Can Garmin Maintain GPS Lead?

It is precisely 3,068 miles from the North Pole to the giant warehouse at the intersection of South Ridgeview and 151st Street in Olathe, Kansas. Inside, workers are betting that a gift-carrying sleigh will be making many stops in the town next month en route to millions of American chimneys. Stacked to its 30-foot ceiling with shrink-wrapped pallets of consumer electronics, the warehouse belongs to Garmin Ltd., the country's leading seller of devices that use global positioning satellite (GPS) technology. GPS was once an obscure niche appealing to the military, boaters and pilots, but lately GPS devices have begun migrating onto millions of dashboards. And lest there be any doubt Garmin believes this journey is just beginning, look next door. There, cranes are constructing a new warehouse that's even bigger.

It's a sign of a technology that's approaching a tipping point. Fewer than 1 in 10 American drivers currently use satellite navigation systems, but that ratio is set to rise sharply. Last year, unit sales of GPS devices grew by 235 percent, according to NPD Group. The growth is fueled by sharp price declines. A year ago, a decent handheld GPS device cost $500; today a similar unit costs $300. By Christmas some analysts expect to see cut-rate models as low as $99. For Garmin, the growth has created a gusher of cash. Its 2007 revenue is expected to surpass $2.9 billion, up 64 percent from last year. Its stock has doubled in 12 months, giving Garmin a bigger market capitalization than General Motors. If you've watched CNBC recently, there's good chance that you've heard Jim Cramer screaming praise for Garmin stock.

But even as Garmin's wares head toward iPod-like ubiquity, the company faces challenges. As Garmin cuts prices to match competitors, its profit margin will shrink. Competitors are rolling out cheaper devices that offer the same basic functionality—displaying your location on a map and offering spoken directions ("Turn left on Jones Road"). Cell-phone manufacturers are adding GPS to handsets, and consumers may detour around Garmin in favor of carrying one lower-cost gadget. Garmin also faces tough choices as competitors buy up the map suppliers that are critical to GPS devices. The company's executives insist they're not worried. They say their engineering teams are constantly devising features that help justify Garmin's higher prices, and that the odds of consumers shifting to GPS cell phones are overstated. Still, Garmin recognizes the uncertainty. "That's a key question for us," says Chief Financial Officer Kevin Rauckman. "Can we continue to be a premium brand?"

Garmin has come a long way in its 18-year history. The company was founded in Kansas in 1989 by two engineers, Min Kao and Gary Burrell. They sought to capitalize on the network of satellites the U.S. government had just launched to make GPS—which had previously been used only by NASA, the military and aviation industries—available for civilian use. The satellites beam location signals around the Earth; by locking in on signals from any three satellites, land-based devices could triangulate to pinpoint a location. Garmin spent the 1990s selling GPS devices to boaters, pilots and hikers. Back then, however, GPS faced a big limitation: the U.S. government, worried that enemies might use GPS for weapons guidance, limited the precision of the devices, leaving most with a margin of error of 300 feet—too far to allow a unit to tell a driver to take the next left. But in 2000, the government lifted that restriction, and today's devices can map a location to within 10 feet.

As accuracy increased, more high-end automakers began installing "nav" systems into dashboards. But in-dash systems typically add $1,500 to a car's sticker price. As a cheaper alternative, companies like Garmin focused on selling handheld "personal navigation devices," or PNDs, which can be attached to windshields, switched between vehicles or used by pedestrians. Early PNDs faced serious constraints. Their limited memory required users to manually download maps via PC, and inputting addresses was clunky. By 2004, however, Garmin's StreetPilot series offered touch-screen controls and preloaded maps. Reviewers loved it, and the market took off.

Today if you walk into the Best Buy near Garmin headquarters, you'll find its PNDs alongside models from TomTom, Magellan, Mio and a handful of other players. Garmin's U.S. market share is around 50 percent, TomTom holds roughly 25 percent, with the remainder splintered. (In Europe, Netherlands-based TomTom dominates.) While older, lower-priced PNDs are the size of a softball, the latest versions—including Garmin's hot-selling n?vi line—aren't much bigger than a deck of cards. Garmin's lowest-priced models start around $200. Anne Mitchell, a Colorado lawyer, received her first Garmin last Christmas. "I was blown away by the ease of use," she says. During cross-country drives, her family relies on their PND not just for directions but for "points of interest" data that help them locate pet-friendly motels. Like Mitchell, many GPS newbies first encounter the device when renting a car. "We don't make a lot of money on [rental-car] sales, but we reach a lot of people," says Jon Cassat, Garmin's marketing-communications chief. "As soon as people experience this technology, they're hooked."

Although Garmin's PND business accounts for roughly two thirds of revenue, it also sells specialty devices for boaters, airplane pilots and fitness buffs. Engineers in those divisions spend part of their time dreaming up new uses for GPS. Example: in the late 1990s, a group of engineers who were hard-core runners began carrying handheld GPS units during workouts to track performance. Over time, they developed watch-sized models that track runners' location, speed, heartbeat and other data; today these devices compete against offerings from Nike and Polar. Similarly, Garmin PR exec Ted Gartner, an avid bird hunter, helped conceive the Astro, a device to track the location of hunting dogs, while sitting around a Minnesota camp fire with some buddies.

Garmin says its multiple product lines don't just boost profits, but also make it easier to create new features. For instance, for years its marine GPS units have had a MAN OVERBOARD button, which a skipper can hit if poor Gilligan falls in the drink, to document the precise location from which to organize a search and rescue. Engineers in the fitness division exploited that location-marking function to create a RETURN TO START feature, which directs lost runners back to the place they began a workout. For its automotive line, engineers utilized the same idea to create a DUDE WHERE'S MY CAR? button, which allows a user to mark the location of a car in a mall parking lot.

These features sound useful, but for a populace already toting cell phones and iPods, one question looms: Do we really want to carry another gadget? Today fewer than one percent of America's 240 million cell phones utilize GPS, according to Frost & Sullivan. But as more wireless companies promote GPS (usually for $9.99 a month), more subscribers may sign on. Some of these phones will utilize Garmin components or software, but that's a less profitable business, and over time the migration of GPS into phones could imperil Garmin's core products. Rauckman, the CFO, has heard this fear for years. Having one device that does everything "is great in theory, not in practice," he says.

Garmin executives like to analogize to digital cameras. Even though cell phones take pictures, many Americans still want a higher-quality digital camera. The same will be true with GPS, Garmin believes. Bonnie Cha, a senior editor at the product-review site CNET, has experimented with both PNDs and GPS-enabled phones. Her verdict: the small size of cell-phone screens makes them hard to use for maps or directions while driving. "There's still a need for a stand-alone GPS device," she says. Says Jocelyn Vigreux, U.S. president of TomTom: "It's not an either/or—these technologies are complementary."

To fight against commoditization, GPS companies have also begun loading devices with new features. Some, like MP3 or video players, strike users as superfluous. But device makers and consumers seem excited by high-end models ($600 and up) that have begun offering traffic and weather data, along with more in-depth information on restaurants, hotels and gas stations. "The companies are trying to turn PNDs from a product that you use opportunistically"—when you're navigating an unfamiliar area—to "a car-based information portal you use every day," says Ross Rubin, director of industry analysis at NPD Group.

It's a risky strategy. PND makers find themselves facing the type of challenge confronting TiVo. That company has loaded its TV-recording devices with new features, but it's still struggled as more cable boxes offer the program-recording that most users see as TiVo's primary benefit. Similarly, if all consumers want is a voice telling them how to get from point A to point B, many may choose cheaper options than Garmin. The company's executives, however, say that by continually upgrading their devices, they'll be able to defend their premium position, the same way Apple's iPod far outsells lesser-known, less-expensive MP3 players. It's reinforced this message using advertising taglines like "Grab a Garmin" and "Give a Garmin," which try to cast its name, like Kleenex, as a generic term for the entire product category.

For Garmin and its rivals, the latest challenge stems from its supply chain. While Garmin makes most of its wares itself—even designing its own boxes and ads, which are currently in heavy preholiday rotation during NFL games—it relies on two outside companies, Tele Atlas and Navteq, for maps (just as its competitors do). In July, TomTom announced plans to acquire Tele Atlas. Last month, Nokia made a deal to buy Navteq. With competitors owning these key suppliers, Garmin could be at risk; it'd be as if Burger King suddenly had to buy its hamburgers from McDonald's. In a late-October interview with NEWSWEEK, Garmin waved off these concerns, saying it had long-term contracts in place with map suppliers. But just days later, Garmin launched a hostile $3.3 billion bid for Tele Atlas in hopes of upending the TomTom deal. Garmin's stock fell sharply on the news, and as NEWSWEEK went to press, analysts were speculating whether TomTom would counteroffer, driving the price higher.

While that byplay matters to insiders, consumers will be far more interested in the ways in which GPS technology could someday affect their lives as profoundly as technologies like cell phones and social networking. Industry executives already speculate that as more drivers embrace automated navigation, accident rates may decline, since fewer of us will be peeking at maps or craning for street signs. (This assumes the devices aren't themselves a distraction.) While Garmin remains focused on navigation, smaller start-ups are offering applications that let users broadcast their location to friends and family, to allow for impromptu meet-ups. For helicopter parents, there are obvious child-tracking uses. There are also inevitable side effects as we offload what was once a basic human skill to a computer. For starters, our ability to give directions may fade just as quickly as our ability to memorize phone numbers has eroded since programmable cell phones took over.

And there will surely be applications of this technology that we can only dream about today. Consider one idea NEWSWEEK tossed out during an interview: since skiers are always pulling over to consult trail maps, wouldn't a ski GPS device be a no-brainer? Upon hearing that idea, Garmin fitness chief Tracy Olivier glanced nervously at the PR guy—leaving the distinct impression that designs for something like that are already on the drawing board.

In the meantime, Garmin will keep upgrading its lineup to blunt the damage done by falling prices—and keep fending off skeptics. "Analysts have been on the fence about us for years, and they've missed out on the entire seven-year run in which we've averaged 40 percent stock-price appreciation every year," says Rauckman. But so long as customers like Terry White function as walking advertisements, Garmin's business should continue to grow. White, a technical sales manager at Adobe in Detroit, is on his fourth PND, and he's given Garmins as gifts to friends. "When they start to be priced below $200, everyone will have one," White says. As shoppers stand poised at the preholiday starting line, Garmin can only hope the route to that point is simple and direct.