The growing value of mapping and location assets is clear as recently witnessed by Google's (GOOG) $1bn acquisition of Waze. Mapping and related location applications such as monitoring traffic flows is becoming increasingly significant to smartphone makers as a point of competitive differentiation. At the Nokia (NOK) Lumia 1020 presentation, CEO Stephen Elop's focused on the camera as its major point of differentiation. However after the camera it was the Lumia 1020's mapping technology with its augmented reality and ability to work off-line that was the feature most commented on. With mapping and location services growing as a major point of differentiation for smartphone makers, Apple (AAPL) is best advised to purchase the last remaining independent mapping company on the market, namely TomTom (TMOAY.PK). Apple already licenses its mapping and location services content from TomTom.
The map on a smartphone is becoming more than just a global positioning system (GPS). Additional features are being rolled out such as traffic flows, retail opportunities and augmented reality. The next step will be for retailers to be able to advertise directly to potential customers in their vicinity via the mapping technology on the smartphone. This could be powerful. For example a retailer could directly advertise in-store deals to a potential customer walking by.
Mapping and location services are the next growth areas in the smart phone arena. The growth is visible as can be seen with the 19% external sales growth in Q2 2013 delivered by Nokia's HERE mapping business. Google just launched its latest version of Google Maps to much fan fare in the press. Smartphone makers and ecosystems are starting to use their mapping and location services as a point of differentiation to consumers.
From supplier to competitor
As history in the tech space shows, a supplier can quite easily morph into a competitor. The biggest example of this is Samsung, a major supplier of memory to Apple. Samsung eventually became Apple' major competitor in the smartphone space. As a result of this transition from supplier to also being a competitor, Apple has worked hard to ensure memory supply from other players such as Micron's (MU) soon to be completed acquisition Elpida. This same dynamic was the reason that Apple dropped Google in 2012 as its supplier of maps and licensed the digital map library of TomTom instead. Google's Android operating system is the main competitor to Apple's iOS system.
Smartphone battleground
The software and hardware business is getting more integrated in the smart phone space. The software and apps each ecosystem offers is a growing point of differentiation. The fact that the lack of a few apps (namely Instagram, Pininterest, SnapChat) is the most common complaint about the Windows Phone ecosystem demonstrates the potential power of having ownership of these apps by the actual smartphone maker. Hence software and apps is growing as a battle ground for smart phone makers. Mapping and location services now sit squarely in the middle of that battleground.
It is interesting to note that Apple's mapping and location services have been historically seen as source of weakness vis a vis the Google maps experience. This can be partly explained by Apple's approach of amalgamating many different external service providers into its map function. It would be more efficient to bring them all in house and deliver a very high quality competitive product. This article from 2012 refers to some of the issues Apple had with its mapping and location services product as per the view of the consumer. Interestingly Apple announced two deals to bolster mapping, HopStop, and Locationary on July 19th, 2013. Apple is addressing its mapping business and looking to make acquisitions.
Strategic value of mapping
As mapping becomes more significant, the strategic value of owning the mapping content increases. A smartphone maker could find itself in trouble if all the available mapping assets were to be owned by its competitors. The price of licensing TomTom's maps are not such that it would be cost efficient in anyway to acquire the whole company. However it would be a major a competitive issue for Apple if TomTom fell into the wrong hands.
TomTom is the only major provider of mapping content either not owned or heavily tied into one of Apple's smartphone competitors. Nokia has its HERE mapping business and Google Maps through its Android ecosystem is very strongly aligned to several of Apple's competitors such as Samsung. That makes Apple vulnerable if TomTom were to fall into the hands of a competitor at a time Apple is evidently focusing on beefing up its mapping product.
TomTom
TomTom is the market leader in mapping & navigational services with maps that cover 112 countries and more than 3 billion people. The company also has hundreds of millions of probes globally contributing to its traffic service. Effectively TomTom is a software company with mapping, traffic and location services as its key products. It sells this content through a variety of channels to many consumer and corporate customers.
At TomTom's Q2 2013 results conference call, management stated that 38% of TomTom's revenue came from License Deals and Content. The remaining 62% came from hardware, namely Personal Navigation Devices (PNDs) and the new growth area of GPS watches. Investors are bearish on TomTom due to the competition for PNDs from GPS services on smartphones. However the content and licensing side of the business is seeing growth driven by various customer groups.
The Automotive division sells services and content such as maps to car manufacturers world wide including the likes of GM, Audi, Ford, BMW & VW. The business solutions division helps corporate customers manage their commercial fleets through various different software programs.
The Licensing business unit leverages their content to deliver high quality digital maps to customers including other PND manufacturers, internet companies and importantly smart phone manufacturers. This is the division that licenses TomTom's all important mapping content to Apple, HTC, Blackberry, Mapquest amongst others. The list of TomTom's licensing partners is available here. At Q2 2013 results reported on July 25th, the stock was up 5% as the company outperformed with revenues declining by a better than expected 4% and the FY 2013 guidance of E900 - E950m revenues was maintained.
Ultimately TomTom is a content company with maps and traffic as its content which is then sold via various market routes. There is definitely significant value in their content as mapping and location services becomes one of the key differentiators for smart phone makers.
Apple needs to buy TomTom due to the strategic value there is in the company's maps. TomTom owns one of the world's three main mapping libraries at a time when mapping is moving to being a battleground product for smart phones. If a competitor were to buy TomTom, Apple would be left in a position where each of the three global map libraries would effectively be in the hands of one of its competitors namely Nokia, Google and whomever purchases TomTom.
The cost but most importantly the time to rebuild a global map would be extremely high, put Apple at a competitive disadvantage and feeling very vulnerable in the mean time. Note Nokia purchased Navteq which became Nokia's HERE mapping business for $8.1bn in 2007. The more recent comparison in Google's purchase of just the Waze app for over $1bn. Mapping assets are expensive to come by and take years to build.
Given TomTom has a market capitalisation of only $1.2bn with a Net Asset Value of $1.1bn, it is easy to foresee a strategic purchase by Apple in order to avoid the competitive nightmare of all three major mapping assets falling into the hands of Apple's competitors. The rationale for the acquisition of TomTom is driven solely by strategic and competitive reasons. This makes TomTom a great stock to own. The press is starting to pick up on this logic as witnessed by the May 17, 2013 article in the Wall Street Journal.
Apple integrated their software and hardware and produced amazing products. This is the overarching trend in the smartphone space. It begs the question if and when a hardware company like Nokia becomes the hardware division of Microsoft and when a software company like Tomtom become the mapping division of Apple. In the case of the latter, I think that time is soon. Buy TomTom.
Disclosure: I am long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Source: http://seekingalpha.com/article/1581572-apple-needs-to-buy-tomtom-asap?source=feed
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