Nokia launched free satellite navigation on its cellphones on Thursday to boost handset sales and prices, a fresh blow for satnav makers whose $25 billion market has already been hit by Google.
Following Google's lead, Nokia, the No 1 cellphone maker, will offer free navigation on 20 million smartphones initially.
I'm sure Nokia's real enemy here is Google, said analyst Tero Kuittinen from MKM Partners.
Shares in satnav market leaders Dutch TomTom and U.S. Garmin sunk, TomTom fell 11 percent by 1700 GMT, while Garmin fell 4.2 percent.
It's a major shock for the navigation industry. Going forward profit margins have to come down, said Gartner analyst Thilo Koslowski who predicted that if others follow, they could snatch up to $5 billion of the satnav market in the near-term.
Analysts said the move may also spark a flurry of acquisitions from the likes of Samsung, RIM and Microsoft, as consumers will expect free navigation to be a standard feature on smartphones.
This has massive consequences for pure software companies. It is, of course, a watershed for the industry, said Michael Halbherr, vice president for location-based services at Nokia.
Underlining the shift away from separately priced service, Halbherr said he saw navigation as a function masquerading as an industry.
If you are a pure software player, you've got a big problem. Who's going to pay for turn-by-turn navigation now Nokia and Google are giving it away, said analyst Martin Garner from British consultancy CCS Insight.
TomTom also sells navigation software -- it charges $70 for its North American iPhone navigation application -- with 70 percent of sales coming from personal navigation devices.
HELPING SMARTPHONE BUSINESS
Nokia sells more smartphones than any of its rivals, but it has lost ground to Apple's iPhone and RIM's Blackberry.
It will help us to sell smartphones, Anssi Vanjoki, head of marketing at Nokia, told Reuters in an interview. It will serve as a defense to our product prices.
Google started in late 2009 to offer free navigation on Motorola's Droid model smartphones in the North American market.
Android vendors have been too slow in addressing the low-end smartphone market. If Nokia floods the market with cheap mapping smartphones next winter, it might undermine Android vendors effectively, said MKM's Kuittinen.
Turn-by-turn navigation has been one of the key revenue sources for Nokia's services offering, and the company had said it expected one-third of its targeted 2 billion euros ($2.84 billion) services revenue next year to come from navigation.
The big question is -- can Nokia generate revenue enough to compensate for the revenue streams they kill, said John Strand, chief executive of Danish telecoms consultancy Strand Consult.
The only way to do that short-term is through extra hardware sales and a higher average sales price. It will take time to develop all the new revenue streams -- years, he said.
But one analyst said the move, when looked at alongside the moves of Google, could mean Nokia is readying to write down Navteq goodwill in its fourth-quarter report on January 28.
In 2008, at the peak of the market, Nokia bought digital mapping firm Navteq -- a rival to navigation specialist TomTom's Tele Atlas unit -- for $8.1 billion.
Looking at what has happened in the last 12 months... the environment has become more challenging for Nokia and navigation services, said FIM analyst Michael Schroder.
There is a risk that they will make a writedown on Navteq when they report fourth-quarter data next week, but it is impossible to speculate on the size, Schroder said.
Shares in Nokia were 0.7 percent higher, in line with slightly firmer stock markets.
(Reporting by Tarmo Virki and Brett Young in HELSINKI, Sarah Marsh in BERLIN, Tova Cohen in TEL AVIV, Anastasia Teterevleva in MOSCOW, Matt Cowan in LONDON and Harro ten Wolde in AMSTERDAM; Editing by Mike Nesbit and Elaine Hardcastle)