LEX In the 19th century a considerable amount of military manpower was used to draw detailed maps of the British Isles. Updated regularly ever since, this valuable intellectual property is owned by Ordnance Survey and protected by a tiny, but intentional flaw in each map that identifies copies. But the road maps based on the data have become cheap commodity items. The challenge for personal navigation device maker TomTom is to avoid that fate.
The attempt is not going well. TomTom shares lost another 10 per cent on Tuesday morning following a trading update. The Dutch group has now seen its market capitalisation shrink by two-thirds from its October high. The problem is rapidly falling prices. Nervous about the outlook for consumer spending, electronics retailers have been clearing inventory, as have some smaller map device makers. So while unit sales unit sales for the satnav market doubled in North America in the first quarter, compared with 2007, and grew by 40 per cent in Europe, TomTom’s revenues actually fell. Margins collapsed, and full year guidance for sales has been cut by a tenth.
TomTom has product updates ahead that it hopes will reinvigorate sales of high-end models. But the group’s difficulties appear more profound. Penetration growth is being driven by the cheapest devices, which will continue to put pressure on average selling prices. Competition remains tough, particularly as US peer Garmin is trying to increase its market share in Europe. Meanwhile subscription- based services such as traffic updates, remain a long way off from making a material contribution. Developing the software and services side of the business is essential and explains the rationale for taking over map designer Tele Atlas. But if the competition authorities approve the deal, the €1.8bn of debt necessary to fund it will leave TomTom with little room for manoeuvre if rivals push harder on pricing. The way ahead is far from clear.
