Why SIRF Can Still Succeed in a Rapidly Commoditizing Business

Folks who follow the ups and downs of SIRF’s stock price in the hopes that it goes up more than down, have likely heard many time more than they care to admit how SIRF is a one trick pony in the rapidly commoditizing and increasingly competitive business of producing GPS chipsets.

I recall similar arguments about both Garmin and Navteq for a quite a while, about all the competitors that plan to enter Garmin’s PND market or how super high resolution photography would tank Navteq’s old fashioned map making business. Meanwhile shares of both companies have continued to see tremendous success despite these challenges which indeed have materialized, yet been slow to hamper either Garmin or Navteq’s growth. They succeeded because 1. The did one thing, and only one thing and did it well and 2. the overall market was growing so fast that any bumps created by competitors were smoothed over by the torrid overall growth.

Those arguments of the intense competition in PNDs is what led me to follow SIRF in the first place… logic being: heck if I know who will win the PND race, but they’ll all need top of the line GPS chips to have a go at it.

Keeping their technology at a premium price seems like the right approach for SIRF in the face of oncoming competition. What's the alternative? Drop price on even the latest and greatest models to keep market share up?

It’s much easier to lower prices than to try to raise them again later with pretty much anything, so going low doesn't make sense to me. SIRF still have basic chipsets to sell to low end folks who just want to have a line item in marketing that's says "w/ GPS inside" so they're not walking away from that market. Instead they're trying to keep their de facto standard for more leading edge and expensive devices that require 1. higher performance and 2. ease of integrating GPS with other things they want to do with the device, which for many manufacturers is a huge costs savings over multi sourcing components and testing to be sure they play together nicely on the device.

Here are five reasons why I think SIRF still has many bright days ahead of it:

1. Huge Category Growth Ahead
What’s that saying, a rising tide lifts all boats? LBS is a nascent market, with in dash navigation not even hitting mid single digits in North America let alone any other mass adoption of location awareness services. PNDs (personal navigation devices) are growing 100%+ a year with similar growth outlook ahead for the immediate future, and GPS chips seemingly going into everything these days, from portable gaming systems to package tracking and vehicles of all sorts.

2. Market Leadership Position
For folks who live and die by performance and features like PNDs, and OEM solutions (75-80% of SIRFs current biz), I just don’t see them trying to save $3-4 dollar on the GPS chip and risk poor performance for such an important component, particularly since most of these devices will retail in the hundreds of dollars. I think they’ll tend to stay with the recognized market leader. Reminds me of the early days of Internet ad buying, no one ever got fired for buying Yahoo, but if you recommended 100Hot.com, it was a heck of lot more work and well you were taking your chances. Same with recommending IBM computers in the 1980s.

3. Handset Market Will Be A Big Growth Driver
Only 20% of SIRF’s current biz is cell phones, and GPS in handsets is becoming more a necessity rather that a luxury. For one, U.S. based GSM carriers selected device based solutions for adhering to government e911 requirements, which for now means required GPS chipsets. Typical handset churn is something like 18 months so all new replacements phones will need GPS. Europe and other countries are also looking at mandatory e911 requirements. Also carriers and MVNOs are looking for ways to raise ARPU through data services and will increasing want LBS as a way to accomplish this. The U.S. is way behind in adoption of LBS applications, and if they ramp as has been seen in Japan and Western Europe then there is huge potential growth there in terms of revenue, and you need GPS chipsets in phones in order to earn this money.

4. Software based alternatives will likely supplement GPS rather than replace
Software based positioning solution are all over the place… if it propagates a signal in any mass way, someone has tried to triangulate off it. But at the moment many are commercially un-viable. One big structural problem with many software based mobile solutions is that they often require 'talking' to the network to get data points to triangulate from, talking to the network means paying big money to a mobile carrier or satellite service provider which makes them economically unattractive to many. In reality for the foreseeable future it’s likely these technologies would just be used as compliment or backup to traditional GPS rather than an outright replacement. And guys like SIRF should in theory be first to know of anything that's making traction, since enabling location awareness is their sole business. I'd expect that they'd more quickly adopt alternative location awareness technologies into a single solution more quickly than someone not 100% focused on the sector.

5. Major online players embracing location and mapping in a big way
Digital search guys are looking at location awareness quite aggressively. Google, Yahoo, Microsoft, and Ask are all investing and developing significantly in mapping space. It's just a matter of time before people will want to see more real time stuff around those maps… and local advertising is new fertile ground for expansion for folks like Google who will need to aggressively identify new growth areas in the form of local and mobile search.

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Is the Map All That? Google, NAVTEQ and Imaging America

There was an interesting blog posting on Directions Magazine that is essentially a comment by a Google exec saying that they weren’t interested in bidding for Navteq because they felt that if they wanted to get into the digital map making business they could do so much more economically by opening up map making to the masses and develop a wiki map program to build maps through their Google Earth Platform. There is an interesting article over on O’Reilly Radar about how Google already used ‘crowdsourcing’ to develop maps in India.

Google currently sources data for their maps from a large variety of sources, but I don’t think it should come as too much of a surprise to see Google make their own maps in the very near future if they so wish. With the all the street level initiatives under way as well as the recent acquisition of Imaging America many of the pieces are there for Google to begin building build their own navigation maps from data they already own or can now more easily acquire. For simple road navigation the existing maps are likely more than adequate and my guess is that NavTeq and TeleAtlas have priced the maps low enough for online players like Google that there is not a financial motivation for developing their own. Only 5% of Navteq revenue comes from Internet and Wireless, which must means many orders of magnitude smaller revenue on a per-map render or user basis that in the auto segment… my guess is that this is in part a defensive maneuver, to keep folks like Google from turning from a customer into a competitor.

One short year ago, Navteq shares were getting beaten up in part because of concern by Wall Street types that technology such as the very high resolution photos that Imaging America’s equipment makes possible, would soon mean that detailed maps could be created by a variety of new market players. Buyers of the images would simply need to use the images to build their own maps using a few folks in a back office somewhere using some CAD software rather than via the more expensive and time consuming process of driving the nations’ roadways. That threat still exists, particularly for consumer navigation quality maps, but I don’t think that is as interesting to Google as the acquisition of previously unmapped items ranging from fire-hydrants to pine trees and street signs which will continue to feed the need for more and more data that is Google’s lifeblood.


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Digital Location Management Inc.

I was looking through the Google Maps terms of service and legal notices yesterday to see if we could use Google Maps for a project and uncovered a few things of potential interest.

First, the geo encoding is performed by Navteq in case anyone was wondering.

Second, besides the usual suspects of Navteq and TeleAtlas, I was surprised at the number of other map related resources that are working together behind the scenes to power Google Maps… many not so well known names such as Euro Geographics, Top Map and GeoNext.

Third, also interesting to note that the foundation of business POI data seems to be from infoUSA and Acxiom… but Google of course adds to this through both business listings submitted via the Google Local Business Center and its patent on scraping address data from web pages.

I guess with all these different sources, I shouldn’t find it surprising that I can often more reliably find a local retail businesses location through a search on Google Maps than through the retailers own web store locator.

For anyone looking for a new business to start, I can see this area of Digital Location Management developing into a full blown cottage industry, as we’ve seen with search engine optimization (SEO).

As the digital world turns more and more to finding things via maps, whether on the web, a PND or mobile phone, the reliable representation of retailers on those digital maps will become increasingly important and a consultancy/management market will need to be created to help anyone with a retail presence in the bricks and mortar world to ensure that their locations are properly reflected in all the various digital map data sources for such information, and to ensure that retail location information is accurate and updated.

What do you think?

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In light of TomTom's recent acquisition of TeleAtlas, the obvious question on everyone's mind is... what about NavTeq. There is a good post over on Seeking Alpha with some speculation on what may be in store for them and the potential winners and losers.
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