TomTom's Tele Atlas Purchase: How Will Rivals Respond?

NEW YORK — TomTom's plan to purchase map supplier Tele Atlas is an industry-changing event that could give TomTom some key advantages in the competitive GPS market, competitors and analysts said.

Tele Atlas and Navteq are the only two suppliers of digital street maps to makers of consumer GPS devices, and the purchase would give TomTom, the No. 2 supplier of personal navigation devices (PNDs) in the United States, the ability to buy digital maps at a cost lower than its competitors can.

Low-cost maps are considered important in the intensely competitive PND market because maps can account for up to 20 percent of the wholesale cost of a PND, industry executives said.

A Netherlands-based TomTom spokesman admitted that TomTom would benefit from "an inter-company price." The spokesman didn't elaborate.

TomTom is Tele Atlas's largest customer, accounting for about 30 percent of Tele Atlas business, confirmed TomTom. TomTom claimed the purchase would enable it to improve the accuracy of its PNDs' navigation instructions, now claimed to be about 97 percent.

Several PND executives said the deal puts pressure on Garmin, the No. 1 U.S. supplier, which would presumably continue to buy maps at a typical market rate from Navteq. By contrast, the Tele Atlas deal could allow TomTom to purchase maps at a third of the going rate, one industry member speculated. Another executive called that estimate "reasonable."

Tele Atlas said it supports the acquisition, which is expected to be finalized by the end of the year pending clearance of European antimonopoly regulatory hurdles and other stipulations.

After the acquisition, valued at more than $2.7 billion, Tele Atlas will continue its business as a separate unit that supplies map data to customers other than TomTom.

Those customers include competing PND suppliers Mio, Cobra, Navigon and Dash, and at some point they could decide to switch map suppliers so as not to support a major rival.

For now, however, Kiyoshi Hamai, Mio's senior sales and marketing director, said Mio has no plans to switch to Navteq. "We've been assured by [Tele Atlas] that nothing is going to change." He also noted that the industry is heading into the critical Christmas selling season, and this would not be a good time to switch map suppliers.

Michael Ippoliti, ABI telematics and automotive research director, said he does not expect Tele Atlas customers to flock to Navteq in the near term. "Everyone has their contract in place for buying data, and I don't think those will change," he said.

One PND supplier, however, told TWICE it will likely wait out the end of its contract and then switch to Navteq.

A second key issue is whether Navteq will now raise prices. In the future, PND makers might be reluctant to buy maps from a company owned by a competitor, and so the deal may leave Navteq in a more exclusive position and embolden it to raise prices.

Again, ABI research said, "Not in the short term. Most companies are thinking that Tele Atlas will discount its pricing, and that could keep the pressure on Navteq. On the other hand, companies may say, 'I can't support the competitor,' and then Navteq will have more pricing power," said Ippoliti.

Navteq issued a comment on the deal, saying only, "We believe the announcement reinforces the value and importance of map data and location content."

ABI's Ippoliti called the TomTom/Tele Atlas announcement "the first major step in what is sure to be a very interesting period for the map data marketplace because it puts Navteq in play. It's open for someone to buy — like Garmin, Magellan or Google — because now suppliers are saying, 'Wait a minute, there's only two [map] vendors and one will be snapped up. I better do something.'"

Phil Magney, principal analyst for TRG, noted that the TomTom deal is not finalized and that Garmin could still outbid TomTom to purchase Tele Atlas.

A Garmin spokesman, however, wouldn't comment said the company doesn't comment "on speculation or potential mergers and acquisitions."

TomTom said it wants to buy TeleNav because it requires better interplay with a map supplier to improve the accuracy rate of its navigation directions, now at 97 percent. The TomTom NV spokesman said, "The way TomTom and Tele Atlas cooperate [at present], it's impossible to make 100 percent accurate maps. It's easy to get to 50 percent, and then it costs a lot of money to go to 80 or 90 percent, but to go to 100 percent is virtually impossible."

As consumers use the devices more frequently, even a few mistakes are not tolerated, the spokesman said. The deal "will lead to the best maps in the industry," he said, particularly in light of the fact that TomTom offers a feature where users can update the maps and broadcast that update to other users.