Action camera maker GoPro (NASDAQ:GPRO) recently announced a deal with Roku to launch a new channel on the latter's streaming set-top boxes. The new channel, which will feature GoPro-produced and user-submitted content, will be similar to the GoPro Channel, which is currently available on Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube, Microsoft's (NASDAQ:MSFT) Xbox Channel, and Virgin America's flights.
GoPro states that when the channel launches this spring, it will diversify away from its traditional content of extreme sports with more footage of musicians, animals, and "how to" videos showing how the featured GoPro footage was shot. It will also feature more professional content via its partnerships with the National Hockey League and the X-Games.
GoPro previously declared intentions to build a media network to diversify its top line away from action cameras, which are now being challenged by cheaper competitors with comparable specs. However, Roku's channel marketplace is already crowded with similar "channel apps" from Time Warner's HBO, Disney's ESPN, Netflix, and other well-known digital channels.
Nonetheless, the Roku deal is a big step for GoPro toward becoming a legitimate media network. Let's take a look at the key benefits of this expansion.
The business of streaming media
Many "cord cutters" have been ditching their cable providers in favor of Internet-only services like Netflix, Hulu, and Amazon (NASDAQ:AMZN) Prime, which has fueled demand for streaming sticks and set-top boxes. NPD Group estimates that 25% of U.S. households will own a streaming device by the end of 2015, up from 16% last year. That percentage is expected to rise to 40%, or nearly 40 million homes, by 2017.
Roku, the current industry leader in the U.S., controlled 29% of the domestic market in the first nine months of 2014, according to Parks Associates. Google's Chromecast came in second with 20%, followed by Apple (NASDAQ:AAPL) TV at 17%, and Amazon's Fire TV at 10%.
Assuming that Roku maintains control of at least a fourth of that market, this means that roughly 10 million homes could have access to GoPro's network by 2017. If GoPro strikes similar deals with Google, Apple, and Amazon, it could easily double or triple that figure.
A tiny but growing business
Today, GoPro's YouTube channel has nearly 2.7 million subscribers. According to YouTube tracking site Social Blade, that would translate into ad earnings of just $19,200 to $306,000 per quarter -- paltry figures for a company that posted $634 million in revenue last quarter. When we consider that some of the GoPro Channel's content is professionally commissioned, it's highly likely that the media business is operating at a loss.
Although the GoPro Channel doesn't generate meaningful revenue, it can help reduce its sales and marketing expenses -- which rose 61% year over year last quarter -- by spreading virally across social media. That's the real reason the channel exists -- its videos are all advertisements that users voluntarily watch. From the Xbox Channel, users can even order GoPro cameras from the Microsoft Store, with sales being split between GoPro and Microsoft -- something that the Roku tie-up won't initially offer.
To expand its fledgling media business, GoPro has hired several experienced digital media executives. Last November, GoPro hired media veteran Zander Lurie, who previously worked at CNET and CBS, as its senior VP of media. Before that, it hired Adam Dornbusch, the former business development head of Current TV, as programming chief, and former Skype CEO Tony Bates as the division's president.
Long-term risks and rewards
GoPro's deal with Roku is a positive development that will help the company keep promoting its brand as a lifestyle. However, I don't think it will be an instant "game changer" that will rapidly expand its media presence. Instead, I think the investment will take several years, after more households buy streaming devices, to pay off.
Until then, GoPro should be careful about spending too much on securing media deals and commissioning professional content. As a user-powered network, GoPro is a great way to promote the brand virally. But if GoPro gets carried away and tries to evolve into ESPN, it could become a wasteful money pit that will weigh down its bottom line.