In response to Phil Town's last post about Garmin, Dave H had two concerns about its moat:
I used to love Garmin, However I'm concerned about the moat for 2 reasons.
1. They don't own the software (recent battle with Tom Tom)
2. All cell phones will soon have GPS. Leaving only the Auto/Aviation/Marine business at low margin negotiated prices with those manufacturers.
How do you see the moat?
Thanks.
Here's what I think:
Dave H,
Well, this is where really knowing this marketplace is the key. And I'm going to confess that I'm no expert. Still, here's my view if only to give you some things to dig in on:
1. The lawsuits are about TomTom swiping Garmin software. Both sued each other. It's a stand off. And seriously, have you seen TomTom compared to Garmin? If Garmin swiped it from them, how'd they make it so much better? This should tell you that TomTom swiped it from Garmin since the rule is that if you steal, you steal from the best. This law was set when Microsoft swiped Apple's GUI and it remains in effect.
2. You are right. Cell phones are going to have GPS and it's being supplied by Garmin.
3. Garmin is the industry leader in four segments. They own 90% of the General Aviation GPS and 60% of the backcountry GPS, most of the boating GPS and a big chunk of the auto / cellphone GPS.
4. I like to have the best stuff and Garmin is the best stuff.
5. The best stuff does not always win (again, see Microsoft v Apple) unless the best stuff is owned by the biggest company. Garmin is the industry monster with double the revenue and three times the earnings of #2 TomTom.
6. TomTom competes on price (thus the lower net margin). Never own a business that competes on price. Garmin is the high priced competitor. With high price comes high margins. With high margins comes high profits. With high profits comes the ability to crush opponents in economic downturns when the low price guy gets forced by the big guy with big margins to sell below cost to compete and then its bye-bye.
Moat is about brand but it's always backed up with the Big Five numbers plus debt. Garmin has no debt and simply phenomenal big five.
When there is lots of money the TomToms of the world have room to play. There is enough market to go around. When the crunch comes (and here we go) the business with the biggest moat wins and the rest lose.
When it comes to GPS (which is about not getting lost on the road, in the air, on the ocean or in the wilderness - fairly mission-critical stuff), buying the cheap guy makes about as much sense as going for a cut-rate heart surgeon. No pilot would do it. No explorer would do it. No boater would do it. So the Garmin brand really means something life-critical in a way that TomTom does not. Even the TomTom name is a joke... and no one wants a joke for serious GPS work.
So yeah, as far as I've dug in, I think Garmin has a good brand moat and its going to get a lot better during an economic crunch.
Now go play.
