Microsoft is rumoured to be about to buy GPS device manufacturer Garmin, showing how important location-based services have become.

As GPS navigation has moved away from its traditional domain of air, marine and car-based Sat-Nav to a more personal domain of Personal Navigation Devices and now GPS phones, a whole new class of location-aware devices and location-based services is about to emerge, with Microsoft, Google and Nokia poised to lead the field.

However, as the following article argues, Google has much more to gain and potentially more to lose in the race to become the world's primary navigator. If Microsoft buys Garmin, it will be Google who suffers.

A tale of three markets

Navigation is becoming the new battleground for major companies around the world, as they smell a new paradigm shift about to happen, and with it, some fantastic market opportunities. Unlike other wars, though, this one takes place across three distinct markets.

1). The GPS navigation market

The most obvious of these markets is the existing GPS navigation market, where Sat-Nav devices from the major players such as Garmin and Tom Tom have morphed into complete personal entertainment systems that also help you navigate across the globe. Although mostly car-based, these GPS devices do everything a Personal Multimedia Player can, and most things that a mobile phone can, too - even take pictures!

Many of them are also portable, letting you take them with you so you don't get lost when on a walk in an unfamiliar town.

As such, despite the difference in size, the GPS device is slowly but steadily encroaching on the mobile phone market.

2). The mobile phone market

The mobile phone is a giant-killer of the consumer electronics world, slaying market after market as it absorbs the features of other products in a relentless push to become the single gadget you need.

Already low-end digital camera manufacturers such as Minolta have been squeezed out of the consumer market, as mobile phone cameras have become good enough to make a low-spec digital camera redundant.

Next on the list of the mobile phone manufacturers' hit list is the GPS device, with Nokia stating that most of its phones from 2008 will come with a GPS receiver built in, and backing its talk with the $8.2 billion purchase of mapping data company Navteq.

As GPS devices become more personal, companies such as Nokia have clearly taken notice, and have seen how useful a personal navigation device can be.

They've also thought that if people want a personal navigation device, they might as well have it in the one gadget they already own - their mobile phone.

If that mobile phone just happens to come from Nokia, then so much the better!

The convergence of the GPS device and the mobile phone market is therefore all about convenience, and the mobile phone's insistence that it is the only personal gadget that consumers really need.

3). The Search Engine market

However, there's more at stake than hardware here. Powering the navigation revolution is the software, data, and, crucially, the maps that are needed for navigation to be truly useful. Knowing where you are is one thing: knowing where everything else is and how to get there is what really matters.

Navteq and TeleAtlas are the two companies who provide most of the world's mapping data. Increasingly, however, it's the major Web search engines that are providing people's experience of mapping software through their own applications that make use of this data. Google has Google Earth and Google Maps; Microsoft has Microsoft Virtual Earth and Maps; and Yahoo has Yahoo! Maps.

Search is really all about navigation

From a search engine's perspective, real-life navigation is no different from what they already do on the Web - helping users find their way through a confusing world of seemingly limitless options and choices. For although they're called search engines, really they're all about navigation - helping you navigate through a sea of information, literally billions of pages of it, to locate the one item of information you're actually searching for. Netscape got it wrong - it was never a Navigator, it was just a boat, cruising along a torrent of information; it was the search engines that were the navigators all along.

Now extrapolate this concept to the real world. Here, the world consists of landmarks, points of interest, places to go, ways to get there, and, crucially, places that sell the products you want at the price you want them. What you need is a real-world search engine that locates that one item of interest to you amongst the virtually infinite items of non-interest that surround you.

In other words, navigating through the real world is no different from navigating the virtual world of the Web. And if a search engine can help you navigate the virtual world, why shouldn't it help you navigate the real world as well?

Why real world navigation matters so much

So, three huge markets, each defined by billion dollar companies, all chasing the one prize - to dominate real world personal navigation in the same way that Google dominates the virtual world of Web-based navigation.

But why? What's the payoff? These companies are spending billions of dollars on services that in some cases are being offered for free. There must be something worth doing this for.

There is, and unsurprisingly, it's advertising.

How to get ahead in advertising

Companies such as Nokia, Google and Garmin aren't just looking to help people find their way to points of interest; they want people to find the products they want to buy now at the store nearest to them. Not only will this provide a valuable service to consumers, it will bring a bonanza of ad dollars to the company that captures this market, as advertisers compete for the attention of genuinely interested consumers as they pass their shop windows.

You can see why advertisers are so keen for location-based ad services. Today, for example, you might see a picture of a new pair of shoes advertised in a magazine by a shoe shop, and think "they're great, I'll buy them next time I'm out shopping." Then, when you do go shopping, you either forget about the shoes altogether, or you buy them from another store, effectively wasting the cost of the expensive advertising taken out by the original shoe shop.

With location-based advertising, though, you'd be alerted that the shoes were on sale in the first shop when you're within 200 or so metres of the store. In other words, you arrive at the mall, and the shops will tell you what products they've got that you want, before you reach their shop window, and well before you reach the shop window of a competitor.

In this way, location-based advertising extends the reach of the shop window, and both shops and manufacturers will pay a much higher premium for this kind of advertising than they will for the blanket advertising of the kind found in magazines.

A huge new market

How much more? Well, according to a report written last year by Jupiter Research, mobile advertising will grow from $1.4 billion in 2006 to $2.9 billion in the US alone by 2011. That's advertising on a mobile phone (i.e. the 'personal' part of personal navigation) without any form of location-based advertising.

Once you factor in the ability to locate the user (i.e. the 'navigation' part), and therefore pitch adverts at him specific to his exact location, those figures rise dramatically. According to private equity firm Veronis Suhler Stevenson (VSS), local consumer Internet ad spending (i.e. location-based advertising) will rise to $19.2 billion by 2011.

And these figures don't count on the impact new gadgets like ubiquitous GPS phones will have on our spending habits (and thus the advertisers' spending habits). This is a high stakes game that the big blue chips are betting big on.

Which market will win?

With mobile phone companies, GPS device manufacturers and now search engines all wanting a piece of the action, who's the most likely to win?

Not the GPS manufacturers. Although Garmin are looking at creating their own mobile phone, the fact is that Nokia's purchase of Navteq, the mapping company that provides the data for Garmin's current GPS devices, leaves them seriously exposed, and shows the firepower that the GPS companies are up against.

Garmin is one of the world's largest GPS device manufactures, with a market cap of $24.36 billion and gross profit of $882.39 million. In this war, however, it's up against Nokia, the world's largest mobile phone manufacturer with a market cap of $141.37 billion and gross profit of $17.6 billion; Google (who surely need no introduction), with a market cap of $193.56 billion and a gross profit of $6.3 billion; and Microsoft, with a market cap of $281.64 billion and a colossal gross profit of $40.43 billion

Any one of these companies can pick off Garmin for breakfast, and all have superior distribution channels for any product or service they choose to launch.

As such, the GPS device manufacturers, including Tom Tom, are all too small to win this war. They'll survive in their lucrative Sat-Nav market, and may even enter the GPS phone or Personal Navigational Device market in a big way, but in the medium term, the real battle is between the mobile phone companies and the search engine giants.

Search Engines vs Mobile phones

Now this really is a battle of the titans. Mobile phones have beaten every contender thrown at them, and the giants of the world, Nokia in particular, reign supreme. Sure, Apple might have stolen their thunder in 2007, but as the iPhone's recent price drop showed, coming so soon after its release, competition in this market is fierce.

Nokia have positioned themselves perfectly. They've shown they've got the technology with their award winning GPS phones (the Nokia N95 in particular - see pics, left), and with their purchase of Navteq, they've now got the data and software they need.

However, Microsoft and Google are hardly softies, either. Google has grown fabulously rich off the back of online advertising, making its founders, Sergey Brin and Larry page, the fifth richest Americans according to Forbes, worth $18.5 billion each, while Bill Gates is still the world's richest man with a fortune of $59 billion.

Google know all about making advertising work, while Microsoft know how to capture and milk a cash cow when they see one.

Both these companies are also are in the process of positioning themselves for this big fight. Google and Microsoft have been pushing hard in the mapping world with Google Earth (below left) and Google Maps, and Microsoft's Virtual Earth and Live Maps, respectively. They're both also working on 3D versions of these mapping applications, letting users see the Earth in a 3D view.

You can already create routes with these applications, and of course location-based advertising is already in place. However, it's advertising that responds to the location of where you want to get to, displayed on your stationary desktop browser; not the location of where you are, right now, just minutes from the product or service being advertised. The holy grail isn't quite in reach yet.

To reach out and grab the holy grail requires a device in the user's pocket, with one of these company's name on it, tied tightly to the mapping applications they provide and the ad platform they've built.

For Google, this device will most likely come in the form of a mobile phone (see photoshopped pic, left).
Rumours have persisted all year that it's currently working on building its own mobile phone with the help of HTC (amongst others).

The phone, rumoured to be called the GPhone, is rumoured to feature GPS and location-based services built-in, and so would be tailor-made for both mobile advertising and location-based advertising, giving Google a new platform on which to leverage its hugely successful contextual advertising technology.

Microsoft are trying an alternative approach, with the rumour that it's looking to buy Garmin. As such, they seem to be going down the Personal Navigational Device path rather than the GPS phone path. A Microsoft/Garmin GPS device would integrate tightly with Microsoft's mapping efforts, and also offer location-based advertising, but in a gadget that would have no mobile phone functionality.

Given people's preference to have one gadget with them, and for that gadget to be the mobile phone, this strategy is ultimately doomed to fail. Just as the Microsoft Zune lost out to the iPod, so a Microsoft/Garmin partnership will also lead to a dead end - at least as far as world domination is concerned!

And the winner is...

So this leaves us with Nokia slugging it out for total domination with Google. Nokia is a world class mobile technology company that hardly puts a foot wrong, but with little experience in the advertising world. Google is a world class Web technology company with the world's most successful online advertising network. If anyone can make location-based advertising work on a grand scale, it's Google.

However, it has no hardware experience and no presence in the consumer electronics market. Making it big in the mobile phone market is extremely difficult, particularly when going head to head with the likes of Nokia.

Yet the stakes are perhaps highest for Google than all the other companies fighting in this space. Google's stated mission is "to organize the world's information and make it universally accessible and useful." That's not just information on the Web - that's all the world's information.

For a company with such a tightly focused aim, missing out on such a huge information market as that offered by personal navigation and location-based services would be unthinkable. That's why they're building the Google phone. The world's information might be accessed mostly from desktops today, but that won't be the case in five years or so. Google needs a mobile device, and it needs it fast.

Google could make its job a lot easier if it bought in the expertise from another company. Garmin would make a much better fit for Google than it would for Microsoft. Although Personal Navigation Devices will clearly sell well in the near future, it's GPS phones where the revenue lies in terms of location-based advertising.

Combining Google's advertising platform and search engine with the technology it's developing for its GPhone, and then throwing in Garmin's GPS expertise into the mix on top, would create a class-leading combination that could stop Nokia in its tracks and give Google the domination in the mobile location-based world that it clearly needs if it's to keep to its mission statement.

Microsoft and Garmin, in contrast, would be a poor combination. Garmin has the technology, but Microsoft doesn't have the vision. If Microsoft can't make online advertising or search work when competing with Google, what chance will it have when competing with Google and Nokia in an unfamiliar market?

Whatever happens, Garmin's days as an independent GPS device manufacturer look to be numbered. As the market evolves and the big boys rush in, it looks set to be swallowed by someone. Whether it's Microsoft or Google, and whether Google or Nokia ultimately wins the war, the real winner in this mother of all battles will be us consumers, as the fierce competition and the innovation it brings with it bring us a golden age in personal navigation.