Deutsche Bank analyst Jonathan Goldman released analysis on Tuesday that found TomTom is going to price its new model One 125SE at $59 at major online stores like Walmart.com (WMT). This is $20 below Garmin's lowest price point, likely forcing Garmin to come down on price, as well.
Goldman writes that the One 125SE is likely a "costed down" version of the One 125 which debuted last November at $180 and was available last December for $85. At $59, the price drop is either 67% or 33%, depending on whether it's compared to the original price of last year's model or the later price.
The money quote? "This is not encouraging for the whole category," writes Goldman. "At $59 this device is almost certainly priced below the bill of materials. Thus, TomTom is probably losing money on each one even if WalMart is only marking it up 5%."
Now, let's think about this for a minute. GPS devices are, by and large, interchangeable. There is very little customer brand loyalty. People buy based on screen-size and, to a more limited degree, feature sets -- all of which are more or less equivalent across the brands. At the same time, customer expectations on price are not elastic. Once people know that they can buy a GPS device for less than $50, then it becomes very hard to convince them otherwise.
Even more troubling for the big guns, in a market where there are still more tha a dozen major makers of personal navigation devices, its very, very hard to stop a cascading price reductions effect. So if TomTom goes below $50 this season, then expect others with weaker brands to quickly follow.
Lastly, there is the Amazon-Walmart.com wildcard. These giants are swinging price axes wildly and reducing prices across multiple categories. Amazon (AMZN) has even been doing this for popular devices, dropping the price for the hot-selling Palm (PALM) Pre smartphone.
So if the e-tailing giants decide to have their own little price war with GPS devices, Garmin and TomTom will ultimately suffer due to reduced customer expectations. It's important to note that on eBay (EBAY), refurbished high-end GPS devices are now readily selling for less than $50, and in some cases, less than $40-- and with one-year warranties.
True, Goldman notes that Garmin has done a better job of controlling price erosion, keeping the annual decline for its door-buster offerings (the signature GPS sale offering for Black Friday) at a more modest year-over-year reduction of 25%. But the very same door-buster that was launched more than a year ago at nearly $200 and sold for $120 around the holidays is now selling for $79.
So the year-over-year decline in Christmas pricing is not painting the entire picture. The reality is, GPS devices lose more than 60% of their value within a year and, like computers, commodity hardware products are getting so cheap that it will likely be difficult for Garmin, TomTom and others to maintain their already declining profit margins. This is not even factoring in the Google effect, of course, which could erode margins further due to its handset-based GPS turn-by-turn navigation's low-low price of $0.
