TomTom maps the future

The market leader in SatNavs has had remarkable success, but will it be able to maintain its position on the road ahead?

by Rhymer Rigby
Last Updated: 23 Jul 2013

You see them everywhere nowadays - in cabs, in white vans, in sales reps' cars ... They sit there quietly on the dash until, suddenly, a curiously demonstrative female voice pipes up: "In 200 feet turn left!" We are, of course, talking satellite navigation (SatNav) systems for cars. And the company best known for them, Amsterdam-based TomTom, is one of the great personal electronics success stories of the past few years. Like Bluetooth earpieces, its products have become a leitmotif for those who work in their cars, and yet a scant half decade ago the market for them barely existed.

For those unfamiliar with the current must-have dashboard accessory, SatNav represents the fusion of global positioning systems (GPS) - which determine the user's position on the earth using signals from geostationary satellites - and handheld computers. The reason that this is an idea whose time has come is that while GPS has been popular among outdoorsy types for at least a decade (and the military for far longer), only in the last few years have palmtop computers become powerful enough to hold maps of entire countries. The result is a device that can tell you where you are on a map and give you 'turn-by-turn' directions from A to B.

The story starts with Palmtop, a company founded in Amsterdam in 1991 by Peter-Frans Pauwels and Pieter Geelen to develop software applications for handheld computers; products ranged from personal finance to games.

In 1994 Corinne Vigreux joined Palmtop from Psion and, in 2001, her husband, Harold Goddijn, former CEO of Psion, became the fourth full partner. At this point, the company decided it needed a new name and plumped for TomTom.

The name doesn't mean a great deal. It was simply something that was available in most markets; it was catchy and the native American drumming connotation, which suggests communication, was a positive.

The crucial breakthrough that allowed the products we know today to be developed was the introduction of the iPaq (a handheld computer). "It was the first product where you could see that there was a potential for enough storage for a reasonable sized map, although at the time it still wasn't the whole country. It would have been the south-east of England or similar," says TomTom's development director, Mark Gretton.

It was this storage combined with sufficient processing power to render the map, move it in real time and receive the GPS signal that TomTom had been waiting for. Before this there had been plenty of mapping applications, but they were not smart in the way that GPS real-time systems are: although well received, they were not much more than electronic A-Zs.

"The breakthrough," says Gretton, "came when we realised that we could do everything that a real turn-by-turn system built into a car does." Navigator One was the first product, but it was basically just a piece of software. The trouble is that consumers do not want to pay very much for software, so "we took the software and put it with a GPS receiver and a kind of mount to hold the PDA (personal digital assistant) and the various cables".

Although this wasn't particularly elegant, it was a solution. "The whole dynamic changed because it was a complete navigation system - our sales exploded and the cost per box we could charge was greatly enhanced because it was a bit of hardware, rather than just software you downloaded and copied."

At this stage TomTom did not buy the PDAs; the bundling (putting together and selling the PDAs and the navigation equipment in one pack) was done by the distributors. After approaching the PDA manufacturers, TomTom started to handle the bundling itself. A survey done at this time threw up a surprising fact: some 70%-80% of customers bought the bundles rather than the SatNav kit as an add-on for existing PDAs. Clearly, they wanted an all-in-one solution.

This was the point, in 2003, at which Gretton was brought on board from Psion, where he had been CTO. He explains: "Harold approached me and said: 'I've got this navigation stuff and it's fine, but it's all bits and pieces'.

What's more, pocket PCs are rather fiddly things with complex menu systems and not best suited to car drivers, who probably don't want all the extra functionality. Something simpler and easier would be better. I could see that there was a real opportunity."

The devices were available in high-end cars, but the equipment cost thousands.

So Gretton joined the board of the small company of 30 people, with no UK office and no engineering facilities, with the mission of delivering an integrated system that did everything people wanted to do, in a dedicated device that was easy to use - and at a price that appealed to everyone.

"We were a very small team consisting of one electrical engineer, one project manager and myself," says Gretton. What the team did have, though, was Gretton's manufacturing contacts in Taiwan from his days at Psion, which meant that the Taiwanese designers and manufacturers took TomTom seriously despite the business's tiny size.

Crucially, says Gretton, "we got the vision absolutely right. Navigation was clearly a popular application - and one we could bring to a wider audience. The whole process took nine months from start to finish, from me joining to launching to the press, which I'm very proud of. That was my first year at TomTom."

Rather appealingly, Navigator's successor, the TomTom Go, was designed in a garage in a mews in Kensington, proving that the myth of the garage start-up may still have some currency. Go was launched at CeBIT, the IT and technology show held in Hanover, Germany, in May 2004. "Everyone was very surprised. It was a little software company that was doing OK. I knew I had done it all right, but no one was taking us very seriously and suddenly we had Garmin (US manufacturer of GPS systems) all over our stands taking photographs."

Soon afterwards, Garmin, now TomTom's biggest competitor in the US, approached Goddijn and asked: "How much do you want for the company?" Gretton laughs: "Harold said: 'We want to do this for ourselves'. I think those were the exact words he used."

TomTom's competitors may have been rattled, but a lot of people still thought they were mad to get into hardware. However, says Gretton, as a 'product guy' through and through, he disagreed. What they were offering was something far simpler than a PDA and the marketing message was built around the ease of use. "Having spent much of my working life explaining PDAs to people, this was a great joy - far, far simpler."

It helps, he adds, to understand quite how novel all this was back then: PND (portable navigation device) did not exist as a term before the CeBIT event in 2004, and the TomTom stand was stuck somewhere out by the screen printing machines as it did not fit into any category. CeBIT 2004 marked the beginning of the vertical take-off. "I wrote a business proposal," says Gretton, "based on selling 100,000 units over the lifespan of the product, and by the time we got to summer we'd sold that many."

By the time the first TomTom Go was phased out, they'd sold 350,000.

And that was just the beginning. The following year, when everyone else was starting to launch PNDs, TomTom could offer Bluetooth, hands-free and online services. Even at the launch event of the new range this year, he says he still feels the business has a big jump on the competition and that running as fast as possible to maintain this is key to its success.

This is clearly something the markets agree with. The company floated in 2005 and was 10 times oversubscribed; the float price was EUR17.5 and it's currently at EUR28, which values it at about EUR4 billion. Not bad for a business that until very recently had employees numbering in the low tens; it now has 450.

Of course, Gretton (and no doubt most people from TomTom's early days) could probably retire now. But it's pretty nice working in a business that is the market leader, having stuck to its guns. And besides, as Gretton points out, they've just moved into new offices in London. But it does beg the question - what now? Well, for starters, the company is very well placed. Indeed, in most of the markets in which it operates, it commands a 60%-80% share, the exception being the US. With its dominant position, it is often compared with that other consumer icon, the iPod.

Fiscal 2005 was the company's annus mirabilis. Revenues rose four-fold to EUR720 million, the number of integrated units sold rose from 250,000 to 1.7 million and net profit rose seven-fold from EUR28m to EUR143m. It is, to put it mildly, unlikely that the company will ever enjoy a year this good again. Still, Gretton sees no reason why growth of 30%-40% shouldn't be possible. "We are now on that mass adoption curve and the growth will still be millions and millions."

Moreover, penetration remains pretty low - about 8% in the UK and no more than 15% anywhere - so there is little worry that they will run out of customers any time soon. "We are," he says, "very focused on keeping our gross margins around the 40% mark, which we can do as long as we are market leader."

And, of course, there will soon be a lot of repeat customers. The early adopters are now starting to upgrade and while no-one expects the lifecycle to go down the route of the mayfly-like mobile phone, it is entirely reasonable to expect things to speed up a little.

But the company recognises that in the electronics market, yesterday's novelty is today's classic and tomorrow's commodity. Again there are parallels to be drawn with the iPod. TomTom has moved away from a single offering to a variety; thus, there are specialist devices for motorbikes, a simple entry-level plug-and-go device, and the all-singing, all-dancing models at the top of the range.

There have also been incremental improvements. "For instance, we've made a bigger display, but reduced the overall size of the product. One of our more sophisticated devices has a 20-gigabyte hard drive in it; there are features such as situational awareness, where the volume can be adjusted if you're in a noisy car going fast, or the backlight can be dimmed if you're in a tunnel," says Gretton.

However, there are other, much more interesting developments on the horizon.

Last year TomTom bought German company Datafactory, whose business is the tracking and tracing of vehicles. As a result, it has now launched TomTom Work. Essentially, this allows the business with a couple of vans to have the kind of control currently enjoyed by fleet managers. "What we've done is take the same philosophy that we used for personal navigation and said: well, that's valid in a tracking and tracing world as well."

Gretton envisages that TomTom Work will be used by people such as builders and small businesses - the kind of firms that have somewhere between two or three and a couple of dozen vehicles, although there is no reason it shouldn't be used for far larger applications. "It's based on our consumer navigation device, but there is a link to a black box that does the tracking and tracing; then there's a link through to a website, so you just put the black boxes in and off you go."

Then there's the rather intriguing possibility of using real-time data.

This looks at the truism that someone with local knowledge, say, in London, will always be able to find their way around faster than someone with SatNav. In a manner analogous to the way that a relatively small number of set-top boxes can give an accurate picture of television viewing habits, a small number of cars that regularly signal back their positions on their routes (allowing speeds to be calculated) will let the company build up models, rather like weather forecasting, of how roads behave at certain times. The ultimate goal is a device that not only knows where you should go, but can also predict what the traffic conditions are likely to be.

TomTom trails Garmin in some markets such as Korea, China and Singapore, as well as the US. Garmin recently sued TomTom for patent infringement, although it indicated that it would settle out of court; TomTom, however, has said it will defend itself vigorously. The UK is seen to be 12-18 months behind the US in the use of SatNav, and there has been speculation that Garmin's suit is as much about defending its turf as anything else.

This minor cloud aside, things look pretty good for TomTom. Indeed, its main worries are curiously positive ones: namely, that its previous growth rates are almost certainly unrepeatable and that it has to maintain a commanding lead in most markets. Most companies would kill for such problems.

But it is also difficult to predict the future of a market that didn't exist five years ago: crystal ball gazing is a difficult art, not least because the pace of technological change has been so fast.

To predict where things will be in another five years might require a map that even TomTom's software engineers would struggle to produce.

HISTORY OF GPS

Where am I? The question is simple, but the answer hasn't always been. During the WW2 and the Cold War, the US Navy experimented with a series of navigation systems to meet the navigational needs of nuclear submarines. Transit, the most advanced system at the time, was the first to rely on satellites, five of them located in polar orbits.

In 1973, the US Department of Defense approved plans for the most comprehensive satellite navigation system, Navstar GPS (global positioning system), a constellation of 24 satellites placed in 12-hour orbits. The first satellite was launched in 1978 and full capacity reached in 1993.

At that point, the US decided to make the technology available worldwide for commercial and civilian uses, with one reservation: it retained the right to take the network down in case of a military emergency. This had already happened during the first Gulf War - the first time the US army had used GPS - but with minimum disruption since there were few commercial users then.

As the popularity of GPS for commercial applications grew (surveying, civil aviation safety, emergency services and transport navigation), its origins as a military tool, built at a cost of $12 billion, became increasingly controversial. Its reliability and the restrictions imposed on civilian access to the highest levels of accuracy were questioned.

Partly as a reaction to such controversy, in 2003 the EU and the European Space Agency decided to launch their own satellite navigation system, the EUR3 billion Galileo project. Intended primarily for civilian use, Galileo is not subject to military restrictions and the full signal accuracy - within a metre or less - will be available to all on completion in 2010.

China, Israel, India, Morocco and Saudi Arabia have since joined the Galileo programme, and the EU and US also signed an agreement in 2004 to make their services compatible and allow users access to both.

1991: Peter-Frans Pauwels and Pieter Geelen found Palmtop to develop business-to-business software for mobile devices, such as dictionaries, personal finance products, games and route planners

1994: Palmtop specialises in the handheld market. Corinne Vigreux joins the company from Psion to market applications globally

1996: The handheld market expands and diversifies with the launch of the Palm Pilot and the appearance of the first Microsoft-based devices

1999: Palmtop teams up with Ericsson to develop a pioneering network server-driven navigation solution in which the computing power sits on the network rather than the phone. The system is licensed to major mobile networks in 2001

2001: Harold Goddijn, former CEO of Psion Netherlands, joins and becomes the fourth full partner. The name TomTom is adopted

2002: TomTom Navigator, the first truly mobile in-car navigation solution, is launched

2003: TomTom Navigator 2 hits the market. Mark Gretton, creator of the original Psion Series 3, joins the team to develop an all-in-one navigation product.

Alexander Ribbink, former vice-president of brand development at Mars, joins TomTom as marketing director of the growing range of products

2004: TomTom Go, the portable stand-alone car navigation device, is launched in the spring, and TomTom Mobile, a new navigation solution designed to turn smartphones into in-car navigators, comes out in the autumn

2005: TomTom goes public on May 25 and is listed on Euronext Amsterdam. The IPO raises about EUR117m

2006: On 1 March TomTom launches a new range of integrated navigation products, with new and updated Plus content and services. It also announces the launch of TomTom Work. On 2 March, TomTom is added to the AEX index.

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