Posted in new media insights

GoPro: Progress and Dilemma Under the S-C-P Paradigm

The rapid adoption of smart phones and tablets has brought about huge business opportunity to action cameras since 2010. GoPro, as a dark horse dominating this niche market, has achieved outstanding performance during past years, and completed its listing on Nasdaq Stock Exchange in June 2014.

However, faced with an influx of competitors and a misstep of pricing policy on Hero 4 Session, the company has recently got into trouble as its shares go below IPO price, even to dismiss hundreds of workforces.

Structure-Conduct-Performance paradigm (Bain, 1959) is utilized in this essay, to analyze how GoPro’s conduct and performance interacts with each other under the development of action camera market, and to provide insights for future.

GoPro Photo of the day
GoPro Photo of the day

Brief of GoPro Inc.

Started as a professional hardware provider to help athletes document themselves engaged in their sport, GoPro has now repositioned itself as

a widely adopted solution for people to document themselves engaged in their interests, whatever they may be” (Lazar, 2015).

The company began doing business as GoPro in 2004 since it was incorporated as Woodman Labs, Inc. in California. It was reincorporated in Delaware in 2011, and in February 2014 changed name to GoPro, Inc.

GoPro provides capture devices of small, lightweight, versatility but high resolution, which enables to take quality photos and videos even in highly challenging situations. Apart from hardwares, GoPro makes great efforts in content generation in all kinds of new media platforms, including YouTube, X-box etc.

As to financial performance, GoPro (GPRO) completed IPO in June 2014, and the initial price was $24.00 per share. During 22 months, it rocketed to $98.47 in Q4 2014, but recently hit under $10 in February 2016. Correspondingly, the revenue increased sharply from 2012 to 2014, and remained “good” in 2015, but the net income decreased by 41% compared with 2014 (Lazar, 2016).

Structure

The digital camera market is pretty mature with intense competition, dominated by Japanese manufacturers. According to market share in 2014, the CT4 is 65.45%, which reflects a concentrated and oligopolistic market structure.

digitalcameramktshare
Digital camera market share (Damodaran, 2014)

Besides, if we apply the Rule of Three (Rajendra & Jagdish, 2002) to analyze this market, it could be categorised by

  1. “Big Threes” – Canon, Sony and Nikon, each of whom provides a full line products of capture devices.
  2. The Ditch  – contains second-tier players, say Samsung and Panasonic who are also generalists but have different niche breadth, and mid-sized companies such as Olympus, Fuji, Casio etc.
  3. Specialists – GoPro-liked companies who has a narrow product line in a niche market.

Screen Shot 2016-05-03 at 11.48.56

To define more precisely what niche market GoPro is in, there exist two expressions in the industry.

One is action or wearable camera market, focusing on the functional features and segmentation of customers. The other is “smart phone accessory market that wants active cameras” (Damodaran, 2014), highlighting the concept of complement goods (Huh et. al., 2016) for the emergence of smart phones.

Although less known for consumers, the second definition has broadly extended the market, estimated for a $51 billion market in 2023, which benefits from a huge customer base of smart phones.

No matter which definition to accept, GoPro is undoubtedly an early mover, taking 47.5% of the total market share in 2014. One giant player is traditionally sufficient for a niche market, but it won’t apply to this case for the market is far more valuable than expected. Consequently, it’s inevitable that competitors pour into the blue ocean to grab profit, especially for much price sensitive countries like China.

market-share
Action camera market share

 

Conduct

As analyzed in structure part, the market is premature so that current competitors are not “good competitors” (Chung & Doran, 2012), which means they don’t try to grow the pie but fight against to enlarge own shares.

As to GoPro, it basically carries out intelligent product and pricing strategy, but has been dragged down by the repricing of Hero4 Session. Trapped in growing competition, the company will pay much price for such misstep.

Product strategy

GoPro’s product portfolio matrix consists of cameras (Hero series), virtual reality (Omni), drone (Karma) and accessories.

As to its core product, GoPro actually provide scarce choices for its cameras. On the official online store, customers can only see three kind of cameras, including Hero4 Black, Hero4 Silver, and Hero4 Session. The Hero series differentiate themselves by resolutions and video features. It’s worth to be mentioned that Hero4 Black edition camera is offered in music- and surf-specific bundles, each of which is packaged with accessories tailored for respective markets. As a result, it further extends its target consumers from consumers to professionals.

Virtual reality device and drone are designed for tech-savvy customers to consolidate its role of a specialist in this market. The accessories are sold both bundled and separately, and most of them adapt to GoPro products only. With vast choices of accessories, customers can select their preferred bundle to enhance the function and versatility, which helps to diversify GoPro’s products in a cost-effective way.

 

Screen Shot 2016-05-03 at 12.35.07
Hardware products provided by GoPro

In addition to hardware manufacture, software plays a critical role in GoPro business. It offers an application of both mobile and desktop interface, enabling users to offload, edit and share photos or videos. This could be very tricky, because it converts content generated by users to free advertising at no cost of user experience. On the other hand, it solves one of the users’ potential pain points, making export photos much effortless.

YouTube is not the only one channel for GoPro’s content distribution, but the most successful one. It has attracted near 4 million subscribers on YouTube, and the total length of GoPro related video clips was as long as 2.8 years in 2013. Moreover, it seeks cooperation with Microsoft Xbox, providing on-demand viewing of GoPro content, and brings a new channel for LG smart TV.

In its IPO files, Nicholas Woodman, Founder and CEO said “GoPro is a content-driven company.” It has already covered roughly all the links of media value chain, through content creation, distribution and consumption, to support the sales of its hardwares. The horizontal integration may simultaneously ensure more content be circulated, as the foundation of attention economy.

Pricing policy and “bad competitors”

The pricing model of GoPro follows the concept of upselling. Schiffman (2005) explained it as

“what happens when you take the initiative to ask someone who already has purchased something you offer to purchase more of it – or more of something else.”

Consequently, the cameras themselves are not expensive, but for people who have higher demand for quality, additive accessories of different price points are supplied.

  Hero4 Black Hero4 Silver Hero4 Session
Price $499.99 $399.99 $399.99 (first released)

The greatest benefit of upselling is to attract customers of different purchasing level, echoed with the company’s slogan for serving professionals to consumers of whatever interests they possess.

However, the problem derives from the segment of much price- sensitive customers. Since this kind of customers have less expectation to professional capture techniques, they just want to pay at a minimum price but take extraordinary photos, which can make them different from others. For them, the upselling strategy would succeed only when the initial price is attractive enough.

Unfortunately, as mentioned in the structure part, players are attempting to enter this market and some of them have become vigorous rivals. Polaroid’s Cube and Cube+ cameras are just a case in point, surprisingly similar in size and shape, but far cheaper than Hero4 Session.

Less than three months after Hero4 Session was released, GoPro repriced it at $299.99 and cut it to $199.99 two months later. Nevertheless, the passive adjustment due to supply and demand is proved of little use, GoPro has struggled to redeem its financial performance.

Performance

GoPro has achieved prominent progress from 2010 to 2014, and maintained revenue growth in 2015. However, the growth rate has dropped from over 250% to 16.2% at a risky pace. (Graph 4) August 2015 is a significant point for GoPro, when the company released its new product but received less desirable market performance.

chartoftheday_4234_gopro_s_revenue_growth_n
GoPro’s revenue growth since 2010 (in million U.S. dollars)

As shown in its 2015 full year income statement, though the full year revenue continued to increase, the net income shrunk by 40.9% compared with 2014. By examining the quarterly performance, the misstep of Her4 Session caused tragic loss despite of its lagging repricing. (Graph 5) The gross margin for Q4 fell sharply while operating expenses went up steadily. The ultimate net income turned to be negative, and became the first ever loss for the company.

Screen Shot 2016-04-28 at 12.06.12
GoPro ‘s 2015 Q4 Non-GAAP Income Statement Summary (in million U.S. dollars)

Meanwhile, operating expenses usually make up a large proposition of GoPro’s gross profit.

During 2015 the company was preparing to launch more specialized capture devices like drones and VR, that resulted in the rise of R&D spending. Sales and marketing cost a lot, mainly for digital marketing on web and social media. Interestingly, social media is usually considered to be free, but the reality is it remains to be capital-driven, and calls for accumulative investment in a much longer term. For general and administration, it kept the same with last year.

Screen Shot 2016-04-28 at 12.32.57
GoPro’s operations data 2013-2015

The company’s stock price corresponds with its financial performance. (Graph 7) After it hit the peak ($98.47 per share) in October 2014, quadrupled its IPO price ($24), and reached second peak in August 2015, the price took a wild ride and fluctuated at $10. More- over, when the price first dropped below IPO, the company repurchased approximately 1.5 million shares at an average of $23.05, but failed to prevent its further slump.

Picture1
GoPro Class A common stock 22-month quote

The downward trend in sales is definitely one of the attributors, as stockholders got disappointed and started challenging the future development. Meanwhile, it’s necessary to consider the trend under the macro economic condition and global Bear Market.

Moreover, the recession of economy has also disturbed the own economic cycle of GoPro, which always has the best sales number in Q4 of each year, taking advantage of western holiday periods. Reversely in 2015, it just performed the worst during its former golden seasons.

Conclusion

To brief sum up, GoPro is encountered with an intersection point, because of the change in market structure, the misstep of pricing policies, and the global economic recession.

According to the Rule of Three, the Specialists in the market will make worse financial performance when they enlarge their market share. This could be an alert for GoPro, as its current product strategy and upselling pricing policy has brought not only benefits but also threats to the company.

Its inventions of VR, drones and other professional devices are supposed to retarget a niche market, but it’s hard to say whether these products can duplicate GoPro’s former success. GoPro could never be the only mover in the market as before.

Taken drones as an example, its previous cooperators, say the drone manufacturers, are seeking substitutes for GoPro’s camera, or using self-developed cameras to cut down the cost. In this sense, GoPro’s development of drones may well be a decision with no choice.

Last but not least, GoPro is still a brilliant company that keeps the pace with cutting-edged technology. Although the action camera market already seems kind of crowded, it could gain far more potential value when related to smart phones, which has been a rigid demand for tremendous consumers.

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