TomTom, the Dutch company that chose its name in an attempt to appear friendly twice, today announced it’s cutting 10% of its workforce. While the company has done well of both its traditional hardware offering of in-car navigational units and high-priced apps for smartphones, the market is clearly shifting from the former to the latter model and with that shift barriers to entry into the driving navigation market decrease substantially.
Thus TomTom is facing tough competition not just from rivals offering similar, although usually less feature rich, products for a fraction of the price. To illustrate this TomTom is currently the third highest selling Navigation app in the UK selling for £49.99 (TomTom will received £35 of this), while the top selling app in the category, offering core function of turn by turn navigation including voice instructions, sells for just 69 pence. Still TomTom is doing far better than competitor Garmin, based in the low-tax Cayman Islands, whose smartphone app in the UK gross less than £0.69 apps. If you’re just looking for core functionality then TomTom’s app’s pricing mean for most it has, like ten percent of its workforce, become redundant.
TomTom’s strategy: use traffic data to increase value
Not a question of profitability
TomTom’s third quarter results surprised analysts, with a 50% jump in profit to Euro29 million while sales fell 10% to Euro336 million. The latter figure shouldn’t be too much of concern however as the shift from hardware to software brings higher profit margins, and while Apple’s 30% cut of app store profits is substantial, this is lower than the cut most retailers would get on TomTom’s hardware products.
To cut jobs in the context of a 50% jump in profits would seem insensitive at the best of time, but to do so as the company is facing increased competition for low-cost and free apps, like Wuze, which offer functionality such as traffic data seems suicidal.
Social Functionality will help Wuze compete
Core functionality of free apps can help gain traction, but to gain the usage needed to have accurate traffic data it hasn’t been enough. Wuze however appear to have solved this by building in social functionality into their app which has made in an app store hit. Unless TomTom can catch up and offer new functionality then this could be the app which replaces them. Clearly a mistaken time to restructure your research and development department through job cuts.