We’ve all seen what Apple ($AAPL) has done with technology, branding and margins. Many articles have been written about how the iPhone may make up a minority of high end smartphone shipments but captures the vast majority of the margin in the business. As a technology guy I have chalked up a good deal of the Apple success story to the “hidden hero” of their offerings which is software. Between iOS and MacOS they have a huge advantage and wrap beautiful, well-designed and cutting edge hardware around it.
As an aside it’s interesting to note that this is quite the opposite of how system vendors like IBM went about their business a couple of decades ago. IBM mounted a major campaign to increase the “clothing rate” of their hardware with more software and services. This helped margins but because most hardware and software wasn’t tightly integrated it was hard to execute. On big exception was the massively successful AS/400 which was a fully integrated solution. It was also differentiated, high margin and worked better than most systems in the field. Much of the “innovation” we’ve seen for the last decade is an extension of many of those features into other platforms like Intel servers, laptops and mobile devices. But I digress…
The company and stock in question here is GoPro ($GPRO) which I have enjoyed on the short side now for some months and am switching over to a small long position. The reasoning there is a combination of continued strong execution, partnerships with commercial content providers, much lower valuation and limited competitive inroads thus far. There are still major doubts in my mind including: maintaining what is a very high-priced package, differentiating on top of a “standard” SoIC platform from Ambarella ($AMBA), and the continuing puzzle of how they will monetize a “media content” business.
A deeper question for GoPro the company and the brand is whether or not they represent a set of qualities that consumers will find willing to pay for. Like others I’ve seen many competitive products in the market and most are much less expensive. The question in technology though is do these alternatives all suffer from the “six months to junk” technology syndrome. If I spend $500 on a GoPro and use it frequently for the next two or three years I don’t care much about the price versus a $200 alternative that sits in a drawer until I toss it or unload it for a few dollars at the next MIT SWAP sale.
Were it not for the great success Apple has had the question wouldn’t make much sense. GoPro still lacks a value-added retail presence. They have nice display space all over but there’s no equivalent of a genius bar around them. Any ecosystem effects are still limited. There’s some level of community to be sure but it’s not the same as something that demands investment suggesting a longer term commitment. Drones are one potential area where GoPro might get something close to a “designed in” position. It’s a small category but it’s a start.
Competition seems non-threatening considering the “usual suspects” like Sony, Kodak, Canon, Nikon and Polaroid. Apple would certainly be formidable competitor but they have bigger fish to fry. Given how big Apple has become a GoPro-like product wouldn’t move the needle and would be more of a distraction than a strategy. There will probably be credible competition from China but again the consumer experience, distribution and partnerships will matter.
I’ll be doing more research for sure. Video is certainly huge and GoPro has a good vantage point from which to execute a strategy. Still early.