GoPro Floundering, Apple’s iAD Strategy, The Great PC Rebalancing

The last few quarters, investors have been quite cautious around GoPro as the bear thesis rang loudly in their heads. Yesterday, it seems the bear thesis played out as they missed revenue estimates by nearly $100m and shares dropped 25% and were halted. The company also announced they would cut seven percent of their workforce.

The fundamental issue here is GoPro reached their max TAM. Wall St. doesn’t love hardware companies and it is for this reason. Once they sell a product to everyone who wants one, growth slows and consumer replacement cycles become unpredictable. For GoPro to be valuable in the eyes of investors, they needed to be doing things to grow their addressable market. GoPro has likely sold in the range of ~20 million units in total to date. The true question surrounding this category is, how big is it? An average of 6 million units a year is not that interesting even if ASPs are high. GoPro has to expand the TAM and that is what they are not doing. The Session was an epic failure and largely overpriced. I believe they should have been more aggressive with the price and perhaps made it less feature rich. For example, maybe 720p instead of 1080p, no wifi, etc, and used this product as their entry level action cam to entice new customers. Instead, they priced it too high and it did not sell.

While I fully understand all areas of the debate around this, I still feel the market is larger than what has been sold to date. GoPro is the dominant vendor with the majority share in this category and I do believe brand matters here. Which means GoPro is not immediately vulnerable to low-end disruption. That may happen someday, but not today. The real question here is if GoPro is indeed a one trick pony. In this dissection of GoPro’s financial Jan Dawson makes the following point:

All of this serves to reinforce the problem I outlined in last week’s column: companies highly dependent on sales of a single product – in GoPro’s case, “capture devices” – may do very well for a period of time but, unless they are able successfully to parlay that success into a broader-based strategy that goes beyond a single category, they often begin to struggle. This is particularly the case when the company fails to build a meaningful ecosystem around its products. GoPro’s financial filings suggest it believes its partnerships with retailers, celebrities, and others will provide differentiation but, given its latest product has essentially flopped, there are now legitimate questions about whether its single trick is enough.

Perhaps the most fascinating part of this discussion is whether or not GoPro should have gone public to begin with. This would make for a fun discussion and is a fantastic case study on many levels.

Apple’s iAd Strategy

Buzzfeed’s John Paczkowski reported Apple is stepping back from its iAd platform. The most pertinent part to understand from the report:

While iAd itself isn’t going anywhere, Apple’s direct involvement in the selling and creation of iAd units is ending. “It’s just not something we’re good at,” one source told BuzzFeed News. And so Apple is leaving the creation, selling, and management of iAds to the folks who do it best: the publishers.

Apple will step back from selling and let publishers sell through it. The report goes on to state Apple will give 100% of the revenues said publisher generates through their platform.

iAd always felt like a play outside of Apple’s core strengths. By essentially opening it up for publishers to use the platform and sell ads, they potentially make it more interesting for advertisers to take seriously. The question I’ve always had regarding iAd is how far Apple allows it to reach. How far beyond mobile ads does it go? Can it go to voice search for example, or can it get to Apple TV in some way? Is their broader strategic benefit having iAd be the main platform for publishers to monetize on Apple’s platform? Perhaps there are more questions than answers here. However, the clear next step in advertising is around video and mobile video. What Apple will allow publishers to do around video will be key. The latest estimates I’ve seen for online video advertising is forecasted to be an all-time high as 40% of US ad spend will be on video in 2016. This number will only grow significantly.

The Great PC Rebalance

We are on the cusp of simply not talking about the PC hardware landscape much longer. It is relevant for many people, but not all people, like the smartphone is. But there are a few interesting things to watch.

Both IDC and Gartner are reporting preliminary PC declines of ~10%. My estimates were -8% and I can see -10% from what I heard from retailers around Q4. We measure PC sales compared to last year and, in reality, yearly PC sales are declining. The market for annual sales is simply getting smaller. While it is still in the 280-290m range (down from 320m three years ago), the bottom has not yet been reached. We may ultimately end up having the PC bottom be in the low 200m per year range. Which carries with it some important implications.

The first is broad industry consolidation. Acer, Asus, Toshiba have already exited, Samsung is trying their hand again but likely to exit eventually–again. Which means the market is left to Lenovo, Dell, HP, and Apple. With very real caution surrounding HP with the hardware split, we may see their exit someday as well. While I’m not officially making a declaration here, it is certainly a scenario I have worked out. If the market is left to just these three or perhaps four players, then share gains will lead to healthy sales for whoever is left standing.

I’ve seen the lineups from all the PC vendors for 2016 and can state confidently this is the strongest lineup of PC hardware we have ever seen. If Apple comes in strong, then the PC market may not be as bad in 2016 as it was in 2015. I still have upside share gains in my model for Apple, but the Windows vendor lineup is strong with Lenovo and HP showing very slick OLED laptops that I expect to get attention.

Also, to the point about GoPro above. I believe it would make sense for Microsoft to buy them. Microsoft has made it no secret they want to be more aggressive with first party consumer hardware. This is the plan with Surface. Microsoft can not lose the consumers and they are at risk of doing so. If they acquired GoPro they could do some tight PC integration, thus again making the case for the PC, and solve some major experience problems with the company. Namely, that you record 30-40 minutes of video and no one wants to sift through all that to find the 10 seconds you want to keep. GoPro has done some things in software to try to help this but it remains a burden.

What is happening in the PC market I call “The Great Rebalancing.” We are seeing stability among the primary vendors and, once it all shakes out, while smaller, it can be a healthy segment of computing.

One thing to watch is the noise Xiaomi and Huawei are likely to make as they enter the PC space. This could shake things up a bit if true and, in particular, Lenovo’s share in China (40%) and how PC TAM could expand in emerging markets.

Here is a look at our PC model as it stands.