket, Gate5). Nokia's Internet strategy is now $8.1 billion clearer. It recently introduced its own PND, and has been vocal about its intentions. OVI is the public face of these initiatives, which are not yet very visible in the United States but that will change in the coming months and years.
Nokia's stock price fell on the announcement, with narrowly focused Wall Street analysts arguing the price was too high. It's true that the Nokia offer values NAVTEQ at 8.6 times its projected 2008 sales, and 24.5 times its 2008 EBITDA (earnings before interest, tax, depreciation, and amortization). The $2.55 billion TomTom paid for Tele Atlas was 5.2 times its forecast 2008 sales and 20.9 times its 2008 EBITDA. It is not unusual at all for the first-mover in a market to get a better deal than those that follow, especially when the bidders are competing for the one remaining player. Although NAVTEQ's stock price had been run up a bit due to acquisition speculation (it was about $66 a month earlier), the price Nokia offered is only 3 cents above the September 28th close. In its conference call with analysts, Nokia made the case that NAVTEQ is a superior product to Tele Atlas; true or not, the price is hardly a huge premium over existing valuations. Helping put this price in perspective, an auto industry colleague pointed out that $8.1 billion is more than Ford could hope to get from selling Volvo, a NAVTEQ customer.
The deal must still be approved by regulators and shareholders, but consensus indicates that all the steps toward winning approval of the NAVTEQ-Nokia purchase will simultaneously help the Tele Atlas-TomTom merger acceptance, and vice-versa. So what does the merger of the two leading firms in their fields NAVTEQ and Nokia mean for the still nascent Location Based Services market, and the more stable, but fast-changing PND and Cellular markets?
Impact on the Participants
The deal offers Nokia and NAVTEQ many benefits, and almost no downside. NAVTEQ employees heard nothing of the deal other than the announcement of a world-wide company meeting to be held on October 1st, which is standard practice. The stock price rose prior to the purchase announcement, and as both parties said in the conference call, the offer was the best presented and makes good sense for shareholders. It gives NAVTEQ the opportunity to have its product in millions more devices, and literally changes the scale of the company's market.
For Nokia, controlling the map data that underlies Location Based Services will help their own efforts, as well as provide a revenue source from other buyers of the data. As Nokia CEO Olli-Pekka Kallasvuo said in the conference call, it is the cornerstone of the company's Internet services strategy. Judson Green of NAVTEQ made a point of discussing the automotive in-dash market, and how 75% of cars with in-dash navigation use NAVTEQ maps. There will likely be little impact here, as the auto OEM business is small compared to the other market potentials. His point about having the resources for strong expansion is much more relevant.
There was the requisite discussion of user-generated input, a counter to the TomTom initiatives. It could be that Nokia's capital will allow NAVTEQ to expand into new markets in the traditional way, while also setting up the staff and structure necessary to collect and confirm user-generated map data. It remains to be seen whether Tele Atlas or NAVTEQ will make the Wiki-Map model a reality, since vetting the data is a perpetual problem with Wikis. One aspect that got brief mention but holds at least as much potential is real-time traffic improvements. What if some percentage of Nokia handsets had the ability to serve as probes for real-time traffic data collection? Not even OnStar has as many devices in circulation. Unlike Wiki-Maps, structures are already in place for collecting and using this kind of user input, and it could give Nokia/NAVTEQ a real advantage.
The only potential downside anyone has yet uncovered in this deal is the vague concern that NAVTEQ will lose customers due to its new corporate parent, or that some other key players (Google, Microsoft, cellular carriers) will be annoyed and make future transactions more difficult. Realistically, these seem like minor concerns.
Impact on the Map Database Industry (Tele Atlas, NAVTEQ)
Both the major players are now owned by larger companies. For those who license map data from them, the effect should be minimal. It seems unlikely that either buyer (TomTom or Nokia) will launch into any kind of price war to steal map data customers they have bigger fish to fry. Other PND makers are now left with no choice but to buy map data from a competitor Nokia will be as much a navigation device competitor as TomTom. This deal makes things equally bad for all the other map data purchasers. Map data license prices will likely increase, but neither a run on sell-at-a-loss "sweet deals" nor a "squeeze the competition" sharp jump in map costs is likely.
Tele Atlas stock had its biggest gain in almost three months, based on speculation of higher bids. For both TeleAtlas and NAVTEQ such counter-bids are highly unlikely, as the process usually involves the possible players, and the agreements always include a break-up clause that would require a significantly higher bid by any counter-offering company.
The competition to improve map data will intensify, which is great for consumers. Each parent will want to have an edge in the growing LBS arena, so higher precision, better POIs, more visual content, user-generated content, and all the other points of differentiation for map data will continue to improve, and probably at a faster rate than if each had remained independent. Makers of 3D and satellite image data are probably also happy, as the potential for profitable sales, either products or entire companies, has increased. It is also possible that alternative business models for map data creation could develop out of resistance to buying from direct competitors perhaps map data developed directly from satellite images, or perhaps the use of regional data providers. In Europe for example, AND (Automotive Navigation Data) currently has street-level maps of Belgium, Luxembourg and the Netherlands. Such companies may now become more viable alternatives to Tele Atlas and NAVTEQ. This is a difficult path; map data is tremendously complex, and the two major players have amassed so many resources it is hard to envision a profitable way around their control.
Impact on the PND Industry (TomTom, Garmin, Magellan, Others)
At least one Wall Street analyst agrees with the ABI Research view that the 10% to 15% drop in Garmin stock on the deal's announcement was just a knee-jerk reaction to the expectation that Garmin would be the NAVTEQ buyer. Garmin has refused comment on the story, in at least one instance. Quarterly profits for Garmin will remain strong however, so the stock will be back up soon. Longer term though, things look very ominous for PND makers. Anssi Vanjoki of Nokia said he saw the PND market continuing to grow, plus there will be a new and untapped Pedestrian Navigation market. He is right, but the players in the PND market, indeed what constitutes a PND, will not be the same.
Garmin, Magellan, and other smaller players had best be examining their business models. ABI Research spoke with a Wall Street analyst who asked (hopefully) if Garmin has a Plan B. It is perhaps safe to assume one of the competitive bids NAVTEQ considered was from Garmin, but its pockets arent as deep as Nokia's. Garmin would have needed to assume large debt not something the company has done before, and not an easy step. So now Garmin is in a spot. Short term, there won't be much difference. Map data will probably cost the company a bit more, but that is nothing compared to the impact of the changing PND market.
Mobile Internet Devices (MIDs) will soon be readily available, and will offer navigation capabilities along with a host of other functions. Mio and other PND makers are starting to offer mobile-TV enabled devices, adding cameras and media playback capabilities to PNDs. As handset-based navigation takes over the price-sensitive, low-end and casual navigation user, and multi-function MIDs take over the high-end, high-price segment of the market, where will the single-function PND fit in? Can the brand image of any PND maker compete with the companies and brands that are moving into the MID space? Google? Intel? Apple? Nokia? So if they aren't making the MIDs, and they aren't making handsets, what will happen to the single-function PND, and the companies that produce them? Palm Inc provides one example: the once-successful PDA morphed into a smartphone that had strong acceptance, but couldn't compete long term against stronger and deeper challengers, leading to corporate splits, sell-offs, software changes, and a murky future.
As ABI Research has discussed in its Telematics blog (1
) the one area that could save Garmin, if not the other PND makers, is its skill with the Navigation Experience. Even the Nokia-NAVTEQ team will face that challenge. Although the steps from a map database (either NAVTEQ or Tele Atlas) to an accurate and easy to follow routing, on an attractive and easy to use device, are not given the recognition they deserve, they are extremely difficult steps. Everyone who has been frustrated with an in-car navigation system, or been misled by a low-price PND that can't speak street names properly, can attest to the difficulty. The challenges can be solved eventually, but right now Garmin is the leader in this area. In real-world use, Garmin has consistently been the best at delivering a good navigation experience, and that ability could provide the company a new business model.
Navigation Experience skills could also prove to be the exact value proposition that places Garmin itself in play. Any of the PND makers could be a candidate for acquisition by a consumer electronics company with the desire to grab some of the PND market profitability and use its CE strength to maintain the business going forward. Such a scenario would be unpleasant for the PND maker, as only its navigation experience would be valuable to the buyer. But such a course may be preferable to the alternatives.
Impact on Other Navigation Players and Internet Portals (NIM, TeleNav, Google, Microsoft)
Early on October 1st ABI Research spoke with TeleNavs CEO HP Jin about the Nokia-NAVTEQ agreement. Although TeleNav has some Nokia handsets using its product in the Chinese market, in the short-term Jin saw little impact on TeleNav and others in the handset-based navigation market. In the long term though, he said, "Who knows?"
He is right on both counts. We can be fairly certain, however, that the marketplace for handset-based navigation software just got a bit smaller. TeleNav, along with its competitors Networks in Motion and Telmap, will be fighting over the Anyone-But-Nokia market. This is still a very large market, to be sure, and one that will be supported by the cellular carriers as the current model gives the carrier more clout. As the handset-based navigation market matures, it remains to be seen how these players will define their roles and products.
For Nokia-NAVTEQ, the sharp minds at TechCrunch.com have correctly identified a very interesting path that is somewhat "hidden in plain sight."(2
) Can Nokia arrange a deal with Google for future map-based advertising revenue? Right now Google and the other Internet portals at Yahoo and Microsoft, are using NAVTEQ maps (along with other sources). Instead of pushing Google to competitors, Nokia could agree to share in future advertising revenue a much larger source of revenue than just navigation in exchange for using Google Maps with NAVTEQ data on Nokia devices. Google is the best at advertising revenue models, and providing free Google Maps on every Nokia device could make for a win-win. What role could Enpocket play in helping Nokia put together an effective business strategy under this theme? Nokia could try and do it without Google, but might it learn valuable lessons by working with the experts first?
Impact on the Cellular Carriers (US, Europe, Worldwide)
Some industry watchers feel the cellular carriers will be annoyed since Nokia is taking a chunk of the service revenues they were hoping to monopolize. Industry veterans agree, but also admit this is just status-quo; the love-hate relationship between handset makers and cellular carriers is longstanding. It is not guaranteed, however, that the current business structure would provide greater benefits to the carriers. Each carrier has to purchase LBS software and systems from vendors like Telmap and TeleNav. If the Nokia-NAVTEQ combination can now offer the same services as a bundle with enabled handsets, nothing prevents the carriers from making equally profitable, but very different, arrangements with Nokia. The impact of any difficulties would show up in EU markets first, and US markets last, along the lines of Nokia's share and clout with the carriers.
What Happens Next?
One player who surely has projects underway, but has remained quiet in this space, is Qualcomm. The CDMA giant is one of the few firms with the financial and technological wherewithal to threaten both Tele Atlas-TomTom and NAVTEQ-Nokia. The weak link is, of course, map data. The company will have to get data from someone, which will put to the test all claims of independence and support for selling to any interested buyers, even if competition with the parent company is obvious.
The reaction of Tele Atlas-TomTom will also be interesting. Which direction will it choose to move, now that Nokia has taken an aggressive step? TomTom has to recognize the future for PNDs is limited, and that it may need to partner with someone to challenge Nokia. Analogies to chess are quite appropriate here.
The development of MIDs and high-end handsets will also play a role. Some in the conference call were probably surprised when Nokia management proudly stated that it sold 1.5 million of its top-of-the-line N95 handsets. Particularly in the United States, the success of the Apple iPhone has gotten more headlines. The unlocked N95 is now for sale in the United States at around $700, making the iPhone seem like a bargain, but navigation is a weak link for the iPhone, despite its ability to download Google Maps. The iPhone must go in that direction, but how?
One final point: both deals to acquire key map data suppliers (TomTom-Tele Atlas, and now Nokia-NAVTEQ), were arranged by European companies. This is a clear indication of the more advanced, and adventurous, state of European businesses and consumers regarding LBS. There are implications for Handsets, GPS, Telematics, and for the entire LBS market. Anssi Vanjoki's assurances during the conference call of "playing the game openly" will be put to the test, but that too would fit the European model. Nokia has been thinking long and hard about a Location-Based world, has a strategy in place, and is implementing that strategy. Perhaps it caught Google looking the other way (at 700MHz spectrum?), and perhaps Garmin has a Plan B, but Nokia knows where it is going and is in a big hurry to get there first.
Reprinted with Permission (C)2007 ABI Research www.abiresearch.com