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Nokia Finds GPS Maker Navteq To Its Liking: Here's Why

Source: nokia.com

The numbers are flying fast and furious today: Nokia snapping up GPS mapping leader Navteqfor a staggering $8.1 billion. Many on the Street are scratching their heads at such a high valuation but wow, dig a little deeper and Nokia may have stumbled upon something that other handset makers missed, or weren't willing to pony up the cash to make something ambitious and forward-thinking really happen.

To wit, lets look at GPS first. iSuppli says the market is booming; 70 million units sold last year, and an expected 250 million units by 2011. This will be a $16.5 billion consumer electronics sector by 2013. And just about everyone I'm talking to says GPS will be the "it" gadget for this year's holiday shopping season. Personal Navigation Devices should grow four-fold by 2010.

Handset makers are also seeing extraordinary growth. Research in Motion is going gangbusters; same with Apple and its iPhone. Palm just released "Centro" last week, meaning smart phones are getting cheaper and consumers are looking for new capabilities at better price-points for their pockets.

Why is the Nokia deal for Navteq potentially a stroke of genius? And why did the deal command such a high premium? Nokia is in a pickle right now: cool handsets and in break-neck competition with several capable players. The company could partner with the likes of Tom Tom and Garmin and offer up a me-too mapping device and try to jump on the GPS bandwagon. It wasn't likely going to shell out $30 billion for Garmin, which has seen quite the meteoric rise these past several months; its market cap jumping 250% over the past 12 months. Nokia also runs the risk of offering up its own mapping services on its handsets and angering service providers like Verizon and AT&T that are trying to offer services of their own. That's the "pickle" I was talking about.

So Nokia took a decidedly bolder step instead, and went straight to the source. By buying Navteq, Nokia doesn't have to mess with pesky service providers; or shell out billions more for another hardware maker that may or may not successfully be folded into a new Nokia handset.

Instead, the company buys one of the world's two mapping software companies and will make its money from ongoing licensing fees Navteq generates. Why partner with Tom Tom or Garmin when the two are already shelling out big licensing fees to Navteq? Now they can just write their checks to Nokia instead. Ironically, the same goes for RIM and its BlackBerry. BlackBerry's mapping is based on the Navteq data. So now, Nokia gets to collect licensing fees from one of its biggest competitors. Nice trick.

So yes, it costs Nokia a little more to go this route, but it end runs having to deal with pesky consumers (something Nokia has had trouble with anyway) and it end runs any "service lager heads" the company might face with service providers. Which Nokia needs in order to enjoy any sense of marketplace success.

Pablo Perez-Fernandez at Global Crown Capital tells me that, "It gives Nokia a key ingredient in the future of GPS. All of those guys are nervous. Nokia will become a major distributor. Nokia will control one of the only two global providers of digital maps. Nokia intends to become a major GPS player in 2008."

Just not in the way we might have all thought. In a better, more lucrative way, instead.

Questions? Comments? TechCheck@cnbc.com