Garmin announced today a cut in its revenue and earnings forecast for 2008.
It blamed a challenging macroeconomic climate and intense competition. One bright spot was that “The automotive/mobile segment gross margin continued to be sound at 39% as PND pricing declines moderated.” But this will prove to be a transient plateau in a precipitous decline in the PND market.
Although we continue to earn industry-leading market share, the sector is not growing as rapidly as earlier anticipated and consumers appear to be more cost-conscious than ever.
Garmin may have many strong business opportunities (for example lifestyle-oriented market segments like fitness), but the generic PND is not one of them. The reason is that PND functionality is being built into smartphones. The incremental cost to the phone manufacturer is just a few dollars. The new iPhone is a case in point. It has great mapping software from Google and the screen is large and high-resolution; this PND functionality is effectively thrown in for free.
But it gets worse for PNDs. GPS in phones is intrinsically superior to GPS in PNDs, because the data connection through the cellular service dramatically speeds up time to first fix and can also improve location accuracy.
Garmin appears to have recognized that smartphones will eat its PND lunch, and has embarked on a smartphone development, the Nuvifone. But this is a very, very challenging gamble. The handset business is brutal, not just competition-wise but because of the complexities of regulation, certification and network validation. Garmin must have expected this, but it was still surprised:
The nüvifone will not be available in fourth quarter as previously announced. While we had hoped to have carrier launches in the fourth quarter, we have found that meeting some of the carrier specific requirements will take longer than anticipated.
The Nuvifone may turn out to be a winner for Garmin, but it’s a long shot. It is possible to differentiate on commodity features in handsets, but not in the mass market. An analogy with cameras would be misleading. For GPS there is no essential technical requirement equivalent to a good camera lens in terms of differentiating value in a handset.