Original URL: http://www.theregister.co.uk/2007/10/05/nokia_navteq_deal/

Doubters fret at Nokia Navteq deal

But the logic is unassailable

By Faultline

Posted in Mobile, 5th October 2007 15:06 GMT

Comment Nokia has spent the greatest part of its life being misunderstood by US stock analysts, and its move to acquire US mapping company Navteq, for a colossal $8.1bn, at $78 a share, is no exception.

Navteq had revenues last year of just $581m but is on track for about $800m this year, with its last quarter up 49 per cent to $202.3m. Most of that gain has been in portable devices, particularly wireless devices. Its net income and cash position has grown at around the same rate.

But financial analysts are still wary of the deal and are talking it down. However, if Navteq performs at that same level for just one or two more years, the price will have been more than repaid, and if it had paid less, there would have been counterbids.

At Rethink we spent the best part of 2003/4 arguing with finance analysts who said devices such as mobile handsets would inevitably have competitive price erosion, and therefore Nokia, as the biggest such device maker, would have the biggest erosion.

Instead Nokia, with the biggest market share in global handsets, has driven down its costs faster than its average sale price has fallen, increasing margins and generating piles and piles of cash – it has $12bn in the bank prior to the deal - which is best spent on essential services acquisition. Also, as more complex networks emerge, Nokia has been able to sell more complex devices at the higher end. So where Motorola has suffered from device commoditisation, Nokia has evaded it and resisted further price erosions.

But despite this, Nokia has changed its plan to become the handset platform of choice into the mobile internet platform of choice, and we would think that an acquisition of this nature gives it the stature to offer its own location based services without a three year run at the problem – which is what it would take if it built its own mapping division from scratch.

But instead of applauding, the big question being asked this week is why Nokia paid so much for Navteq. The result has been a drop overall in all handset makers' share prices, and talk of core Navteq customers like GPS specialist Garmin, and Google and Yahoo! Maps, going elsewhere for their maps, or buying a rival so they are not dependent upon Nokia.

One reaction was that Garmin must counter bid for Netherlands based Tele Atlas, which has a $2.6bn takeover offer on its plate from GPS player TomTom. Others are saying it's too late for Garmin and the bidders for Tele Atlas are likely to include Microsoft and Google. Investors were ditching TomTom shares early this week at the prospect of a bidding war.

There are other global mapping companies, but we need to think about just what it has taken to get this far in offering positioning systems for the handset. GPS chips and their antenna needed to shrink and someone needed to work out the revenue opportunities and how to bring it all together.

We have been talking about systems which know where a cellphone owner is and deliver relevant advertising, since we first heard that 3G would be able to offer Location Based Services through triangulation. That concept has gradually transmuted to using GPS, and chip makers are predicting a heyday over the next two years, as top end cellular devices all come with working GPS systems.

It was always assumed that using a 3G triangulation process to find a location meant that these services would come from cellular operators who would own the triangulation data.

Now it's clear that this is not the way to bring that to market, a handset maker like Nokia can offer "over the top" services without any reference to a operator, something that has typified its stance in recent weeks as it pursues an orchestrated transition into a mobile portal player with its music store, its advertising acquisition Enpocket, DVB-H TV services and now this move into maps.

This week, Nokia even added the ability to offer video from CNN, IBN, Jamba, Sony Pictures and others through its Nokia Video Centre, to go with YouTube and Reuters deals already announced, delivered to its N95 devices – again without reference to the video strategies of cellular operators and initially pushed only in the Asia Pacific region.

Someone is going to combine handset location with highly localised advertising, and now Nokia is in pole position to be the first to get there, before Google and Microsoft – both hell bent on dominating mobile advertising – have made their first steps. If we added localised search to the equation we would have a complete strategy.

It was essential that Nokia at least tried to stave off the combination of Google Maps and advertising on a handset, and in order to be successful it needed to buy the mapping company that had the biggest global reach in terms of maps and population covered by those maps, which in Navteq's case is some 69 countries, so it had to win Navteq, hence the high price.

How many more companies of this type has Nokia got to buy we might ask? Nokia understands that there is only one internet, and that where a service ties up both mobility and the internet, then these are the only new games in town.

The only other issue is whether it needs to buy or partner on a search engine which has to add the mapping data to the search and raise search advertising revenues from vendors that are physically near the mobile search user. It can either compete with Google and MSN and Yahoo! on this, or partner one of the weaker ones to help support it against Google, or do its own thing.

What Nokia now has to do is smooth over ruffled feathers and convince existing clients that it will not undermine their services, and that they should stay with Navteq. In that way it will make some rival device makers, as well as Google and Yahoo reliant on it and begin to change its relationship with these constituencies from rival to customer.

Failure do to that successfully would mean the great bulk of that $8.1bn would be wasted. But given just how much work goes into the Navteq mapping process, employing as it does 3,000 people, we can’t imagine any customers dropping its maps for an inferior service just to remove dependence on Nokia.

"Location based services are one of the cornerstones of Nokia's Internet services strategy. The acquisition of Navteq is another step toward Nokia becoming a leading player in this space," Nokia president and CEO Olli-Pekka Kallasvuo said.

"By joining forces with Navteq, we will be able to bring context and geographical information to a number of our internet services with accelerated time to market. We also look forward to maintaining and enhancing the services and support provided to Navteq’s existing and future customers".

Copyright © 2007, Faultline

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