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Garmin Takes Huge Risk With Smartphone

Priya Ganapati

SAN FRANCISCO -- Garmin(GRMN) just can't seem to catch a break.

The maker of personal navigational devices is gearing up to launch the Nuvifone, a slim touch-screen GPS-enabled phone that it hopes will expand its reach into a newer market.

But the company is likely to face a margin squeeze right out of the gate as it tries to price the device to better compete with smartphone makers like Apple(AAPL), Research In Motion(RIMM) and Nokia(NOK).

Garmin's greatest threat will be from Apple, which just raised the stakes by pricing its upcoming, faster 3G iPhone -- which also has GPS capability -- at $199.

Garmin hasn't disclosed its pricing plans for the Nuvifone, which is scheduled to debut either late in the third quarter or early in the fourth quarter of the year.

Garmin spokesperson Jessica Myers declined to comment whether the Nuvifone is already in production but said, "We are still moving ahead with the Nuvifone as we had planned and are displaying the products at tradeshows in the U.S. and Asia."

Analysts had been expecting a cost of $399, with a $100 subsidy to the company from service providers, but that's now likely to change. To compete effectively, Garmin will have to retail the Nuvifone at $199 in the U.S. -- a price that could affect its margins "mightily," says Oppenheimer analyst Yair Reiner. Oppenheimer doesn't have an investment banking relationship with Garmin but makes a market in Garmin, Apple and RIM shares.

"Getting to the viable price of $199 could involve considerable pain," Reiner adds. At a $200 subsidy from the carrier, Garmin is likely looking at a product margin in the mid-teens, estimates Reiner.

Compare that to Reiner's estimate of mid-to-low 30% gross margin for Apple's iPhone. Another analyst, Carl Howe, director of enterprise software research at Yankee Group, says the 3G iPhone could be Apple's most profitable product yet, with margins of around 50%.

Garmin's Nuvifone launch also comes at a time when the battle in the smartphone market is more heated than ever. RIM is set to launch the BlackBerry Bold, a 3G smartphone with a full keyboard, even as it is also reportedly working on a touch-screen model.

In addition, Sprint Nextel(S) is gearing up to bring Samsung's Instinct, -- a 3G touch-screen phone -- to its users. And Apple's new 3G iPhone is scheduled to launch on July 11.

The broader economy alone -- crimping consumers' appetite for tech toys -- makes this a difficult time for Garmin to be getting into the business. But throwing in the intensifying smartphone competition and pricing pressure could revive investor fears that have surrounded the company's personal navigation devices, where growth has slowed and prices continue to fall steadily.

Shares of Garmin have lost nearly half their value since the beginning of the year. On Tuesday, shares fell more than 5% to close at $43.48.

In 2006, the stock climbed nearly 73%. But a botched attempt to acquire mapping supplier TeleAtlas, increased competition in the market and resultant fears of sustained pricing pressure took their toll on the valuation. Garmin rival TomTom eventually acquired TeleAtlas for $4.3 billion and closed the transaction earlier this month.

Garmin's smartphone strategy is in line with the company's goal of expanding into newer markets, says Reiner. Garmin started by offering marine GPS units, expanded into aviation, outdoor and fitness segments and finally into navigation systems for automobiles.

The handset market is naturally the next step. "What they are trying to do is exploit a niche that they believe is not being addressed," says Reiner. "There are a lot of handsets that have GPS functionality but we have really not seen any phone that offers turn-by-turn dynamic navigation as the heart of the device."

Initial reviews for the Nuvifone have been mostly positive, with the device's user interface gathering praise. "It's obvious that the device is very GPS-centric with tons of icons for applications to help you find nearby points of interest," according to a blog poster in Laptop magazine who played with the device at the ongoing CommunicAsia conference in Singapore.

But given the economy and coming competition, Garmin will need more than a few positive reviews to win over consumers -- and win back investors.