TomAd - Business Plan

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1 TomAd - Business Plan Corporate Venturing in Technology Sectors Prof. Anu Wadhwa TA: Bettina Bastian

2 Executive Summary Nowadays time and information seem to be more important and valuable than ever. Knowing things before others rule on the outcome of almost all our actions. In the same time the technological evolution of the last decades found its way into almost all parts of our daily life. Providing devices that are dedicated to help people to save time and gain information at the same moment will therefore be appreciated and can generate a huge revenue for its provider. TomAd is a new venture that allows TomTom, the world leading personal navigation solution provider, to combine the service of up-to-date information together with a low cost mobile device. It provides users with additional information about his surrounding area and makes it possible to gain and distribute almost real time feeds about traffic, weather conditions and other information. This all by holding the cost for users at the lowest possible level. The main idea behind this venture is to finance the additional services with customized, location dependent advertisement. Advertisers will get the chance to solicit for their goods or services directly on the screen of TomTom devices as long as the device is geographically close to the advertisers location. Compared with regular billboards, TomAd opens new dimensions for advertisement. TomAd does not have the physical limitation of billboards which may be placed closed to the advertiser's location but still far enough that passing person will not find the advertiser's company. TomAd can simply indicate where the advertiser's company is exactly located. The advertisement is in the car. Additionally TomAd advertisements are cheaper and more easy to change compared to traditional billboards, therefore TomAd addresses a much broader customer base willing to advertise. The advertisers have further the advantage that it is possible to chose time, place and target user of TomTom devices for displaying its ad. Similar to Googles AdSense system where advertisers pay by the number of clicks, advertisers on TomAd pay only the number of ads that have actually been shown. We believe that nowadays people are used to customized advertisement and that it is widely accepted as a way to offer additional services for low cost. Modest ads are not percepted as s disturbing object but more as a source of further information which would not be noticed otherwise. Additionally the venture does not involve major technical research or development and can therefore be regarded as easily feasible and implementable in a short time. TomAd - Business Plan 1

3 Background TomTom is the worlds largest personal navigation solution provider. It is a relatively young enterprise that started to produce software for personal digital assistants (PDAs) in the early nineties. In 1991 they produced applications ranging from dictionaries and personal finance products to games and route planers. The steady evolution of PDAs and cell phones allowed TomTom to develop more and more sophisticated applications which resulted in the first navigation software for PDAs in Thenceforward TomTom can be considered as the leader in personal navigation. They introduced several innovations in this market, most of them as a result of continuous development of their own products and the integration of already existing services from other technology sectors. By combining mobile phones and their personal navigation products they opened a market for delivering real-time information to their devices. This approach allowed them to inform its users about road accidents, tailbacks and heavy congestion earlier than any other source. Being a fast growing company that unlocks regularly new sectors for its products makes TomTom a hotbed for innovation and continuous development. TomTom's mission is to provide all drivers the best navigation and mobility experience by redefining routing. It is their believe that complex mobility technologies should be made to work for all. As company, TomTom produces navigation technologies for 16 countries mainly in Europe and North America but it is expanding to more countries such as to Brazil in December Their worldwide headquarter is located in Amsterdam, the Netherlands, and the North American headquarter in Concord, Massachusetts USA. Additional offices are suited in various locations in Europa, North and South America, Asia and Australia. In the year 2006, TomTom shipped 4.7 million PNDs which represents an increase of 178% compared to Their revenues grew by 89% to 1'364 million and the net profit by 55% to 222 million. The growth of TomTom is also reflected in the number of employees. In people were employed and TomTom hired 309 new people in That are 627 employees by the end of 2006 or a growth of the number of employees of 98%. Venture Opportunity The development of sales in car navigation systems shows that in the near future almost every car will be equipped with an on-board navigation system. It will be essential to have strong complementary assets as it will be hard or even impossible to distinguish navigation TomAd - Business Plan 2

4 system providers by the quality of maps or suggested routes. One of the assets is real time information about traffic, weather conditions, new maps and other services. On the other hand the prices for personal navigation devices dropped in the last few years like they do for almost all electronic devices. Producers of car navigation systems are therefore forced to find new ways to generate revenue in order to be able to provide these services. TomTom as the leader of navigation systems will have the possibility to exploit its presence in cars and continue to broaden its services to the customers and assure low prices at the same time. One opportunity to make this possible is to surf the wave of customized commercials. As Google shows, the acceptance of well directed advertisement is remarkably high and the pricing model of 'cost-by-cause' can generate a drive in revenues that is highly favored. TomTom already has the knowledge to combine its devices with modern telecommunication networks as the 3G network and already demonstrated the capability of approaching realtime data processing with its traffic informations and the map-share service. To include advertisement marks just the next step in the evolution to a full information provider and corresponds to the evolution path of newspapers and radio broadcasting. We believe that a majority of customers will categorize the advertisement as extra information additionally to the services a TomTom device already provides and appreciate the benefits that arise. Business Model Having PNDs equipped with a 3G mobile network connection sitting in almost every car, makes it possible to address the users with dynamic and up-to-date information and gather feedback from and about the users. These are all the ingredients that are necessary to do user specific advertisement like it is seen nowadays in internet services like Google-Search. What TomAd additionally has, is that it knows the exact location of the user, which differentiates it from radio broadcast advertisement. Compared to billboard ads, TomAd has the advantage of advertising in the car, for a longer time and very user specific. TomAd will address the market of in-car and drive-by advertisement while having the above mentioned advantages over the existing techniques. TomTom will provide an easy to use internet portal for the advertisers, where they can control location, duration, frequency, TomAd - Business Plan 3

5 content and target customer of their ads. The advertisers will be charged on how many times their ad has been showed on PNDs. On the PND side TomTom can due to the additional revenues sell its devices for a lower price than its competitors. Therefore they can grow their Prototype of TomAd enabled PND user base and make the TomAd service even more attractive for advertisers. There are several ways how the ads can be addressed to the PND user. First a company can place a image directly into the map allowing to indicate where they are located. Second there can be a short text displayed e.g. above the map, where the user can click on it to get further information. Additionally for convenience and security reasons there will be a ad-history available on the PND so that a user can later on review the ads and obtain further information about a product or firm. Revenues will be generated by selling ads and by gaining market share on the PDA market because of less expensive devices. Organizational Support Requirements Most of the resources needed for the project are already inside the company. The engineering team will be asked to upgrade the old system to make it compatible with the new technology. Before being sent to the user, the real time information has to be process so investment will be needed to acquire computer power. Since this new venture should be an important and critical change for the company, the first priority of the internal resources will be this project. Two external supports will also be needed. First of all, the venture needs ongoing collaboration with a major 3G network provider. Since TomTom has already the necessary TomAd - Business Plan 4

6 collaborations and contracts with such partners, e.g Vodafone, for another new service called TomTom ONE XL HD, there might be some minor expenses to extend the use of their infrastructure by TomTom. The second external resources the venture needs are sales people, sales managers and some designers. The existing sales team does not have the know-how to successfully approach and sell the idea of the venture to important firms. There are several ways to acquire this support. Because TomTom is a relatively small firm and because advertising is not even close to their core business we propose to either buy the know-how and create a separate BU for it, or to outsource this part of the venture. Acquiring a small advertisement firm is the more difficult option. This firm would have to be young, innovative, small and global, which will be quite difficult to find. However, if there opens up such a possibility this is definitely the way to go because this way TomTom has more flexibility and potential to introduce further advertisement based services. Outsourcing the advertisement part of the venture, on the other hand, is less difficult. A possible company to work with is Clear Channel. We propose to go with Clear Channel because it is less expensive, faster to accomplish, they have a lot of experience and are a global company. Start-Up and Market Entry The venture will be integrate gradually. At the beginning, only the new products will be compatible with the new technology. If it shows to be a success, the old products will be put up to date and the future ones will all be compatible with the technology. This strategy will allows TomTom to judge the success of the venture before being totally involved. If it shows to be a failure from the start, the damages will be limited. Constraints and Contingencies The venture is in complete accordance with the core competency of the company which is the development of navigation systems. The strategy of TomTom is to stay ahead of its competitors. In order to keep their leading position in this active and profitable market, they must be precursor of the future development. In response to the consumer desire, the producers keeps improving their product and rationalizing their price. The important accorded by the consumer to the speed of the device and its autonomy is always increasing. The venture proposed will allow the company to bring the services to a new level of speed and autonomy with the real time updates. It will also provide more information to the client than TomAd - Business Plan 5

7 ever. More than that, this crucial development will also enhance the exploitation s benefice of TomTom. The principal risks of this venture are the reaction of the markets. First of all, we need to find an important number of interested advertisers. A first study will have to be done here. If it shows it will be impossible to fill 40% of the possible advertisement. The price of connexion to the 3G wireless network will also have to be verified. This cost has to be lower than CHF 4 per month. Even if an interesting advertiser s market is found, the consumers also need to be interested to this kind of product. A second study of the market will be needed here. If the venture is launched but appears to be a source of lost by 2011, it will be considered as a failure. The year 2011 will be the point of no return for the project. Organization and Staffing Since TomTom has no business units the venture will be executed on a project basis. The project combines technology aspects with advertisement and has a well defined interface with Clear Channel and even people form Clear Channel working at TomTom locations. The R&D has to provide a software so that Clear Channel and/or the advertising clients can decide their selves on the content and localization of the ads. TomTom's R&D and Clear Channel do work separately on the same project leaded and coordinated by the project team. This is necessary to not reveal internal know-how. Since TomTom has absolutely no competencies in advertising it is necessary to employ a manager which has extensive experiences in this sector. This manager will together with the R&D project leader build the head of the overall venture project. Schedule The development and setup of the technical infrastructure needs up to one year to be ready, so the complete year This includes planning, infrastructure setup, software development, prototyping and testing. Since this is the most time consuming task, research and development (R&D) will start as soon as possible. Since R&D of software is related to TomTom's core business, a early start of R&D will be doable without much effort. The same the negotiations with the 3G service providers which can also be initiated at the very beginning of TomAd - Business Plan 6

8 Human resources (HR) should immediately start looking for a experienced manager in the field of advertisement. The goal is being able to approach Clear Channel in June 2008 with a well working prototype and a well prepared project team including R&D and Advertisement management. We have defined four milestones for the further development of the project: Milestone 1, April 2008: The project team contains members of R&D as well one experienced advertisement manager. R&D has finished the work of the first internal, working prototype of the TomAd system. Milestone 2, June 2008: The heads of the company and the project team will approach Clear Channel to outsource the advertisement part of the project. The R&D is ready to present a first official working prototype, especially of the web-portal where advertisers can register and upload their ads. The management of TomTom will show the working system to Clear Channel. The marketing starts planning the press informations and advertisements of TomAd itself. Milestone 3, August 2008: Prepare launch-to-market. The marketing campaign begins at this point. Clear Channel can start to sell ads. The first beta release of the technical infrastructure is up and running. Milestone 4, January 2009: Launch-to-market! Financials Costs The venture doesn't need a huge technical investment. It can be seen as a natural extension of existing technologies. The venture will need three main parts. A interface where the advertisements can be registered, a database to store all the advertisements and the statistics of its usages and a process to communicate with the TomAd devices. On the other hand, the commercial launch will need quite a big marketing campaign. Its purpose is to convince the customers of the profit they will gain by buying TomAd. Additionally we will have maintenance costs for dedicated hard and software. A precise calculation can found in the appendix. The internal investments that are needed can be divided into several parts. For the technical infrastructure an investment of CHF 2'000'000.- will be needed in the first year, to develop TomAd - Business Plan 7

9 the software and buy hardware. In the second year an amount of CHF 500'000.- will be needed for the same points. The Installation and maintenance cost will be about CHF 1'000'000.- in the first year and CHF 500'000.- in the following years each. The operational costs of Clear Channel will be satisfied by TomTom with CHF 1'000'000.-in the first year and CHF 500'000.- in the second. After this time, Clear Channel will only earn money from advertisement sold for TomAd. Advertisement for TomAd itself will be the biggest investment. A total investment of CHF 8'000'000.- in the first three years will help to boost TomAd in the personal navigation market. TomTom will need to invest about CHF 14'150'00.- in the first three years before the breakeven is reached. CHF 70'000'000 Break even CHF 52'500'000 CHF 35'000'000 CHF 17'500'000 CHF Revenue Cost Revenues The average usage of a car is about 40 minutes a day. We estimate that TomAd can display at most 0.5 advertisements a minute (resulting in a maximal advertisement duration of 2 minutes). Such an advertisement will cost CHF 0.02 for the advertiser, whereas CHF 0.01 will be retained by Clear Channel. With this estimation each device generates a revenue of CHF 72.- a year and a cost of CHF 24.- of annual fees for accessing the 3G network. Together with the expected evolution of the PND market and the total change-over of TomTom's PNDs TomAd - Business Plan 8

10 to TomAd within the next four years, the break-even will be reached around the beginning of Compensation Arrangements The technological development of the venture can be seen as a normal progress. The compensation in this sector therefore will be the normal salary. The management team will be very well paid. The total budget allowed to their salary will be of CHF If they produce results that are better than the expectations, a fixed percentage of these extra will be give to them in bonus for good work. TomTom needs to obtain an important number of advertisers as fast as possible. For this reason, compensation arrangements will be used to motivate the sales team. If the knowhow is acquire threw an acquisition, the reward will be a fixed percentage of the revenue an employee generate with the enterprises he recruited. If the sales support is acquire by outsourcing the sales activity, the reward will be a fixed percentage of the revenue the outside company generate with the enterprises recruited. Only for the first year, since no profit will be created by the advertisement, the outside company or the new BU will received a salary of CHF For the following years, the salary will be based on a 50% return of the incomes created. Since the venture is inline with the core business and they are the only one involved in it, the entity of the equity will stay the property of TomTom. TomAd - Business Plan 9

11 Appendix Appendix A -Clear Channel Clear Channel is the most experienced billboard advertising company in the world. Besides this, they own over Radio stations. The experience from this two domains make it the perfect partner for TomAd. As Customized Advertisement via PND will open a hole new advertisement channel, Clear Channel won t let this opportunity pass by. References: TomAd - Business Plan 10

12 Appendix B - Costs TomAd - Business Plan 11

13 Appendix C - Growth rates TomAd - Business Plan 12

14 Appendix D - Revenues TomAd - Business Plan 13