"And if an epitaph be my story, I'd have a short one ready for my own: I had a lover's quarrel with the world." -- Robert Frost
Tuesday, March 7, 2017
Snap Out of It: GoPro or Go Home
Most software is fungible these days. Snap (NYSE: SNAP) has called itself a "camera company," which is clumsy shorthand for its goal of becoming a premier consumer hardware company. While Snap has successfully created exciting marketing events with its filters and is well-situated to promote blockbuster movies, this expertise alone cannot justify its current valuation. Following Larry Ellison's unrelated comments many years ago about "going back to the future," hardware is becoming sexy again because software features are easily replicated.
My main concerns are 1) Snap's main user base is between 10 and 29 years old; and 2) GoPro (NASDAQ: GPRO) is already the premier camera company.
With respect to 1), this group lacks high levels of disposable income and isn't known for brand loyalty, indicating hardware margins or profit may be stressed. As for 2), if Snap plans on avoiding competition with GoPro by focusing on teenagers and younger adults with cheaper products, Polaroid and vintage cameras have already been done. Spectacles is not revolutionary, unless you count flashing lights as a remarkable innovation over Google Glass. How does Snap plan on differentiating itself long-term?
Unlike Amazon (NASDAQ: AMZN), Snap cannot displace existing software and hardware companies, which have entrenched users and their own "sticky" ecosystems. Furthermore, how many different ecosystems will consumers tolerate before they become frustrated? A quick online search shows several apps capable of adding both filters and special effects to pictures, such as BeFunky.com. In short, Snap lacks a "wide moat" from a technological standpoint and needs to quickly capitalize on its accomplishment of being first to market and capturing younger users.
Being first to market can be a long-lasting advantage in the consumer market. Success begets success as retailers provide more prominent shelf space to faster-selling products, leading to relationships between suppliers, advertisers, and manufacturers that are hard to displace. If a consumer company is first to market, competitors often end up vying for second place, fighting over shelf and virtual space that hasn't already been allocated to the market leader. Older readers might remember that Gameboy was first to market and maintained its leadership position in the videogame industry, even though Sega later produced a much better product. In fact, Nintendo continues to ride the success of the Gameboy today, while Sega sputtered with its Dreamcast console, becoming the Reebok to Nintendo's Nike.
How can Snap ride the wave of its younger user base and its "first to market" unique filters? One interesting scenario would be for Snap to partner with existing hardware companies like Fitbit (NYSE: FIT) and GoPro. More specifically, Snap could leverage the retail relationships smaller hardware companies have already built and offer access to its software and user base--for a fee, of course--as a way for smaller hardware companies to combat Apple and Samsung. Trying to displace Fitbit and GoPro shelf space in existing retail establishments doesn't make much sense--there's only so much shelf space to go around--and Snap doesn't have enough hardware products to open its own stores yet. If Snap tries to go against Apple, Google, and Samsung alone, it risks becoming exactly like Fitbit and GoPro, i.e., hardware companies desperately trying to hang onto to existing customers as larger companies copy their products and force the smaller companies to spend more dollars on each additional user, delaying profitability and making it harder to maintain margins.
One potential scenario involves GoPro CEO Nick Woodman pledging his own net worth as collateral and taking GoPro private, with the understanding that Snap would be a long-term partner and GoPro would design its products to be compatible primarily on Snap's software platforms. With either Snap or a consortium of equity funds buying a 49% stake in GoPro, Woodman could direct GoPro into new areas, diversifying his own user base and continuing to spend dollars on marketing and retail relationships rather than software engineers. (Note: most of GoPro's open technical careers are currently in Romania and the Philippines for software-related positions.)
Once software costs are minimized, GoPro could quickly move into new areas such as 1) food delivery by drone; and 2) tourism/travel.
Right now, Walmart (NYSE: WMT) is attempting to solve the "food desert" problem in inner cities, which tend to have cheap fast food and not enough healthy food. Using drones and online grocery ordering could revolutionize healthy eating in inner cities or isolated areas like First Nation lands. GoPro could offer to work with Walmart, Costco, and Target in delivering fresh food to consumers--a low margin business, but one that could serve as indirect advertising for its drones and other hardware products and a way to gain feel-good content.
Users, especially younger users, are tired of meaningless news and will quickly warm up to a software platform bringing them creative and positive content, such as tourism videos. GoPro CEO Woodman originally wanted to create content through an entertainment channel, but it wasn't profitable to do so, or he would have done it. As a private company in a cooperative setting, and with Snap handling the software, GoPro could focus on content development and capturing more users outside of Snap's existing demographic. Snap would broaden its demographic reach and save money and time leveraging GoPro's existing retail channels, and GoPro would maintain its financial strength by avoiding the costs of building and maintaining a competitive software platform.
Netflix once advertised with Amazon in its early days when it was trying to build its brand, and Jeff Bezos put a stop to it as soon as he found out about it, but GoPro and Snap don't compete directly with each other or larger food retailers, airlines, or travel agencies, making it easier to build relationships.
Once Snap demonstrates it can be a reliable partner, it can branch out to other consumer companies like Fitbit and discuss partnerships or demand a premium to reach its users in more substantive ways. For example, if Snap receives a movie licensing deal, it would normally create filters and receive payment for its marketing. However, in a longer-term partnership where its platform is used as a conduit to attract self-made content--such as mini-movies--it could become the purveyor of cool.
Right now, YouTube and other larger companies focus on all types of users to gain the most advertising dollars possible, but in doing so, fail to differentiate themselves. People sometimes go on YouTube to search for music and random videos, but they don't look forward to opening its app every day because Google relies on algos rather than curated content guaranteed to "wow" users. If Snap and GoPro create a mutually beneficial relationship establishing themselves as content curators and conduits for creativity, they can attract other companies experiencing difficulty breaking through the usual Apple, Google, and Facebook channels.
Snap's 12% drop on March 6, 2017 shortly after its IPO indicates it needs to think outside the box. In the hardware world, Apple and Samsung already dominate. Smaller companies like Snap need to figure out a coordinated way to take on the established behemoths or end up bleeding cash trying to avoid becoming fads. Meanwhile, GoPro CEO Woodman needs to do something soon. In 2015, he ordered a 180-foot yacht, to be delivered in 2017. It won't look good to be in a custom-made yacht while his shareholders suffer. Unless Woodman does something soon, his yacht might end up being called "French Revolution" or "Marie Antoinette." Will GoPro and Snap work together, or will they try to displace Apple and Samsung, two companies with marketing budgets larger than most companies' market capitalizations? Shareholders of Snap and GoPro should hope their CEOs make the right choice.
Bonus: the kind of partnership I envision is similar to the way Disney runs international resorts, i.e., a hybrid licensing and royalty model. Basically, Snap could license its software and platform to GoPro (and other smaller hardware companies like Fitbit) and also negotiate royalties based on revenues to incentivize a true partnership. In the first few years, the licensing fees would be smaller and the royalty percentages higher, but as both companies learn each other's channels and execute more efficiently, the licensing fees could increase while royalty percentages to Snap decrease. More here on the overall model.
Update on March 8, 2017: great comment from another website: "I like your Nintendo vs. Sega analogy but you compared apples to oranges. Gameboy was a portable handheld. Dreamcast was a console system. A better comparison would be how Sega's 16GB Genesis was better than Ninendo's 8bit NES system or how their full color GameGear portable was better than Ninendo's black and white, dinky Gameboy. But like VHS and Beta, Nintendo won out."