Lights, Camera, Action: GoPro’s First Take on Virtual Reality

Ready, Set, GoPro

GoPro was founded in 2002, while founder Nick Woodman was on a surfing trip in Australia. Frustrated by the lack of availability for camera equipment to record extreme sports, he set out to create accessible cameras and equipment. Today, GoPro is a household name, known for creating the segment of action cameras while smartphones were disrupting the traditional camera industry. However, since its initial public offering (IPO) in 2014, GoPro has struggled to meet the expectations of investors, with its stock price trading down to $8 in mid-November 2017 from its all-time high of $98 in 2014.

GoPro’s problems are multifaceted and include systemic problems like an oversaturated market and a lack of recurring revenues. Additionally, attempts to launch products in new verticals have been unsuccessful, such as the introduction of the Karma drone in September 2016. Within a month of launch, GoPro issued an indefinite recall citing safety issues as Karma Drones were reported to lose power and drop out of the sky. Recently however, GoPro has strung together some successes, experiencing strong, positive reception to the launch of the Fusion 360-degree camera and partnerships with the NHL. The public has been especially impressed by the launch of the Hero6 in late September this year, with doubled processing power that facilitated image stabilization and faster transfer speed to smartphones. This success has been made possible due to the GP1, GoPro’s proprietary image processing system-on-chip (SoC) which replaced their previous processor supplied by Ambarella. Ambarella also supplied the image processors to GoPro’s competition in the action camera market, which contributed to the indefensibility of GoPro’s market position.

Putting Problems into Perspective

GoPro is stuck in the niche of producing extreme-sports cameras. Despite repeated attempts to diversify and become a media company, it has failed to make a significant breakthrough. The problem with being part of the extreme camera niche is twofold. First, despite projected industry growth of 15 per cent by 2021, the market is becoming increasingly competitive with highly similar, lower-priced offerings. Second, GoPro’s recent product releases seem to be failed attempts at planned obsolescence vis-à-vis Apple’s iPhone. While GoPro attempts to stay ahead of the pack through incremental product upgrades from model to model, few users upgrade their GoPros with successive product offerings, resulting in little recurring revenue. This means that every year, GoPro must convince millions of users to purchase its products for the first time solely to maintain revenue levels. In an attempt to encourage more repeat purchases, the company has rolled out a trade-up program.

In short, GoPro lacks a defensible market position and will struggle to find one if it remains in the stagnant extreme-sports cameras niche. While GoPro was the first-mover in what was a novel space at the time, GoPro must leverage its brand equity to capture another market and create a defensible position.

GoPro Value Chain

A Virtual Reality Check

Founded in 2009 as Next3D, NextVR was the first-mover in the VR broadcasting market. It was able to leverage the technology it had already developed for the 3D TV market before its collapse and use the unique compression techniques to offer fast-streaming VR broadcasts. Most virtual reality (VR) companies produce their videos by taking a series of consecutive pictures from multiple cameras and stitching them together for a panoramic effect. NextVR, on the other hand, creates a three-dimensional wireframe of the visual field captured by each of its cameras, then projects the videos taken onto this wireframe. This technique provides a competitive advantage for NextVR as it produces a more authentic experience with less distortion and a more real-world scale. The lack of distortion and more accurate scale prevent the risk of migraines commonly caused by competitive VR offerings from Intel and FOX (Intel TrueVR and FOX Sports VR). NextVR’s video is produced using compression technology originally developed for 3D content, which reduces redundancy by filming the viewing field of the left and right eye separately, allowing for smoother content transmission and less painful distortion for viewers. With 30 patents granted in the distribution, transmission, and processing of virtual reality images and videos, NextVR has a clear advantage over its competitors.

NextVR’s strength also lies in its network of strong partnerships with sports organizations. Today, with the advent of Netflix, Hulu, and other non-traditional streaming services, sports remain one of the only barriers against cord-cutting for consumers. Networks such as ESPN and FOX buy the exclusive distribution rights of games from sports leagues and provide a convenient medium of consumption that keeps sports fans to such channels. Fortunately, big budget sports organizations are eager to try out new technology in an attempt to increase connectivity with fans—namely, virtual reality distribution. NextVR enjoys multi-year partnerships with the NBA, NFL, and Wimbledon, among other sports organizations. Furthermore, many networks do not see virtual reality streaming as competition, but instead as a complementary service.

Due to the large technological barriers to entry, it would be extremely difficult for GoPro to organically enter the market. If GoPro is looking to expand into content production and delivery within the virtual reality space, it must acquire a specialist in the field—and NextVR is the optimal target. Acquiring NextVR would expand GoPro’s value proposition from content enabling in niche sports to content enabling, producing, and delivery across mainstream sports.

Next Steps for GoPro

GoPro has long attempted to move upstream in its value chain and become a media content generator. In an August 2016 Variety magazine feature, CEO Nick Woodman stated that GoPro was aiming to become more of a media company by introducing 32 short-form shows by the first quarter of 2017. However, by November 2016, GoPro had axed the division and its 200 employees and admitted that the company needed to revisit revenue generation opportunities. One of these revenue generation opportunities was moving into the sports broadcasting vertical. Its first foray into this vertical was the partnership it announced with the NHL in 2015 to provide a taste of the live content to fans during the All-Star Weekend. In late 2016, GoPro announced it was exploring select partnerships with the GoPro Fusion camera and Fox Sports, the Golden State Warriors and USA Today. In a different segment of the same vertical, NextVR has been successful in VR content production and delivery, becoming a leader through its proprietary software. The majority of its patents surrounds the “selective resolution reduction on images to be transmitted or used by a playback device,” for example producing and distributing content.

As NextVR is upstream from GoPro in the sports broad vertical, this acquisition represents a natural next step in GoPro’s expansion. By increasing its share of the value chain, the new combined entity becomes the go-to solution provider for VR content creators. GoPro would now be able to control the process through recording, editing, and ultimately broadcasting while also leveraging the existing, market-leading competencies of GoPro and NextVR.

Capturing the Market in a Flash

The proposed combined entity would allow GoPro to not only achieve its long-term goal of expanding within its niche sports vertical, but also to have a market-leading presence across a larger vertical, such as mainstream sports broadcasting. NextVR has the best software in the market–customers have noted significant quality differentials over competition, including minimal headaches and enhanced realism. Furthermore, NextVR has the benefit of strong media partnerships with established content generators that have proven value. GoPro has the best hardware in the market, an area in which NextVR has no expertise as the hardware used in the NextVR “rig” is third-party hardware, such as the RED Epic 6K. GoPro’s Fusion VR camera has been touted by research analysts as the best in the market. GoPro also has the benefit of mainstream brand recognition that can bring NextVR into the spotlight. By combining the companies’ complementary strengths, the resulting entity can provide end-to-end solutions for sports networks to distribute their content in VR. Combining this with a potential first-mover advantage will allow GoPro to become the de facto standard for the Live VR Sports market.

VR Sport's Integration

In addition, GoPro will be able to leverage its newly found scale to continue securing major contracts with sporting organizations around the world. From this scale, network effects will serve as a barrier to entry for competition. Scaling revenues over a largely fixed cost base will make margins in this business progressively larger. The longer-term nature of these contracts, in conjunction with accumulating broadcasting deals, will contribute an increasingly meaningful amount of recurring revenues. These stable cash flows can be used by GoPro to re-invest in CapEx, R&D and M&A, crucial activities in a rapidly evolving industry. The strong pool of intellectual property and knowledge across both companies, where GoPro and NextVR own 320 and 30 patents respectively, will drive joint R&D ventures, while simultaneously securing their dominance. In sum, accumulating IP, scale, and contracts will reposition GoPro in a highly defensible market position.

A Picture Perfect Acquisition

GoPro has historically demonstrated a willingness to supplement its lack of capabilities in certain areas with acquisitions, a strategy which has been met with success. Examples include their 2015 acquisition of Kolor, a VR image-stitching software, and the $105-million acquisitions of Stupelfix and Vemory, both video editing software.

Despite this, NextVR would represent GoPro’s largest acquisition to date; NextVR last raised capital at a valuation of $800 million in early 2016. Industry estimates for the market size of VR broadcasting range from approximately $400 million in 2018 for software only and roughly $1.5 billion in 2018 for software and hardware. Assuming a 25 per cent market share on the $400 million base case would be conservative, as NextVR is currently the standout competitor of four platforms including Fox Sports, LiveLike, Intel and TrueVR. The $400 million figure assumes growth to more than $4.1 billion in 2025, which is approximately 39 per cent in seven years. Based on this growth, a 12 times valuation on NextVR’s estimated 2018 revenues is reasonable and implies a valuation of $1.2 billion. This represents a 50 per cent increase from the last valuation and is relatively in line with GoPro’s total enterprise value of approximately $1.1 billion, which suggests that this is a merger of equals. Under these assumptions, the pro-forma revenues would be almost $1 billion higher than GoPro alone by 2020.

Seeing the Future Through a New Lens

Once the VR Sports market reaches critical mass, GoPro-NextVR can monetize beyond licensing fees. Application integrations can provide a host of ancillary revenues. For example, an Amazon button integration can allow viewers to view and purchase in-game merchandise. With a StubHub integration, users can select seats and purchase tickets for the next game. An UberEats integration would let viewers order wings while watching the game. In between quarters, Sony can play a trailer for its next Blockbuster VR game, while Expedia can showcase travel destinations around the world. In this future, GoPro-NextVR’s live sports content will be the tentpole supporting these ancillary revenue streams.

After merging with NextVR, GoPro will successfully break out of its current market and reposition itself as an end-to-end VR sports company—this combination will blend both companies’ unique capabilities, allowing them to dominate a quickly growing nascent market and ultimately resulting in a defensible market position. Once this position has been established, there is a world of possibilities for GoPro and NextVR to monetize and deliver a unique experience to customers.

Picture a customer sitting in her living room watching a soccer game on her headset. With a flick of her hand, she moves from the side-lines to the perspective of a Fusion camera on the referee. With another movement, she’s flying above the pitch in a Karma drone, watching the arena from a bird’s-eye view. She points at the ball, and an overlaid product listing shows up on Amazon; she flicks it into her shopping cart. After the game, she points at an empty seat, and purchases a ticket on StubHub for the next game. With a combined GoPro and NextVR, this vision is possible.