Thursday, 18 October 2012

Why Apple should buy TomTom

Edit (19-Oct) - I've topped off this mini-series by writing a second piece on the valuation issues around a potential deal. See the new post here.

Happy anniversary

It's been a long month for Apple

Tomorrow marks a month since the release of iOS6, along with its universally derided mapping app. I have written extensively about why this was a retrograde step and what exactly is wrong with the app.

In the meantime Apple has made its apologies, gone on a mapping recruitment drive and begun fixing some of the more egregious errors. However I don't think that is enough. The key message from my analysis was that there were fundamental issues with the data and the engine couldn't be easily fixed. Also this is only the presenting issue.

The underlying problem Apple is grappling with is that mapping is simply a harder, messier business than they thought. Particular when their biggest competitor is going from strength to strength, and the third guy in the room is no slouch either (at making maps I mean. damn useless with phones though!).

In short Apple is under pressure both to accelerate the patching of the existing maps, and acquire some heavy duty mapping expertise.

Which is why Apple should buy TomTom.

What does TomTom offer?

The thing to understand is TomTom isn't just about the digital map. The map itself is, of course, useful. It's a database containing vector-based information about roads locations as well bunch of other  datapoints (e.g. one-way systems, available turns at junctions, traffic frequency at different times of day etc.). The basic database for the US + Western Europe is a few gigabytes in size and would fit nicely on a microSD card.

But the value goes deeper than that. After all if it Apple already licence this map data. But TomTom owns much more than that.

As important as the map is the network of relationships behind it. What most people don't realise is that the majority of digital mapping isn't done with cars - its done by getting the underlying GIS data from thousands of government agencies, utility companies and transportation companies and integrating it together. The hard bit about building a map isn't actually driving the roads - its about getting that data. It is noticeable that Google built out its US map much more quickly, because it could start with a core set of federal data rather than having to go to multiple providers. In contrast its build-out in Europe has been much slower as its been dealing with a much more fragmented market and much tougher regulator landscape. TomTom of course has had all these relationships for years, and this represents significant hidden value.

TomTom's Mapshare Reporter
As important as the relations is the people. Again although TomTom has seen swingeing job cuts of late it still employs hundreds of experienced mapping experts. These guys don't simply grow on trees; to assemble a comparable outfit from scratch would take years. This represents a significant asset.

Finally there are is a raft of software and services which TomTom has built on top of Tele Atlas. In particular the database of Points of Information (PoIs - everything from service stations to restaurants and hotels), its Mapshare portal for crowdsourcing map updates, the routing algorithms to map out a journey and HD Traffic, its live traffic offering.

I think about it like this - just licencing the map is like buying an MP3 of the White Album. But acquiring TomTom is like acquiring the original score, with the Abbey Road studios thrown in to boot.

Note I am pretty much ignoring TomTom's (still significant) satnav hardware business. That's not to say its go zero value, but it has zero value to Apple.

The map is what matters.

Three reasons why Apple should do the deal

So why should Apple buy TomTom. I think there are three big issues to consider.

1) It accelerates the improvements to the current map

In my previous post I outlined identified three problems with initial release of iOS6 maps. a) wrong or incomplete map and PoI data, b) distorted or missing 3D images/textures and c) poor quality traffic routing or search queries. I also concluded that this isn't something Apple is going to be able to fix overnight, either because they are pretty fundamental engine issues or because it will take time to crowdsource the necessary data.

I don't think TomTom will help much with the 3D image/texture issues - that lies more with getting the right satellite data from DigitalGlobe or improving/changing the 3D engine from C3. However I think owning TomTom could significantly accelerate fixing the other problems.

  • Integration is the key to a digital map
    When it comes to wrong or incomplete map data, a lot of the problem wasn't that Apple didn't have the data, rather it wasn't integrating it correctly. Often the underlying TomTom map had the correct data, but Apple have overlaid incorrect information from third party sources. Owning TomTom will help this process along - as I pointed out earlier the raison d'etre of a mapmaker is exactly that - to correctly integrate data from a number of different sources.
  • Faster map updates: Owning TomTom's map also accelerates the process of updates. If Apple use TomTom as a third party licencee they will always have to wait on TomTom to provide an updated dataset. If they own the company they can put updates straight through as soon as TomTom gets them.
  • Crowdsourcing: TomTom also has a mature crowdsourcing portal called Mapshare. A bit part of Apple's ongoing fix is to get users to report problems and fill in the gaps - TomTom has years of expertise in managing this process and figuring out what user updates should filter through to its final map.
  • Routing: Another area of mirth have been the routing snafus provided by Apple's turn-by-turn engine. To a degree these were inevitable (Google's turn-by-turn had similar problems in its initial versions). But an easy fix would be to throw in TomTom's mature and proven turn-by-turn engine. 

Bear in mind TomTom is not a magic bullet. These are all issues that Apple can likely fix on its own. The issue is one of opportunity cost. If Apple can fix these all in three months then none of them are a compelling reason to buy TomTom (especially given the transaction would take some time to complete). However if (as I suspect) they will take much longer to fix then Apple need to consider the opportunity cost. Every extra month with the embarrassment of iOS6 Maps hanging round its neck is another month for Google to make hay and take mindshare amongst users.

2) It seriously bulks up Apple's mapping chops

But let's be clear - Apple wouldn't buy TomTom just to help fix the current iOS Maps. They're not that stupid. Actually the bigger reason to acquire TomTom isn't as a mapping elastoplast. Rather its to acquire lasting mapping expertise.

As I said the jewel in TomTom's crown isn't its map database. Its the people and the processes it has build up over the years. Although Apple are pushing hard to hire mapping experts, there simply aren't that many people out there with the necessary expertise. In contrast TomTom has hundreds of mapping experts and a stable, mature mapping organisation.

Also bear in mind that TomTom has genuine scarcity value. With Navteq now in the hands on Nokia/Microsoft, and Google highly unlikely to play ball, TomTom is the only major reservoir of mapping expertise on the market.

I think a good analogy is SAP's acquisition of Sybase back in 2010. What SAP ostensibly bought was a fairly ratty old relational database and a bunch of interesting BI technologies. What it actually bought is the brains and know-how of thousands of irreplaceable database experts. At the time Sybase was the only large standalone database vendor left - if SAP wanted bet its future on data, it had to bet on Sybase.

As this editorial in trade rag Directions Magazine points out - that is why Apple needs TomTom. This is an asset that money can't build, but it can certainly buy.

3) The deal can be done quickly and smoothly

I want to talk about the mechanics and psychology of the deal in a separate post (hopefully tomorrow). But I want to make the simple point that this is a deal which could be done quickly. TomTom's founders hold 48% of the company and "friendly" insiders Janivo/Cyrte hold another 10%.

So Apple will essentially be negotiating with the founders (and their egos). If you are a leading tech entrepeneur there is no one your would rather sell out to than the House That Jobs Built. Harold Goddijn, Apple Senior Vice President (Maps) would do nicely.

Get them onboard and its a done deal.

I think there would be minimal regulatory issues given Apple can point to Google and Nokia/Microsoft as large an significant competitors in the industry; Garmin might pipe up but I doubt they will have much sway.

And it goes without saying that with TomTom currently valued at $1.1bn and Apple's cash pile at $82bn (give or take vendor commitments) money won't be an issue. So far this maps kerfuffle has cost Apple a lot more than that!

Potential stumbling blocks

Before I finish a few notes concerning the case against. Why wouldn't Apple do this deal?

  • Apple think they can fix maps quickly: If Apple think they can address the issues with Maps by Christmas, this takes away a big rationale to do the deal. As I said using TomTom to accelerate the Maps fix this isn't the only reason to buy TomTom, but its certainly a significant reason, IMHO.
  • Apple think they can build mapping expertise themselves, or don't need it: If Apple think they can hire the mapping know-how themselves, or simply believe its not a high priority then they will not do this deal. I think the advantages of acquiring TomTom's scarce mapping know-how speak for themselves, and Apple are clearly pushing deeper and deeper into cloud services which means location MUST be a priority. However Apple may Think Different.
  • This isn't a very "Apple" deal / Apple don't buy other brands: Apple's M&A has traditionally revolved around acquiring smaller companies for their technologies (e.g. Siri Inc for Siri, SoundJam for iTunes) and then throwing it down their broad marketing and distribution maw (what M&A bankers call a "top-line synergy). In the past they have rarely acquired more mature tech companies, especially not those with their own standalone brands. I think its dangerous to say though that "Apple never do x" (didn't Steve Jobs say he'd never do a smaller iPad?). The strategic landscape has changed, and Apple is now much bigger. I think to say Apple will never acquire a larger branded company is foolhardy. TomTom seems as good a place to start as ever.
  • Endangered species?
    Apple don't need the hardware business: 
    Apple is unlikely to want to get into the satnav business. If they acquire TomTom the hardware business is likely to be sold off (perhaps back to the founders). I don't see this as a stumbling block to the deal. Garmin would be interested at the right price (it would give them a virtual monopoly on automobile navigation), or at the end of the day they could simply shut it down for a minimal loss.

In summary I believe the problems underlying iOS Maps will take longer to fix than the market believes, and people underestimate the hidden value in TomTom's asset portfolio. To me Apple acquiring TomTom makes absolute sense.

That's all for today. Come back tomorrow, where I will sketch out some more thoughts on the valuation of a TomTom acquisition and how a deal will be executed.


  1. PS And in answer to a comment (which can't find now - maybe it was deleted?) no I don't own any shares in TomTom, or Apple for that matter! J

  2. Hi Jon,

    Apple is now firing execs of their mapping team. Looking for outsiders with the required skills and knowledge and tie-ing up with tomtom closer.

    Is this the end game?

    1. Yup saw that. A reminder that Jobsian ruthlessness hasn't died with him.

      What was interesting was the comment about Apple going to outside providers for help:

      "Cue, who took over last month as part of a management shakeup, is seeking advice from outside mapping-technology experts and prodding digital maps provider TomTom NV (TOM2) to fix landmark and navigation data it shares with Apple."

      You can read it two ways. Either 1) They are criticising TomTom for not providing good enough data and prodding them to "fix" it. In this case it looks like a veiled attack on their partner and makes a deal less likely.

      or 2) They are trying to co-operate more with TomTom, which makes a deal more likely.

      or actually 3) They are criticising TomTom to try to weaken their negotiating position when they buy them!

      Cupertino Kremlinology! Who knows!

      I would reiterate my earlier point though, that if Apple want to do this deal they have to do it soon if they want to get any benefit in iOS 7 Maps.

      Best regards


  3. Jon,

    I personally believe in corporate politics inside apple. I mean, how could it happen that Apple's CEO didn't know about these problems before launch. This from my pov shows that information doesn't really flow freely inside Cupertino walls.

    I think a part of the people inside Apple know that they themselves made mistakes with the maps engine, the poi, landmarks, vendor management. Basically everything. But they also know that they'll be beheaded when they admit their failures too much.

    So when 'insiders' are being interviewed (off the record) some of them might even believe that part of the problem lies with tomtom. If that is the story that some people might want to spread internally.

    I believe measures taken by Eddy Cue (firing execs) suggest that he is not buying into that. Looking for outside expertise is another way of saying that there's no expertise inside. Which makes the case that you've layed out (expertise of tomtom being the real assets) even stronger.

  4. Apple built this really cool ice cream joint called the iParlor. Until recently it was sourcing ice cream from its competitor, Google. Apple decided it could now make awesome ice cream on its own – so it bought milk from the TomTom Dairy and numerous other ingredients from small organic local farms. It blended it all together and made…some sort of cottage-cheese-butter thing with chocolate and nuts. It didn’t appeal to everyone.

    Apple needs expertise in how to make ice cream – not in how to run a dairy. It should hire ice cream makers from BMW, Denso, Intrado, Blaupunkt and others who’ve done this before. It doesn’t need to know how to properly birth cows.

    1. Hey tx for your comment.

      A few random thoughts (not entirely cogent, I might add. Its early in the morning still!)

      1) I think one difference though is there are only four dairies in the world - one is owned by Google, one is owned by Microsoft, one is a completely free co-operative (but the quality of the milk is completely random) and one is owned by TomTom. So its not only the availability of the milk that is the issue, its the scarcity value of the suppliers.

      2) On the iParlor vs ice-cream makers analogy surely the point of Apple owning an end-to-end ecosystem is that they want to acquire the expertise to make the ice-cream too! Its similar to their move to develop their range of A6X in-house ice-cream making machines.

      3) I guess (switching off analogy mode for the moment) another way of framing the debate will be how much they want to buy-in versus build their IP. You could argue they licence in the ARM instruction set so why can't they licence in the TomTom map with something similar to an ARM architecture licence. I think the scarcity value point may be an issue here though - unlikely AAPL's access to ARM is cut off (too many competing interests) if TomTom get taken out AAPL might lose access or be forced to switch to an inferior OSM-based alternative.

      4) Finally remember the point I made that acquiring Tom2 is as much about acquiring the dev expertise as the actual asset. In this context I actually agree with them that they should hire the ice-cream makers (devs) - just I'm taking it to a more literal degree.

      All the best


  5. Hi Jon,

    How does all the fuzz about Waze fit in to this debate? I mean, Waze valued above $ 1 billion for some crappy crowdsourced maps?

    It's all rumour mill offcourse, but if these stories are true, doesn't that dramatically change the TomTom pricetag mentioned in your analysis? (if they are for sale anyway, which we don't know)

    Kind regards (and let's have some icecream)

    1. Heya.

      Yes interesting to see Waze going to Google. I suspect an element of this is strategic - they are actually the outfit who least needs Waze tech as they have been crowdsourcing stuff like traffic info themselves for a long time. Suspect a lot of it is to keep it out of the hands of other people.

      I think for Tom2 it cuts both ways. On the one hand it highlights the fact people are still willing to cut big cheques for mapping assets. I guess this must be the biggest nav-related M&A since TomTom bought TeleAtlas? If old school digital maps are still what people want then it highlights the Tom2 scarcity value.

      On the other hand I do wonder if it makes Tom2 look like yesterday's technology - as I said they have a relatively old-school centralised approach to data collection as opposed to Waze's more crowdsourced model. Yes they have been crowdsourcing HD Traffic data for a long time via VOD mobiles but I doubt they've had the R&D budget to significantly move this on the recent years.

      The risk is that Waze might be mapping 2.0 whilst Tom2 is mapping 1.0. Another way of thinking about it - much of Tele Atlas' value was in the relationships they had built up with hundreds of geo data sources e.g. utils companies, local govts, transportation authorities etc who fed back data for their maps. Waze going straight to end users could disintermediate some of these relationships.

      So the counter-intuitive conclusion is that while M&A might seem good for the Tom2 story, I worry that it is actually a negative...


  6. Hasn't TomTom been crowdsourcing maps for a long time, through their MapShare service? Long before Waze did? I think the only difference is that Waze has been selling the 2.0 method as something different than TomTom and Navteq are doing. And they branded it differently, with a more 'fun and social' aspect.

    Even though I think TomTom can learn from the social approach towards consumers, I don't think TomTom maps are 1.0 They are 2.0 (crowdsourced), combined with a 1.0 methodology to crosscheck if the crowdsourced information is correct. Also TomTom does a lot of 'passive crowdsourcing', not so much involving customers, but tracking them and learning route patterns.

    Also I heard that those vans are no longer used for mapmaking, but only to make specific additions to the 2.0 maps. For instance to include altitude, curvature, hight (is it accessible for trucks?) and so on.

    I think the 3.0 maps are a combination of 2.0 for creating the maps, plus 1.0 to add additional information to them.

  7. I think the 3.0 maps are a combination of 2.0 for creating the maps, plus 1.0 to add additional information to them.

  8. I think the 3.0 maps are a combination of 2.0 for creating the maps, plus 1.0 to add additional information to them.

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